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(NOTE: Dana Radcliffe is a former Senior Consultant with Deloitte & Touche, specializing in real estate economics. Currently, he teaches philosophy and applied ethics at Syracuse University and Le Moyne College)


Date: September 11, 2000


To: Jim Mahaney


From: Dana Radcliffe


Re: Carousel PILOT calculations



I am still reviewing the draft of the PILOT I received from Minch Lewis at the public SIDA meeting at City Hall on August 28. However, I would like to make some observations and suggestions prompted by my initial readings of the document.


The crucial point, as I see it, is that the proposed PILOT agreement should be understood as calling for a public investment. The City and County are being asked to forgo property taxes, for 30 years, on one of the most valuable properties in central New York. Their entitlement to this future property-tax stream is a valuable asset for the City and County. It is an asset that Pyramid is asking the City and County to invest in infrastructure and other improvements designed to facilitate the expansion of Carousel Mall.


As a public investment, the City's and County's forgoing property taxes on Carousel Mall for 30 years carries an investment risk. That risk consists in whatever probability there may be that the mall expansion will not generate economic benefits sufficient to give the City and County both a return of the invested asset and a reasonable return on the investment.


Because the PILOT calls for a substantial public investment, which would incur an investment risk, evaluation of the PILOT--from the perspective of the City and County (the investor)--should employ the standard tools of investment analysis. Such analysis would focus on the question: What is the expected (or risk-adjusted) return on investment offered by the PILOT? It does not matter that the investment in this case is of a public asset; formal investment analysis is commonly used in the evaluation of both private and public investments.


If the City and County approve the PILOT, those governmental bodies will be making a public investment, whether or not it is recognized as such. The basic question is: Will it be a good investment? This question cannot be answered until the City and County have information necessary to evaluate the investment they are being asked to make. This information includes well-supported estimates of (1) the expected (risk-adjusted) value of the Carousel property taxes the City and County would forgo over the life of the PILOT agreement, and (2) the expected value of the economic benefits to the City and County to be generated by the existing mall and additions to it, over the life of the PILOT agreement.


To be sure, there is a considerable amount of uncertainty regarding the numbers needed to conduct a responsible investment analysis of the PILOT proposal. But, it is essential to remember that uncertainty constitutes risk to the investment, and all such risk must be taken into account in the evaluation of the investment. If no reasonable estimates can be given for the amount of the public investment required by the PILOT and the economic return on this investment, then it is impossible for the City and County adequately to evaluate the significant investment they are being asked to make on behalf of their constituents.


Accordingly, Pyramid should be required to demonstrate that approving the PILOT is a good public investment. The company should be pressed to provide the estimates needed for a fair evaluation of the proposed public investment and to defend those estimates, showing their reasonableness on the basis of the best available data and sound economic analysis.


I understand that, to this point, Pyramid has declined to share with the City and County any of the spreadsheet calculations it has done in its own evaluation of the PILOT. There can be no doubt that Pyramid has generated, for its own use, the information necessary to evaluate the public investment the City and County are being asked to make. The developer's choosing not to make this information available and to defend its plausibility effectively prevents the City and County from carrying out their obligation to make sure that their investments of public assets are economically sound.


Accompanying the PILOT draft I received was a cover sheet entitled "Basic Framework of Carousel Development Agreement and PILOT Proposal." Its last paragraph states: "The proposal doesn't expose taxpayers to new costs or risks. It explicitly protects them from new costs and risks--allowing them to realize the rewards of sales tax growth, jobs, tourism, and national recognition without accepting even a modicum of risk." In my opinion, this wording is misleading, because the PILOT does demand a public investment--the investment of a public asset--which runs some level of investment risk. As indicated above, the risk is whatever the probability may be that, over the term of the PILOT, the project will not generate a level of economic benefits for the City and County equal to a return of the public investment and a reasonable return on that investment. This is a real economic risk. Should the project fail, then the public investment will turn out to have been a bad one.


On the matter of the feasibility of the project, and the consequent investment risk, the following observation by Minch Lewis, in his July 5 report on the proposed mall expansion (p. 7), is relevant: "The financial feasibility of the Mall is dependent on generating $1.2 billion in sales annually. This would translate into sales per square foot of about $283. According to the Urban Land Institute, this is realistic for the top 10% of Super Regional Shopping Centers." This is a startling comment, particularly in a report that favors approving the PILOT agreement. It says that, in order for the project to be financially feasible, it must generate a per-square-foot level of sales that is achieved by only 1 in 10 super regional shopping centers! This naturally raises the question: Is there good reason to expect that the expanded Carousel Mall would achieve a per-square-foot sales level that only a small fraction of super regional malls currently attain? (Again, answering this sort of question is necessary for determination of the project's risk and, so, for adequate evaluation of the public investment.)


Another question regarding the overall feasibility of the mall expansion is whether it is realistic to think that an expanded mall would become a magnet for tourism and recreation activities. How many super regional malls in areas similar to this one have become tourism and recreation centers? Generally, shopping malls are centers of retail activity, not of tourism and recreation. It should be up to the developer, then, to demonstrate a reasonable expectation that an expanded Carousel Mall would be an exception to this general rule. My impression is that the developer feels that the City and County should not be concerned with the feasibility of the project itself, but should leave that to the prospective investors--that is, to the market. However, given that Pyramid is asking for a public investment and that the feasibility of the project affects the investment risk, the City and County are entitled to examine the expansion's general feasibility.


A further question should be addressed: Is the PILOT proposal calling for (1) simply a diversion of property taxes to fund infrastructure and other improvements or (2) a subsidy to Pyramid? The former is the case (with regard to the initial bond issuance) if the amount of Pyramid's PILOT payments equals the amount Pyramid would have paid in property taxes on the existing mall over the life of the PILOT agreement. The latter is the case if Pyramid's PILOT payments are less than the amount Pyramid would have paid in property taxes over that period. And in that case, the awarding of a sizable subsidy to a developer, especially when the arrangement is billed as a payment-in-lieu-of-taxes, raises questions about the fairness of the arrangement relative to other development projects which have not received such a subsidy. The answer to the question cannot be determined without a reasonable estimate of how much Pyramid would otherwise pay in property taxes during the PILOT term. Unfortunately, on this important question, there is wide disagreement. At present, the assessed value of the existing Carousel Mall is $324 million, which means that, were Pyramid paying property taxes on this center, it would be paying the City and County approximately $11 million per year. (In his comments at the August 28 SIDA hearing, Senator DeFrancisco estimated that the PILOT would entail a loss in property taxes of $315 million over 30 years.) However, Bruce Kenan of Pyramid has indicated in public remarks that his company would challenge this figure as being much too high. In his July 5 report, Minch Lewis says that, in fact, Pyramid would pay only about $2.1 million in property taxes. If Kenan and Lewis are correct that the assessed value of the existing mall is far too high, then this raises the interesting question of what Pyramid will report the mall's value to be in its presentations to prospective bondholders and equity investors in the mall expansion. If the existing mall is not the very valuable property it appears to be, then the feasibility of the whole project is cast into doubt, and with it the soundness of the public investment authorized by the PILOT agreement.



These are the main issues I have identified so far--issues that, in my view, have not received due attention in the public discussion of the wisdom of the City and County approving Pyramid's proposed PILOT agreement.


I wish to make it clear that I am not opposed to the City and County making the public investment Pyramid is asking for. If Pyramid can provide the City and County with good evidence that the public investment would be a sound investment, then some version of a PILOT agreement should be approved. But if the City and County are unable to determine if the public investment they are being asked to make is economically sound--as an investment--then a decision to approve a PILOT proposal will be based on hope, not economics.

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