Union Row netted up to $150 million in public incentives with very little public scrutiny of the men behind it, according to an investigation by the Institute for Public Service Reporting at the University of Memphis.
Public records and interviews show the Downtown Memphis Commission, Memphis City Council and Shelby County Commission required no detailed business background from the three principals of the deal before approving the incentives.
In fact, DMC president Jennifer Oswalt and Memphis Mayor Jim Strickland told The Institute they were unaware of developer J. Kevin Adams’ considerable business problems in Florida and elsewhere in the previous decade.
Oswalt said her staff carefully examines applicants seeking to improve public property or who apply in competitive situations where picking the wrong developer might “preclude someone else from doing the project.’’
But in this case, she said, the development is on private property, and local government is not guaranteeing any loans.
“The risk is not what it might appear,’’ Oswalt said, emphasizing the developers plan to use the pledge of public incentives as leverage to secure private financing needed for the project.
Those incentives include up to $100 million in Tax Increment Financing (TIF) approved last winter by the City Council and County Commission and $50 million in loans to build two parking garages. Final financing plans still must be approved.
A TIF allows developers to use revenue generated from property taxes on new construction to offset development costs. That revenue wouldn’t exist without the construction. And if the construction doesn’t happen, nothing is lost, Oswalt said.
“So, the risk is just that we approve something, get all excited about it, and then have to cancel it and nothing happens. It’s very different than city property or some more competitive situations,’’ she said.
She conceded, however, that a worst-case scenario could involve Union Row somehow starting and stalling, in turn causing the Downtown Memphis Commission to repossess the parking garages.
That’s the very sort of scenario that requires close examination, experts say. Redevelopment officials knowledgeable of TIF plans told the Institute it’s a recommended practice to examine business histories at the start of the process to help weigh applications.
“You actually have to sit down with the developer and actually have a dialogue,’’ said Joe Gromacki, Tax Increment Finance coordinator for the city of Madison, Wisconsin, considered a national model for best practices in redevelopment financing.
Uncovering prior lawsuits and weighing their significance is a critical element of due diligence, he said. His office typically checks court databases, Google, news articles and other sources when vetting applicants to track their business records and help flag potential problems that might affect ability to perform.
The Council of Development Finance Agencies, a Columbus, Ohio-based nonprofit that promotes the interests of public, private and nonprofit development agencies and endorses a set of best practices, also recommends a deep examination.
“Local governments should also fully vet the partners involved in the proposed project. Developer performance and their capacity to complete and fulfill the promised project should be examined closely,’’ reads a CDFA position paper, Recommended Practices: Effective Tax Increment Finance Program Management. “Ensuring that the developer has a seasoned team and the appropriate financing and capitalization to complete the project is critical. This includes a review of the developer and other stakeholder’s financial capacity and project history.’’
“The question that you’re asking is how is this guy going to reassure us that what happened back then isn’t going to repeat? And he may have a great answer.’’Toby Rittner, CDFA president
Oswalt said DMC checked no tax returns, credit reports or court records in vetting the Union Row team, examining instead “current’’ information including the amount of real estate investments the partners make on an annual basis. She emphasized “the biggest chunk of equity’’ isn’t coming from local developers but wealthy out-of-state partners that include Third Lake Capital, the investment arm of the family of billionaire Ron Wanek, founder of Ashley Furniture.
The Union Row team can expect a thorough examination of their financial wherewithal when a bank or private underwriter reviews the project, Oswalt said. If bonds are issued for the TIF, the Center City Revenue Finance Corporation also must approve the financing and would look more deeply at the applicants. Additionally, the State Building Commission and the State Funding Board would have to approve the debt service schedule for any bonds, she said.
The developers must guarantee any shortfalls and the government has no liability, Oswalt said.
However, careful vetting — upfront — can reveal potential troubles and will only instill public confidence in the end, said CDFA president Toby Rittner.
“The question that you’re asking is how is this guy going to reassure us that what happened back then isn’t going to repeat? And he may have a great answer,’’ Rittner said.
This story first appeared at www.dailymemphian.com under exclusive use agreement with The Institute. Photos reprinted with permission of The Daily Memphian.