$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.

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.

City Schools, Reevaluate Your $3M Purchase

Today I learned that the Rochester City School district announced a deal that basically gives all the schools (voice over internet protocol) VOIP phone service. Basically, the data lines for your computer's internet connection also carry the phone signal. The great part about this is that the district will save $1M a year. Great thinking... but with $3M what could we do in the IT world. For starters, consider the fact that a crafty school IT department might have realized that you can get those phones free. Go to Vonage.com and sign up for VOIP service and you can get a free phone. I realize that large networks take a bit more than a free phone, but hear me out.

My dream is that one day we will have visionary people making the big decisions for this community and make Rochester a leader again. The bigger picture that we are missing out on is municipal wifi. Municipal wifi is a wireless internet network, generally provided by the city, that enables all residents to access high bandwidth wireless internet connections. Rochester is trying to position itself as a knowledge economy to compete for the jobs that are still being created on our shores, and this would really enforce that branding message. Based on the cost of the Philadelphia wifi system I calculated our cost to be between $2.5 and $3.75M to cover every square inch of our city with high bandwidth wifi that the school district could retail to residents and provide for free to low income households. Imagine if the school district had the foresight to build this network (for the same cost), put Rochester on the map for yet another innovative decision, and MAKE money off the installation.

If anyone who can make a purchasing decision from the school district is reading this, I would implore you to seek unbiased council on this matter with the RIT Golisano College of Computing and Information Sciences to validate my claims. ICS Telecom, the guys doing the current install will tell you I'm nuts. If they're smart, they just might fill out the RFP to install the municipal wifi instead and plug the phones into that. $2.9M spent with 7000 phones and no network, or $2.9M spent with wifi for 220,000 city residents and 7,000 free Vonage phones. We need to demand more of ourselves.