A brief update to the big story of the past few days: The City's web site now has the complete package of supporting documents, deal points and memos that go along with the Greenfire downtown renovation proposal.
I've spent the better part of an hour reading through the 173-page-plus memo that Council gets this week. This isn't a very detailed analysis, but I wanted to get up at least a few early thoughts from a first blush look at this. Warning: I fully admit I may miss or misunderstand some points here; if so, I'll correct 'em based on feedbacks in the email or comments.
The full document set is posted here. If you want to really cut to the heart of the matter, I'd suggest you review these four documents:
- The overview memo on the project from Alan DeLisle
- The five-page cash flow analysis showing City revenue versus expenses
- A summary of parking impact and timing of same
- Perhaps most fascinating, a 46-page external consultant review of the financial feasibility of the project from the perspective of outside consultants Basile Baumann Prost Cole & Associates
First, it appears that the reversion of incentives dollars to the City would essentially mean that all payments would stop if Greenfire doesn't complete all the projects -- and complete a total investment of at least $284 million -- but that appears to apply 'going forward' (i.e., they don't seem to lose incentives back to Year 1.)
As noted above, though, the incentives only get paid as buildings come online, allowing property tax revenue to match incentive payment timing.
From a revenue perspective, the City plays it conservative, projecting $1.5 million in annual property tax intake from the seven projects once they're all online by FY2015. Lease revenue from Greenfire for existing parking spaces rented for the Hill, Rogers Alley and Woolworth sites contributes another $200-250k per year. There's also another $1.19 million in one-time revenue from the sale of the Ramseur St. and Parrish/Church St. parking lots to Greenfire.
Why is this conservative? Because the property tax revenue does not escalate at all through FY2030. That is, the City's analysis assumes no property appreciation in excess of tax rate declines, despite the fact that these projects should grow the tax value of properties in and around downtown (Greenfire's and others alike.)
On the outflow side: Once all the projects are completed, Greenfire would earn $1.48 million in economic incentives per year for a 15 year period. In addition, the City would lease back spaces in the E. Chapel Hill St. deck at a cost of $624k per year; however, the cash-flow analysis assumes that the City would also avoid $160k per year in maintenance costs on the existing, dilapidated E. Chapel Hill St. deck.
Altogether, then, just on the project's bases alone you're looking at $1.7 million in revenue versus $1.94 in expenses per year. The City makes this up with draws from the Downtown Fund ($300k/yr.) and the Parrish Street Fund ($100k/yr.) to show a small annual net profit. (Note that it appears Greenfire would receive the latter in lieu of incentives on the Parrish/Church St. wrapped deck and the small-scale Parrish St. projects.)
The net present value (NPV) figures look a little stronger -- NPV of all funding sources (including the annual funds) is $18.2 million versus total expenses of $13.5 million. One big factor there is the timing of funding -- no surprise, since a discounted cash flow analysis will by definition give much more value to cash flows in imminent years than distant ones. And timing is everything here: Greenfire would put up that $1.9 million to buy the two lots in FY2012/2013, but not start receiving incentives back until FY2016, all of which helps make this project better from an NPV/DCF perspective.
(And with that, dear readers, the blog just went all corporate finance on you. Sorry. Won't happen too often.)
Conservative as the plan is from a revenue perspective, the outside consultant financial report expresses the thought that Greenfire may be overly aggressive in its revenue assumptions on the project -- particularly for the Ramseur St. residential/parking project, which BBPC projects could have an internal rate of return (IRR) of between -11.6% and -19.6%. The E. Chapel Hill St. deck also shows a positive IRR only in the consultants' best-case analysis.
Much of the variance stems from differences in Greenfire's assumptions versus those of the consultant:
- Boutique hotel room rates: $170/night Greenfire assumption, $130-150 BBPC assumption (with longer period of initial low occupancy)
- Office lease rates at the Woolworth site assumed by Greenfire that are 25%-50% higher than BBPC assumptions, while Greenfire also assumes nearly instantaneous 95% occupancy
- Retail lease rates ($21 psf) higher than the consultant range ($13-18 psf)
- Higher residential unit prices than the consultant thinks possible
Interestingly, the consultant does note Durham's strong growth in high-income households, the rise of wealthy empty-nesters, and Durham's disproportionately urban and urbane psychographic profile, all of which strongly support downtown residential growth. Still, the consultant expresses some concern about the high level of absorption required to lease up or sell out all the housing units proposed for downtown.
In fact, this seems to be a factor in the Ramseur St. project's pessimistic outlook from the consultant's perspective -- it presents the largest number of units for simultaneous delivery, which BBPC notes could be a challenge for market absorption, and could weaken its pricing power, impacting project profitability.
Is this a problem for the deal? Not really, but it's quite an interesting issue nonetheless. I imagine this explains in part why the Ramseur and Church/Parrish projects are last to come on-line -- that defers them to the back end of the project, by which time presumably the presence of the Woolworth site tower and other projects increase residential demand downtown.
Still, the Ramseur St. project ("Lot 20" in the cash flow analysis) is the largest single contributor of property tax -- almost as much as the Chapel Hill Deck and the Woolworth Office building combined. Which makes Greenfire's ability to execute on this project critical.
Frankly, one of the stunning things to see from this analysis is just how much risk Greenfire is taking on. If they don't complete these projects and all this build-out on schedule, they lose all the incentive dollars, period, end of story.
Audacious as their request for city-owned decks and lots have seemed to some -- this represents an equally-audacious gamble by a developer, it seems, particularly in the unproven city center market.
I lack the time or wakefulness to take a close look at the parking data tonight, but suffice it to say the City's analysis finds that there's plenty of space in existing structured and surface parking lots to cover current and projected future parking demand even with the temporary off-lining of some facilities for renovation/construction. The Durham Centre deck would be expected to absorb much of the burden, interestingly.