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More numbers (and theories) to study with the Haney deal

02.18.2014 by André Natta · → 7 Comments

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Social_Security_Building_(1974)There’s been a great deal of conversation about the proposed lease agreement that would see the City of Birmingham occupy more than 263,000 square feet of space in the former Social Security building, particularly about the PAC transfers John Archibald has written about in several widely-read pieces for AL.com.

Campaign finance reform is a major issue, and one worthy of scrutiny at any time – especially during an election year. I’m looking forward to seeing what else John is able to uncover in the coming days and weeks and to the public responses to the allegations. I’d like to look at something else today though – the deal itself and a crazy theory as to why it’s being floated in the first place.

Let’s run the deal’s numbers too

The proposed deal’s lease rate is what’s most significant. John references $139 million over 30 years. His fellow AL.com journalist Joseph Bryant, as late as the morning of February 17, was referencing $127 million as the figure. It makes a big difference. John’s figure works out to $17.62 per square foot per year for the life of the lease while Joseph’s comes to $16.10/sq. ft. The current average rate for office rentals in Birmingham, AL proper according to LoopNet is $16.72/sq. ft., making Joseph’s figure look very favorable for the city (even if the length of the lease is questionable – more on that shortly).

John’s figure looks favorable depending on how you believe the deal would be structured normally. If Haney used $16.11, the average for the metro area, as a baseline with an annual 3% increase applied, it’s the equivalent of what the year 4 rate would be – again, something quite favorable to the city. If Haney decided to look at the rate as escalating every five (5) years, it’s the equivalent of the year 20 rate, one much more favorable to him.

Looking at those numbers, concerned citizens’ comments, and the dollar amounts being floated around via pro-forma comparisons, the biggest issue monetarily is the lease’s length. It seems as though there’s a plan (or at least a perceived, albeit limited) desire to get this done as soon as possible, but you could see what Boston’s newly elected mayor (and one Fast Company says we need to watch) Martin Walsh does with his City Hall and hold it up as an example. Here’s the PDF of the proposal candidate Walsh floated during his campaign.

The point? The lease shouldn’t be 30 years long (and the city should be looking elsewhere for viable options); it should be long enough for the city to identify and complete its long-term plans. We can tackle non-traditional options in a future piece, but needless to say the deal should continue to be called into question for several reasons.

Why are we doing this again?

My somewhat twisted observations lead to a discussion about the other issue that hasn’t been getting attention – why is the city looking to consolidate police, fire, and the municipal court into one space in the first place? The answer becomes more apparent when you look at the fair market values applied to the city-owned properties in question.

While private citizens pay property taxes on their residences and commercial properties to the city, Birmingham doesn’t pay them to itself, so it gets a chance to see a double benefit from vacating these structures if they put the properties up for sale. First, there’s the instant benefit from selling them off (leading to an instant infusion of cash into a city that’s seen several years of tenuous budget negotiations). There’s also the ability to collect property taxes in addition to sales taxes and business taxes depending on how the land’s used.

How much could they bring in for the properties in question? If you add up the fair market values of all the city owned land occupied and/or adjoining the existing facilities, it would be questionable if Birmingham let go of it all for less than $9.5 million. Note this is based on the fair market value assigned by the county tax assessor; the actual amount received could be much higher depending on demand. Any new structures or redevelopment of the property would be sure to increase that value, only adding to the potential long-term revenue.

Downtown Birmingham is a hot market, with several developments planned for the area surrounding the most valuable of the three sets of land – police headquarters. The projects scheduled for completion around it stand to completely remake downtown – while adding significant value to the Fountain Heights neighborhood (yes, that’s Fountain Heights):

We could also talk about its proximity to Innovation Depot, Railroad Park, Regions Field, and all of the residential developments announced and unannounced for that portions of Southside. Do we finally see a new grocery store for downtown (one its residents will be willing to support)? Is additional residential development possible (resulting in a different amount of taxes collected)? Might we see another skyscraper climb toward the sky downtown? Money and politics are definitely front and center, but we should look at all the ways they’re involved in this instance.

André Natta is the stationmaster for bhamterminal.com.

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Filed under: Commentary · development

6 comments
Dystopos
Dystopos

The average rent per square foot is irrelevant if the city has better options. I believe it does. The city owns vacant and underdeveloped property and enjoys privileges favorable to acting as its own developer. Rather than rushing to react to a pitch by a private owner ( one made, I might add, through purchased influence), the city should state what is needed, and only then seek ways to accommodate it. I have no problem with a long term commitment, if the basis of entering it is long-term planning. This is completely backwards, though. If short term accommodations are needed, a short-term, even piecemeal fix is more appropriate.

Andre Natta
Andre Natta

Thanks for the comment, @Dystopos:disqus. I'll make the same point I did to Brandon though - the city would need to produce a capital budget for any major expenditure and it's been a while since that's been an easy task. I'll also add that you basically just summarized most of what I said in the first part of the editorial anyway.

Dystopos
Dystopos

Apparently the Mayor's office disagrees that a capital budget is necessary for major expenditures. While there has been no budget in recent years, there have been plenty of major capital expenditures.

B. Hill
B. Hill

The rents paid at the Haney Building, or any other privately-owned location for that matter, even if market rate, would also include the cost of property taxes paid on those buildings. This is something the city would not have to pay on buildings it owns, a savings it is currently realizing by occupying the buildings it does. With the city's available I allocated bond authority, if the city wants to consolidate and also create economic development by doing so (even if it a foregone conclusion that the current buildings would be vacated or sold), it could make more sense for the city to acquire properties in a particularly distressed part of town. With the time value of money, and the available supply of large and in many cases historic buildings throughout the CBD and adjacent neighborhoods (see: Carraway Hospital) it would likely be much cheaper to construct a new complex to accomplish the consolidation. Rgeardless of what is decided, it would be important for the city to consider the degree of economic impact there would be from the concentrated population increase in any new location (including the Haney Building) from the increased need for walkable breakfast, lunch, and other services.

B. Hill
B. Hill

Please forgive typos in post - writing from a mobile device!

Andre Natta
Andre Natta

Yes, Brandon, you're right. Among the questions we have to ask though is whether or not the city is ready to build or renovate. A point I was saving for later is the fact that there hasn't been a true capital budget presented for consideration to our City Council in a few years. Construction's a capital project...