Economics: A Pyramid of new debt

Few Memphians have seen the financial projections for the Memphis Riverfront Master Plan -- they're not good news for a City now battered by fiscal crisis. The project will lose money for at least 20 years, with debt piling up to a peak of over $140 million. We boil the issues down for you.

Flawed market analysis

Sensible businesses, before they ever design a product, determine whether there is a market need for that product. But not the RDC.

The objective of the riverfront development should not be to develop a parallel downtown...
-Jack Belz

Apparently, the RDC set out to develop, not revitalize, the riverfront. They hired consultants Cooper, Robertson & Partners, who came up with a design and calculated the potential leasable space. Using rules of thumb they calculated the potential leasing revenue and compared that to existing market demand studies already done by the Center City Commission and others. It appears that the RDC did not do any substantive new research. They did not come to an understanding of whether the new development would attract new markets.

Worse: they just assumed that the riverfront development would draw off any available demand and ignored the negative impact that would have on the rest of Downtown.

By Jack Belz's reckoning, the realistic market demand isn't sufficient to justify speculative development on the Promenade:

There is adequate vacant property east of Front to accommodate all of the commercial development which the market could absorb for at least 50 years....The objective of the riverfront development should not be to develop a parallel downtown but rather to provide the environment and amenities to facilitate the optimum development of the existing downtown properties.

Dismal financial scenarios

Even if market demand on such a scale actually appeared, would the project still make economic sense? In May, 2001, RDC insiders were clearly worried. "We have a finite amount of money for five years, and if we don't do a quality job on development, we're dead," John Stokes told the Executive Committee. "That underscores what comes next--development."

Development of the scale that is contemplated by the RDC will require financing that is enormous in scale and complex in its formulation.
- Urban Land Institute

"Five years is a quick timeframe made more challenging by the fact that most of the revenues are generated by land we have to create," the minutes dourly noted.

The designers certainly created land--enough to build 3,400 residential units, 900 hotel rooms, and 5.3 million square feet of office/retail space. But they couldn't create financial success. The unpublished cash flow projections were stark and dismal:

• The total construction costs were $340M.
• Assuming $200M of public money, $140M would have to be borrowed.
• The project wouldn't be cash flow positive for at least 20 years.
• After 30 years, somebody would still be on the hook for $116M of debt.

Even RDC's own experts, the Urban Land Institute, seemed alarmed:

Development of the scale that is contemplated by the RDC will require financing that is enormous in scale and complex in its formulation. It will come from multiple sources, both public and private, and will require management that is able to weave together financing in a manner that is mutually reinforcing to each financing source. [p.33]

Cash flow concerns and hopes for quicker leasing revenue is probably why, by spring of 2003, development of the Public Promenade had become a high priority. This may also explain the unexpected addition of skyscrapers in the final plan.

The taxpayer pays.

Plan proponents have repeatedly assured Memphis that the Promenade plan will pay for itself and will not burden the taxpayers. At least three City Council members didn't buy that, and neither should you. The Master Plan is the first clue.

The "public portion" of Master Plan construction costs was $200 million (more than 58%). We don't know how much will be the City, State, and Federal government shares. But public portion means "taxpayers" in our dictionary.

After the $200 million "public portion" is subtracted, the RDC will still have to borrow the rest of the money to build the Master Plan infrastructure. The RDC doesn't have the balance sheet or credit rating to borrow such sums as $140 million. We believe the City will have to guarantee the bonds, putting the taxpayers at risk.

Taxpayers are already paying for this. Most of the RDC's operating budget has been, and continues to be, public money: A combination of "fees" from the City and operating revenue that used to go to the City. Indeed, the RDC has negotiated a set of long-term City contracts that will pay their own bills. Without taxpayer's money, the RDC couldn't exist.

Furthermore, to get developers to take risks and build, the City must offer tax and other incentives. Taxes not paid have to come out of other taxpayers' pockets.

The big unknowns.

What we've discussed here is the original Master Plan -- before the Promenade phase was factored in. We are still looking for an update to the financials that includes Promenade. (Were those projections run and presented to the City Council before they voted to proceed on May 18, 2004?)

Nvertheless, we aren't optimistic that the riverfront finances will be salvaged by skycrapers on the Promenade. After all, as Mr. Lendermon has so often told his audiences, there is "very little chance those skyscrapers will ever get built."

NEXT: Environment: The unanswered questions.