Sunday, August 05, 2012

Do the pros outweigh the cons for the proposed sports complex?

Do the pros outweigh the cons for the proposed sports complex?

The City is considering a sports complex at 6th Street and the South Lawrence Trafficway.  The City contracted with Conventions Sports & Leisure (CS&L) for a report to project the demand for such a facility.

What are the Pros?

1.      The project will attract some level of tourist spending which will generate jobs.

2.      The project will leverage a land donation and financial contributions from Assist Foundation and Fritzel family.

3.      The project may serve the recreation needs of Northwest Lawrence.

What are the Cons?

1.      The project is costly.

The City’s indoor component of the project is estimated to cost $25 million for a 181,000 square foot fieldhouse.  This indicates a construction cost of $138 per square foot, which is higher than three of the four comparable facilities listed in the CS&L report.  This suggests that the project costs are inflated and should be examined closely.

The project causes the City to jump to the west of the South Lawrence Trafficway, creating a need for very expensive infrastructure.  This will cost many millions of dollars for services that are not now available at the site.  The infrastructure costs are too high to be justified by a highly risky sports complex.

2.      The project is very large.

The fieldhouse is very large at 181,000 square feet, larger than 5 of the 6 comparable facilities listed in the CS&L report, many serving larger metropolitan areas.  Given the size of the Kansas City metropolitan area, the scale of the proposed fieldhouse appears to be too large for the market served.

3.      The projected demand for the sports complex is much higher than the demand experienced by comparable facilities.

CS&L report projects the Lawrence fieldhouse to attract 294,000 attendees annually to 34 tournaments.  This is greater than the annual draw at the Fieldhouse USA in Frisco, Texas.  It seems highly unlikely that the Lawrence Fieldhouse, serving a smaller and less rich metropolitan area will outperform the Frisco facility serving a much larger and richer metropolitan area.  Given the size of the Kansas City area and the performance of other facilities, the projected demand for use of the Lawrence fieldhouse seems highly exaggerated.

4.      The fieldhouse will not serve the recreation needs to the residents of Northwest Lawrence.

If the demand for the fieldhouse is as great as the CS&L report indicates, it appears that use of the fieldhouse will be restricted for 30 of 52 weekends each year.  This high incidence of restricted use will lead to a disgruntled public who will assuredly call for facilities that are open to the public without such an interrupted schedule.  The City should rethink whether the proposed sports complex is a business venture or is a facility to serve the recreation needs of the residents of Northwest Lawrence.

5.      Competition in the Kansas City region is not fully reflected in the demand calculations.

The CS&L report lists possible tournament sponsors.  This list includes sponsors who are owners of facilities in the Kansas City area.  It seems highly unlikely that these sponsors, such as the Heart of American Volleyball, would send their own tournaments to a competing facility in Lawrence.  The list of potential sponsors who would support tournaments appears to be inflated.

6.      Ownership of the facility assumes that Lawrence taxpayers must absorb all risk.

One-half of the comparable facilities listed in the CS&L report are privately owned.  If this project could attract the level of demand projected for it, private investors should materialize to make this a viable project without large levels of public subsidy.  It appears that the planning for this project has not properly explored leveraging investment from private investors to reduce the risk absorbed by the taxpayers.

As structured, the taxpayers of Lawrence must absorb all of the risk for any operating losses and construction cost overruns on this project.  The KU Athletic Association is absorbing none of these risks.  Private investors are absorbing none of these risks.  It appears that the taxpayers are being asked to absorb too much risk in this project which should be shared by the KU Athletic Association and private investors.

7.      Partnering with the KU Athletic Association is questionable.

The KU Athletic Association is projected to build an outdoor facility at the sports complex, yet it will pay nothing for the use of the land, will contribute nothing toward the development of the infrastructure to service the site, will contribute nothing to the operation of the complex as a whole, and has made no promise that its facilities will be open to the public.

The KU Athletic Association is notorious for not allowing either the public or even KU students to make use of Athletic Association facilities.

Recently, the KU Athletic Association saw four employees convicted of federal crimes involving stolen tickets.  This first scandal led to a further scandal with two local police officers losing their jobs over fixing speeding tickets in exchange for basketball tickets.

Given this history of corruption and rebuffing the needs of the community, the KU Athletic Association seems like an undesirable partner for an investment of this scale.  The Athletic Association should be making a very large contribution to this complex, such as covering operating losses, and should be attempting to rebuild public trust by assuring the public that it will have access to the outdoor facilities.

8.      The land donation has prohibitive strings attached.

The City’s plan promised the residents of the land to the north of the proposed site a buffer from non-residential uses.  The land donation is only enough space to build the facilities without leaving open space as a buffer.  In effect, the land donation forces the City to renege on its only plan and not provide the needed buffer.

The proposed plan seems to provide only 800 parking spaces.  This seems prohibitively small if the parking is to support a 10,000 seat stadium.

The City should reconsider whether this land donation is adequate to produce a good project which provides adequate space for the facilities and buffers these non-residential uses from adjoining residential properties.

9.      The commercial development cannot be supported by the sports complex.

The CS&L report projects demand for hotel space at only 9,500 stays.  At 60 percent occupancy and 365 nights per year, 9,500 stays is enough to support only 43 hotel rooms, far less than the “upwards of 300 rooms” mentioned in the report.  The City is investing millions of taxpayers dollars in two hotel projects, one downtown and on closed to the KU campus.  It is unwise in the extreme to threaten these investments by promoting more hotel space that cannot be supported by the sports complex and will only compete against hotels in which the local taxpayers are invested.

The CS&L report projects spending at only $12.50 per attendee who visits the project for the day and $80 per attendee who stays for the night.  The report projects that only 1 in 5 attendees will stay for the night.  Even if the 294,000 visitors figure could be met, this level of spending is only enough to support about 25,000 square feet of retail, (((.2*294000*80)+(.8*294000*12.5))/300=25,480).  This level of spending would support, at most, a few fast food restaurants.  If the project performs closer to the performance found in the comparable facilities listed in the CS&L report, these the supportable retail space will be even less.

As is so often the case, developers exaggerate the demand for commercial, especially retail space.  The City only does harm to its existing retail districts by allowing outlying new districts to be built.  The City should rethink the viability of any associated commercial space associated with this project.

10.   An alternative exists.

The City can build a recreation center on land west of Lawrence Free State High School with its baseball and football fields plus its gym and the City’s attached indoor pool.  A recreation center built near these existing facilities could serve the citizens needs and attract some level of tournaments with their ensuing economic benefits.  This alternative site would not require any major new infrastructure; the site already has the necessary services.  The location would develop its own synergy through coordination of events with the facilities at the High School.  The City should carefully examine the relative costs, benefits and risks of this alternative.  It may be a less costly, less risky, and nearly as beneficial an option that can better serve the needs of the residents of Northwest Lawrence.

It appears that the pros for the proposed sports complex do not outweigh the cons.  The City should sharpen its pencils and study the alternatives more closely. 

Wednesday, August 01, 2012

Where are the studies that are needed before we make such huge investments?

Where are the studies that are needed before we make such huge investments?

The City Commission is rapidly moving ahead with a $12 million subsidy package for the apartment and hotel developments at 9th and New Hampshire Streets.

Before any city considers making such a large investment, its professional staff should engage in a planning exercise to ensure that this is a good investment.  Lawrence has not done this.

These studies should include:

               Market Analysis

               Cost-Benefit Analysis

               Feasibility Analysis

Market Analysis

The market analysis answers the question, “does Lawrence need these new developments?”  If the city does not need the development, the project will, if built, simply cannibalize demand away from existing properties.  The effects of cannibalization can be minor to catastrophic.  Lawrence invested heavily in the Oread Hotel.  The downtown depends upon the success of the historic Eldridge Hotel.  It is unwise to foster development of another hotel that could hurt these two hotels.  It is foolish in the extreme to subsidize the development of another hotel that could hurt these two hotels.  Similarly with an apartment building, the taxpayers should not be asked to subsidize an apartment building that will cause problems for other existing apartment buildings.

A market analysis should have preceded any consideration of TIF or any other subsidy, but a market analysis was not prepared.  Casual observation suggests that the market is not right for this development, especially with heavy taxpayer subsidy.  Developers are building apartments faster than population growth among renters, thus there seems to be no need for more apartment buildings now.  Hotels seem to be struggling rather than bustling, thus there seems to be no need for more hotel rooms now.

There may be little or no new market for this project; it may only cannibalize existing markets.

Cost-Benefit Analysis

Cost-benefit analysis answers the question, “does the present value of all future costs and benefits exceed the present value of all current costs?”  If the benefits do not substantially exceed costs, then the City should not invest scarce taxpayer dollars in these ventures. 

A cost-benefit analysis should have preceded any consideration of TIF financing or any other subsidy, but a cost-benefit analysis was not prepared,  Again, casual observations suggests that the taxpayers will not get a good return on their investment.  Out of the $12 million in subsidy, the taxpayers will get a $800,000 contribution toward paying down the debt on the existing New Hampshire Street garage plus about $500,000 toward building an art park where the Salvation Army building now stands.  That leaves $10.7 million to be covered.

It takes Herculean assumptions on benefits to cover the remaining $10.7 million in costs.  We cannot look to any taxes on either the apartment or the hotel; they have all been given back to the developers.  Apartment buildings do not create many jobs, but hotels do.  However, if the need for new hotel rooms is small or non-existent, then there will be few or no new jobs in this hotel.  The hotel will simply cannibalize jobs from other hotels just as it will cannibalize customers.

The expected benefits from this project may be less, even substantially less, than the costs.

Feasibility Analysis

Feasibility analysis answers the question, “will the project be financially feasible only with the subsidy?”  It turns out that the City did engage a private consultant to conduct such a study.  Such studies generally conclude: first, that the project is not feasible without the subsidy; and second, the project is feasible with the subsidy.  Ironically, the feasibility analysis said that the project is NOT feasible with or without the subsidy.  This is a clear indication that something is wrong with the numbers that the developer is submitting, and that consideration of any subsidy should stop until more and better information is found.  Our City Commission ignored this message and went ahead with the subsidy.

The City has chosen to invest $12 million taxpayer dollars in project about which it knows little.

Our City Commission is guilty of being overly eager to cut ribbons.  This is not unusual among politicians, but it is scary.  The City Commission voted to give $12 million taxpayer dollars to a project that may have little or no market demand behind it, that may not generate enough benefits to justify this very high public investment, and that may not be financially feasible.

The necessary studies are missing or are being ignored.  The City staff should have shown leadership to the City Commission and the taxpayers by causing these studies to be properly prepared, properly interpreted, and properly acted upon.  City Commissioners are not trained in the intricacies of Tax Increment Financing or benefit-cost analysis or market analysis.  City staff members are appropriately trained.  The taxpayers have a right to expect more from our staff.

Hold on to your wallets; this same system is about to make an even larger decision on a sports complex.