A detailed look at the revenue shortfall
By Dan Schroeder
In an earlier article I gave an overview of The Junction and its current financial situation. In brief: Tax increment revenues from 10 other redevelopment districts are paying off the Series A bonds ($7.3 million), while lease revenues from the Salomon Center are paying off the Series B bonds ($8.9 million). But the future revenue to pay off the Series C bonds ($22.4 million) is uncertain. Tax increment from the Junction district itself is covering only about half of the $1.9 million annual payments on the C bonds, and even that revenue is scheduled to disappear when the redevelopment district expires after 2014. The Boyer portion of the Junction is not yet making a profit, so it isn’t providing any lease revenue to the city. Consequently, the Junction continues to be subsidized by lease revenues from BDO.
In this article I’ll take a closer look at why the revenues from the Junction are falling so far short of what was predicted. Looking into these details can give us a better understanding of the Junction’s financial prospects, and perhaps teach us to be more skeptical the next time we hear rosy predictions about the future.
Flashback
To focus this analysis, let’s resurrect some official Ogden City predictions from just two years ago. Here’s the lead article from the city’s July 2007 utility bill insert, titled “The Junction -- A Good Investment” (Click on the image to see the article at a legible size):
The most obvious inaccuracy in this article is the implication that the city’s investment in the Junction was only $6 million, when in fact it was over $40 million plus interest. But putting that blunder aside, let’s focus on the table of revenue projections:
The most notable numbers are the four in the upper-right corner, which predict the Junction’s property values and the tax on those values for 2007 and 2010. How do these predictions match up to reality?
Reality Check
According to the Weber County Assessor’s office, the actual market value of the Junction in 2007 was slightly under $30 million--and the taxable value was less than $9 million. These numbers were based on assessments as of January 1, 2007, and they determined the taxes paid near the end of that year: about $150,000. Because these numbers would have been publicly available by the time the city’s article was written, it would seem that the article’s author had something else in mind.
Perhaps “2007” really meant the end of 2007, that is, tax year 2008. By the middle of 2007 it should have been possible to predict the status of the various construction projects as of the following January 1. But even then the actual assessments fell far short, giving a market value of $70 million, a taxable value of $54 million, and a total property tax of $845,000.
The 2009 numbers are a little higher: market value $80 million, taxable value $61 million, and an expected property tax of $980,000. The numbers for 2010 will be higher still, but not by a lot.
Here’s a graph showing the Junction’s property tax for the last three years, broken down by the various buildings and parcels:
Whereas the only building being taxed in 2007 was the Salomon Center (and at less than half its final value), every taxable Junction building is at least partially on the tax rolls for 2009. Next year we should see some further increases in the taxable values of the Wells Fargo building, the Earnshaw building, and some of the smaller buildings.
Minor details: (1) The Junction’s RDA district also includes the square block west of Grant between 22nd and 23rd Streets, but none of the preceding numbers include the properties on that block. If you want to know the RDA’s tax increment revenue from the whole district, you need to add that contribution (about $160,000 for 2008) and then subtract the tax on the district’s baseline value before it became an RDA district (about $50,000). (2) The numbers in the paragraphs above include not only real property but also equipment in the buildings, which contributed nearly $5 million to the value and $75,000 to the tax in 2008. The graph, however, does not include the tax on equipment. (3) For those properties that are leased by the RDA (that is, the Salomon Center and all the Boyer properties), the property tax is being paid not by the owner but by the tenants. Unfortunately, the bookkeeping for these properties is too complicated for the county’s web site to handle, so you can’t look up the property values and taxes there. I got the numbers from Shelly Campbell-Bustos in the Assessor’s office, to whom I am extremely grateful. To see a complete table of the numbers, click here.
Why the Discrepancies?
So why were the city’s published projections so far off? Let me count the reasons.
First, the projections neglected the fact that not all of the Junction property is taxable. The most valuable untaxed property is the parking garage, assessed at $12 million. (If the garage is ever used commercially it will become taxable--but for the foreseeable future, it would be economic suicide to charge Junction patrons for parking.) The nonprofit Treehouse Museum, assessed at $3 million, is also untaxed.
Second, the projections neglected the fact that residential properties are normally taxed at only 55% of their full value. The difference takes a significant bite out of the taxes from the Boyer apartments and the Earnshaw building.
Third, some of the assessed property values undoubtedly came in lower than what the projections assumed. This was especially true of the Salomon Center, which cost approximately $18 million to build but is now assessed at only $9.8 million (not counting the equipment). The county actually tried to assess the building at the higher value, but the tenants successfully appealed on the grounds that their lease rate reflects a much lower market value for the building.
Fourth, the projections assumed that the 2006 tax rate would be in effect through 2010. In fact, Weber County’s tax rates tend to decrease over the long term; the 2008 rate was 12% lower than in 2006.
Fifth, the projections for “2007” included the $30 million Ashton Square condominiums--a project that hadn’t even broken ground when the projections were made and that was ultimately canceled. Similarly, the projections for 2010 apparently included a hypothetical $65 million hotel/condo complex on the still-vacant parcel between the Salomon Center and Washington Blvd. Both of these projects were promised to have significantly more value per acre than anything else at the Junction. (More explanation of what’s included in the projections can be found in this earlier version of the article.)
And sixth, the projections were overly optimistic about the timetable for completion of many of the buildings.
The standard excuse for the Junction’s current financial trouble is “the economy”. But the economy has nothing to do with the first four reasons just given, and was only partly a factor in the last two reasons. Perhaps, in a booming economy, the Ashton Square condos would have been started in 2008 and on the tax rolls by 2010--but not sooner. Even during the best economic times, it’s hard to imagine that by 2010 Ogden’s market could have absorbed a new $65 million hotel/condo complex in addition to the Earnshaw building, Ashton Square, Boyer apartments, and other competing residential developments downtown. The timetable for completing several of the buildings had already slowed down by the time the utility bill insert was published, when the economy was still strong.
Sales Tax and Lease Revenue
As the table indicates, property tax isn’t our only revenue from the Junction. It also produces sales tax and lease revenue.
The projected sales tax figures are not particularly large, and we can probably assume that the construction delays and cancelations have resulted in still lower receipts. I’ve inquired with the city regarding the actual sales tax received so far, and will post the numbers when I get them. (Because local sales tax goes into the city’s general fund, it cannot be applied directly to the RDA bond payments. In the end, however, that’s a technicality; what matters is the city’s total revenue.)
The projected lease revenue for 2007 is very close to the annual lease payments made by the Salomon Center tenant, Health & Fitness L.C. That money has been coming in since July 2007, and most of it is being used to pay off the Series B bonds.
The additional $300,000 of projected lease revenue for 2010 must be what was expected from the properties leased to Boyer. The actual lease revenue from Boyer to date has been zero, because Boyer isn’t yet making any profit.
Boyer’s properties (under long-term lease from the RDA) include the Megaplex theater, the Wells Fargo office building, the restaurants, and the adjacent mixed-use buildings with retail on the ground level and apartments above. These buildings are now all finished, at least on the outside. But the office building is less than half occupied, with only two tenants who both moved from across the street. (This is the building for which the Ogden City Council declined to approve two additional floors, which the city itself would have had to “lease” at a cost of $400,000 per year until actual tenants were found.) Boyer’s mixed-use buildings are also mostly unoccupied. Until these occupancy rates increase, Boyer will be losing money on its Junction developments overall. Whenever it does start making a net profit, the city’s revenue will be half of that profit. Ogden Community and Economic Development Director Scott Waterfall has stated that he doesn’t anticipate receiving any income from Boyer in the near future.
The Bottom Line
The Junction projections in the 2007 utility bill article weren’t merely optimistic: they were unfounded and deceptive. Still, perhaps we shouldn’t focus too much on that article. After all, it was published at the start of the 2007 mayoral campaign.
A more reasonable “optimistic” prediction for the Junction would have been a built-out taxable value of about $100 million, which would generate about $1.6 million in property tax annually. Combined with the Boyer lease revenue, this would have been just enough to make the payments on the Series C bonds through 2014. After that, either an extension on the tax increment or subsidies from BDO (or some other source) would still have been required to continue the bond payments through 2026.
A reasonable “pessimistic” scenario is more or less what we have: two Junction parcels still vacant, significant construction delays on some of the others, and no lease revenue from Boyer expected for several years. Payments on the Series C bonds are requiring a subsidy from BDO of almost $1 million per year, in addition to all of the Junction tax increment. If the tax increment expiration is not extended, the subsidies could increase to the full $1.9 million bond payment.
(Let’s try not to imagine even worse scenarios, such as the Salomon Center tenant walking away and defaulting on the lease. Then the city would be liable for another $590,000 a year in bond payments.)
So is the Junction a good investment? From a strict financial standpoint the answer is an unequivocal “no”. It is being subsidized by other RDA districts, by BDO, and by occasional one-time expenditures. Over the 20-year duration of the bonds, the subsidies will add up to at least $20 million, and possibly $30-40 million.
The question, then, is whether the Junction’s benefits to the greater community are worth a subsidy of one or two million dollars a year. Even as someone who doesn’t especially care for the particular entertainment venues at the Junction, I can see real value in creating this new gathering place in the heart of our city. But I can’t put a dollar amount on this value, so I’ll leave the final judgment up to the reader.
Of course, now that the Junction is (mostly) built, our opinions on whether it was a good investment are purely academic. The more pressing question is what we should do next. In particular, should our public officials extend the Junction’s tax increment for another 12 years beyond 2014? Also, what should Ogden do to promote development of the two Junction parcels that remain vacant? I hope to address these questions in a future article. Meanwhile, please share your views on any of these questions.
