Mike Worswick’s Notes from IEDC’s How You Build It Conference

Quotes, observations and reflections
International Economic Development Council
How You Build It Conference
Oklahoma City June 6-8, 2010

Comments on OKC:
Oklahoma City has been in the process of actively redeveloping the city for over 15 years. The voters have approved an additional initiative that will bring to 25 years the active partnership of government, business and community. The process has been funded by a 1% sales tax the voters have approved and renewed three times. This process raises about 750 million in each of the votes. The first was used to build the Bricktown area, build an arena and more. The second round of $750 million went to improve schools in the core of Oklahoma City. The third round of $775 million will focus on infrastructure and redevelopment in the city core.

One significant note is that Oklahoma City has used these funds to do these improvements on a cash basis. So things like the Bricktown canal and the Ford Arena were built debt free. These cash basis improvements has given the city staying power and the ability to attract tenants because there is no massive debt service issue on any of the projects.

Oklahoma City officials report that Bricktown will continue to require city support. The city appears committed to the success of this area because of the belief that a vital center city is essential to making OKC a world class community. One speaker indicated that they have had substantial turnover in bar and restaurant operators in the Bricktown area. Walking the district, one can see signs of failed businesses and many spaces that have yet to be initially developed. In spite of this observation, the area has a very positive feel and personality. We were told that Bricktown does not produce events. They rely on the ball park, the movie complex, Bass Pro and ambiance to draw traffic.

A flaw OKC development people see is that the small amount of retail in Bricktown is too diffused. They hope to concentrate the retail in one area of Bricktown in an attempt to gain some consumer sales traction. Bass Pro arrived in 2003. The canal project started in 1996 and opened in 1999. (Other than Bass Pro, I saw very little to indicate that retail was vibrant in this area).

Substantial tax credits were used to attract Bass Pro to the area. Mayor Cornett of Oklahoma City stated that the retailer was the catalyst to making the Bricktown area work. According to the mayor Bricktown will continue to require financial incentives for development. The city must invest for success according to the Mayor.

There is very little general retail business in the city core. OKC redevelopment officials have no expectation of general retail returning. They plan to add some specialty retail in an area called automobile alley. This is a multilane street which is substantially wider than Kansas Avenue.

Devon Energy is building a 50 story skyscraper in the heart of the city. The vertical campus will include a corporate park with public areas and a small auditorium. They are designing a complex that will be a visual highlight for the city. One hundred million dollars of TIFF funds is being generated as part of that development. The negotiations with the city by Devon resulted in those funds being used to overhaul a nearby large city park and improve every street in the downtown. This will include some street narrowing. I repeat that there are streets in OKC that look more like airport runways rather than streets. Kansas Avenue seems like a quaint country lane in comparison.

A key reminder from every OKC speaker: the projects are debt free and built on tax revenue cash flow. (Look at the cost Topeka spends annually to fund infrastructure debt service.)

My personal comments on sales tax as a funding mechanism:
This form of tax has been relatively easy to administrate and collect. There are arguments that people outside the taxing area make contributions to the cities cost of operation. All that has been true. By the way, OKC sales tax including MAPS 3 is 8.375%. Topeka tax will be 8.95% after the new increase. The internet is changing the taxing equation. As sales tax approaches 10%, people look for a way to avoid paying this expense. It is easy to get a high dollar bicycle, HDTV, computer or other expensive gear shipped to a doorstep. A two thousand dollar tax avoided expenditure saves the consumer $180. Few consumers pay the state use tax. As tax rates increase the desire to skip the tax payment grows. (Count the number of out of county cars buying cigarettes at an Indian reservation.) As sales taxes increase in the internet age there are a number of consequences. First, people attempt to avoid the tax. Second, the higher the tax rate the more the incentive to avoid. Local retailers who may be price competitive are still placed at a disadvantage because of the tax differential. As these retailers close their stores because of reduced sales the community loses jobs along with income and property tax revenue. Either a uniform tax must be assessed nationwide in place of the current tax model or government must stop relying on this mechanism for tax collection. Another possibility is aggressive auditing of citizens PayPal and credit card accounts looking for use tax avoidance. Who wants to be the politician to push this thought forward?

More thoughts from the conference:
• In OKC private sector coordinates with the public sector in advance. Agreements are made by the time the projects move forward. The parties work to assure media buy in.

• Craig Seymour states there must be a profit motive in the investment. In assessing the feasibility of a project three things must always be considered. Is there adequate demand in the marketplace for the project (i.e. skating rink)? Can the technical and physical issues of the site be overcome? Is the project economically viable based on projected revenue streams.

• If the area contains functionally obsolete buildings they must be torn down. Green grassy areas are better than dead structures (heard from at least 3 speakers)

• The public sector may need to invest funds to lower the risk for a private investor to become involved. This could range from land acquisition to tax abatements and more.

• There are almost no large hotels being built in the USA without a substantial contribution from public and community involvement.

• Land control is an absolute must to the success of an area wide project.

• Ralph Basile states that there must be a rational business model. There must be value to cover the development cost and provide a return to all investors. (My note: the public sector may define its return based on additional growth in the area for having made the investment.)

• Mr. Basile notes that in phase one of every project that the addition of extra parking is critical. This infrastructure issue must be met in advance.

• Biggest challenge for most projects today is finding construction financing. The market for long term seems to be opening up but interim money is the big problem.

• Jerry Lee of Hines: a developer needs to be part of the project very early in the process.

• A number of projects are funded by additional room taxes on hotels. To make this work, operators must see that the project is not a burden but will produce additional room nights.

• Successful projects create destinations. (i.e. where would a biker like to ride)

• Blake Cordish: Projects must have enough critical mass to create an impact.

• Cordish believes that experiential environments (think Power and Light District) are the development opportunity in large markets.

• Cordish reiterated the OKC statement that development takes a long term partnership of government and private entities. His example was a 25 year plan for Toronto. Similar words were heard from officials in OKC and Baltimore. (How will we in Topeka insure a plan that survives repeated changes in elected officials?)

• Mayor Cornett of OKC: Suburban population must recognize the value of a vibrant downtown if a project is to succeed. He further stated that there must be resolution to the basic issues before a vision project can succeed.

• Mayor Cornett: Unfunded ideas are a dime a dozen.

• Mayor Cornett: It is easier to get citizens to agree in desperate times.

• OKC used a process similar to our Visioning process. They accumulated 1700 items of citizen input to consider for MAPS 3 (MAPS is their 1% sales tax development fund). No item got into the final plan presented to the voters that did not poll at least 50%. No project was allowed that could not be easily explained or defended. The third vote approval came because the public could see and remember the accomplishments of the first two tax votes. They did not give specifics but gave the impression that they got enough votes to win this las election but not with much margin to spare.

• Richard Ward of Zimmer (Ward is a long time developer): in most studies there is a latent demand from about 15% of the employees in an area to want housing close to their work.

• Richard Ward: projects are only successful when you have something to build on. There must be a major institution leading the charge or a major sponsor/investor.

• A master developer is critical to coordinate development in an area.

• Once a project gets started too many bells and whistles often get added and destroy the feasibility of the project.

• Recurring theme: does the project meet a real need? Is there enough demand? Is there a measurable return for the investment?

• Jeff Downs Deputy Mayor Montgomery Alabama: City offers incentives to get merchants involved in the development area. They make low interest loans to fix buildings etc. If the business stays and operates for 5 years the loan is converted to a grant.

• Quote of the meeting “You can’t fall out of a ditch.”