January 7, 2009

Capital projections

A talk with the new don of downtown development

Since the Downtown Development Corp. was formed in 1990, $620 million has been invested in the heart of the city.

Now, more than half a billion dollars of new construction is in process, with another $1.9 billion announced and awaiting construction.

Alan DeLisle, assistant city manager for economic and workforce development in Durham, N.C., begins Feb. 1 as DDC’s director, overseeing that and whatever else is to come. DeLisle, a 48-year-old father of two, has a broad résumé in development, including managing a similar private, nonprofit downtown development agency in Buffalo, N.Y.

In Durham, DeLisle oversaw one of the biggest and most controversial public-private developments in recent memory, the Durham Performing Arts Center, which opened late last year.

Here, he’ll have a $1 million, mostly taxpayer-funded budget and help the agency — whose 25-member board of directors reads like a primer on financial influence in Louisville — negotiate land and development deals downtown.

He advocates for business involvement in government, and praises the soft alliances between Metro and some of the city’s most substantial economic generators. He comes recommended by the mayor’s office and members of the DDC board.

DeLisle talked with LEO Weekly in December.

LEO: I want to ask you a philosophical question first: Should city governments be in the development business?

Alan DeLisle: Oh yeah, I definitely believe that they should be. In any economy — regional or national or whatever — there’s strengths and weaknesses. I guess maybe the best way is just to give an example of what we did here in Durham: We focused the last seven years, we had an intense focus on the markets that weren’t functioning well or on their own that needed some help, and we thought long and hard about where the taxpayer would get its best return based on its investments. We strategically worked through a master plan for downtown and determined as a community that these are the areas we needed to invest in that would bring about the maximum return.

The goal is to make sure that you’re getting a return financially, in terms of taxes back to the city, to support the programs you need to support. And then there’s the economic impact that occurs beyond that, which is the spending with additional dollars, directly and indirectly.

I think if you don’t make those kinds of investments — you can not make those investments and then certain thing don’t happen, and they’re going to happen somewhere else, and then you’re going to fall competitively behind those regions, because then your quality of life factors decline, and then your future young work base is going to go elsewhere. I think philosophically, that’s a fundamental issue: You have to stay competitive. In the environment that we’re in today, the way the system works today, in my opinion you have to be involved or competitively you’ll fall behind and your quality of life will decrease. If you’re not investing and growing, somebody else is.

LEO: I see a couple parallels between Durham and Louisville projects in a few places. I wanted to ask you about those. In Durham, you helped shepherd the Durham Performing Arts Center, which is a $46 million project completed with a 28-year payment agreement and a 5-year tenant. It's not entirely clear they'll be able to pull in enough talent and dollars to keep the thing floating and that would leave the taxpayer in trouble. In Louisville, we have an arena for which taxpayers are on the hook for more than $200 million over the next 30 years and there's no clear explanation for how enough seats will be filled annually to pay for it. Is that putting the risk for these projects more on the taxpayer than the developer?

AD: Well, let me explain a little bit in more detail how the performing arts center was financed. There was an occupancy tax that was approved by the state legislature — actually before I got here — that paid for roughly half of it, half of the debt service. And then Duke University contributed $7.5 million to the facility as well. The rest of the debt service is being paid by naming-rights agreements, which we have three major naming rights agreements, we’ve got about five or six minor naming-rights agreements being collected.

There are some guarantee provisions in against the naming rights, and we’ve been able to eliminate a good portion of that guarantee and we’re very close to getting some of our final naming-rights agreements in place here. For the taxpayers of Durham to be able to get a new performing arts center without virtually hitting the general fund up front was quite amazing. So that obviously takes some of the risk out on the back end.

LEO: What’s left to be covered by general fund dollars in that arrangement? How much?

AD: Let me explain a couple other provisions and I’ll come back to that. The city, they get a dollar for every ticket sold, and then in year three we get $1.50, plus we get a 40 percent cut on net revenues. And for the first five years of having the tenant in place, if there’s any operating deficit, those all go to the operator, not the city.

We have been getting calls from all over the country saying, how did you get this kind of a deal done? And on top of all that, we have one of the best operators in the world in the Nederlanders, who control the product out of New York City, they actually control these big shows. So we have the best of both worlds because they’re bringing — Durham, North Carolina is getting the major shows before anybody else in North or South Carolina. So we think it was an incredible deal for the city and an incredible deal for the taxpayer.

Now, are there risks involved? Yes, there’s risk in any project, so I’m not going to sit here and say that there aren’t. The five-year deal: Generally speaking, we did want more, we wanted a 10-year deal, but to get Nederlander and to get the deal done, we ended up with a five-year deal, but we think it’s going to be a great public-private partnership, and it’s wildly successful already.

LEO: Are you familiar with the downtown arena here?

AD: I am familiar with it, but what I’m not familiar with is how they financed it yet. I’ve got a pile of documents that I’m plowing through right now, and I’m still working on Cordish — I haven’t gotten to the arena yet.

What’s your take on it?

LEO: Well, the missing piece, to me at least, is this curiosity over how they’re actually going to fill the seats. We’ve been given a number — well, we’ve been given several numbers — that we have to fill 115 dates a year all the way up to more than 200 dates a year to make the thing stay afloat. There’s been no clear proposal from the arena authority or anyone else suggesting how we might do that. Our major tenants are the University of Louisville basketball teams — men’s and women’s, and that’s not very many dates a year — and unfortunately we’re not selling out the women’s games, but the men’s typically.

AD: So I guess what they did is they have a certain ticket revenue or net revenue number they have to hit to service the debt service.

LEO: Right.

AD: And didn’t they do a TIF as well on that?

LEO: It is a six-square-mile TIF, which is substantial, obviously.

AD: Right.

LEO: And that covers, I can’t remember off the top of my head, a couple hundred million or more. The taxpayer’s on for about $200 million — that’s council-approved.

AD: I obviously don’t know the deal real well on that, and there are so many factors that go into this. And then you’ve got to kinda push all those factors against each other and say, OK, where are we?

But the way we have done our deals here is that — we’re the tobacco town, I know Kentucky is too — we had several tobacco warehouses or campuses downtown, two huge ones, a million square feet apiece. Over a seven years period, we got both of those [redeveloped]. Now that was an incredible team effort by everybody here. In that case, the private sector led, made their investments.

And then see we’ve got a little different situation because we live off of, almost entirely, the property tax. We get a little sales tax. What’s interesting about Louisville compared to Durham is that you guys have the payroll tax — what do you guys call that?

LEO: The occupational tax.

AD: Yeah, the occupational tax. So when we do kind of a tax increment financing, we’re working off of a permanent revenue stream of the property tax, and we know how to measure it and we know exactly what it’s going to get us when we do a public-private partnership. I have to sink my teeth into understanding — I’m starting to understand how the TIFs work there, with the occupational tax and the property tax and the sales tax.

LEO: Are you familiar with the latest Cordish deal, the Center City project?

AD: I’m getting more familiar with it.

LEO: If I could compare the two — obviously Center City is a larger project — but it sounds like you guys have a pretty good setup for DPAC in Durham in terms of not only protecting the taxpayer but a series of requirements for the operator and for the developers; the way you’ve described it, it sounds considerably stronger than what we have for the Center City project, which is essentially we’re requiring them to develop 200,000 square feet on the property and — you know, simplifying it — that’s basically it, working on the assumption that they’re going to do what is in their best financial interest and develop the whole thing. What are your thoughts on imposing a strict set of guidelines or expectations on a developer, as a city?

AD: Overall, I think it’s important, and I think, again, there are so many different factors that go into a deal, and one of the things that I’m very aware of is often times when you’ve got — one of the most important things in development is a proven developer, somebody who gets it done and provides high quality. You know better than I do how important all these different market niches are to a successful downtown, and clearly what the Cordish Cos. brings to the table is significant in just about any town that they’ve done, they have been successful and they’ve delivered.

I know here, when we have a developer who has delivered, such as, we’ve got Capitol Broadcasting here — they own the [Durham] Bulls, and they did American Tobacco, which was one of those big warehouses that we’re talking about, and the city invested in a new baseball stadium here, basically took all the risk, and it has turned out to be probably the single best thing that the city could have done, because it has turned into millions and millions and millions of dollars of private sector investment.

So I am a huge supporter of the City Center project [sic] and the Cordish project. I haven’t read all the details of the agreement, but they’ve got a proven developer who’s already delivered once that is going to deliver again, and that’s why there is the support that I think you see from the community.

Now, you try to get the best deal you can. When we were talking to the Nederlanders, it was the same thing, it was like there was a tremendous amount of comfort level that they were going to deliver and produce, and if you look at the acts that they’ve brought in here just in the last two weeks, and if you look at what they’re bringing in the next two or three years, I mean, they’ve just saturated the marketplace with high-quality acts. Sometimes you get what you pay for.

LEO: How does the recession affect the work that DDC does?

AD: Obviously it impacts the work that DDC does, and it impacts downtown, it impacts the region. A lot of it is just the credit markets, being able to get financing and that sort of thing — that’s the hardest part of it right now for the private sector.

But, as you know, things are cyclical, we’re going to come out of this, and the work that we do now, we need to act like there’s really nothing wrong, we have to keep moving forward and working with the private sector and creating public-private partnerships so that when the financing is there, the spigot opens up and we’re off and running. Whereas if we’re saying, well, we’ll just sit back and do nothing for a couple years, you know, it’s kinda like what I’ve been reading is the Ford plants are very important there, and I’ve been very impressed with how the leaders of Louisville have been paying close attention to that, not just now but for years, so that it’s positioned to be a winner down the road as opposed to a loser. And that takes a lot of work, working behind the scenes, yes, sometimes putting in some public dollars to help maybe renovate the plant or maybe upgrade the skills of the workers.

That investment pays off at times like this, and I see downtown as a similar engine. It is a great economic force for Louisville and the state. We’ve got an obligation, and this is one of the reasons why I took the job, is because I was just so impressed with the standards they have set there. I like the way they have made the investments for the long term, the streetscape improvements and some of the things they’ve done there. They could’ve done it for less money, but in the long run, I think they get a much better return if the standards are high.

LEO: In Durham, you’re an employee of the city. What is your understanding of your relationship to government at DDC?

AD: We are obviously accountable to the city government, we receive funds from the city government, and we expect to be — I am a big proponent of public-private partnerships, and so the real key and the real success story in Louisville, and I expect to keep that going, is to bring government and business and higher education, keep them together, keep them talking, and to me that’s the beauty of an organization like the DDC, is any time you can get those three entities — and the community, obviously, I mean I don’t want to, the stakeholders of downtown, the business leaders and the business community, the colleges and universities, and government — coming together, talking about great ideas, trying to coalesce those ideas around some plans, and then find the funding to make them happen. The ultimate relationship is that.

I can’t wait to work with the mayor and the mayor’s team. I’m a big fan of the mayor, I’ve kinda watched him for years. I remember when my mayor from Buffalo was involved in the Conference of Mayors and I would have opportunities to run into Mayor Abramson and listen to him speak and so I’m excited about his leadership.

LEO: You mentioned accountability to the taxpayer and to the government, which is providng about 80 percent of the DDC budget right now. LEO Weekly, for instance, has had much difficulty in the past obtaining information from DDC — the agency has said it is not subject to state open records laws. I’m curious what your thoughts are, generally, on openness and transparency at an agency like DDC?

AD: That’s one thing that I have to understand a little bit better as well. Just in general, the goal is to be as open and as transparent as possible. That is the way I’ve always operated here. I can’t even tell you how many boards, advisory groups we have right now that we work with, that my department works with, and that we’re accountable to, let alone the council and the mayor and the city manager and the public. I’m used to accountability.

Now, I will protect the project and protect the client. Economic development sometimes requires confidentiality and negotiations have to take place, and so that’s part of it. Trade secrets, etc. I need to spend some more time understanding exactly how the DDC is set up, and one of the things that I definitely want to work on as soon as I get there is understanding the financing and the funding.

I think it’s great that the business community is as engaged as they are in the DDC and downtown — that’s the first thing that jumps out at me. And at the level of participation of the board members within their respective corporations is amazing. That’s a real positive thing for the community. Again, communities that do public-private partnerships and do them well — as Louisville has done in the past, of course you know it better than I do — but at least the end result has been extremely positive. Overall, transparency is a very good thing.