The first thing that happens to me when I hear about something like the most recent meeting of the city council finance committee: I assume I must not be getting it.
I know that grown-up people on the city council of a major American city would not sit there and ask a bond lawyer if it would be OK for the city to pledge some collateral for a loan, get the loan money and then sort of quietly slide that collateral out of view.
People go to the pokey for that.
The Merc deal
First of all, I don't pretend to understand high finance. Everything I know about money I learned loaning money to reporters. By the way, it's not a bad way to learn.
A major principle in reporter finance: There is a difference between how reporters feel before they get the money and after. I was thinking about that one during the city council finance committee meeting.
Sometimes reporters are absolutely committed to paying back every penny on Monday right on the dot, but that's before. After they get the money, well, priorities slide.
Another lesson I learned and really the most valuable in the long run was that you have to listen carefully to the way reporters answer when you ask them if they will be able to pay you back your 50 bucks at the appointed time. It's not so much what they say but how many words they use. I count.
Any answer longer than one word is a bad answer. If you get a complicated answer to that question and you hand over the 50 anyway, you just gave somebody a birthday present.
So on this recent Monday when the finance committee was discussing the city's obligations to rebuild the old Mercantile Bank complex downtown, I was distressed to hear a lot of very complex patter from the council.
They were talking about the collateral the city must pledge against a loan from bondholders in order to pay the city's share of the Merc deal. Some of the council members seemed surprised--although they had no right to be--that the loan was soaking up so much collateral. In order to float this loan, they were told, they would be unable to give away any more tax money downtown for 30 years.
You got it. That's their crisis. They have given away so much tax money--including the $6.3 million they just threw at Hunt Oil for its new corporate headquarters--that their banker (in this case a bond attorney) was telling them they have to go cold turkey and stop giving away tax money for 30 years. Thirty years! Otherwise they will not be able to borrow the money for the current deal, and they will ruin the city's credit.
So here's what you expect them to say, right? "We gave away that much tax money? We must be drunk! Please do some kind of shock therapy for us; put us in a 12-step program; lock us up if we've really done that bad."
But noooo. They wanted to know if they couldn't possibly do some tricks with the collateral.
I don't make these things up. You know how I said when you ask somebody if they can pay you back, you don't want a complicated answer? Listen to Mayor Pro Tem Don Hill at the finance committee meeting talking about collateral. He wants to know if the city couldn't pledge the tax revenues from the buildings downtown but sort of ooch some of those buildings out of the pledge later:
"If it's not part of what's been identified," council member Hill asked, "or if it is part of what you have identified, or if it is a part of what you have identified as a potential spot, going about it the other way, identify it maybe like the way you do the historical tax credit thing, go ahead and identify the potential spot now to carve out because there isn't anything now, because there isn't anything working, so we won't create that problem for the bond market."
That was a question. In a nutshell, he was asking if there were not some way the city could pledge tax revenue from buildings downtown to go toward paying back the bonds, sell the bonds on that pledge, then de-pledge some of the buildings.
After his question was posed, there was a pregnant pause.
Then Wayne Placide of First Southwest Company said politely but decidedly no: "Once we make representations to the rating agencies and certainly once we distribute the preliminary official statement to the public, I think whatever you disclose there as being the value, we can't change it, because that's the value we are representing to potential investors that would be available to service the debt. Any change in that would be inappropriate and certainly would be misleading to the investors."
I would have added, "And it's so awkward, you know, trying to hop into the van with those leg irons on."
I mean, come on. You pledge collateral. You subsequently pawn the collateral. You go to the hoosegow.
Listening, I hoped the problem was me. Maybe I didn't get it. Now after a week of phone calls I have come to a depressing conclusion.
I did get it.
In order to pay its share of the Merc deal, the city must borrow $73 million on the bond market. In order to borrow that money, the city must pledge as collateral all of the new tax revenues from all of the buildings included in a special downtown taxing district.
It all has to do with the Merc and what it is. The Mercantile complex is an enormous World War II-era asbestos-filled dead elephant rotting and stinking right in the middle of the picnic in downtown Dallas. Since the early '90s it has been a big ugly haunted house guarding the gates to Urinetown, ensuring that only homeless people seeking a place to relieve themselves will want to enter that whole end of the city's un-vibrant urban core.
It's that bad around there.
All the top local developers have thought about taking on the Merc--Henry S. Miller looked at it twice--and nobody local could get the numbers to work. But if the Merc doesn't get fixed or ripped and redeveloped, then nothing else anywhere near it has a snowball's chance on the men's room floor.
Mayor Laura Miller made a basic call on the deal: The Merc has to get done no matter what because otherwise it kills everything around it. The preservationistas on the council--not Miller but the rest of the council--declared that not only must the dirt beneath the Merc be redeveloped: The structure itself, a box with a fake rocket on top, must be preserved, for reasons that zip right over my head.
I mean, I sort of get it: The Merc is an important architectural link to an era when Dallas was ruled entirely by people with bad taste. If we lose that, if we start thinking we've always had good taste around here, well, then we've just lost our whole identity. Heaven forfend.
So Miller declared that if the only way to deal with the Merc is to preserve it, then it damn well better get preserved. And as somebody who used to office nearby and longed for a gas mask every time I walked the endless block it sits on, I fully understand. The city could have piddled away money forever "incentivizing" the sandblasting of darling little details all around the Merc, and you'd still need a gas mask to go look at them. And, by the way, a pair of running shoes and a police whistle on any given evening.
"Oh, look at the marvelous job they've done with detailing on that portico."
"Lovely, but I think we need to keep running and screaming."
One company could make the Mercantile deal work: Forest City Enterprises, associated with the Ratner family of Cleveland, Ohio. Forest City describes itself in press releases as a "$7.8 billion NYSE-listed national real estate company."
The investment required to remake the Merc is a quarter-billion dollars. A quarter-billion dollars to bet you can turn The Chateau D'Urine into Shangri-La seems pretty high-rolling. But put it in context: If you're worth $7.8 billion, it's 3 percent of your net worth. The trick is finding somebody worth $7.8 billion.
The Forest City deal was going great guns, and then it seemed to die after city staffers balked at the amount Forest City wanted the city to invest. The issue there is historic preservation of the central tower. That element alone--the preserving--adds a cost of something like $45 to $50 million above the value of the finished product.
Let me put it another way. The city council in its wisdom has decreed that somebody has to spend about $50 million for preservation alone, beyond what anybody could get for the place if they sold it after the renovation is complete. And you know how banks are. They try to loan less than the value of the finished deal, not more, because they want a way to get their money back if everybody scoots to Rio.
The Forest City deal was in the tank. Miller and council member Mitchell Rasansky went to Washington to meet with Forest City. And they paid the price. They put the deal back in the basket. Council members Don Hill and Ed Oakley tagged along with them; they were in the kitchen when the cake was baked; afterward Oakley and council member Bill Blaydes told The Dallas Morning News they thought it was a great deal.
It's an all-the-eggs deal. The Merc deal ties up so much money that the city won't be able to offer even small incentives to anybody else downtown for 10 years and won't be able to do major giveaways for 30. A big reason for that is that the council has been giving away money without counting it. Now they're at the bottom of the drawer. They have to count.
But this is also the kind of big-picture strategy the movers and shakers in Dallas are always saying we need. It's the DFW airport of downtown: one great big jolt of subsidy designed to jump-start the free market all around it.
But it means there won't be any little deals left for individual council members to do. Apparently most of them failed to pay enough attention to figure that out last August when the deal was shown to them. Karl Zavitkovsky, director of the city's department of economic development, told me it was all right there, fully transparent in the deal itself, and all of the deal was briefed to the council.
Some of the new members of the council have been saying it was all done before they took office, but in fact, the deal itself was struck two weeks after they were elected, and they were all briefed on it in their first month in office last August.
"All of the terms of that agreement were briefed and approved by the council in the August meeting," Zavitkovsky said, "and the briefing in August was consistent with the memorandum of understanding that was negotiated between Forest City and the city."
The city signed a development deal with Forest City, and Forest City went to work. Forest City is already all over the Merc: They've got cranes and crews running in and out of there, walls ripped open, 18-wheeler dump trucks hauling off debris. They had a contract, so they assumed they had a deal.
I talked to Forest City Vice President David Levey last week: He said his company had plunged ahead--borrowed money, bought the Merc and surrounding properties, initiated construction--because they had a contract with the city to do so. One of their key assumptions was that the city would pay them what it had promised to pay according to the schedule it had agreed to.
"We needed to be sure from a business point of view that we would do what we said and the funds would be there from the city as we spent them," Levey said.
At the finance committee meeting last week, all the members present except Rasansky, the chair, effectively voted not to pay. By sitting on their hands when Rasansky called for a vote, they voted to walk the deal. The council members who refused to endorse the bond sale were Hill, Blaydes, Oakley, Linda Koop, Ron Natinsky and Steve Salazar (who voted in his usual manner, by ducking out of the room).
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It goes to the full council this week. Three sources familiar with the contract told me the cost to the city of backing out on this deal will be in the neighborhood of $20 million. One source said $20 million was way on the low side. Basically, the city will have to pay back Forest City every cent they've spent to buy property, hire lawyers, order in Chinese food, whatever.
Then the city of Dallas will be the owner and proprietor of the unfinished Chateau D'Urine. And that way there will be some tax money left downtown for the city council to give away to people like Ray Hunt of Hunt Oil.
I hate to be boring, but I have to say this again: This is exactly what we get for voting down two strong-mayor ballot proposals.