Paying for the Past

Should the city of Jacksonville continue to waive the principal on these Downtown residential properties?


Vestcor Properties has 35 complexes listed under its development company; two other properties, The Carling and 11 East Forsyth, are listed under its management company. Why does it make a difference that Vestcor does these as separate listings? The answer lies in the need for tax increment financing (TIF) funds to cover the principal payments on the Downtown properties.

It would appear that for fiscal year 2012-’13, a total of approximately $3.424 million is budgeted toward paying principal on the Vestcor projects. This actually causes a deficit of $2.326 million for the Northbank TIF.

This deficit requires transferring the full surplus from the Southbank TIF and then moving money from the general fund. This is money from the TIFs that could go to other Downtown projects and money from the general fund that could go to critical needs. Is it necessary to continue to fund Vestcor’s principal payments on the city’s loans?

In the Financial News & Daily Record issue of March 11, 2010, Max Marbut reported that Vestcor was requesting modification of low interest loans on the buildings that the city entered into in 2003. The loans, of $17.8 million for 11 East Forsyth and $16.5 million for The Carling, were converted to interest-only loans. The article lists the total investment in the projects as exceeding $59 million.

The article adds that The Carling has 100 units and 11 East Forsyth has 127 units. Based on the information provided and some simple math, the cost of renovating both buildings came to $260,000 per unit. The annual interest cost from the city’s 1.4 percent loan of $34.3 million is $480,000.

We already know that the principal being deferred as shown in the Northbank TIF spreadsheet is $3.424 million per year. If funded only with rents, the total combined principal and interest cost per unit is $1,411 per month. This is before one dime is spent on operating expenses. Based on current apartment prices, it will be decades before inflation allows the rents to cover the expenses. This is not including Vestcor’s private investment in the buildings.

Using the rental rates on the Vestcor website and assuming the unit prices are spread fairly evenly, the average rent per unit at The Carling is $1,008 and the average rent at 11 East Forsyth is $1,038. With the current occupancy rate Downtown, the total combined revenue for both buildings should be $220,995 per month.

Who did the math before the renovations were done? Should the city be responsible for deferring the principal payments for years into the future? It appears the city and Vestcor both went forward with the low interest loan and the decision to spend $59 million to complete the renovation. Based on unit size and cost of other larger apartments and condominiums Downtown, both parties should have realized the market would not support the cost of the renovations.

The combined debt service for the buildings is $304,282 per month or $3.651 million per year. Unless something is done to reduce the debt service, the city will be paying $3.424 million per year in deferred principal payments “forever.” Using the valuation formula of multiplying the rental income times eight, the combined value of both buildings is $21.215 million. This would not be enough equity for a private loan of $34.3 million to pay off the principal held by the city.

One option is for the city to issue Housing Finance Authority or Industrial Development Bonds to pay for the buildings. To issue the bonds for the required principal amount plus the discount rate would require $35.360 million in debt. The AA bonds should mature in 30 years, have an interest rate of about 3.5 percent and be callable (able to be bought back and reissued at a new interest rate). If the bonds were issued and paid by Vestcor, their annual cost would be $2.065 million.

Based on annual revenue from the buildings of $2.652 million, the debt service could be paid, leaving a monthly operating fund of $48,971. It would not be possible to cover all of the expenses with this amount. This is where Vestcor’s responsibility in this financial mistake comes into play. With 35 complexes in addition to these two, the company could take slightly less profit overall and cover the expenses of running The Carling and 11 East Forsyth.

How would this change in financing affect the Northbank and Southbank TIFs? Instead of deficits in both TIFs, there would be a total surplus of $2.384 million available for Downtown Investment Authority (DIA) projects.

The first priority might be a rapid transit bus route on Riverplace Drive in the Southbank TIF. The residents of the three towers in the area are now expressing safety concerns. To address these, a separation of the bus lanes and bicycle lanes is needed. This will decrease the width of the median and eliminate the ability to provide turn lanes.

These changes will require two roundabouts; the first at the Wyndham entrance and the second between Riverplace Tower and its parking garage. Jacksonville Transportation Authority estimates that the cost to make these changes will be between $1 and $2 million. The TIF monies could be used to implement these improvements.

The second project might be to start changing Downtown core streets from one-way to two-way and design them similarly to Laura Street (but without the roundabout). The estimated cost of this project is about $600,000 per one block section of street. The Northbank TIF surplus would increase to about $2.5 million in FY 2013-’14, allowing for four blocks per year to be upgraded. The total cost for these street projects in the core area would be about $96 million, so only the critical blocks would be completed first.

In addition, the $34.3 million paid to the city from the bonds could be dedicated to this project. This would allow the DIA to revamp 50 blocks and then spend $4.3 million on other projects.

The conversion of streets from one-way to two-way slows down traffic, the wider sidewalks that accompany them are more pedestrian-friendly, and drivers are more likely to stop in the area and visit local businesses. The idea is to make Downtown more people-friendly and encourage shoppers to visit businesses in the core area.

It's hoped that additional funds would be found to upgrade all the core area streets and begin many of the public projects needed to redevelop Downtown. In the meantime, changing the financing terms and methods of The Carling and 11 East Forsyth would free up millions of dollars to start the public projects on the DIA’s to-do list.

When Vestcor, the Jacksonville Economic Development Council (JEDC), the City Council and former Mayor John Peyton were trying to bring housing Downtown, they didn't intentionally create a bad deal for the taxpayers. However intended, the deal negatively impacts taxpayers and the availability of funds for other Downtown projects; therefore, the loan from the city should be redone. o

Fouraker previously was a paralegal at law firm specializing in municipal law. He has been in banking for the past 20 years.

No comments on this story | Add your comment
Please log in or register to add your comment