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 9^th 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.