Imbalanced investment
Many residents of Fort Wayne have some sort of family tie to the old GE factory on Broadway. My wife’s grandfather worked there most of his adult life, going back to when the family lived on Indiana Avenue just south of Rudisill Boulevard. The facility’s size is impressive; more than one million square feet of developable space. It has loomed vacant or nearly vacant for decades over a once-thriving central neighborhood.
With so much subsidized development occurring downtown, it’s natural that city residents would be hopeful that something could be done to restore life to the collection of dilapidated industrial buildings on the site or at least ameliorate the disrepair.
The obstacles to development have been the sizable environmental remediation costs, the added expense of retrofitting existing non-conforming space into usable commercial and residential units, and the reality of the difficulties accessing the property, considering its siting among narrow train trestles. If this project is completed, it will increase the supply of Class A and B commercial space by 40 percent, according to local industry experts.
It’s not surprising that many in the community were happy to hear that a developer had been named to begin the massive reconstruction project. Seeing only pictures of glimmering new facades and smiling people in the architectural renderings, there has been little public skepticism expressed. What’s not to like?
Political projects fail the market’s test for viability, yet cannot escape its realities. A clear example of this was when the collapse of the American Tobacco Campus development in Durham, North Carolina, which had a very similar “public-private-partnership” capital structure, was purchased out of foreclosure for a third of the original cost. The problem with having government involvement in economic development is that the solutions introduce mal-investment, if not outright corruption or the potential for fraud.
Disclosure of financial details has been muddled to date, but what has been communicated is concerning to this councilman.
For Phase 1, the developer has laid out a plan to amass $218 million in financing to construct a facility worth $80 million, at best, using $140 million of public money and borrowing $60 million in mortgage debt. The remaining $18 million of equity will be split 80-20 between limited partners who have not been named and the newly created development entity (RTM Ventures LLC) that will have $3.7 million invested. The same developer will take a fee of about $17 million when the project is completed and retain ownership. Assuming this floats, Phase 2, the east side of the property, will have similar financing, bringing the total project costs to $440 million.
These figures make this project difficult to support for any councilman interested in financial stewardship.
Electric Works is certainly worth supporting to the extent that it can be done without public financing. At the end of the day, we are not looking at a public asset, but a privately owned commercial building. At $100 million of local government financing, we are taking $1,100 per household to dedicate to a private company’s balance sheet.
One certainly wouldn’t expect to beggar their neighbors to construct a house that would be worth $150,000 using more than $300,000 of those neighbors’ savings while the end owner only contributes $8,000 and borrows $142,000 from the bank, putting the neighbors’ $300,000 in jeopardy as a second lien. To ask for a $33,000 fee for arranging the deal would be madness.
If this is how these transactions are to be done, then we should all line up for this deal when we are in the market for a new home. Woe to the bag holders.
http://journalgazette.net/opinion/columns/20180321/imbalancedinvestment