Wednesday, February 24, 2010

Finance and Football

It has been a busy week - I've started another student competition, and I've had some mid-terms.  Blogging has suffered.

I'll have to make do with a link to an interesting post from Smart Football about the financial elements of sports teams.    The post deals with leveraged buyouts and how its relation to sports teams.  I'm not sure how many of my readers share my love of sports and finance, but I thoroughly enjoyed reading about both at once.

Wednesday, February 17, 2010

The gang that couldn't shoot straight

Can we do anything right?  Atlanta has lost out on federal stimulus funding for the Peachtree streetcar line. This despite Kasim Reed going to Washington to personally lobby for funds.  Oh, not to mention our massively influential senior Congressman who was surely doing everything in his power to further the cause of alternative transportation.  Right?  He must have helped out, right?

I mean, this is the guy who said of commuter rail funding, "I have done my part and will continue to bring federal money home to the people of Atlanta."  That guy surely did everything possible to get the administration to fund this ready-to-go project, right?  Anyway, I'm really glad we keep sending him back to Washington to fight for the things that are important to Atlanta, since that is working out so well for us.

Requisite sad panda at right.  There really isn't a whole lot to say.  Who did get funding?  Cities who could contribute their own funds to the projects.  From regional transportation sales taxes.
A transportation official in Atlanta noted that one of the likely winners that leaked out early, Tucson, Ariz., was paying more local money for its project's capital costs than Atlanta. Where Atlanta's application would put no local money toward the streetcar's construction, Tucson planned to pay a large portion of the building costs of its streetcar project itself, from a half-cent regional transportation tax.
Last weekend I ran into an old friend who lobbies the state for transportation and infrastructure issues - he told me I was to young to feel like it was too late for Atlanta to catch up with other metro areas when it comes to infrastructure and transportation.  I'd LOVE to feel hopeful about things, but lately it is really, really hard.

Can anybody disabuse me of this notion?

Bueller?  Bueller?

Friday, February 12, 2010

The difficult economics of urban revitalization

A week or so ago, I got an email about the banners wrapping the Medical Arts Building, where Peachtree Street crosses the interstate Downtown.  Thomas Wheatley and Maria Saporta tackled the issue, but I thought it would be more illuminative for my readers if I tackled the underlying problem.  Namely, why the heck is this building still sitting empty downtown?

So I've been playing with some spreadsheets in my spare time over the last week.  The basic question I'm trying to answer is, "What could you afford to pay for the building in order to renovate it as office space and make an acceptable profit?"  The owners have suggested this is one option they are looking at, so it is what I've focused on since it is the most straight-forward option.

The building is for sale at an asking price of $11 million - it was bought in 2004 for about $5 million.  For a starting place, consider that the already renovated and income producing Imperial Hotel nearby is valued by Fulton County presently at $5 million, and the Medical Arts Building is valued by the County at $3 million.  So we have quite a discrepancy already.

You can see the details after the jump, but I've used a residual analysis to come up with an idea for the value of the building.  Basically, you say, "It costs me X to renovate, I can sell it for Y, and I need to make Z profit.  So I can afford to pay up to the amount that my profit drops to Z."  (Feel free to download the spreadsheet and follow along.  See below for important notes.) 

  • The main findings are that a reasonable price that could be paid in order to redevelop the building for office use would be about $2 million.  A reasonable top-line, in my estimate, would be about $3 million with a number of favorable assumptions.
  • Under absolutely optimum (read: completely insane and impossible) conditions, you could justify paying up to $7 million dollars for building, but this assumes minimal construction costs, maximum rent levels, very low cap rates, minimal T.I. allowances, adding the building to the National Register to qualify for maximum historic tax credits... a perfect storm of events no one in their right mind would bet on, which is what you'd be doing if you paid $7 million for this building.
  • It is much easier to see a scenario where construction costs are at their highest, rent levels stay very low, tenants continue to demand high T.I. allowances, it takes forever to lease things up, and cap rates move up.  In that case, you wouldn't pay anything at all for the building because you'd never actually develop it.  In case you were interested, this is basically where the market is now, although I think construction costs might have come down a bit from a few years ago.  It isn't that the building is worth nothing, it is just that you can't do anything with it given present conditions.  
The point of the analysis is to make this basic point - many, many property owners in Atlanta have completely unrealistic conceptions about what their property is worth.  This fact makes is very, very difficult for areas like Downtown to have the type of turn-around we all want to see.  Here, you have owners asking $11 million for a building, and the absolute maximum amount possibly justified that someone could pay for the building is $4 million less than that.

Now, it is possible that you can do some other analyses with a different use than commercial office space - you could run a boutique hotel scenario, or convert it to condos, etc.  Perhaps a different scenario would be more profitable and push the value of the building higher, but I don't see any reasonable way you could justify paying more than about $4 million for that building, and even then I'd suggest you overpaid.  It is probably worth analyzing the value of the property if you just tore the building down, as sad as that would be.  [Ed. update: Some back-of-the-envelope calculations suggests that tearing it down would be more profitable.  Assuming it costs around $900,000 to demolish it and the associated parking decks, you'd only have to get about $100/sf to exceed the $3 million mark.]

Realistically, the owners of this building overpaid when they bought it six years ago.  They haven't done anything with it since then.  Somehow they have held on to the property and not given it up in foreclosure, despite the fact that it doesn't produce any income [correction: it does produce some income in parking and with these billboards].  If they can keep holding on, I would be very surprised if anything happened to the Medical Arts Building any time soon.

If you want to see this building redeveloped any time soon, you are hoping it goes into foreclosure and a bank sells it for a realistic value to get it off their books.

If that wasn't a long enough post, you can see the details of my analysis after the jump.  Be warned: full-on geek mode follows.  I'm not sure how much will make sense if you don't know some level of real estate finance.

Wednesday, February 10, 2010

Thanks for nothing, Sonny

So MARTA met with Governor Perdue recently, and the word on the street is that Perdue is receptive to helping MARTA out with its finances.

Sometime next week, Perdue is expected to release the details of his first stab at a statewide plan to increase transportation funding. We’re told that the governor will recommend that MARTA be allowed to use a greater share of the Fulton-DeKalb sales tax to prop up its operations.
Perhaps as much as 60 percent, word around the Capitol says — with a sunset clause and other restrictions. 
Based on 2009 sales tax collections of $327 million, the new leeway would permit MARTA to shift an extra $33 million toward payroll and other expenses.
Not enough to close what the transit agency says is a $120 million gap this year. But it’s something.
Are you kidding me?!  Wow, how very generous!  Apparently MARTA is going to get held hostage in regional transportation funding talks, as well.  If Fulton and Dekalb legislators balk about adding an extra penny tax for regional transit funding, well, no help for MARTA. 

First, I think Fulton and Dekalb legislators would be stupid if they opposed the regional sales tax.  Yes, we already pay an extra penny that other counties don't because of MARTA - but sinking the regional transportation funding because of this would be cutting off our nose to spit our face.  

(In make-believe world, I'd love to see MARTA get wrapped into a regional transit system that gets funding from all the metro counties and/or the state.  I have no illusion that will happen, of course.)

So let me get this right..... the best we can get out of the state is letting MARTA use an extra 10% of the sales tax revenue, which will cover all of a 27.5% of the budget deficit.  We could cover the entire budget deficit if they let us use about 87% of the sales tax, instead of the current 50%.  Thats great.  So MARTA is still screwed.  I really don't see how this helps, and its fairly insulting to think that this is what it means when the Governor and the Legislature decide to "make nice" with MARTA.  

With friends like these, right?

UPDATE: Political Insider's latest suggests that Perdue's MARTA plan may be to simply lift the 50/50 capex limit.  It is a bit unclear, but they've posted a document outlining Perdue's "Transportation Resource Legislation" that simply calls for lifting the cap for three years.  I'd still rather not see MARTA funding get tied up with something as messy as the regional transportation sales tax, but it is better than nothing.  Hopefully state legislators (ahem, Jill Chambers) aren't feeling vindictive or petty, and the 50/50 cap is simply suspended instead of adjusted as first reported.  So credit is due to Sonny Perdue if I'm reading the document correctly.  

BeltLine picks lead design team

The BeltLine has picked a great lead design team.  Perkins + Will has some fantastic folks, and James Corner Field Operations was in charge of NYC's High Line (right), a model urban adaptive reuse parkspace.  I know a few folks over at P+W, both personally and by reputation, and I hear nothing but great things.

Most importantly, for those of us frustrated with the pace of the project:
Project officials say the firms’ work will help make the endeavor more competitive for federal funding — which many say is vital should the Beltline become a reality much sooner than 2032, as Reed has said he’d like to see.
Fan-fucking-tastic.  Now if we can only speed up the transit component...

Thursday, February 4, 2010

Is it worth keeping the Falcons Downtown?

My knee-jerk reaction to articles about building a new Falcons stadium Downtown are that, heck yeah, the Atlanta Falcons should be in Atlanta, for crying out loud.  How would the Doraville Falcons sound?  Maybe we can call it the Atlanta-Sandy Springs-Marietta MSA Falcons?

Then I remember that there is a reason I'm a finance major.  Making decisions like whether to spend gobs of public money on a new stadium should be made on stronger rationale than civic pride.  Rather, there are tools we can use to make rational decision.  One is calculating the net present value of the investment.  I found a frustratingly opaque report on the new Yankees Stadium, suggesting the stadium has a positive NPV.  One must assume the cost of bond financing is the discount rate?

There is also a ton of work out there suggesting that stadiums aren't really worth the investment, but in my brief research yesterday I couldn't find anything with actual analysis.  Sure, these stadiums cost a lot, but if they generate comparably large returns to the city, they can be worth it.

Wednesday, February 3, 2010

Is Peachtree-Pine foreclosure for real this time?

The original loan for the Peachtree and Pine shelter has been sold to Ichthus Community Trust, who has issued a notice of foreclosure.  The shelter has a month to pay off the $500,000 loan.  The shelter has been on the brink so many times in the past though, it is hard to believe they won't have some way to pull this out of the fire.

Playing the blame game with GA rail woes

I'm now done with the ULI competition, but have been hit with some sort of sinus infections/cold.  I'm fairly useless right now to be honest.  I woke up around 8, ate some breakfast, and fell back asleep until 1.

I flagged some articles that came out during the competition, and so right now I'm getting a chance to address them.  First up is the dust-up between John Lewis and Sonny Perdue.  John Lewis said the reason Georgia didn't get any rail money is because of failure from the state leadership, i.e. Perdue.  Perdue responded by saying, basically, "hey, you guys sure got a lot done with all your seniority and influence.  way to go guys.  I'm totally committed to rail, btw."  Lewis responded by basically saying, "yo, I've brought home the bacon plenty, stfu."

“I have said for years that Georgia needs a comprehensive, regional transportation plan to solve our problems. That is not the responsibility of any federal authority, but it rests squarely on the shoulders of the governor.... 
“I have done my part and will continue to bring federal money home to the people of Atlanta. Now it is time for other responsible officials to do theirs.”
So.  Who to blame?

Monday, February 1, 2010

ULI Madness, 2010 version

So we have shipped our submission for the 2010 ULI Urban Design Competition.  The architecture, landscape architecture, and urban design folks have pulled an all-nighter.  We've tweaked and fixed and gone over everything a million times, and finally had to just stop and mail the damn thing.  Like last year, I had the opportunity to work with some fantastic folks at Georgia Tech and I had a great time on the project.  The team this year was Luke Wilkinson, Claire Thompson, Louis Johnson, Jason Combs, and myself.

Last year I just posted the pretty pictures from the submission, but this year I'm putting up the entire submission and my pro forma summary board.  This year's site was in the East Village in San Diego.  You can see photos of the site here.  The challenge was to come up with a new catalyst for a distressed urban area given current market conditions.  The site seemed to have every active fault line in San Diego, as well.

As far as our submission goes, I'll just let the boards speak for themselves.  Click the pic below for a full-scale version of our submission.

[UPDATE:  The submissions that go to the ULI are judged blind.  While we are all very proud of the work we did, we decided it'd be best to take down the images in the rare case that someone at ULI is on the interwebs reading this little blog.  I'll put the images up later on in the year after judging is done.]

A few notes on the pro forma board - the ULI competition tries to use current market conditions, but it is very difficult to be realistic about things like rental rates, absorption rates, and constructions costs and still be able to present anything to actually develop.  It is fundamentally and Urban Design competition, not a real estate development competition.  The plans need to be relatively feasible, but the financial analysis portion is used to support the design/planning component.

Additionally, the ULI competition uses a heavily simplified pro forma that does not include most of the details and costs that I would normally include in a development pro forma.  Past winners have used what I considered unrealistic assumptions. So, the pro forma below is designed for what I refer to as "ULI world," and is not representative of types of assumptions or the level of detail I would typically go into for an analysis.

[UPDATE: Like with the design boards, the pro forma has been taken down for the time being.]