How will Ephesus-Fordham Affect Chapel Hill’s Budget?

Memo to Town Council:  How will Ephesus-Fordham Affect Chapel Hill’s Budget?

John Morris and Fred Lampe reviewed the Town of Chapel Hill’s cost benefit analysis for the Ephesus Fordham District in May 2014 and sent this report to the Mayor and Council.

As part of the planning for the proposed rezoning and development of the 190 acre Ephesus-Fordham area, the Town of Chapel Hill’s staff has analyzed how this development will affect the Town’s budget, that is, how the increase in tax revenue from the new development will compare with the Town’s increased cost to serve the same new development.

The anticipated development at E-F will be a big impact on the Town, increasing business space about 13 percent, residential space 4.5 percent, and population 5 percent over twenty years.

The Town analysis assumes that the police and fire budgets will be increased by 2.9 percent at the 20 year mark to serve this new development. This is not an increase that is proportional to the size of the new E-F development, but it is still a meaningful increase. Police and fire make up about 23 percent of the Town’s budget. The Town analysis shows the remaining 77 percent of the Town budget being increased by only 0.15 percent to serve new development at E-F. This is an increase so small as to be insignificant–only 15 cents per $100.

Without any explanation or justification, the Town staff is assuming that the 3000 new residents and new businesses at E-F will not need, or at least they will not get, services like transit, public works, parks and recreation, and many others. This is a huge omission from the Town analysis. Assuming that so many new residents will not place additional demands on 77 percent of the Town budget is just not reasonable. This analysis covers 20 years, not just a year or two when some costs could be swept under the rug and not noticed.

As stated above, the Town has assumed that, aside from police and fire, the “other” budget increase to provide services to E-F from the remaining 77 percent of the budget will be only $1.8 millionover 20 years. If this 77 percent of the Town budget were to increase proportional to the amount of new tax valuation produced at E-F compared to the total Town tax valuation, the added cost to the Town would be $29.8 million, as calculated by the Town spreadsheet, instead of $1.8 million. Perhaps there is a rationale for not having to increase the budget fully proportionately to support the residents at E-F. But even if the needed budget increase is only half the $29.8 million, it still undermines the Town’s expectation of benefits to our fiscal condition.

This major undercounting of Town costs is only part of the problem. The other side of the fiscal ledger is the anticipated increases in tax valuation and revenue from E-F. Much more attention has been paid to these revenue benefits, but here also, some of the assumptions are highly questionable.

Most of the new developments at E-F will be multifamily residences. A consultant did a recent study for the Town which estimated the likely tax valuation of these residences at $150 per square foot. The Town staff decided that this estimate was “below market value” and developed a new estimate of $218/SF, which the Town has applied to all the anticipated new residences at The Park, the theater site, Ram’s Plaza, and Eastgate to estimate future tax revenues for the “Moderate Revenue Assumption” case – the only case that purports to make money to help the Town Budget.

This $218/SF number came from assuming that Greenbridge ($277/SF) and Granville Towers ($160/SF) are comparable buildings. But Greenbridge is an extremely high end project and Granville Towers is not a multifamily residence at all, but a private student dorm that packs many rent payers into a small space near campus. Unless all the anticipated new residences at the four sites end up being valued close to the level of Greenbridge, the projected tax revenues will fall far short. Is it a realistic or desirable future for Chapel Hill to have the E-F area studded with Greenbridge-like projects?

To look for a better comparable than Greenbridge, consider the Chapel Hill North apartments as referenced by East West Partners in their April 27, 2014 CH News “advertorial” – “Other than a few high-end condominium projects, there has been only one, moderately urban apartment project built in the last 13 years on the edge of the town at Chapel Hill North”, near I-40 off MLKjr Blvd. The tax value of this development is only $75/SF as verified by Bill Hiltbold of the Orange County Tax Office. Even if the new residences at E-F have double this tax value, the Town’s estimate of added tax valuation at E-F would fall far short.

Thus both the Town’s estimated increased costs to serve the new E-F development and the assumptions about added tax revenues are highly questionable. If realistic estimates of E-F revenues and costs are used, the conclusion would be that proceeding with the E-F plan, including the borrowing for new infrastructure, will require significant tax increases during the 20 year period analyzed.

The Town should not proceed with the proposed synthetic TIF loan or with the rezoning of E-F until the Town analysis of budget impacts is further tested and a result produced that the Town’s taxpayers can have confidence in.

John Morris
Fred Lampe

May 12, 2014

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