$250,000 Option to Buy Midtown for $6 Million

Last week Bob Duffy announced a bold plan to secure a $250,000 option to buy Midtown Plaza for $6 Million by February 13, 2007. Everyone knows that downtown Rochester will never become the bustling place that it once was until the Midtown and Sibley buildings have been intelligently redeveloped. The black hole of vacancy they create in the city's center is a cancer that scares off businesses and residents alike. I desperately want them both to be addressed. The question is how, and is this option the answer. Let's look at how this has played out to date.

Midtown was purchased in 1997 for $23.5 million and due to a steady exodus of tenants the owner filed for bankruptcy and the lender, Blackacre, took possession of the property in 2001. By 2005 the Rochester Downtown Development Corp. estimates that Midtown is nearly 90% vacant. Midtown Rochester Properties (the entity formed to manage the property) found out this year that the only remaining anchor tenant, JP Morgan Chase, will be moving out in the spring. The rents from the property can no longer cover even the property taxes. Property manager Lawrence Cohen tells the city in a letter dated November 9 that he is, "pleased to offer the City of Rochester the option to buy Midtown Plaza." As a real estate investor, I'd be pleased to dump a giant liability on someone else and charge them a premium to take it too!

In their defence, Bob Duffy and City Council, have the best intentions for Midtown. I know they want to step in and take control over what happens with the development there. The problem here is the nature of the deal. First a lesson in options. A buyer pays an agreed upon amount of money for an option. That option locks the purchase price and terms of sale for a period of time stipulated in the option contract. In this case it is a laughable 90 day window. Most options are measured in years, unless immediate action for development or flipping the property is planned by the buyer. In this case the city is paying the seller a non-refundable $250,000 that gives them the exclusive right to pay an additional $5,750,000 to buy Midtown before February 13th.

The D&C reported that the city worried about less than reputable developers buying Midtown and simply sitting on it to collect what little rents are coming in. I say we should be so lucky. Any developer who would buy a property with tens of millions of dollars in deferred maintenance and asbestos abatement liability coupled with roughly $800,000 dollars in annual tax liability will have to default on the taxes to break even. At that point, the city can take back Midtown for only the cost of completing the foreclosure. Another thing to consider is that the current owner is actually paying the taxes and is current on them. If the city buys the building, we loose nearly a million dollars a year in tax revenue.

City Council should either counter offer Midtown Rochester Properties LLC with a $25,000 option price with all the same terms, or call their bluff. Vacant buildings with a fraction of the risk exposure and complexity to rehabilitate sit on the market for years in this city. Let them try to sell it. After the city has collected another $800,000 in taxes next year, make an offer to buy it for $3 Million. For a 90% vacant asbestos liability needing tens or hundreds of millions of dollars in renovation that may still be too much. Furthermore, the city is about to pay $250,000 for the option before it actually conducts the due diligence to see what condition the property is in, what the rent rolls look like, or even have their consultants develop an informed estimate of fair market value.

If an employee of mine bought a $250,000 option before doing the due diligence and having all the information I would fire them on the spot.

America: Welcome to the Police State

You've heard that "Freedom to assemble" is a Constitutional Right... right? This is what freedom of assembly looks like in the United States. Thank God we don't live in some oppressive country where our basic liberties aren't protected! Is this the Democracy we are fighting to protect overseas? I welcome your comments.

Whatever Happened To Credibility?

Rochester's Achilles Heel - Property Tax

Rochester has plenty of plenty of things going for it that would attract people from outside the area, so what is it that holds us down. I don't believe it's the Kodak layoffs, the sky high sales taxes, or even the flight of manufacturing jobs to China. To misquote a popular campaign slogan, it's the property taxes stupid.

Rochester is in the best position for an economic recovery it has seen in twenty years. No, I'm not crazy. Our missing the property value bubble that has occurred during the past 15 years was the best thing that could have happened to us. We are completely hedged against any major down turn in the housing market, and we are one of the few affordable housing markets left in the country that isn't in the sticks. With the highest paying jobs in the nation being the most conducive to telecommuting we are in a fantastic position to attract high income workers tired of commuting three hours a day. The single biggest factor stopping someone from moving here is the property tax.

The D&C today has a great article that addresses this crisis and paints a clear picture of the problem. This excerpt about a Massachusetts family with Rochester ties illustrates this point perfectly.

But he's not coming home. The reason: property taxes.

"If the taxes were close to similar, we'd be back," he said. "It would be a no-brainer."

Here's the math: His present 2,600-square-foot house is worth about $525,000. Taxes are about $4,400 a year.

He could buy a similar house in a Rochester suburb for $300,000 to $350,000. But the taxes in, say, Canandaigua would be about $9,100. They would be even more in Webster — closer to $12,000, he figured.

"We're staying put," he said.

This is by no means an isolated case. In fact, one of my best friends moved to the Boston area to attend MIT. From there he got a job as a Microsoft consultant and settled in to a house roughly an hour west of the city. His average commute is three hours a day and his wife suffers the same fate. We spoke two months ago about his thoughts on moving to Rochester. With both of their parents living in Penfield, they are eager to return to the area. The quote above was nearly identical to our conversation. There was no way my buddy was paying a 300% tax burden for the "privilege" of living in NY.

Comparing the proportion of the average home's value that is paid in taxes annually, Monroe County ranks #2 in the Nation! Unbelievably, school taxes account for 60% of our property tax burden. I firmly believe that education is one of the highest priorities in American society, but this is an outrage. How efficiently do you think school funds are spent? The Rochester city school budget of $582.9 million is nearly 50% larger than the entire city budget of $403 Million. Why is it that serving 34,000 students costs that more than serving 219,000 residents? Why are Rochestarians not demanding the Teacher's Union reevaluate their belief that more money equals better education? I challenge any Teacher's Union member to graph the city school budget with graduation rates, average GPA, or any other success indicator and try to make the argument that giving more money to that bloated institution equals improvement. Without a union, we could probably demand that salaries of administrators had some performance based indexing... Sadly, to a union that's unthinkable.

We need to fix our property tax problem, or face economic collapse. The city schools are the first place to look for efficiency. Too bad Spitzer has decided to not ask for spending caps from schools... Must be that Teacher's Union endorsement has him out of crusader mode. Go Figure.

Renaissance Square Resources

To compliment our previous post about demanding LEED Platinum Certification for Renaissance Square we wanted to provide you with some additional information about the project.

• Interactive overview of the project site from the D&C
• D&C special projects feature on RenSquare
• Architect's PowerPoint Presentation (finalized transit center on page 10)
• RenSquare's official website
• Lead Architect, Moshe Safdie's website (pronounced mow-sha sawf-dee)
• U.S. Green Building Council's LEED website
• World Trade Center to be LEED Gold Certified
• The Costs and Financial Benefits of Green Building (134 Page PDF)

The last link is a great report that studied the whole project lifecycle of over 30 building projects and has loads of information. Here's two of the graphs from that report illustrating the savings:

The Junto's New Look

Sorry to change the look and feel of the site on you, but I have had some serious problems with the site displaying correctly on Internet Explorer. The new site now scales to the size of your window for a more user-friendly experience. The new site also allows for a number of additional improvements that will be installed over the next few weeks and months. If you have any questions or suggestions you can email me at rochesterjunto@gmail.com.

Unions Holding Rochester Back?

In his controversial speech this week, Joe Klein fingered unions as one of the causes of Rochester's woes. Are unions really that bad, and how does an organization of employees hurt us? Let's do a brief recap of American unions.

During the 1800's and early 1900's employees as young as 5 worked 18 hours a day in conditions so horrendous that is was not uncommon to see bodies carried out of the jobsite with some regularity. If you were injured, you were fired and likely starved to death. By the 1970's labor unions had made tremendous contributions to America's working class and had won 8 hour work says, workers comp for injured employees, a minimum working age and numerous other worthy benefits. This rich history of fighting for the little guy was hijacked in the mid 19th century by the mafia. Corrupt union leaders and politicians realized the massive voting power of these labor groups. If you disagree I have two words: Jimmy Hoffa. Hoffa was a corrupt union leader whose mafia connections netted him a pair of cement shoes in the 70’s.

In the year 2006 we find the working world very transparent and employers are frequently honored for their working conditions. Employers who treat employees like crap can't keep good employees in this new fluid information age. Barriers to switching employers are almost nonexistent. Now unions seem to function primarily as voting blocks that politicians will sell their soul to win the support of, and as a tool to extort employers to the point of financial collapse. This is not to implicate that every union is corrupt or detrimental to business, but that it is a pervasive problem. One of my first encounters with a union employee was at the MCC automotive school in Henrietta. Much to my RIT College of Business colleagues’ amusement I elected to take a brakes and welding class. There I met a 25 year old guy we’ll call Steve.

Steve and I talked often about his job as a union employee at Delphi. Steve told me about the first few weeks on the job when the more senior employees demanded he slow down his productivity so as not to make the others look bad. His production in his first few weeks on the job far outpaced guys who had been there for years. On more than one occasion, while showing off his brand new red Corvette, Steve bragged about having only changed a few tires all day on the job. Needless to say, this pissed me off. I was paying $25,000 a year to get a degree that would land me a finance job that I drove to in a car that barely functioned. The job started at $28,000. Steve, 25 years old with no degree, was making $52,000 and shared with me that in short order he would be making nearly $90,000 as a journeyman. Clearly the union was working, employees were excellently represented. But then something happened. They priced themselves right out of a job.

A recent D&C article read, “Delphi Corp.'s bankruptcy could change the U.S. auto industry, experts say, ratcheting up pressure to produce cheaper parts overseas and forcing deep cuts in union wages and benefits and manufacturing employment. Delphi, the largest U.S. auto supplier, expects to close many of its 31 domestic plants as part of its reorganization.” The airlines are dominated by unions and are constantly going back to the taxpayer trough to get bailed out because they can’t make the business decisions needed to stay profitable. Soon GM will be in bankruptcy because of management’s blind allegiance to the internal combustion engine, inability to innovate, and the labor union’s crushing influence over tactical business decisions. UAW workers will scream about layoffs of their employees being paid $60,000+ to sit next to a robot and ensure it keeps chugging along, blind the real cause of their plight. To be sure I will investigate and discuss the platforms and impacts of our local labor organizations in future entries.