Public-private partnership driving today’s retail development
by Ted Carter
Published: September 27,2013
Every Mississippi school child knows the state gave birth to the blues and brought the world Elvis. What is far less known is that the concept of public-private partnerships originated in the Magnolia State with former Gov. Hugh White‘s 1936 Balance Agriculture With Industry (BAWI) program.
Leading the state into un-chartered territory, White set a goal of developing an industrial sector that matched the state’s agricultural base. He’d do it through such financial incentives as public bonding of private projects and tax abatement.
White’s government-as-a-partner with industry gave the state its current-day distinction as a player on the global manufacturing scene. In more recent years, though, the partnership concept has brought Mississippi modern “lifestyle” retail centers and big box stores, including Renaissance at Colony Park, a project of Mattiace Properties and H.C. Bailey Companies funded in part by state bonds backed by a percentage of sales taxes collected at the retail center.
Ahead of Renaissance at Colony Park, Mattiace Properties principal Andrew Mattiace teamed with Jackson officials to establish a Fondren tax increment financing district to pay for retail redevelopment there. “The Fondren district was difficult, but the City of Jackson was terrific to work with,” says Mattiace, whose company has undertaken public-private partnerships that have carried about $30 million in public-sector bonds.
An early success came in the late 1990s when Mattiace persuaded then-Mayor Kane Ditto to back land work that led to construction of the Target plaza in North Jackson. “Mayor Kane Ditto went out on a limb and did that,” Mattiace says.
In return, ad valorem taxes collected on the site went from $3,000 a year to “probably $3 million,” he adds. “The bond indebtedness has long since been paid off.”
And more recently, public-private partnerships have made Madison “the growth market of all growth markets in the history of Mississippi,” Mattiace says.
Proceed With Caution
The rewards that accompany public-private projects can be substantial — but so can the risks, cautioned commercial development executives who gathered at the Jackson Hilton last week for a forum sponsored by the International Council of Shopping Centers and its Mississippi Alliance Program.
All players public and private must have air-tight market and cost data and the instincts to know when to walk away, the panelist said.
Otherwise you get Prattville’s Exchange at HomePlace instead of Birmingham’s Summit, says Alabama developer Jeffrey Bayer, whose Bayer Properties has developed more than 10 million square feet of retail and office space, with a specialty in regional retail shopping complexes.
The circa 1994 Summit lifestyle center marked an early public-private project success for Bayer Properties. The 150-acre, one million square-foot shopping complex came chock full of challenges, including building on the side of a mountain, but market research showed a potential for The Summit’s success as a regional shopping destination.
Birmingham pitched in $5 million in bond financing from incremental increases in sales tax collections. Revenue from The Summit paid off the bonds within 17 months instead of the scheduled 5-year period, according to Bayer.
“We couldn’t have done it without the public contribution,” says Bayer, whose company has since completed nearly $500 million of public-private funded retail projects across the South.
The projects typically employ tax increment financing, or TIFs, and sales tax share backs.
At the close of the last decade, Central Alabama’s Prattville sought to achieve Summit-like success with a $9 million contribution for development of the Exchange at HomePlace, a 700,000-square-foot lifestyle center built near high-end homes on the east side of the community of 34,000 residents. Today, the retail center is only 20 percent occupied and has created “a drastic situation” as Prattville struggles to repay the bonds, says Bayer, who also serves as Alabama/Mississippi state director for the International Council of Shopping Centers.
The debt forced Prattville to enact a penny sales tax increase in 2011. The increase brought the city’s sale tax total to a whopping 9.5 percent.
The lesson, Bayer says, is that all parties must be thorough in the their preparation and market examinations. “You can’t just work on intuition. You must make sure you have good data that really supports the project.”
Mattiace, a member of the discussion panel, advises that public officials needing to assess a public-private investment should turn to third parties with no stake in the project. It often can be another developer, he says, someone who “is not connected emotionally and mentally…. They can analyze and underwrite better than somebody inside the government.”
You must look at today’s trends, the market history and the trends of the future, Mattiace says of making sound assessments.
Bayer’s principal advice to public officials: Lose your delusions.
“It seems wherever we go, retail development seems to be seen as the panacea to all government’s” revenue problems, Bayer says. “Everybody seems eager to bring retail development to their community. You must be very realistic about what you can achieve.”
Know this, says Bayer: “It’s hard to say ‘no’ but the worst thing that can happen is that you say ‘yes’.”
On the other hand, localities that achieve success with one project should not lose the momentum they’ve created, Mattiace advises. “Don’t stop there. Renew that TIF district. Go build a town center.”
Just as a spruced up home with attractive landscaping draws buyer interest, a shopping complex must be inviting to the eye and offer relaxing, quality amenities, the forum panelists said.
“We love curb appeal,” Mattiace says.
It’s all about decorative hardscape finishes, landscaping and amenity packages, he suggests. “You can build a Taj Mahal but if you use asphalt it just doesn’t work.”
Parking area irrigation is equally important — and costly to do effectively, according to Mattiace.
Panelist Eric Seitz of the Seitz Group has developed shopping complexes from New Mexico to Virginia, including projects in Mississippi. “Just changing a parking lot and putting in intensive curb appeal has brought sales revenue up 40 percent” in some Seitz Group centers, he says.
In Mississippi, for instance, a center may generate $250 a square foot. Go to Mount Pleasant, S.C., and you’ll find centers that show sales of $500 a square foot, Seitz says. This, he says, is because “you can’t see the Lowe’s until you drive into the parking lot… Gorgeous live oaks” make it happen.
“Run the numbers to see if you can justify a bond issue that will take the center to a higher brand level.”
Until around 2008, Jeffrey Bayer’s company built on greenfields near interstate interchanges based on a belief suburbanization would continue to put rooftops near the interchanges. That is no longer occurring. “I don’t know if we’ll see it come back in my lifetime,” Bayer says.
Bayer Properties has since refocused and now prefers infill niche development, he says, where it looks for “existing assets or a piece of ground that happens to be available.”
What Bayer Properties is doing today, Bayer says, “takes some of the mystery out of what we were doing as an industry 10 to 15 years ago.”
He suggest municipal planners look at the core of their downtowns. “The suburban sprawl of the 1960s and ’70s has created the need for filling those cores.”
Skin in the Game
A development company does not necessarily approach a partnership with the public with a firm idea of the stake it will put into the deal, the panelist said.
However, Mattiace Properties has a history of putting up 10 percent to 15 percent, Mattiace says.
“Projects today require greater equity,” he notes. “We have to tailor the ‘ask’ to the specific transaction. Then it becomes a transparent give-and-take between the public and private sectors to try to tailor something that really will work.”
Time value of money, is the developer contribution on the front end or does it come over a 10 to 15-year period? – “That all affects the financing of the transaction,” Mattiace says.
Seitz of the Seitz Group said it’ hard to tailor a deal with a specific contribution in mind “but off the cuff 10 percent” is typical.
Bayer Properties’ share of the deal hinges on the confidence it has that the numbers are good and solid, Bayer says. The first task is to decide if you want any part of the deal at all, he adds.
Intangibles aren’t entirely absent from the decision, however. “There is intuition and emotion by nature,” Bayer says. “We are all optimists or we would not be doing what we are doing.”
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