Herndon Opinion by Jasbinder Singh and friends

The first three blog posts in this series shed considerable light on how and why 17 councilmembers passed the cost of the garage from downtown businesses to the (uninformed) taxpayer.  They concluded that:

• the share of 9 Business participants decreased from the purported 60% to about 10%,

• The taxpayers’ share increased from the often-stated 40% to almost 90%, and

• The share of non-participating businesses (the vast majority of the businesses in the downtown) remained constant at 0%, even though it was obvious that they too would benefit from the availability of public parking.

The taxpayers’ share increased largely because (1) the public was misled about the real cost of the structured parking and (2) none of the 17 council members asked any questions about the taxpayers’ cost of program.

This blog post departs from the focus on government’s decision-making to the fairness of the costs allocated to the common taxpayer.  It examines bits and pieces of data developed during our research about the program.

1.    The Bankruptcy of Office Condos at the TPI Center and Pay-Back of the Subsidy

Of the two properties representing real expansion of commercial space in the downtown area under the Shared-Parking program, the TPI Center has experienced considerable financial difficulties over the last seven years. According to Fairfax County assessment records, In 2006, the TPI Group, Inc. purchased 3 office condos (containing 17,268 sq. ft) from Herndon Commerce Center, LLC for $5.8 million (in 2012 dollars) or about $336/sq. ft.   The condos, however, turned out to be highly unprofitable.  According to the same records, Citibank, the bank of record in this case, bought the condos back for $1.75 million in 2009.  In 2012, Elden Street LLC purchased the condos from the bank for $1.825 million (or, about $106/sq. ft.) in the ensuing bankruptcy proceedings.[1]  These figures imply that the market value of the condos was closer to $106/sq. ft. and that the TPI Group paid far too much for them.[2]  Looking at it in another way, this suggests that the office rents received by the TPI Group must have turned out to be much lower than those upon which the purchase decision was made.  In other words, the space must not have provided benefits commensurate with its cost. [3]

The wide divergence between the cost of newly constructed office space and its market value, amounting to about $186/sq. ft. (=$336-$150) in this case, suggests that any subsidy provided by the Town could not have helped much. The condos were destined to sputter along before going bankrupt. The case records show that TCI Group did not pay its share of the cost of the future garage, which amounted to a relatively small amount.  Had the Town charged the full cost of surface parking, the cost of the condos would have increased by about $45/sq. ft. and hastened the TCI Group’s bankruptcy.[4]

Therefore, it is obvious that the valuation of a struggling new business will remain low during the periods of its financial troubles.  As a result, it will generate lower real estate and occupational taxes, and thereby pay the subsidy back at a lower rate than otherwise.  The question we have to ask is, “Will it be able to pay back the subsidy if it were a strong business?”

 2.   Pay-back of the Subsidy by Financial Strong Businesses

According to our calculations, if the Town were to construct the planned garage today, the three condos would receive a subsidy of about $703,000.  Some people often claim that real estate and occupational taxes more than compensate for such subsidies.[5]  Let us examine whether this claim is valid in this case.

Assume that the Town’s real estate tax rate is $0.26 per $100 of the assessed value (it is very close to the current tax rate).  In 2013, the three condos were given an assessed value of $2.4 million by the county.  Accordingly, the three condos would pay $6,240 in real estate taxes to the Town this year and every year in the future (if we assume that the yearly taxes would remain constant).

In addition, if we assume (generously) that (1) the property is not capable of attracting high quality professionals on a continuing basis, (2) 60 people work in the three condos, and (3) each person is supported by annual gross revenue of $100,00o in consulting fees, the condos should generate an occupational tax of about $2000 per year for the Town.

Thus, the Town would realize a net increase in tax revenue of $8,240/year.  This amount is miniscule when compared with the $703,000 subsidy the Town would provide, if it builds a garage.  It is readily apparent that the three office condos will not be able to pay back the subsidy for about 85 years, if ever.   This analysis does not even take into account (1) the $3 million already spent by the Town for providing the surface parking, (2) the potential $2 million subsidy that is likely to be provided to the Art Center, and (3) the loss of open land in the heart of the downtown – the land that is used for major public events in the town.

What this means is that even a thriving business, under the best of circumstances, will never come close to paying back the subsidy provided by the Town.

3.   Time to Change the Policy

The analysis strongly suggests that a garage financed under the Shared-Parking Program would be an economic drag on Town finances for years to come.  Therefore, it is quite reasonable to conclude that the Shared-Parking policy, as currently structured, is unfair and inequitable for ordinary citizens of the Town.

There is still time to reconsider the policy and it is not too late for the Town to develop an equitable formula for sharing the costs and benefits among the participating businesses, non-participating businesses, the citizens of the Town, and those folks who live outside the Town, but enjoy its benefits.   

Tagged: Decision-Making In Local Government, Equitable Allocation of Costs