Saturday, June 13, 2009

Sweetheart Development Deal With Politically-Connected Developer Breaks Law, Who Cares?

City of Indianapolis officials' flagrantly ignored Indiana law in awarding more than $20 million in public subsidies to a politically-connected developer recently. This is the case of young Tadd Miller, who has zero experience on his own developing property, who won a multi-million-dollar public subsidy for the development of the former Bank One operations center in downtown Indianapolis. The City of Indianapolis' Metropolitan Development Commission voted 7-2 recently to authorize the City to purchase a parking garage adjacent to the property for $18.5 million from Smoot Construction. In actuality, the City is purchasing both a parking garage and the Bank One Center; however, the Bank One parcel will be deeded to Miller's company courtesy of the taxpayers. Indiana governmental bodies are required to pay "fair market value" for any land it purchases based on the average of two independent appraisals. A "fair market value" is understood to mean the price that a willing and unpressured buyer would pay to a willing and unpressured seller in the real estate market. Unfortunately for taxpayers, the City of Indianapolis threw out the fair market value requirement in obtaining appraisals for Tadd Miller's parking garage. As the IBJ's Cory Schouten reports:

City officials would not release two appraisal documents they relied on for the $18.5million garage purchase agreement, citing a state law that calls for confidentiality. But they acknowledged the appraisers used a “prospective value approach” that assumes successful completion of the operations center redevelopment. The valuations also assume surface parking lots on the former MSA site will close after a variance allowing gravel instead of pavement expires.

They say the appraisals, which estimated values of $18.6 million and $18.9 million, comply with a state law that requires cities appraise land acquired for redevelopment at “fair market value.”

The private owner selling the garage and office building is an affiliate of Columbus, Ohio-based Smoot Construction, which had partnered on a failed 2004 plan for two high-rise condo towers on the MSA site. Smoot bought the properties from Bank One in July 2004, and would realize a roughly 6-percent annual return from its purchase price if the deal closes with Miller and the city.

“At least on paper, it seems there’s a component in here that’s incentive to get the site developed,” said John C. Snell of Fishers-based Snell Real Estate Evaluation Co., of the city-ordered appraisals. “The question is whether the garage carries more value because of the development being brought.”

He said the city likely asked the appraisers to consider factors such as the revenue from the developer’s purchase of 600 spaces in the garage in the valuations. He said such requests are normal.

“An appraiser can’t be concerned with politics or economic development,” Snell said. “They must respond to financial criteria.”

But the future-value approach does carry risk: If the appraised value of a property is tied to certain assumptions and those assumptions don’t materialize, the appraisal won’t mean much.

Excuse me, but a "fair market value" does not contemplate a "future-value approach" for determining a property's value. Indiana law permits one of three approaches for determining "fair market value": (1) the current cost of reproducing the property less depreciation from all sources; (2) the 'market data' approach or value indicated by recent sales of comparable properties in the market, and (3) the 'income-approach,' or the value which the property's net earning power will support based upon the capitalization of net income. A combination of these three approaches is common; future value of the property is not permitted under Indiana law. The City of Indianapolis' valuation approach allows the appraisers to inflate the "fair market value" based upon the development that will occur after the City pumps more than $20 million into the project to make the development possible.

What the public needs to understand is that the $18.5 million is what the seller, Smoot Construction, asked for both parcels. The deal for Miller means he will get the Bank One parcel for nothing. The City of Indianapolis will borrow the money, since it's flat broke, and make payments that will match the payments Miller will have to make to finance his deal with projected revenues the City expects to earn from the parking garage. Although Miller will be paying the City for use of 600 parking spaces in the city-owned garage, the payments he will make are far below the fair market value for the parking, which I conservatively estimate to be worth $1.1 million a year. The deal requires Miller to pay back an amount equal to the $6.6 million in tax abatement and parking fees of approximately $2 million over 10 years.

Beyond the clear violation of Indiana's "fair market value" appraisal requirement, the deal as constituted immediately rewarded Tadd Miller with a multi-million-dollar windfall. By his own admission, Miller lacked equity investors for his proposed $65 million development of the property for mixed use as apartments and retail. With the approved public subsidy of more than $20 million, Miller will now be able to sell opportunities to invest in his deal and line up the required financing based on the MDC's approval of the deal. City leaders are giving him 90 days to get his house in order. It also appears that city leaders carefully crafted the deal to skirt a state law requirement that the purchase be approved by the City-County Council.

Schouten's story also notes a shift in city policy with this sweetheart deal. "Veteran developers privately question whether the awarding of incentives to the apartment project signals a change in policy for the Ballard administration," Schouten writes. "For the last two years, economic development officials in the mayor’s office have consistently told applicants that projects must create a substantial number of jobs to win incentives." The Mayor's spokesman, Robert Vane, told Schouten this deal was "unique." “We believe that this development will spur additional work in the area, which in the long term will create jobs and a stronger tax base.”

The reaction I heard on the street after I testified against it at the Metropolitan Development Commission hearing on its approval only 48 hours after the deal had been publicly announced supports Schouten's story. One developer stopped me the other day on the street to complain to me about Miller's sweetheart deal.

1 comment:

Baloo said...

What happened to Ballard bringing Transparency to local government. Guess that is just another one of his broken campaign promises.