Judge Doyle Square: Lots of Unanswered Questions, Lots of Public Dollars

By Madison Alder David Ahrens

557659c743bdd.image.jpgDespite the detailed and extensive analyses of the costs and purposes of the public expenditures in the City's Negotiation Team report, there remain more significant questions than answers for the proposed loan of over $40 million and a grant of $12 million to Exact Sciences, a private corporation (with a current debt of more than half a billion dollars) and JDS LLC, a corporation created by Bob Dunn for which we have little information.

Of all of the unanswered questions, the most significant is, "Where's the equity (money)?" The basic financial package offered by JDS LLC (Dunn's privately held company) is $46 million in equity (actual "cash" contribution), $91 million in debt (private) and probably $50 million from the City.

An unknown amount of the $46 million in equity may be derived from the very complicated "1031 swap" in which we sell the land under Blocks 88 and 105 (including the Madison Municipal Building). That leaves the question of the source of the remainder of the funds. The report says that it is "under discussion." That is, the source of the equity share and the lenders are unknown. Which begs the question: Do they exist?

Who's Backing Up This Loan?

The second significant question is the absence of a guaranty. Clearly, if there are no equity principals, it is unlikely that there are guarantors to this very substantial loan. JDS LLC can offer little in terms of a financial guaranty. Mr. Dunn declines to provide a personal guaranty. Imagine attempting to get a used car loan without showing your bank account or proving you have a job.

Given the reputed reluctance of lenders to provide loans to the most "ironclad" and traditional projects, one can imagine how this project appears to major banks and loan funds. First, there is funding of a hotel in a market that is likely overbuilt and has a developer who owns a competing hotel and that is less than a success. This is coupled with a 350,000-square-foot office/lab for a single tenant with a single new product, etc. in a commercial market that could not absorb that much space in years. Plus 650 very expensive underground ($35,000 per) parking spaces.

Despite repeated requests to do so, JDS/EXAS has failed to submit a TIF application. This is a basic explanation of the financial terms of the project.

This may be because a thorough underwriting by lenders would disclose more than JDS wants known. The question is whether it is indeed the timeline or the inability to come forward with the necessary documentation for a Term Sheet.

Has JDS turned the TIF process "on its head?" Normally, equity and debt is attained from external sources and the "gap" is closed by a relatively small (no more than 55% of the tax increment) loan from the city. In this instance, the developer is attempting to secure very substantial grants and loans (without guarantees) from the City and then using that as the basis for private dollars. 

Jobs-Based TIF

This is the City's first use of a Jobs Based TIF to a borrower. However, the proposed terms of the TIF are not in compliance with the rules that were established to guide their implementation and as a result the City asks for wide-ranging exemptions.

The recommendation provides a $12 million grant for retaining and creating 400 well-paying jobs for a period of not less than 12 years. There is no discussion of paying back the $12 million--only a penalty if they fail to produce these jobs. It is unclear whether the City provides all $12 million up front or as in the TIF rules--on a jobs per dollars basis.

Similarly, the penalties are not clear. For example, when do they have to reach the goal of 400? Finally, there is no discussion of how EXAS would actually "guarantee" the $12 million. This may be difficult for a company that adds $10 million in debt each month.

The proposed subsidy or Jobs TIF results in a city subsidy of about $80,000 per job. The corporation, not the job-holders, receive this subsidy. What is the "equity lens" that awards $32 million ($12 million plus $20 million for parking) to the shareholders of this multi-billion dollar corporation? How does a job subsidy of $80,000 per position benefit the City? We have no city income tax, employees are not required to live in the City, etc.

Pricey Parking

The recommendations propose to fully finance 650 private parking stalls at a cost of $20.5 million. Of these 650 spaces, 50 would be allocated to the 210-room hotel and the remainder to EXAS. This would provide 600 spaces to fewer than 400 employees in 2017.

This would leave a substantial surplus of spaces over the weekends and evenings when the EXAS employees would not be at work. JDS could rent these stalls and further reduce revenue to the Parking Utility. If the office building fills with 600-700 employees, there would be few spaces left for the hotel guests.

The negotiators state that the hotel can be limited to 50 spaces (for over 200 rooms) because hotel guests would arrive after the employees leave and then depart before the employees arrive. This is a very questionable assumption. Why use this far-fetched notion? This is an attempt to understate the costs of the hotel. A more accurate statement of the costs for the hotel would be $5 million (150 spaces x $35,000).

Most problematic is the design of the building and parking structures. The building on Block 88 has one floor of underground parking. Block 105, however: six floors of underground parking at a cost of $35,000 per stall. This additional cost could be substantially reduced if the parking were equally distributed. It would also ease the traffic flow as 1,200 vehicles are not entering and leaving at the same time. These additional costs are due to the imposed deadline of EXAS of occupancy by July 2017; however, these costs are not attributed to EXAS.

Limited Public Review

In addition to not providing a Gap Analysis, routine underwriting processes, the recommendation requests that the review of the Board of Estimates be waived despite numerous other waivers that would benefit from public review. Thus, we are requested to provide the largest loans and grants to the riskiest ventures with the least review.

At Tuesday, July 8th's Common Council meeting, the Council passed authorization for a "Preliminary Agreement" with JDS LLC and Exact Sciences. This would provide $48.6 million to these developers, largely so that the employees in the high-paying biotech sector will have free parking.

The vote to approve a killing amendment from Alder Mark Clear was approved by a vote of 12-7. In favor were Alders Bidar, Carter, Cheeks, Clear, Eskrich, Hall, King, Palm, Phair, Schmidt, Verveer and Wood; against were Alders Ahrens, Baldeh, McKinney-Harrington, Kemble, Rummel, Skidmore, and Zellers. Not voting was Alder DeMarb.