Report: Expansion of Carousel Center

Report to the Mayor, Common Council, and Citizens of the City of Syracuse Regarding the Expansion of Carousel Center

Summary

The City of Syracuse is facing a major policy decision about the proposed expansion of the Carousel Mall. The existing Carousel Mall was developed by the Pyramid Companies with participation from the Syracuse Industrial Development Agency. The property is exempt from property taxes but makes a Payment-in-Lieu-of-Taxes (PILOT). The City will collect taxes from the existing mall beginning in 2006 after the PILOT agreement ends.

The attached report of the City Auditor addresses the question: Should the City forego the property taxes the existing mall will pay in return for the economic benefits of an expanded mall?

The report identifies the risks associated with both courses of action. The amount the City would collect in 2006 is in question. Real estate taxes charged to retail establishments are not an effective way to support local government. And future real estate taxes from commercial enterprises are highly dependent on the future of the business.

The projected benefits of an expanded mall are substantial, but so are the risks associated with those benefits. The report considers the risks and identifies the alternative courses of action available to the City. The City is committing the land for the expansion, is giving up alternative developments, and is foregoing tax revenue. However, if the City does not promote the expansion, the City looses the potential for capital investment, jobs, and resources that support the local economy.

The report finds that the proposed development will be self-supporting. The capital investment will be made by the private sector. The operating expenses of the project will be funded through the revenues of the project, including reserves to maintain the public improvements financed through the PILOT agreements. The proposed expansion will proceed in phases. Each new phase will be supported by the PILOT payments from the successful completion of the previous phase. If a phase is initiated but not completed, the City is protected since the PILOT payments from the previous phase will be treated as tax payments.

The report examines the fairness issues involved in the decision. Tax policy of the City is being used to promote economic development goals. Tax policy discourages property owners from investing in City neighborhoods because improvements usually result in assessment increases.

Conclusion:

The report concludes that the potential benefits of the proposed Carousel Mall expansion exceed the costs incurred by the City. No public money will be invested in the proposed expansion. No public credit will be used to secure the financing for the proposed expansion.

Recommendations:

Based on the above findings, the City Auditor recommends that the City:

Approve the proposed PILOT agreements
Enter into a revenue-sharing agreement with the County to provide for treating excess sales taxes generated by the Carousel Mall expansion as property taxes, thereby compensating the City and the County for the amount of property taxes which would have been paid by the existing Mall.
Explore the possibility of an urban economic investment zone to provide incentives for non-commercial property owners. The urban economic investment zone would include the whole city. It would reward residential property owners who invest additional funds in improving their property in City neighborhoods. It is likely that an urban economic investment zone would require New York State legislation.
Encourage the use of PILOT agreements to promote additional commercial investment in the City.

Full Report

Authority and Objective:

The City Auditor is responsible for making recommendations regarding the affairs of city government. The objective is to improve the operation of City government.

Scope:

The City is facing a major policy decision with regard to the proposed expansion of the Carousel Mall. The City has been asked to modify an existing agreement with the owner of the Mall to accommodate a major expansion of the Mall. The developer is proposing to triple the size of the Mall and to change its use to a multi-purpose recreational and tourist center.

The purpose of this report is to recommend a framework for evaluating this major policy decision. The report examines the economic issues affecting the region as well as the financial implications for City government.

Methodology:

This report compiles information from several sources, evaluates the data, and shows how the information can be applied to the decision on the Mall expansion. When possible, information has been confirmed by comparing specific items with data from other independent sources. The data is organized in a decision model under conditions of uncertainty. The approach is to evaluate the risk that an adverse outcome will result.

The Question:

Should the City forego the property taxes the existing mall will pay in return for the economic benefits of an expanded mall?

Background:

The Carousel Mall was the catalyst for the Lakefront redevelopment project. The project aims to reclaim and redevelop 800 acres of blighted land in the area bounded by Routes 81 and 690 on the South and East and extending to the shore of Onondaga Lake on the North. Built on the site of a former scrap yard, initial construction of the Mall cost over $350 million. It employs over 3,000 workers. It includes 1.3 million square feet of tenant space.

The Syracuse Industrial Development Agency (SIDA) participated with the developer of the Mall to initiate the redevelopment of the 800 acres. In 1987, the area was filled with dilapidated and abandoned buildings. Roads were inadequate. Much of the land was polluted by a century of industrial use. The initial improvements were paid for by the developer. Subsequently, SIDA issued bonds and repaid the developer. The Mall is making payments to SIDA to pay off the bonds. Those payments are technically known as Payments-in-lieu-of–taxes (PILOT's). The Mall itself is tax exempt until 2006. At that point, the bonds will have been paid off by the payments from the Mall.

The Issues:

How much will the City collect from the existing Mall?

Under the terms of the existing Payment-in-Lieu-of-taxes:
The existing PILOT schedule requires substantial increases in the years 2001 through 2005. However, those amounts will go to SIDA, not to the City general fund. They can be used only in the Lakefront area. The bonds which SIDA issued to finance the improvements already made in the Lakefront area will be paid in 2002. The remaining payments, totaling $27.5 million, will pay for additional improvements in the Lakefront area.
After the existing PILOT expires:
After the existing PILOT expires in 2006, the mall property will become taxable. It would then pay taxes determined by its assessed value. It is assessed at $324 million. It would pay $11 Million in property taxes when the existing PILOT expires in 2006. This amount would be divided between the City, the County, and the School District.
Sales Taxes:
Although the expanded Mall will expand the economic base of the region, the City's benefit from the additional sales tax is limited by the recently adopted agreement between the City and the County for the distribution of sales tax revenue. The City's share is limited to a growth factor of 2% in any given year. That is a serious consideration for the City, and it limits the cost/benefit analysis.

What economic benefits accrue from real estate taxes on retail establishments?

Tax payments made by shopping centers are transfer payments. Actually, most shopping centers have tenant leases that pass the burden for tax payments through to the tenants. The tenants in turn collect the tax payments from the customers in the form of marked up retail prices. So the economic impact of tax payments from retail institutions is dependent on where the customers come from. In the case of the Carousel Mall, 43% of the customers are from outside the County. This fact means that 43% of the taxes paid by the Mall have a positive impact on the local economy.

What are the risks associated with the property tax revenue?

Assessments can be challenged
The overall property tax revenue that the mall would pay is estimated in # 2 above at $11 million. Assessments are challenged regularly based on the continually changing market value of commercial real estate property

When the mall becomes taxable in 2006, it will be assessed based on its value as a shopping center. The Urban Land Institute, a non-profit research organization widely recognized as an authority on shopping centers, would classify the expanded Carousel Mall as a "Super Regional Shopping Center". Super Regional Shopping Centers in the East are paying an average of $1.66 per square foot in property taxes. The risk is very high that Mall will not pay $11 million in property taxes. It is likely that the lower square foot figure is more realistic than the existing assessment. The existing Carousel Mall has 1,239 million square feet of leasable area. That means that it would pay about $2.1 million per year. Based on current tax rates, $378,000 would flow to the City general fund and $798,000 would go the School District, for a total of $1.2 million to the City. The County would receive the balance, about $924,000.
The economy may change in the next 4 years
The ability of a mall to pay real estate taxes is dependent on the level of business conducted by its rent-paying tenants. Changes in the economy affect those transactions.
The mall may become less economic
Some malls lose economic vitality as a result of many changes in the retail shopping environment. Shopping habits change. The demographic mix of a mall's primary shopping area change. Some malls age poorly. Competition among malls is on going. When these adverse factors occur, public revenue can be affected. For example, the Fayetteville Mall is not paying the taxes that local governments were counting on.

What are the projected benefits (economic and otherwise) of an expanded Mall?

Over 8,000 construction trades workers will be employed during the multi-year expansion
8,000 permanent, new jobs will be created in the local economy (in addition to the 3,100 jobs currently at the Carousel Center)
$900 million will be invested in construction activity
$300 million in annual economic activity will be generated in addition to the $115 million in economic benefits the current Mall produces.
Regional cultural, entertainment, sporting, tourism, and hospitality attractions will be developed in the expanded Mall. Those attractions will provide additional spin-off benefits and generate added economic activity throughout the city
Millions of visitors will be attracted from outside the area (as many as 25 million annually), many of whom will visit not only the Mall, but Armory Square, the Everson Museum, SU events, restaurants, shops, boutiques, and other attractions. The impact will be similar to the impact of the State Fair during the 12 days when the Fair draws thousands of visitors to the Syracuse area.

What are the risks associated with that revenue?

The expanded Mall may not do as much business as projected:
The financial feasibility of the Mall is dependent on generating $1.2 billion in sales annually. This would translate into sales per square foot of about $283. According to the Urban Land Institute, this is realistic for the top 10% of Super Regional Shopping Centers.
The expanded Mall may not become a destination point for tourists:
The Mall is dependent on attracting a substantial amount of new business from beyond the local area. The existing mall has drawn business from beyond the county. An analysis of historical sales data supports the mall developer's claim that Carousel has succeeded in attracting a substantial amount of business to the area. In the period from 1990 to 1999, the area sustained a massive exodus of high-paying industrial jobs—almost 15,000 were lost, almost 33 % of manufacturing jobs in 1994. During that period, some malls closed and others opened. At the same time, retail sales in Onondaga County increased by 36%. It is reasonable to attribute a significant portion of the growth in retail sales to new business brought to the area by Carousel Mall.
The developer may not be able to obtain long-term financing:
There is no public credit or cash in the project. The financing for the public improvements would be secured by the revenues from the Mall. The City will have no financial responsibility for the success of the project. The investors who buy the $900 million bonds will be the ultimate decision-makers about the future of the proposal. If the expanded mall cannot make the PILOT payments, the bondholders will suffer the loss. The City taxpayers will have no exposure. In fact, the city will gain because an area that has little value now will have $900 million in improvements. However, because there is no recourse to the City in case the project can't pay its debt, investors may be unwilling to loan money for the project at reasonable interest rates.

What is the risk that the Mall expansion will not be completed?

The PILOT agreements are set up to encourage the completion of the project. But ultimately, the development will be phased. Each new phase is dependent on the successful implementation of the prior phase. The phases will be determined by market conditions. If a subsequent phase is delayed, the prior phase will make payments into an escrow account. If the subsequent phase is not initiated, the funds in the escrow account will be converted to tax payments. The City and the County will both share in those payments.

What are the opportunity costs involved in this decision?

Commitment of physical asset: land
The City is committing approximately 140 acres of Lakefront land to the project.
Potential of Alternative development
During the past 10 years, approximately 50 economic development projects using public subsidies have been implemented. These projects generated a total of 400 new jobs. Most of the projects were cases of business expansions. The Syracuse region is not been an active private development region since the early 70's.
Foregone tax revenue
If the current pilot is extended, the City will not receive $1.2 million annually that would otherwise be due from the Mall. If no additional private development is generated by a mall expansion, however, the net loss to the City will be about $200,000 when the ongoing taxes on the scrap yard and oil tanks are considered. In fact, the net loss to the City will be less, or the net could be positive if private projects like the recently announced Babies-R-Us store opening near the Mall are initiated.
Lost development potential:
If the mall does not expand, the opportunity cost would be foregone investment, jobs, economic impact, entertainment opportunities, spill-over benefits of dollars/visitors from outside the area coming to the City, and the loss of potential conventions and other events.

Would the expanded Mall place new demands on City services?

The expanded mall will pay for most of the services it uses from the City. The most significant will occur during the construction phase. The City is responsible for construction inspection to assure that local building codes are met. This will require an increase in inspectors. The building permit fees paid by the developer are sufficient to cover the increase in operating expenses.

Water and sewer use charges as a result of the expansion will increase significantly if the Mall is successful in attracting 27,000,000 tourists annually. This would actually benefit the local users of the system by increasing usage without increasing fixed operating expenses.

Public Safety operations may change as a result of an increase in tourism. The impact on City services should be included in future discussions. The infrastructure and related public improvements are being maintained by funds provided from the PILOT payments. It may be appropriate to consider public safety expenses as well. One approach would be to create a special service district for the Mall which would allow the Mall to purchase the specific services it required on a "fee for service" basis.

What equity issues are involved in this decision?

Assessment policy of the City penalizes homeowners
Homeowners who improve their residences are penalized with higher property tax assessments. New York State law requires that all property be assessed at full market value. Any improvements that increase the market value of a property are reflected in increased assessments.
Comparison of high-paying skilled jobs with low-paying non-technical jobs
Many citizens of the region, both inside and outside the City, can benefit from the jobs which will be generated by the expanded Mall. However, high-paying, skilled labor jobs are needed as well.
Selective PILOT's
Other companies and private citizens have not had the opportunity to negotiate PILOTs with the City.
Subsidies for private developers
The public sector should provide incentives to the private sector only when those incentives produce compensating public benefits. In the case of the existing Carousel Center, the public has gained 800 acres of prime real estate for development purposes, in addition to the economic impact of 9 million visitors from outside the County.

What are the arguments for rejecting the proposed PILOT?

The current PILOT expires after 2005, and the city would receive some property tax payments that are not currently being received.
Most of the jobs are low-wage and generally will not pay fringe benefits
The city will not receive increased sales tax revenues from the expanded mall based on the new sales tax revenue sharing agreement with the County.
The direct benefit to the public in the plans outlined by the developers are inadequate
The developer has not substantiated that the expansion cannot occur without public incentives.

What are the arguments for supporting the mall expansion PILOT plan?

Ordinarily, it is not sound public policy to provide government incentives for retail establishments. Retail establishments tend to be a purely "local draw" in nature, attracting very few customers from outside the immediate community. Generally, government economic incentives should be reserved for companies that draw money in from outside the local community or that use local goods and services to sell their products nationally or internationally.

The mall expansion as proposed, however, is not a typical retail effort. It is a regional attraction involving retail, entertainment, hospitality, and tourism that projects to bring millions of new visitors to the area. The ability to import dollars from outside the locality with very little public expenditure is an appropriate use of public incentives.

The attraction of 8,000 new, permanent jobs cannot be denied. Many other regions work long and hard and spend a lot more money to land these jobs. Even though most of the jobs are lower paying and many are part-time, they can meet a need in the region. Some jobs can be filled by members of households seeking secondary income. Others can provide part-time employment opportunities for our youth.

The ripple effect throughout the entire economy of the City would be substantial. Estimates range as high as $1.5 billion per year. Other jobs or different types of jobs would be preferable, so economic development agencies cannot stop looking to attract high-paying, high-quality jobs to the area. But this is the proposal that has been presented for decision, and it could have substantial long-term implications; it would be a mistake to push for the perfect, instead of the good.

Public incentives of any kind should be made available sparingly. Ordinary taxpayers deserve incentives for their investments as well. Unfortunately, the project will not occur without incentives. Unfortunately, there is no one else waiting in line to risk and invest in such a substantial development. Unfortunately, the economy and conditions are such that the only way to attract some economic development is through incentives.

This is a process, and negotiations must take place; the project can be structured to provide more public benefit. Linkages with local businesses and off-site facilities like the Everson Museum and Burnet Park Zoo will be dependent on programming. The future of many of our local businesses and cultural institutions has been threatened by the out-migration of the region's population. The expanded mall provides an opportunity for growth by attracting prospective customers to the region. It will expand the pool of prospects for supporting the local businesses and cultural institutions.

The estimates above have substantiated by an independent consulting firm.

Conclusion:

The potential benefits of the proposed Carousel Mall expansion exceed the costs incurred by the City. No public money will be invested in the proposed expansion. No public credit will be used to secure the financing for the proposed expansion.

Recommendations:

Based on the above findings, I recommend that the City:

Approve the proposed PILOT agreements
Enter into a revenue-sharing agreement with the County to provide for treating excess sales taxes generated by the Carousel Mall expansion as property taxes, thereby compensating the City and the County for the amount of property taxes which would have been paid by the existing Mall.
Explore the possibility of an urban economic investment zone to provide incentives for non-commercial property owners. The urban economic investment zone would include the whole city. It would reward residential property owners who invest additional funds in improving their property in City neighborhoods.
Encourage the use of PILOT agreements to promote additional commercial investment in the City.