Economics Make County Garage For Arts Center A Bad Gamble
Written by Michael Lewis on November 2, 2006
By Michael Lewis
Good news: Just 18 years after a performing-arts center was first planned and seven years after groundbreaking, the county has begun dealing to develop nearby parking.
Bad news: The deal under discussion isn’t likely to make economic sense.
The costs won’t work unless they’re low-balled, as Miami International Airport and the performing-arts center were until the public was on the hook. Then, low-balled costs snowballed. Last week alone, the estimated cost of airport expansion rose another $1 billion.
Since sifting numbers can be mind-numbing, let’s look first at who could benefit from the primary deal being discussed.
Potential winners are:
Concertgoers, who would wind up with parking after current temporary deals evaporate. How much they’d pay is a topic to which we’ll return.
Operators of the arts center and presenting companies, who need audiences to pay the bills.
The arts center, which might get the garage’s profits, desperately needed to fill an unfunded operating deficit. Like popcorn in movie theaters, a center-owned garage might have contributed mightily to a bottom line.
The Miami-Dade County commission, which would gain deniability.
When it approved the center, the commission pledged that while the county would pay hundreds of millions for construction, it would never fund operations. But now, without aid, the center won’t pay all its bills because it has almost no endowment.
By building a garage and funneling profits to the center, the commission wouldn’t be handing over operating money, just construction money.
nMaefield Development, which would sell to the county land for a 1,600-space garage on a site that was cheap when the center was planned but is ultra-costly today.
That cash would enable Maefield to buy land from the McClatchy Corp., publisher of the Miami Herald, then flip that slice of it profitably to the county and use another piece to build a big-box mall with 90-foot-tall electronic billboards across from the arts center.
nMcClatchy, which by selling land around its Herald building for $190 million would reduce a debt it estimates will hit $3.3 billion at year’s end.
McClatchy’s third-quarter report says the corporation had expected to sell the land this year to help fund income-tax payments and now "will use all of our excess cash and draw down on our revolving line of credit to make these payments." The report says the corporation expects to sell the land in the first half of next year and wind up with $118 million in after-tax proceeds.
With all those winners, what could be wrong with this deal?
First, the obvious: If government could develop the land profitably, why wouldn’t the landowner do it? It’s unlikely the county is more efficient — look at astronomical overruns at the airport and the arts center.
Second, why is the county targeting Maefield’s high-priced site when many nearby would do? Shouldn’t the county request proposals? Is a garage meant to benefit the public or Maefield and McClatchy?
Third, what about timing? The county isn’t flush with cash — unless it plans to strip general-obligation bond money from approved projects and shift those funds to a garage. Does timing have anything to do with an upcoming strong-mayor election and potential seismic shift in county power?
Fourth and most calculably, do the numbers make sense?
Maefield wanted $200 million from the City of Miami to build and operate a garage. That failed plan sets a benchmark for what land may cost, since Maefield isn’t going to sell cheaply.
Nationally, building urban garages costs $50,000 and up per space. A government garage cost $77,000-plus per space in San Jose, CA, before construction costs skyrocketed. Those extremes would put a 1,600-space garage’s cost on moderately priced land at $80 million to $125 million if construction costs could be held down.
Operating a garage costs $500 to $2,000 per space each year. And annual interest could be $3.5 million to more than $5.5 million, depending on construction and land costs and assuming a top rating for county bonds.
Facing those costs, what revenues could a garage yield?
If the arts center put on 300 major events a year (a generous assumption), all 1,600 spaces were used for every event (a very generous assumption, considering that a recent arts-center event played before an audience of 700) and the county got the same $15 parking fee for center events as the Omni garage gets today, a garage could yield $7.2 million a year — leaving $2.9 million above breakeven to repay debt if all costs were minimal.
But every assumption would have to be optimal (which is dangerous) to repay an $80 million debt.
At the high end of the assumption spectrum, the county would lose more than $1.5 million a year on operations and interest and never have a penny to pay capital costs even assuming total parking sellouts, absolute operating efficiency and total honesty in county operations for the next 30 years or more.
Further, neither assumption leaves a penny to help fund arts-center losses.
Moreover, the only way to ratchet up revenues is to charge center patrons far more than today’s $15 — or to fill a garage in that neighborhood day and night with other users, which today is unlikely.
With only arts-center customers, under the high-cost scenario, the garage could break even and repay its debt at about $25 per patron if every space were filled for every performance. But for $25, few center patrons would actually park there instead of using the $20 valet service at the center.
That cuts down the list of winners on this deal to Maefield and McClatchy.
That’s not to say a county garage must fail. But negotiating with one seller long before a request for proposals is issued — if one ever is — makes this deal smell even worse than our financial estimates.
The county officials in charge of the garage project say they are still looking at how to pay for it. A better question is: Should they?