The Rotten Golden Egg

Last week's column was about the deal to redo the Mercantile Building downtown, and the day it came out (last Wednesday), I went to the City Council meeting and heard the mayor misstate a key element of the deal for some reason. I don't think she was doing it on purpose. I think it's a complicated issue that's easy to misunderstand. She said this deal differs from most of the tax incentive packages the city gives developers in that this developer, Forest City, insisted on getting its money "upfront."

Makes them sound like greedy bastards, eh? The reason I don't think she did it on purpose is because this is her deal, and she likes Forest City.

The way it usually works: Developer develops development. Pays taxes. Taxes go into an account at City Hall. When enough money has piled up in the account, which may take several years, the city gives some of the tax money back to the developer. It's a gift from the taxpayers, offered to get the developer to do the deal in the first place.

In this thing, however, there's a giant goose egg baked into the cake. The city is insisting (did anybody ever vote on this?) that Forest City fully restore the asbestos-filled Mercantile Tower. That adds $50 million to the deal, according to the city's Department of Economic Development director Karl Zavitkovsky. And that's a straight loss, over and above the reasonable cost (about $200 million without the restoration) of redeveloping that property. It gives somebody--us, I guess--$50 million worth of aesthetic pleasure. But if you sold the joint the day the redevelopment was done, you wouldn't get the $50 million out. The $50 million is the biggest chunk of what we the citizens of Dallas are putting into it, because no banks would put up the money for it.

In fact, from what I was told by Forest City, the banks said the $50 million had to be paid in as the development was done, not years later, whenever the city’s bank account had built up enough to pay it.

So this isn�'t Forest City demanding. It's the banks. It�'s not really upfront. It's pay-as-you-go. And the banks would have been crazy not to demand it.

Look at it from the bank's point of view. They're only involved in this thing if it goes south, if it comes back to them in default, as most of downtown Dallas did in the 1980s.

So imagine the worst, which is what bankers do for a living. It happens. They get it back. They're real lucky, though, and they are able to peddle it for the $200 million it's worth. But they're still upside, down the $50 million for the restoration.

They don't want to have to go to some future City Council and say,"Hey, we're sorry the Merc deal tanked and made you all look like idiots, but you do remember, do you not, that you owe us $50 million for the splendid restoration we did of the tower with the fake rocket ship on top."

I mean, the council was trying to weasel on this thing last week, before it ever got done. What would they do if the thing had flopped in the marketplace? "I'm sorry, sir, but if you want $50 million, you need to call 311."

The banks want to see the $50 million showing up as Forest City spends it out, guaranteed like a Men's Wearhouse suit. That is why the city had to sell bonds to get this money, rather than wait for its bank account to build over five or six years.

And then the next issue: the bonds are being guaranteed by a tax increment financing (TIF) district that ain't got no money. The assumptions I heard them using to back this thing up were that downtown will increase in value at three percent a year. That sounds pretty reasonable, unless you remember that downtown decreased in value a billion dollars in the last 10 years.

These are not general obligation bonds backed by the full faith and credit of the city--not supposed to be, anyway--on which you and I would have had a chance to vote at the polls. These bonds are sold and guaranteed by the TIF. But guess what? The bond salesmen told the city: Nobody is going to like bonds guaranteed by a TIF that ain't got no money in the bank, so unless you want to sell these as junk bonds, the council is going to have to guarantee these bonds from the general fund--that is, if the TIF bellies up and can't pay the bonds, the city promises to pay them off right out of the annual budget.

Does that sound like general obligation bonds to you? Yeah, it does to me. We're pledging the full faith and credit of the city. But this way, you and I don't get to vote on it.

Weirdly enough, I still think the Merc deal is a good deal, because the mayor is right: If that huge hulk of a bombed-out mess of a rotting corpse of a stinking barn of a building doesn't get fixed, the whole east end of downtown is screwed.

But it is a strange deal. It's strange mainly because of the restoration, which I don't remember anyone voting for. And I think it's unfair and squirrelly to act like Forest City is ripping off the City of Dallas. If I were Forest City, I'd be looking at this thing, especially after last week's bizarre council session on it, and I'd be drumming my fingers on the desk thinking, "Hoo-boy, I hope this all works out."

Which I do. --Jim Schutze

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