The Junction: What Next?

Tough decisions confront our community -- UPDATED

By Dan Schroeder

In two recent articles I’ve tried to provide an overview of Ogden’s Junction development and a detailed look at its revenue shortfalls. The most pressing problem is how to make the $1.9 million annual payments on the Junction’s “Series C” bonds over the next 17 years.

Revenue Sources

For the short term, most of this money can come from the tax increment revenue that the Ogden RDA receives from the mall redevelopment district (which includes the Junction plus the block west of Grant between 22nd and 23rd). This year the tax increment should be about $1.1 million, and over the next two or three years it should creep up a little higher, as more of the new buildings are completed and taxed at their full value.

A second source of revenue is tax increment from the American Can redevelopment district, north and west of the Junction. About 10% of the funds raised by the Series C bonds actually went toward the American Can parking garage, not to the Junction (as I should have mentioned in my earlier articles). In return, the American Can district is contributing $200,000 per year to the debt service.

A third revenue source is lease payments from Junction tenants to the Ogden City RDA. Most of the Salomon Center lease revenue is being used to pay off the Series B bonds, but there is about $100,000 per year left over that can be applied to the Series C bonds.

In addition, it was hoped that the Boyer Junction developments (Megaplex Theater, Wells Fargo building, restaurants, and smaller residential and commercial buildings) would be generating lease revenue by this time. But much of Boyer’s space is still vacant, so it isn’t yet making a profit or passing any income on to the RDA. City officials are now refusing to predict when this situation might change. Two years ago, however, they apparently projected that the city would receive over $300,000 annually from Boyer. It seems possible that this could still happen eventually, but not in the next few years.

The final source of funds is lease revenue from Business Depot Ogden. BDO currently provides the city with about $3 million per year, and a substantial portion of this money has gone toward the Junction bond payments during the construction phase.

The Short Term

For the next few years, however, it appears that the subsidy from BDO can decline dramatically: $1.1 million from mall district tax increment, plus $100,000 from the Salomon Center, plus $200,000 from the American Can district gives a total of $1.4 million, leaving only $500,000 needed from BDO to make the $1.9 million bond payment. And the mall district tax increment should soon climb to $1.2-1.3 million, allowing the BDO subsidy to decline further.

That’s the situation until 2015, when the mall district tax increment is scheduled to revert back to the taxing entities. Even in a best-case scenario (with $300,000 in Junction lease revenue from Boyer), the BDO subsidy would then have to climb back up to about $1.3 million. Whether the city can afford this would depend on what other uses it has in mind for the BDO lease revenue.

Long-Term Tax Revenue

Presumably there are other uses for the BDO funds, because the RDA is now asking the Taxing Entity Committee to extend the tax increment on the mall district through 2026, when the Series C bonds will be fully paid off. To understand the magnitude of this request, let’s make a few more projections.

By 2015, all of the existing Junction buildings should be completed and fully on the tax rolls. Even if we allow for a slight decline in the tax rate, the tax increment on the mall redevelopment district should be at least $1.25 million per year from 2015 through 2026. Barring some unexpected catastrophe, this is reasonable low-end estimate.

In a more optimistic scenario, the two vacant Junction parcels will be developed by 2015 and contributing additional tax. If the value per acre of these parcels is then comparable to the rest of the Junction, they could provide about a half million dollars of additional tax revenue, bringing the total annual tax increment to about $1.75 million. (Two years ago, city officials dreamed that these parcels would be developed to much higher values, resulting in a fantastic projection of over $3 million in tax revenue. I’ll ignore that projection in this reality-based article.)

So when the RDA asks the taxing entities to extend the collection of tax increment, it’s asking for about $1.25-1.75 million per year, over a period of 12 years.

The Taxing Entities

Now let’s look at where this money will go if the RDA’s request is declined. The answer is about the same for the Junction as for any other property in Ogden. Here’s the breakdown from my own recent property tax statement:

I’ve simplified this chart by combining taxing entities with similar purposes; for instance, “Schools” includes both the Ogden City School District and the Statewide School Basic Levy, while “Health & Safety” includes the Weber-Morgan Health Department, Paramedic Fund, 911 Service, and Mosquito Abatement.

Multiplying these percentages by the total projected tax increment of $1.25-1.75 million gives the following annual revenue to the taxing entities:

(Click the highlighted link for a more detailed version of the above table.)

If the tax increment is extended for 12 years, each of these entities will either have to do without this revenue (and thus provide a lower level of service) or make up the revenue by raising taxes on the rest of us.

Because the schools would take the biggest hit, the RDA is offering to pay them back $300,000 per year through so-called “mitigation payments”. As you can see, these payments would make up no more than half of the lost revenue to the schools. The RDA is also offering to sweeten the deal by handing some real estate over to the school district. There have been no reports of similar offers to the other taxing entities.

In order to extend its collection of tax increment, the RDA must convince six of the eight members of the Taxing Entity Committee (TEC) to vote for this proposal. The eight members include two from Ogden City (currently Council Chair Amy Wicks and CED Director Scott Waterfall), two from Weber County, two from the Ogden School District, one from the State Board of Education, and one from the Central Weber Sewer District (nominally representing most of the smaller taxing entities). The Ogden City representatives are being asked to relinquish general fund revenue in exchange for five times as much revenue going to the RDA. Everyone else is simply being asked to hand over their money to the RDA--although the school representatives are being offered part of their money back.

Why any of the TEC members (except those from Ogden City) would vote for such a deal--against their own best interest--is beyond me. The RDA could perhaps argue that it is morally entitled to the tax increment because without the new Junction developments, the revenue wouldn’t be there in the first place. But this argument should have been made before the buildings were financed, not after. Instead the city was promising, until just two years ago, that the Junction taxes would revert to the taxing entities in 2015.

So at this point, the RDA is effectively begging the taxing entities for a bailout. But assuming that the entities would even consider such a gift to charity, they should be asking how much the RDA truly needs.

Just how needy is the RDA?

Unfortunately, that question doesn’t have a simple answer.

One complication comes from differing attitudes toward the BDO lease revenue. On one hand, this is the revenue that formally underwrites the bonds, so perhaps it should be used to pay them off. On the other hand, anyone can think of other uses for that revenue.

Another complication comes from our uncertainty over the Junction’s future taxable value. Take the low and high estimates from the table above, subtract the $300,000 mitigation payment, then add back $300,000 from the American Can district and the left-over Salomon Center lease revenue. If you’re optimistic, add another $300,000 from Boyer lease revenue, and you end up with anywhere from $1.25 million to $2.05 million in revenue that the RDA can apply toward the $1.9 million annual payment on the Series C bonds. So there could be a shortfall of $650,000 that would have to come from BDO or somewhere else (still much less than what BDO paid in 2008), but there could also be a surplus of over $100,000, with no subsidy from BDO at all.

Given this wide range of uncertainty, a reasonable approach might be to wait and see how the Junction is doing in 2014 before promising any bailout. Indeed, the minutes of the June 25 TEC meeting show that one of the members asked why the RDA is in such a hurry to get the extension approved. And the RDA’s response was telling:

He [Richard McConkie] clarified for planning purposes, and for staff to have the ability to be able to negotiate on a future hotel or other major retail component, the tax increment plays an important part in sitting down with developers.

Moreover, at an earlier point in the meeting, McConkie specifically stated that in order to lure a hotel developer to the RDA’s vacant Junction parcel, the city would probably have to build a $4-5 million parking garage.

So the reason this is coming up now is simple: The city wants to borrow another several million dollars, and it needs another guaranteed revenue source to underwrite that debt. Then the city can gamble the money on yet another speculative venture such as the much-rumored new hotel. Whether Ogden’s market is ready for a new hotel, which would compete with the Marriott, the Hampton, and the Ben Lomond, seems not to concern the city administration.

Instead of asking the TEC to further enable its gambling addiction, here’s a novel idea for the Ogden City RDA: Sell the vacant “hotel” parcel on the open market (it’s assessed at nearly $1 million), get it on the tax rolls, apply the proceeds to pay down a little of the existing debt, and let the market decide what should be built on that parcel of land--and when. With the Salomon Center and Deseret Books right across the street, any number of businesses should be able to thrive at that location if given the chance. And when the streetcar comes through in a few years, a parking garage will be superfluous.

Selling the vacant parcel may or may not be the RDA’s best option at this point. Perhaps there are other options that don’t require incurring even more public debt at the expense of our schools and other public services. At the very least, I hope more citizens will become aware of the uncertainties, the trade-offs, and the risks that accompany the decision our community is now facing.

Citizens, please weigh in with your opinions!

Update 8/7/09 12:55 p.m. MT: "I've just received word that the Taxing Entity Committee will meet again, to consider the RDA's proposal, on Wednesday, August 19th, at high noon." -Dan S.

The Junction -- A Good Investment?

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.

Junction 101

A crash course in geography and economics for Ogden taxpayers

By Dan Schroeder

As every reader of Weber County Forum knows, there are few projects in Ogden that are as important or as controversial as The Junction. But this reader, at least, has gotten through the last four years without ever actually understanding the complexities of this project. Motivated by the administration’s recent request for a 12-year extension on its entitlement to Junction tax revenues (and by a lull in the summer when I had few other responsibilities), I set out last week to remedy this situation. This article summarizes what I’ve learned.

The Lay of the Land

The Junction occupies the former Ogden City Mall site, taking up two square blocks (about 20 acres) of downtown. Here’s a graphic from the Ogden City web site, showing a simulated aerial view facing west, which I’ve labeled with the names of the major Junction components:

When the Ogden City Redevelopment Agency (RDA) bought the old mall site, it acquired the entire two blocks with the exception of the Episcopal Church. The RDA still owns most of the site, but not all. At the south end, the RDA traded some additional land to the church in exchange for a parcel across 24th Street. At the north end, the RDA granted one parcel to the Treehouse Museum and sold three parcels for commercial development. Those three parcels are now occupied by the Ensign Plaza building, the Earnshaw building, and the vacant land that was intended for the Ashton Square condominiums. (The privately owned parcels are tinted yellow in the graphic.)

The RDA continues to own the parking garage, the Salomon Center, and the vacant land that was intended for the Midtown Hotel (these properties are tinted green in the graphic). However, the Salomon Center is leased to Health & Fitness L.C., an entity set up by Gold’s Gym and Fat Cats.

The rest of the land at the Junction is also still owned by the RDA, but is under long-term lease to the Boyer Company, which built the Megaplex Theater, the Wells Fargo office building, and the various restaurants, retail space, and apartments. (These properties are tinted blue in the graphic.)

The Debt

To finance its Junction-related expenses, the RDA has issued three different sets of bonds, referred to as Series A, B, and C. (For details, see pages 63-64 of the city's 2008 Comprehensive Annual Financial Report.)

The Series A bonds, totaling $7.3 million, were used to help finance the construction of the Salomon Center. The payments on these bonds are about $550,000 per year, and are coming from tax increment revenue from 10 other redevelopment districts throughout the city.

The Series B bonds, totaling $8.9 million, were also used to finance the construction of the Salomon Center. The payments on these bonds are about $590,000 per year, and are coming from the lease payments that Health & Fitness L.C. pays to the RDA.

The Series C bonds, totaling $22.4 million, were issued to consolidate the rest of the city’s Junction-related debt: $6 million to purchase the mall site, $4 million for demolition, $5 million to settle with Woodbury Corp. for its interest in the mall’s tax-increment revenue, and the rest for streets, sidewalks, utilities, and miscellaneous expenses including legal fees. The payments on these bonds are about $1.9 million per year, and are coming from a combination of tax increment revenue (from the mall redevelopment district itself and from the American Can RDA district) and lease revenues from Business Depot Ogden (BDO). If/when Boyer’s Junction developments ever make a profit, the city’s share of that profit will also be applied to paying off these bonds.

All three sets of bonds were issued in 2005 and will mature in 2025-31. Of the total original debt of $38.6 million, the remaining unpaid principal is approximately $36 million.

Incidentally, this bonded debt doesn’t account for all of the city’s investment in the Junction. The city also used various one-time allocations to pay for miscellaneous expenses, cost overruns, and repairs.

The Revenue

As mentioned above, the city (RDA) has two types of revenue to pay off this debt: tax increment and lease revenue. Each of these requires some explanation.

Tax increment financing is the whole premise of the RDA. When a redevelopment district is created, any additional property taxes from new development in the district go to the RDA for a certain period of time. Normally this revenue is used to pay off a portion of the debt from that development. Under some circumstances, however, tax increment revenue can be moved from one redevelopment district to another. In Ogden, tax increment revenue is now flowing from 10 other redevelopment districts to the Junction. Tax increment financing is controversial because it deprives all the taxing entities (school district, city, county, etc.) of the property tax they would normally collect from the new development. Proponents argue, however, that without tax increment financing, much of the new development would never take place at all.

When the city owns a piece of property, it can receive additional income from leasing that property. The city (RDA) leases the Salomon Center directly to its tenant, and began receiving lease payments in July 2007. The RDA also leases 6.3 acres of Junction property to Boyer, under an agreement whereby Boyer pays the RDA 50% of its net profit (if any) on this property. The city has a similar arrangement with Boyer for BDO, which is now returning about $3 million annually to the city.

The Junction’s retail properties, including restaurants and entertainment, also generate some sales tax revenue. The city’s share of this tax is 1% of sales, and this revenue goes into the city’s general fund (not to the RDA).

The Problem

The revenue streams to pay off the Series A and B bonds seem to be coming through, at least for now. In particular, there is no sign that the Salomon Center tenant might walk away and default on the lease, leaving the city responsible for the Series B bond payments.

The problem is with the Series C bonds. The tax increment revenue from the Junction (including the block west of Grant between 22nd and 23rd Streets, which is part of the old mall redevelopment district) seems to be covering only about half of the $1.9 million annual payment. Most of the difference is being made up by BDO lease revenue, which the city would prefer to spend on other projects.

But in just five years, the situation may become much worse. That’s when the time limit on collecting tax increment from the mall redevelopment district runs out. For the next 12 years after that, the entire $1.9 million annual payment on the Series C bonds would have to come from BDO and/or other sources.

One of those other sources was supposed to be lease revenue on Boyer’s Junction developments. But with so much of its office, retail, and residential space still unleased, Boyer has yet to make a 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.

In an upcoming article I will show in more detail how the Junction’s tax increment and lease revenues have fallen short of what we were promised. I’ll also describe the administration’s proposal to obtain additional revenue by extending the collection of tax increment on the mall district for an additional 12 years.

Meanwhile, the floor is open for comments.