Archive for the ‘Real Estate Development’ Category

Trenton’s Most Foolish Ordinance Yet

Even the State of NJ thinks the recently passed   “New Jersey Economic Opportunity Act of 2013” is a bad idea.  However, the Act was confirmed by Trenton’s   City Council and made applicable to Trenton by Ordinance 13-58.

The Act is meant to stimulate certain types of investment and create jobs in NJ. However, it does so at a high price of over $400,000 per job in tax credits and the loss of local property tax revenue for 20 years.  It is targeted at four NJ cities including Trenton and requires those cities to forego substantial taxes that would otherwise be collected from property owners.   The State’s Office of Legislative Services (OLS) did an economic analysis of the Act which estimates that in the best of circumstances the State’s   investment would return 10% over 20 years.   That’s .05% per year.     We’d be better off investing in a savings account.

The OLS summarizes its findings below:

The Office of Legislative Services finds that the revenue impact of the substitute (the Act) is indeterminate with certain revenue losses due to tax incentive agreements which may or may not be fully offset by revenue increases from expanded business activity. The magnitude of the revenue losses from tax incentive agreements cannot be known because ERG and GROWNJ have no aggregate award cap from January 1, 2014 through the program expiration on July 1, 2018.

What’s worse is that the .05% yearly return assumes that the alternative is that no new   jobs are created unless this Act is in place.  That’s a horrible assumption and the OLS so much as admits it.  Read the full analysis here.

So why did our City Council sign on for a bill that is so terrible for both the State and the City of Trenton?

It’s hard to say and there has been much speculation amongst activist.  Some of facts surrounding the passage the Ordinance are as follows:

  • Council passed it in a hurry with little to no public comment and on a Friday evening when the public was not likely to be in attendance at the meeting.  This was suspicious.
  • One person who did make it to the meeting was a developer from Robert Torricelli’s Woodrose development who stands to benefit from the Act.
  • Days  later  that same Woodrose development  handed  out  500 free Turkeys at their  development site  in Trenton and invited local politicians Marge Caldwell-Wilson and  Eric  Jackson  to  be seen as  having something to do with the gift.
  • Robert  Torricelli was  reprimanded in the US  Senate for corruption

So on the surface this deal is smelly and reeks of connected developers getting rich on the backs of taxpayers.

Given the OLS’ analysis it’s clear that NJ taxpayers are being shafted.  The question is, “are Trenton taxpayers getting any benefit?”

First, we have to assume that Trenton taxpayers are suffering from this bad investment in a similar manner to our suburban friends.    Our State income tax dollars are being wasted.

Then there’s the matter of lost property taxes that many in the activist community have complained about.   This is trickier.

The deal is that a developer would pay no new taxes on improvements to a property for 10 years.   During years 10 – 20 taxes on improvements would gradually be raised to reach 100% by year 20.

So this could stimulate new taxes, just not in some of our lifetimes.    There is no guarantee that any property in Trenton could ever be developed (many abandoned properties have negative value).   So getting something on those difficult plots of land  and having the State stimulate that future tax benefit does have a positive benefit.  Perhaps that’s what our Council members are reacting to (I’m giving them the benefit of a doubt).

But here are the problems:

The deal is unfair

This tax break is not available to all citizens or even all types of investment.  For instance, there are exclusions on retail investment such as stores and restaurants.  The deal is not available to homeowners or even condo owners.    You and I can’t benefit from this Act and are in fact subsidizing those that do. The state and city should not be in the business of preferring one type of investment and one type of investor. They’re not that smart.

The deal will have unintended consequences

Trenton does not have unlimited developable land.  The Act heavily incents developers to build non-retail commercial space or residential rental property.  If all the prime development spots were taken for these purposes, then the price of retail and owner occupied development will go up.   Many in Trenton’s revitalization community believe that if anything, Trenton needs to over index on owner-occupied housing and new retail amenities.  This bill is likely to make that more difficult.  In this regard we’re shooting ourselves in the foot.

There are better alternatives

A maxim in real estate development is that a building or land should find its highest and best use.   This Act warps that concept by preferring only certain developers with certain kinds of projects.   A better alternative is to establish a standard PILOT agreement and stimulus that are available to anyone investing  in our cities.  One such PILOT plan would offer a very high tax rate on land but a very low rate on improvements thereby rewarding high value or high density development no matter what type it is.  This PILOT could even be made optional to existing landowners.  This would be especially beneficial to home owners seeking to improve their homes.    It could do away with existing abatements and negotiated PILOTs (long an opportunity for abuse).    The state could directly and more transparently provide tax credits on the total value of a project of say $200,000 or more.  This standard subsidy gets the   State out of the dicey business of trying to manipulate the economy.

I suspect that the City of Trenton did not have a real voice at the table when this scheme was cooked up.  Certainly it was foisted on the citizens of Trenton in a rush.  This is a big problem as there is no evidence the State is acting in best interest of Trentonians.

An Act and Ordinance of this scale and importance (it fundamentally   changes our tax structure) should never be considered in the current political situation where a Mayor indicted on corruption charges related to real estate development has only 6 months left in his term.   Rather we need to let the next administration determine whether this deal fits into a strategic plan for Trenton.   Let’s vote on it by making it one of the issues in the upcoming election.

Our City Council has done the citizen of a Trenton a disservice by allowing us to be bullied into the deal. There is an online petition being run to show opposition to Ordinance 13-58. I encourage all to sign it.

Petition to Oppose Ordinance 13-58

The Fix Is In

On Friday afternoon, (Jan. 11, 2013) Trenton first heard that Thomas Edison State College was to acquire the former Glen Cairn Arms (GCA) building at 301 W. State St.

The deal is that they pay a one-time fee of $300K and then never another dime to Trenton for all eternity.  TESC wants to construct a nursing school on the site.

To those of us that have observed the RFP process for GCA and the city’s broader attempts to market the city over the years, we know that our failure to interest a developer was due to lack of imagination, financial acumen and hubris.   The city under Doug Palmer had paid a substantial amount of money to acquire and settle lawsuits regarding the building, in excess of $3M.   We always thought we were better than any developer thought we were.  A Walgreen’s wasn’t good enough or a developer wouldn’t pay enough of the demo cost.  Or maybe other payments weren’t made.

In 6 tries over 16 years the city has not found a proposal that it liked enough to accept.  They’ve turned down proposals that would have had a positive return on investment for the city (i.e. paid more in taxes that our cost to make the site read).   And meanwhile, they never presented a plan to make the area around the site attractive to developers.  Over the years both Palmer and Mack have slowly let the city deteriorate in general both in its ability to fight crime but also to function as a working government.

So here we are.

In comes George Pruitt to present a deal to the city for the site that gives us nothing and for all time.

Tonight’s City Council meeting was obscene in the degree to which those of us working to help fix our approach to government were dismissed.  It was as if we were on the wrong side of the negotiating table with TESC, City Council and the administration lined up jointly to oppose us.

George Pruitt and his subjects threw out comment after comment hoping to convince, I don’t know who, that the project was a good idea.  They didn’t need to convince Council because they’d already been dealt with before the deal was announced.   Council and the city administration have given up on the city’s ability to affect change in marginal areas of the city.

This is a scary thought.  By giving up on Glen Cairn Arms, which has quite a bit going for it in terms of location, they’re saying that they don’t know what to do in any marginal part of the city.  They don’t know how to stimulate development.   It’s a hard thing to accept especially when the city administration and council don’t even know that’s what they’ve done.

But back to Dr. Pruitt’s comments on the numerous benefits to the proposed project:  Bob Lowe called them second order effects, which is what they are if you could even prove that.

For instance, he insists that by erecting a shiny new building property values would go up.  However, there’s no evidence in Trenton to suggest that.  It didn’t happen with the ballpark, hotel or arena in the so-called opportunity triangle.  It didn’t happen with the Hughes Justice Complex and it’s not happening with the new County courthouse.   The theory just isn’t supportable with the evidence.  And even if it was, it wouldn’t help our revenues because we don’t revalue our property, ever.

Second, Diana Rogers of the CCRC strongly supported the project.  Well that’s wonderful but who cares.  Ms. Rogers’ contribution to the “logic gone wild show” was to suggest that students at the nursing school would move to Trenton.   Wow! That was a doozy.   So what she thinks is that nursing student from around the world will pass by all of the other nursing schools in between them and Trenton just to come to TESC so that when they get here they’ll need a place to stay.   It’s hard to believe that a person that calls herself a redevelopment professional actually said that in public.

Next we hear the obligatory jobs argument, both construction jobs and permanent jobs.  I’d like for just once somebody to put pen to paper and show exactly how that translates into municipal revenue.  Unless new workers are being recruited from other areas of the country and need housing, and then when they get her happen to decide they want to live in Trenton, new jobs don’t equal new revenue.   Or maybe Dr. Pruitt thought that TESC would be hiring unemployed homeless people already in Trenton.  I don’t know what he was thinking other than he knew the public would like hearing it.

Finally we hear the nursing school compared favorably to other schools like Princeton, Rutgers and The Naval Academy.  The argument goes that those schools spin off industry and stimulate the economies of their host cities.  There is evidence that research universities have contributed to the development knowledge economies.   There just isn’t any evidence that nursing schools do that.  If there was then wouldn’t we be experiencing the boon Dr. Pruitt and others predict given that Mercer County Community College already has a nursing school in downtown Trenton.  I’ve read a lot about the linkage between universities and economic development.  I just haven’t come across the same linkage for nursing schools.

So we’ve got $16.7M in state spending that will make Trenton look a little prettier, give students another nursing option and construction workers another 6 months’ worth of work.  But Trenton gets nothing.

But we expected those banal arguments.  It’s what people say when they have to run away from the hard truth that a public project won’t benefit the host community.  We’ve heard this story too many times to count in Trenton.

What we didn’t expect to hear was the outright hostility to the idea that maybe we should take some time to think about this idea before we act.  I suggested that we form a group to look into the claims that were made by TESC and their paid contractors.   Shouldn’t we verify that there is no hope for site?  Shouldn’t we calculate the city’s cost in supporting this building for all eternity?  Shouldn’t we find a way to determine how nursing student lunches will translate into municipal revenue?   TESC made a lot of claims and didn’t provide any calculations to show how the city would actually benefit.  Shouldn’t we look into that?

And what about the city?  How is it that an economic development department can go 16 years and not figure out how to turn around one of the most trafficked blocks in the city?   How is it that a Business Administrator can’t figure out that a demolition loan at 2% would be a bargain if it generated a 4% return in taxes?  It’s not hard math.

Shouldn’t we do a little due diligence?

Nope rather than allow citizens to help look into these questions, our city council angrily shut the door on meaningful analysis and research.  They literally suggested that if we wanted to, we could  try to come up with something on our own. We could, but we’ve only got two weeks.   I’m sorry but we have jobs.  TESC told the Council that they had been working on this plan for two years.  Trenton taxpayers working as volunteers have only two weeks.

And to top it off, it was suggested that if we as taxpayers were so concerned why we didn’t do something about it before.  With whom?   Tony Mack hasn’t had the same person in the same job for more than 6 months for the past 2 ½ years.  Activists have tried to work constructively with the administration but it’s like walking on quicksand.   Further, I’ve been writing about this very subject for years.   I’ve written post after post about how to deal with land that has negative value.  I’ve proposed that we subsidize demo costs as early as 2008.  I’ve written extensively about neighborhood level development and land value tax.  These are measures to which the Palmer or Mack administrations or Council could have listened.  But instead they’ve chosen to chase business as usual and cede more Trenton land to the State of NJ.  They’ve chosen to be influenced by the same people who have influenced Trenton into the hole it’s in.  They’ve chosen to make us more dependent on the State, not less.

The lack of questions, the suspension of logic and the shutting out of meaningful public comment is proof positive that once again, in Trenton, the fix is in.

Other blogs/write-ups on the subject:

Jim Carlucci’s write-up of the Council meeting

Reasons to be Cheerful. Not.

Glengarry Glen Cairn

Tony Mack’s Worst Deal Yet

Tony Mack’s Worst Deal Yet

Today, Tony F. Mack announced that he wanted to give the Glen Cairn Arms building to Thomas Edison State College (TESC).  They want to put a $16.7M nursing school of some sort on the property.   Right off the bat, unsophisticated Trentonians started messaging that this was progress.

It’s not progress; it’s more of the same.

Every single politician and activist in Trenton for the last 12 years has complained that the State of New Jersey doesn’t pay its fair share in Trenton.  And this deal is simply more untaxed State land.  Do we need another tax exempt property?

Let’s do the math

TESC wants to give Trenton a one-time payment in lieu of taxes (PILOT) of $300,000.  One time!  That’s essentially free.

That $300,000 is to cover taxes for all time on a $16.7M building? Spread over 10 years that’s a 0.2% tax rate. Spread over 20 years that’s 0.1%.  Trenton’s tax rate for the rest of us is 5.5%.   Put another way, the State would be paying 1/50 of what you and I and every other private property owner pays in taxes. That’s essentially nothing.    Many private homeowners in Trenton pay more in taxes than this deal will yield.   It comes nowhere near the cost of paying for the police, fire and public works costs to support the building.  The new building’s direct support costs for just those services would be around $700K per year.

Trenton’s City Council should NOT approve this.

Instead, City Council should do what Fix Trenton’s Budget recommended two years ago and approve a standard PILOT for all new development in Trenton.  That standard PILOT should be based on taxing land at 30% of assessed value and improvements at 1.5% of assessed value. This PILOT should be available to all developers.   A standard PILOT like this would be welcome by developers and go a long way to encouraging new taxable investment in Trenton.   It would also serve as a reasonable basis for PILOTs for non-profits and eventually for a Land Value Tax for the rest of us.   This is important in our effort to have our tax system work for us rather than against us.

“Isn’t something better than nothing?”

It’s true that Glen Cairn Arms has sat vacant for many years.  But, as the math above shows, we lose money on this deal.   So no, “Something is NOT better than nothing”

Why hasn’t the building sold?

The City of Trenton owns the building and has been unsuccessful in selling it for many reasons:

1)    The City has maintained a poor development environment for many years due to crime, ineptitude in city government and lack of a plan to improve.

2)    The city always tried to sell it rather than give it away.  It’s obvious the building is a mess and therefore has no value and maybe negative value.

3)    We don’t have a standard PILOT that makes sense for a developer. I’ve proposed one above.

4)    We may have to demolish it ourselves (i.e. because as the building stands it has negative value)

There are several options

  • We sell it to TESC using a standard PILOT. The current assessed value of the land is $500K. With a $16.7M improvement and using the suggested standard PILOT rate, we receive $400k/ year in revenue. This is what we should get.   It still doesn’t cover all of our direct costs, but it’s closer.
  • We sell it to a private developer with a new package. We would spend the ~$1.4M * it would take to demolish the building in anticipation of a private developer putting a $5M building on the land. With the standard PILOT in place that would yield $225K a year in tax revenue.  This is a 16% return on investment and a pay-back of 6 years.
  • However, we should NEVER approve another tax exempt property deal. Increasing ratables in Trenton should be our #1 priority. This deal with the State of NJ is the opposite of that.

But there’s more

Do we as citizens really want to let Tony Mack negotiate development deals for us?  Time and again, we’ve seen in New Jersey that government money is rife with corruption.  Tony Mack has provided us a case in point.  We have no reason to trust him and every reason not to.

Our Indicted Occupant of the Mayor’s office will do anything to make himself look good to unsophisticated voters.  In this case, it appears that he’s working to curry favor with TESC and let that organization’s patina rub off on him.   The leadership at TESC should know better.   Furthermore TESC and Mack are using State money as part of this scheme.

But I’m really confused about the choice of Glen Cairn Arms?
Trenton has a large unused medical facility with multiple buildings that could certainly be converted into a nursing center.  Why not encourage TESC to purchase all or part of the Capital Health Mercer campus.   Isn’t this exactly the use we’ve all talked about for that site?

Finally …

This deal has been presented to citizens without any economic impact assessment.   Certainly our City Council has come too far with this corrupt and incompetent Mayor to allow him to get by with this. But more importantly, if you support this deal, then you have no business complaining about the State not paying its fair share in Trenton. This is just making it worse.

* I originally estimated $300K based on numbers from a previous bid, but understand that TESC thinks the cost is $1.4M so I’ll use their number to be conservative.

Embrace and Extend: Revitalizing Trenton’s S. Broad St.

This last week, a meeting was held of building owners and stakeholders representing a stretch of Trenton’s busy S. Broad Street from downtown to the Sun Bank arena. I’m one of those building owners.  If you’re familiar with Trenton at all, you know that this is an extremely visible and potentially important stretch of road.

There were around 40 people at the meeting and it’s the first time I’ve ever been in the same room with so many of my fellow S. Broad owners.  It was an important first step in the conversation to revitalize this part of Trenton.  I was skeptical of the meeting at first as I’ve been to a few failed attempts in the past and haven’t been able to get myself organized enough to hold a similar event.

The Old Mill Hill Society gets credit for getting this ball rolling and in particular Kari Brookhouse, Phil DeRose, Pete Kasabach and Craig Shofed.  They got the Mercer County Improvement Authority (MCIA) to fund an architectural firm to do some visioning work.  This was the impetus for the meeting.

To be honest I suspect some of the owners were there because they thought someone was handing out façade grants, but nonetheless they were there.  At the meeting we all got a visual overview of the area and then talked about what would make it better.

If you’ve driven or walked on S. Broad recently you’ll be able to guess that the #1 topic of discussion was trash.  Yep, somehow this busy commercial street has become a dumping ground.  We don’t know why but the architects pointed out that there wasn’t a trash can on the 300 block of S. Broad and yet that’s where all the restaurants are.  This is a problem.

Parking was the other big issue.  We’re a commercial area with no access to off street parking.  One of MCIA’s drivers for being involved in the meeting is that workers and visitors to the new county courthouse near S. Broad and Market St. will have to walk 2 blocks on S. Broad from parking lots at the arena.

Other issues such as crime and Mercer County’s nebulous plans for the “old” county courthouse also weighed on the group.  However, I’m hopeful.

The meeting got me thinking about what would make a difference in these 5 blocks of Trenton.  Together they represent $58M in assessed value but only $12 M of it is taxable.  So, as well trafficked and important as these 5 blocks are, they generate only $600 K in tax revenue.  That’s a problem.

My hope is that if we can continue to get ourselves organized, we can turn this around.

Keeping this part of Trenton clean should not be beyond our grasp.   Dumping enforcement, trash cans, street sweeping, public education about trash pick-up times and maybe some anti-litter marketing could help.  We discussed several small street-calming tactics that should be within our reach  such as trees and decorating the Rt. 1 bridge.   Furthermore, if we’re talking as a group, we’re also sharing business ideas and helping each other attract investment to the corridor.  That’s a good thing.

But what I really want to see happen is that we organize ourselves just enough so we can set a goal to grow from $12 M in value to $18 M over the next 2 years.    It’s not unattainable.  We’re not dependent on the city to grow, though the city could certainly do several things to avoid being in the way.  And, it would help us all.

If you know this corridor, then you know that it has an interesting mix of stakeholders.  On one side is one of Trenton’s nicest neighborhoods, Mill Hill.  On the other is a public works project, Kingsbury. Mercer County owns large buildings on either end of the corridor and there are large regional churches in the middle.

My attitude towards revitalization in this corridor is to “embrace and extend”.  As building owners we need to find business tenants that can embrace both Kingsbury and Mill Hill.  This might not be easy as the demographics are radically different.  This happens to an extent already but as we think about marketing our corridor we need to know more about the buying trends of the two neighborhoods.  Furthermore, why not create an environment in which churchgoers and arena visitors would like to linger. Most of the churchgoers on this block do NOT live in Trenton. Let’s make them feel welcome.

Secondly, we need to aid the extension of the corridor.  My hope is that Mercer County does NOT hold on to the old courthouse and instead sells it to private developers.  Also in the works are development of the former Hill Motel site, a plot of empty land near the arena and an infill lot in the middle of the 300 block.  As a group we will need to support these developments and help them succeed.

By embracing what we have now and then extending through new development, we can meet a goal of increasing values on S. Broad St. and doing our part to revitalize the city.

Fix the product first and then advertise

Trenton needs an ad campaign now like we need another hole in our head.
City activist Pat Stewart has been beating this horse for years. For the love of God, let’s have a product plan first.

Marketing VPs get fired for launching ad campaigns at the wrong time. The right time is around the launch of a new product or product update. Trenton hasn’t updated its product. In fact, we’re not even sure what our product is.

Yet, a marketing campaign is exactly what Mayor Tony Mack has recently suggested.
I’ve written about this before, but basically we need to sort out what we’re trying to sell first.  Are we selling abandoned warehouses as Mack suggests in his recent “Ask the Mayor” session.  If so, are they saleable?  Are titles cleared?  What are the brownfield issues remaining?  What’s the market for abandoned warehouses?   Perhaps we’re selling city-owned houses or infill projects in our nice neighborhoods. Or, perhaps we should promote downtown living.

Mack doesn’t know what we should be selling. Sam Hutchinson doesn’t know. If councilmembers knew, they certainly wouldn’t agree with each other or the Mayor.

A marketing campaign can’t market everything.  If we’re going to make a pitch we’d better make it for a product that’s ready to be sold.  For instance, promoting infill opportunities before we know how we’d take a developer or homeowner through the development process is wasteful and potentially damaging to our reputation as an easy place to develop (of course we don’t actually have that reputation).  Another consideration is what are our development priorities?  What kind of development gives us the most “bang” for the buck?  That analysis has never been done in Trenton and marketing consultants won’t be able to do it for us.

Before launching an expensive marketing campaign, we need to have sorted out the residential market for Trenton.  Who’s going to move here?  Where do they live now?  We have challenges like our crime rate and schools.  Are there population segments that don’t care so much about those things?  Where would they live in our city?

Before we think about promoting Trenton we need a marketing strategy.  Read more about that in the following:  Managing the Trenton brand
The first step in a plan to sell Trenton is to figure out what we’re selling and why.  This doesn’t have to be a difficult process but when we’re talking about spending precious tax dollars and time we shouldn’t just guess.

Second, just as in business, our pricing needs to be right before we market.  Trenton is currently priced too high.  Many of our abandoned buildings have negative value and yet the City attempts to sell them for positive prices.  It’s no wonder they haven’t sold. Also, our tax rate is the highest in NJ making new development in Trenton a bad idea when compared to neighboring towns with half our tax rate.  We need to work out how to make our product’s pricing attractive. Land Value taxes are one answer. Subsidies and abatements are another.

More on how land has negative value in the following: The case for dumping city-owned property

Third, we need to spruce up the product. We can do this by reducing crime in the area of focus. We could clean up a bit. If we’re marketing to population segments likely to appreciate the arts, we could invest in some targeted cultural things. We could also wait until we have a Mayor that’s a little less radioactive.

When you visit Trenton and pick up a paper, all you’ll see are dirty streets, stories about shootings and murders, a recreation department in disarray and a corruption scandal that sought to extort a developer.  No amount of marketing is going to overcome these issues.  And while we don’t have to eliminate crime or have pristine streets to attract new development, we do have to have made progress and at least have a credible plan on how we’ll improve.   The product improvement plan for Trenton doesn’t exist.

Fourth, we need to make sure our operations work. As a customer you hate it when you try to buy something but the store is out of stock, it gets shipped incorrectly, or it’s broken when you receive it.  Trenton is like that.

Our Economic Development department isn’t prepared to deal with an influx of developer interest.  Our residential and commercial realtors don’t have the city’s marketing plan in mind so they can be part of the solution.  There’s not even a promotional web site in place.  Our inspections process has never been a positive aspect of developing in Trenton.  Would it be useful to have turned that department into a positive instead of a negative before we start attracting new investment? Can the City even transfer property?  Properties sold in last year’s auction still haven’t closed.

The bottom line is that before we start attracting interest we need to improve the operations of our city so that our new customers have a positive experience.  If you currently live in Trenton and have dealings with the city, you know we’re a long way from operational excellence.  Companies that run marketing campaigns when their operations are broken make matters worse and pretty soon go out of business.

Advertising is the last step.

To recap, first we must

  • Decide what we’re selling and to whom
  • Competitively price our city
  • Fix the issues that are causing our poor image
  • Improve operational proficiency

These aren’t new ideas; and its’ pretty much Management 101.

For more reading on planning for Trenton’s revitalization see of the below articles:

Revitalization is a dirty job

A Vision and Plan for Trenton

The State of Trenton – by the numbers

Trenton’s Plan: The Ultimate Question

Trenton’s Plan: Setting Goals

Dysfunctional and without a plan

Big suggestions for Fixing Trenton

Trenton is Missing Out on Big Business

Buying Out Tony Mack’s contract is a Win-Win

Our country’s economy and especially its real estate market has been in a slump for 4 years.  However, in the next 2 years we’re going to come out of it, no matter who wins the Presidential election.

When that happens, we don’t want Trenton to be left behind.

A normal economy will grow around 2-3% a year.  For Trenton with its $1.9B tax base and  ~ $70M in property tax revenue that means our revenues could increase $1.4M – $2.1M a year.  That’s if we were normal.

The problem is that our Mayor has become a national and regional publicity problem due to his various missteps and most notably his arrest by the FBI on corruption charges.  It should be obvious to us that no matter how good the national economy, a developer, potential homeowner or business owner would not want to invest in a city under such leadership.

Tony Mack is a drag on Trenton’s economic recovery.

In addition to the bad reputation he’s given the city, it’s also become apparent that Mack’s administration has no intention of addressing our economic growth.  In Mack’s 2 ½ years in office he has not made one proposal to increase our tax base.  In his 10/16/2012 budget address to City Council he did not mention ratables or growth in property taxes other than to pitch his proposed  $.19 tax hike, which would have a negative impact on economic growth.

Mack is not thinking about revitalization.  He’s never mentioned it.  There’s never been a plan presented.  This city’s budget discussions have never contemplated expenditures related to increasing our tax base and thereby our property taxes, our single largest source of revenue.

If by inaction and negative publicity, he “drags” our economic growth by even one quarter of one percent or $150K per year in growth, we would be better off paying the man to step down.  We’d be better off  paying Tony Mack his $126,000 a year salary, NOT to show up for work.

For a man facing a difficult legal battle and under severe personal financial distress, this seems a win-win for both Tony Mack and the City of Trenton.

Palmer’s Dream, Still a Nightmare

It’s been almost two years since I wrote my first article about the Trenton Marriott shortly after I joined the Lafayette Yard Development Corporation board (LYDC).   which oversees the hotel on behalf of the city.  At the time in 2010, I was encouraged that a new Board would take aggressive action to get us out from under the hotel’s debt burden and operational risk.   A new year and a new attitude at our hotel

After I joined the board and began to understand things better I started saying to anyone who cared to listen, and certainly the LYDC board that: Our hotel isn’t worth very much to us and we need to sell it now.

The LYDC board has a few sophisticated people on it and many others who simply have no business being on the board of a multimillion dollar operation.  This is one of the many follies in having a city owned business; it has to be run by citizens who simply aren’t equipped to make important business decisions.

Two years after I wrote the above, hopeful, article:

  • We still own the hotel,
  • It’s still struggling,
  • We’ve bailed it out to the tune of $500K,
  • And we’ve paid $2.8M in debt payments from our city budget,
  • And I’ve resigned from the board.

The fundamental problem is that the hotel is worth more to a third party than it is to Trenton and it’s not worth very much to us at all.  For instance a third party would be allowed to lease out the restaurant space (we’re not).  A third party could profit share with its manager.  We can’t do that.  A third party could make big decisions quickly.  As a public corporation the hotel has to go before a citizen board and sometimes City Council.  The operations of the hotel are severely limited in flexibility and business model structure.

As an asset, the hotel should be valued to the owner (the taxpayers of Trenton) at the present values of its future cash flows. In a good year we can expect around $100K in cash from operations before our debt cost of $1.4M a year. The value of those cash flows comes out to about $700K. This means that we should be happy to sell the hotel for that amount of money.

Of course there may be a buyer who would pay us more than that but every day we turn down offers for anything more than our own value is a day that we’re losing money (because we pay the debt).

For instance, if, when we had an offer for $22M and had wound up selling for $10M, we would be able reduce our $15M debt by 2/3.   That would save almost $1M a year in debt payment from the city. The board President didn’t even manage to bring that offer to the LYDC board.  He failed to do so at the advice of our bond financiers who felt considering a sale would have gotten in the way of their bond sale, and thus their fat commissions. The bond guys were effectively running the board and had a significant conflict of interest.  I quit the board soon afterwards.

The City of Trenton (taxpayers) pay $1.4M a year on that $15M in debt. Every year we don’t sell the hotel means another year we’re paying that full amount.

I hope to God the LYDC board has at least put the hotel up for sale, but as of the time I left the board, they couldn’t even get themselves organized to do that.

The City of Trenton needs to get itself out of the hotel business now, not next year or the year after. There is no reason to expect the LYDC to manage the operation to greater profitability, experience shows it won’t.  We need to put this bad experiment in mayoral arrogance and public gullibility behind us.

Instead, we continue business as usual.  The Marriott will take away its brand in the middle of 2013 because they are disgusted with us.  Waterford, the organization who has managed not to run the hotel at a profit and who caused the city to have to bail out the hotel, may get replaced.    It will likely be replaced with another outfit recommended by Acquest but without a serious national search for a new manager or owner

Erin Duffy at the times wrote a good summary this week in the Times: Trenton Marriott next to Statehouse could change branding to Holiday Inn.

Trenton is Missing Out on Big Business

If you’ve driven up the turnpike from Exit 7 to 8A then you’ve undoubtedly seen all of the giant distribution centers.

These are businesses that could have been located in Trenton if we’d gotten our act together.

One of the things you do as an aspiring civic leader in Trenton is go to workshops where you’re asked to list Trenton’s assets.  People always give the same answers:  its people, its buildings and its location.

Well our people are going to work on the turnpike corridor in places like East Windsor and Robbinsville, our buildings are empty and our location isn’t as good a one would have thought.

Instead Barnes and Noble, Green Mountain Coffee and likely Amazon along with many others have set up shop in modern warehouse space in the suburbs.

Before the apologist tell me that building new construction space is cheap and Trenton can’t compete, let me suggest that we didn’t even try.  Doug Palmer was asleep at the wheel and Tony Mack is, well he’s Tony Mack.

The explosion in industry just 10 miles from downtown Trenton happened without our city even lifting a finger to figure out how we might be competitive.

We had at least one competitive advantage over the suburbs. Those warehouse facilities are hiring Trenton people.  The Kenco facility that houses Green Mountain Coffee are actually bussing Trentonians to Robbinsville.

What went wrong?

My guess is that the views on business among the city leadership are simply too provincial to understand what was happening.  Additionally our culture of corporate extortion limits us to dealing with small time developers.  Serious logistics companies like Kenco wouldn’t give a trifling crook like Tony Mack the time of day.

Furthermore we just don’t have a good story to tell.  To attract a 500,000 SF logistics operation we’d need to show why Trenton is a less costly option than a “Greenfield” in Robbinsville.  We’d have needed all the creative business people we could muster to pull that story together.  A difficult task indeed, but we didn’t even make a serious effort.

Trenton misses out on opportunities like this because we are distracted from the job of revitalizing our city.  Instead of attracting world class development, we’re busy playing political games to attract housing projects like HOPE VI.   We spend our days begging for money through grant writing and we reshuffle the deck chairs in our city budget.

I don’t expect Trenton to develop a plan in the next two years.  Rather we’ll need to wait until a new administration is elected.  In the meantime, we need to listen for candidates who have a “can do“attitude about engaging the city in developing a real revitalization plan.

Kenco brings Green Mountain to Robbinsville

The Economics of “Good Corruption”

JoJo Giorgianni has given us his economic assessment of the value of corruption to a city.  His plan was to use Mayor Tony Mack like a puppet to enrich himself as developers bribed his version of Tammany Hall for the right to build in Trenton.  JoJo’ and Mack’s thinking was that they were facilitating investment and should get paid.  Why else would they have gone to the trouble of getting Mack elected?  In his conversation with an FBI informant, JoJo called this “Good Corruption”.

I guess that’s one idea.

But just to spell it out we, need to be clear about why corruption hurts a city.

Corruption distorts a market and creates uncertainty.

Investors HATE uncertainty!   When it becomes known that one developer has had to bribe city officials, all other developers become uncertain as to what level of corruption they will face as they consider investment in Trenton.  A developer would much rather play by a transparent and clear set of rules rather than the murky give and take of Trenton’s underworld.

Furthermore, in a climate of corruption, it is entirely likely that a developer could face a second round of shake-downs further into the project after there was no turning back.  This possibility opens the developer up to a high degree of risk.  What was to stop JoJo and Mack from ordering the building inspector to look again at a project, unless the developer had “Uncle Remus” visit again (their code for bribe money).

Our PILOT (Payment in Lieu of Taxes) negotiations are another source of risk and potential corruption.  Every developer negotiates separate deals with the administration on what taxes they will pay.  This kind of uncertainty makes evaluating a deal impossible.  Even when options for a “standard” PILOT have been presented to the Mack administration, they have ignored them.  Why give up the opportunity for graft.

Bribery and extortion create an unequal playing field that raises the cost of business in a place like Trenton. Developers have other options and we need them more than they need us.

Trenton politicians have a history of shaking down developers

Tony Mack isn’t the first politician to require that developers “check in” with the administration before doing business.  Other politicians have required contributions to campaigns as a pre-condition of cooperation.  We should all be suspicious of campaign war chests exceeding $200,000.  That kind of money doesn’t come from normal citizens hoping for better government.  It comes from people who want favors, at our expense.

We don’t want to make it expensive, risky or difficult for developers to build in Trenton.  We can see the results:  very little development happens in our city because of our corrupt climate and heavy handed administration.  I’ve talked to many Trenton developers over the years who’ve refused to work in our city again because of the bad taste it left in their mouths.

We need a completely different approach

In a new revitalization minded administration, we’ll:

  • Clean out our Housing and Economic Development and Inspections Departments and start over with a new attitude
  • Publish a process for development that does NOT include the Mayor’s office
  • Set prices for city owned land in a public Internet based auction system (For the time being, NO more deals).
  • Create a standard PILOT hopefully based on Land Value Tax system that rewards investment and discourages speculation

Trenton has been relatively closed to honest business development for many years.  Hopefully, with the Mack era behind us we can start fresh and turn our city into the easiest place in Central Jersey to develop instead of the hardest.  Given our other issues, we need to be better than everywhere else.

Trenton’s Next Self-Inflicted Economic Disaster

Perhaps no other government initiative better illustrates why Trenton has economic problems than the Miller Homes HOPE VI project (aka Rush Crossing).

Early on in the project I suggested privately to City Council members and publically at City Council meetings and on reinventtrenton.com that the Miller Homes HOPE VI project would be economically disadvantageous to Trenton.

One would think that if an activist who is known to analyze Trenton’s economic issues and whose paying job is to do similar analysis for his corporate clients, someone in city government would have at least attempted to calculate the economic impact of Miller Homes. No one ever has.

The city has been flying blind on Miller Homes pushed along by developers, financiers, lawyers and contractors eager to feed at the public trough. The scene has been unseemly. Last year at a presentation to City Council 15 non-residents in “suits” showed up to watch the developer, Penrose, with their enablers, Trenton Housing Authority, pitch the project to City Council. They talked about how they would help the “poor people” but not once did they mention the project’s impact on Trenton’s City budget. These were carpetbaggers feeding on $61M in Federal, State and City tax funds. Their lawyer was there earning $300/hr to sit at City Council, their bond guy was there looking forward to his commission on the publically back financing and the developer was there to get paid to build the most overpriced housing in Trenton.

So what’s so wrong about Miller Homes?

1) The cost is wildly out of line with housing prices in Trenton
2) The cost of supporting the residents will be higher than the tax revenue and Trentonians are left holding the bag

Our tax dollars are funding housing of $300,000 per unit at Miller Homes in a city where the average home price is $61,000.

Only an insane person would think this project is sane. The total price for Miller Homes is $61,000,000 and it will yield 204 units. Simple division works out $299,000 per housing unit. These aren’t specially equipped apartments for the disabled; these are normal 1, 2 and 3 bedroom apartments. Most similar apartments in Trenton rent from $600 to $800 a month.

The $61,000 average sales price for Trenton comes from Zillow and reflects current prices. However even at our economic peak, average home prices were around $100,000.

An analysis of investment property in Trenton shows that property values range between 70 and 90 times rents. Therefore using the most optimistic valuation, an $800 2 BR rental unit would be worth $72,000. At Miller Homes our tax dollars are paying $299,000.

Trenton’s City Council, the administration, Trenton Housing Authority, the State of New Jersey and HUD are behind this. No one has publically admitted why they support this kind of waste. It can only be that with so much waste involved, the developer can afford to throw money at government officials in ways too indirect for the public to easily discover.

The fact remains that new construction for 2 BR apartments simply does not cost $299,000. The 2 BR units in Miller Homes will be approximately 999 SF. Even at fairly expensive construction costs of $120/SF (expensive for affordable housing) the costs should come closer to $120,000. Why then are costs $299,000 per unit.

Defenders of the project will say that they are adding amenities like community rooms and lighted paths. However, in normal privately funded projects these things are always built.

Taxpayers have grossly overpaid.

The cost to serve the residents will be $3M but we’ll collect only $750K in revenue.

Wasting taxpayer money on development isn’t really Trenton’s biggest problem, though the land we donated and $3.5M in funding we provided could have been put to more productive use.

Trenton’s biggest problem is that we’ll feel the negative economic impact of the Miller Homes for the rest of our lives.

If we assume that the owners of the building are taxed like other commercial landlords then their valuation will be based on income. Projected rents, based on THA’s own published comments should be around $140,000 per month for 63 – 1 BR, 73 – 2 BR, 62- 3 BR and 6 – BR apartments. Using the valuation of 90 times monthly rent, the value of Miller Homes will be $13,255,000 (a far cry from the $61,000,000 development cost). At Trenton’s tax rate of 5.63% this will yield $747,000 a year in taxes.

If we assume that Trentonians pay for half of their city government and half of their school costs (an assumption that we have to make should Trenton ever revitalize an no longer be an Abbot district), then taxes generated from Miller Homes need to cover proportionate costs of the residents.

For a 1 BR apartment with no kids, this equates to $4114 per year (to support police, fire, public works etc.) . A 2 BR apartment would include one child and 3 BR apartments would include 2 children (for sake of argument). Each child should cost Trenton about $10,357 to send to school (the city’s portion). Therefore a 3 BR (on average) would require $25,000 a year in public spending.

Given the mix of 1, 2 , 3 and 4 BR apartments in Miller Homes, the project will require $3M in public spending on the city’s portion of its municipal and school government. However, because the rents, and therefore the valuations are so low, we will collect (at most) only $750K in tax revenue.

Even if Trenton were to fully revitalize, other Trentonians will continue to subsidize Miller Homes in the amount of $2.25M a year, forever.

This analysis is meant to show how public officials in Trenton need to start thinking about publically funding redevelopment. We have allowed federal and state funds to be squandered on a project that does not gives us bang for the buck. We could have found better projects. Also, because our City housing and economic development officials and city council members could not be bothered to listen to an economic impact analysis we have burdened ourselves with a financial albatross even bigger than the city’s last major self-inflicted disaster, the much maligned downtown hotel.