Anticipate The Joint Ventures Pitfalls Before The Fire Sale
Written by Michael Lewis on April 20, 2006
By Michael Lewis
Outgoing City Manager Joe Arriola’s legacy may well spotlight his efforts to sell the money-losing James L. Knight Center.
A sale will never recoup the 24-year-old center’s costs – so far, Miami taxpayers have lost about $100 million on a project that was geared to profit while revitalizing downtown.
And it’s doubtful a future owner would aim for the original goal of a world-class conference center luring national and global meetings and filling the connected 627-room Hyatt Regency hotel.
Clearly, the city hasn’t made the numbers work – it subsidized the center by $1.9 million last year.
Of course, police and fire departments don’t profit, either – nor do most other city services. So the questions are whether the value of a conference center outweighs operating losses and whether the center’s services should be a city function. Any service that produces enough profit would find investors willing to provide it without government help.
But while government need not turn a profit, it shouldn’t bleed money in quest of something it cannot provide. And the Knight Center never produced as advertised.
First, it suffered a common fate of joint ventures: massive cost overruns.
Second, the complex included the 21 Riverwalk Shops whose rents to help fund the center disappeared when they were converted after several years to exhibit space.
Third, there was never enough exhibit space – the city wanted 200,000 square feet it never got. From the outset, a key element has been lacking.
Fourth, the project was badly targeted. It aimed at – can you believe it? – meetings from Europe that would come to a downtown that had no amenities and no nightlife, with the Hyatt the only modern hotel.
Fifth, it counted on the University of Miami to hold classes for groups from elsewhere in the US and abroad and fill hotel beds, from which the city was to profit once the hotel met a threshold. The university never brought out-of-town groups, and for 12 years, the hotel paid not a cent for use of city land.
Sixth, City Manager Joseph Grassie, who cut the city’s deal with developer Earl Worsham, soon went to work for Mr. Worsham, raising questions of how the developer got a sweetheart deal.
Seventh, the city never had dedicated revenues to fund losses, so taxpayers have been on the hook for years.
Watching the money flow out, Mr. Arriola has been talking with potential buyers since last year. This month, the City Commission voted to hire a firm to facilitate a sale.
The 5.7-acre site on the Miami River is precious today, though the city got it at bargain-basement prices in 1975. It includes the university’s 23,000 square feet of conference space, two small auditoriums and 14 meeting rooms; the hotel; the 4,646-seat Knight Center; and the 28,000-square-foot Miami Convention Center.
It’s a great package for a buyer who can figure out what to do with it – probably add a massive high-rise. The city may receive enough to pay off bonds it issued to build the center but probably won’t recoup its total outlay.
What can government learn from the deal?
First, know your partner. Mr. Worsham, who never had enough funding and had to give up his share of the project when it didn’t blossom, later got control of Coral Gables’ city-owned Biltmore Hotel. He refurbished the hotel, but less than six months after opening, a judge stripped him of control in an emergency hearing, warning of overdue bills. His 170 limited partners in the Gables included such names as Dan Rather and O.J. Simpson.
Local government frequently partners with developers who fail to deliver on glittering promises, leaving taxpayers holding the bag.
Second, all that glitters is not gold. The Knight Center deal promised university meetings downtown and visitors from abroad. A current city deal promises mega-yachts galore bringing the ultra-rich to fill two sparkling hotels on Watson Island. Which is more farfetched?
A corollary is that the more unusual a project’s promise, the less likely is it to deliver. A joint-venture parking garage – part of the Knight Center project that became the base of a nearby office tower – is more likely to deliver as advertised than a project that would, for example, lure conventions from Europe that never came before. Hotels on Watson Island are more likely to succeed than a marina for 450-foot yachts that now don’t visit here.
Third, it takes more than one project to turn around a city. The Knight Center promised to uplift a sagging downtown. Uplift came more than 20 years later, and the Knight Center had little to do with today’s development boom. The massive land area in front of the center sat vacant for 20 more years until developers of private projects found the timing right to build.
We were told that the Miami Performing Arts Center would change its neighborhood, too. Change is on the way – thousands of condo units. But condos are rising throughout Miami-Dade, so attributing those nearby to the arts center is a stretch.
Fourth, where is the firewall between a developer and government? When the city manager who engineers a deal can quickly become the developer on the other side, something is badly amiss. In a city whose mayor is a business partner of a leaseholder on a city-owned commercial site, such issues are crucial.
Fifth, government never seems to get cost or revenue sides right in its partnerships. The Performing Arts Center was a $100 million plan that ballooned to $500 million, and we have no idea how near it will come to revenue targets. Government has never seen a penny from AmericanAirlines arena. So the fact that the Knight Center was $15 million over budget and costs taxpayers $1.9 million a year seems like small potatoes.
I stood in the crowd of 300 the day the James L. Knight Center opened. It was a proud day for the community. Nobody anticipated the subsequent problems.
Government joint ventures can be useful. But officials should anticipate unwelcome entanglements before signing contracts rather than selling off the assets at bargain prices years later to get out of them.