Memorandum

City of Lawrence

TO:	Public Incentives Review Committee (PIRC)
FROM:	Rob Chestnut, Financial Analyst for the PIRC
Date:	March 4, 2013
CC:	Britt Crum-Cano, Economic Development Coordinator
	Dave L. Corliss, City Manager
	Diane Stoddard, Assistant City Manager
RE:	Analysis of Tax Abatement Request: Kansas Athletic facilities at Rock Chalk Park

As the appointed financial analyst on the PIRC, I am providing my professional opinion regarding the cost-benefit analysis provided for the tax abatement request by Bliss Sports, LC related to Kansas Athletic facilities at Rock Chalk Park.

I support the concept of this project for Kansas Athletics, and I know that it is a critical issue for a number of programs within the athletic department. However, I believe that the staff analysis of this request is flawed. Based on those flaws, I do not believe that the request meets the 1:1.25 cost benefit ratio that is preferred by the City and the County.

In my opinion, there are three primary flaws that the City Commission should take into account when considering this matter for approval as follows:

1) The benefit-cost ratio presented in the analysis of 1.62 (not considering the sales tax savings which has a lower benefit-cost ratio) is driven exclusively by property tax collections assumed to happen in years 12-15 of the project. This revenue is realized after the initial 10-year tax abatement period is expired.

It is reasonable to assume that the facilities will not have taxes levied at any time due to

the tax exempt status of KU Athletic facilities. The staff memo highlighted this fact, and the 10 year abatement is proposed due to state statute limitations. During the initial tax abatement period, nothing precludes the transfer of property from Bliss Sports, LC to KU Athletics. While it is unclear whether or not this will happen, it is a clearly a risk for the City that should discount this benefit well below what is shown in the analysis. If the property taxes for years 12-15 are removed, the benefit-cost ratio is reduced from 1.62 to 0.98 in the analysis.

2) There are no infrastructure costs for the shared infrastructure components considered in the cost-benefit analysis. Estimates provided on the February 14, 2013 memo from Dave Corliss to the City Commission discusses $8.35 million of infrastructure expenses including streets, water, storm sewer, parking and landscaping costs for the site.

Clearly, some of the infrastructure costs incurred directly relate to the Kansas Athletic

facilities being constructed. In my discussions with the City staff, they said that there was no way to estimate the amount of infrastructure cost directly related to the Kansas Athletic facilities, and therefore none were included.

I disagree with this approach. I realize that the cost estimates for the City’s recreation center equal $31 million with a $25 million cap on these expenses. However, there are no firm costs on the rec center construction, and at this time we do not really understand how much of the infrastructure costs will be absorbed by the City recreation center project. Some increment of infrastructure costs should be attributed to the Kansas Athletic facilities that are incremental. If $1 million (12%) of the infrastructure costs were included in the analysis, it would have dramatic negative impact on the benefit-cost ratio. If these are truly “shared” infrastructure costs, then some element of those costs must be included in this analysis.

3) The application from Bliss Sports, LC states a capital investment in year 1 of $40 million. We have not been presented any detail behind this estimate, and the figure drives much of the revenue benefit in the out years of the analysis. I spoke with Steve Miles, appraiser for Douglas County, regarding the method that Douglas County would use to assess this project. He spoke about several approaches including construction costs, an income approach, or a modified cost method that would search for similar projects across the nation. Given this ambiguity, it is unclear what the true property tax proceeds would be for the City, County, USD 343 and the State of Kansas without any hard cost estimates.

Another method to estimate the cost of the project would be to figure the value of the lease payment of $1.3 million that has been stated from news reports to be paid to Bliss Sports, LC from Kansas Athletics over 30 years. At a rate of interest of 4.0%, the payment would finance $22.5 million in construction costs. This is well below the $40 million provided in the application.

A final element of consideration for the PIRC relates to issuance of $40 million in Industrial Revenue Bonds (IRB’s). The conduit financing method was approved by Resolution 7002 in January by the City Commission. The resolution defines the “Project” as a commercial recreational facility. It does not specify the elements of the facility, and it does not specifically limit any development on the site. The site plan has additional acreage on the new Rock Chalk Parkway that has undesignated future development plans.

Based on the information provided to PIRC, it is unclear if improvements outside the seated competition track and field stadium, outdoor soccer facility and softball facility can be financed by the IRB’s and qualify for tax abatement. The GPI zoning that has been approved for the entire site would allow for office buildings, medical clinics and some residential uses.

This issue should be clarified for the City Commission, and it should be determined if specific language be added to IRB agreement that defines what costs can be financed by its proceeds.

I apologize for the lateness of this memo, but I have been consulting with the City staff since late last week regarding the analysis. I want to thank Britt Crum-Cano and Diane Stoddard for their cooperation in providing further information for me to complete my analysis.

In conclusion, based on the above questions I believe the City could lose money on the proposed project. Secondly, it is unclear based on the details provided to date whether or not commercial projects not directly related to the Kansas Athletic facilities can be financed and abated. My concern is that the recommendation could provide City provided IRB financing and 100% tax abatement on ancillary uses that are not within the spirit of the project as it is currently conceived. I look forward to discussing these issues and resolving them.