Saks Fifth Avenue has signed a letter of intent to relocate its downtown store at the corner of Fifth and Race streets, to Kenwood by 2016. Kareem Elgazzar | WCPO
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Commentary: Saks site gives Cincinnati the chance to chart a new course for economic development

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By the time Saks Fifth Avenue leaves its downtown Cincinnati store for Kenwood in 2016, you can bet city officials will get a bargain basement full of ideas for what to do with that site.

Here’s my contribution:

FOR SALE BY OWNER

It’s time to return some market discipline to downtown Cincinnati, where governments own more than 40 percent of the real estate and development cannot be accomplished without massive subsidy. A WCPO analysis in November showed subsidies are fueling the latest wave of downtown residential developments.

Downtown housing is a market segment that almost everyone agrees is red hot right now. And yet, we can’t build the next round of projects without taxpayers picking up more than a third of the construction tab.

This is not a new phenomenon. In 2002, I worked with my colleague, Lucy May, at the Cincinnati Business Courier. We spent four months analyzing two decades of capital spending by the city of Cincinnati. More than $500 million was spent on downtown department stores, apartments, theaters, museums and restaurants. In the end, five of the six blocks that received the heaviest subsidies had lower valuations than the city’s total investment in them.

People don’t like to hear it but subsidies often don’t work. The Saks site is a prime example.

The city of Cincinnati invested more than $15 million in the 1980s to bring a Saks store and Hyatt hotel property to Fifth Street between Race and Elm.  What did we gain? A downtown retail anchor that employed about 110 people and generated about $3 million in city earnings taxes over 30 years, based on a 1996 agreement in which Saks pledged to maintain a payroll of at least $2.4 million at the store.

The Saks store has twice come back to the city for additional concessions worth $8.7 million, money that was used to upgrade the store and keep the doors open, which Saks promised through 2018. So much for contracts.

You could argue that having a Saks gave downtown some sizzle, which helped attract other retail tenants. But it wasn’t a lasting benefit. Tower Place is empty. T.J. Maxx is bound for Newport. When Saks opened in 1983, it was downtown’s fourth department store. When it leaves in 2016, only Macy’s will remain.

As for the other half of that investment, owners of the Hyatt have twice defaulted on their loans since the hotel opened, filing for bankruptcy in 1994 and falling into foreclosure in 2009. In each case, the city made concessions to enable debt restructuring.  In 2009, the city agreed to sell the land beneath the Hyatt to a new ownership group that vowed to invest $17 million in the property. The land was appraised at $3.65 million. The city sold it for $2.1 million.

The departure of Saks provides an opportunity to do something similar at the corner of Fifth and Race.

It’s a one-acre site that Hamilton County’s Auditor values at $6.2 million. It’s one of 413 downtown real estate parcels owned by the city of Cincinnati, which holds 24 percent of downtown’s total acreage and 20 percent of its land value, according to auditor records.

Much of what the city owns was acquired over decades of urban redevelopment projects in which the city buys land then leases it at nominal rates to developers who build things. Hotels, department stores, apartment buildings, you name it. Boosters call that progress. I call it unproductive.

City-owned parcels accounted for $7.25 million in taxes paid in 2012, according to the auditor’s data. The city doesn’t pay taxes, but developers that build on city-owned sites do. The amount collected in 2012 was 12.5 percent of all taxes collected from downtown properties. That’s better than Hamilton County, which owns 11 percent of downtown land value but generates only 3 percent of taxes. It’s a beautiful riverfront, but not too property-tax productive, eh?

Now, compare that to Procter & Gamble, which holds $66 million in downtown land value (6.7 percent of the total) but pays $4.5 million in taxes (7.7 percent). Western & Southern Financial Group is another big downtown property owner. It holds 2.2 percent of downtown land value and pays 1.9 percent of taxes. The owner of the Carew Tower, Emery Realty LLC, holds 1.4 percent of downtown land value and pays 4.1 percent of downtown property taxes.

I've heard it argued that property taxes don't matter to the city. It's the earnings tax that pays the bills. But property taxes would matter if we didn't abate them, or TIF them or reject - as council has done each year for more than a decade now - city manager requests to raise the city's inside millage rates.

Beyond that, I'd be willing to wager that those privately-held properties all generate more earnings-tax for the city than the Saks site does. So, how do we benefit from public ownership of the site?

I’ve heard numerous answers to this question over the years.  All cities do it. Development would grind to a halt if we didn’t. It allows the city to promote the highest and best use of a finite resource. It’s also a good way for politicians to become popular. Give the people what they want. And people seem to want a lot from this site.

Already on Internet forums, people are talking about a movie theater or an office tower.

Developer David Flaherty has expressed an interest in building a mixed-use project at the Fifth and Race corner, calling it “a killer site” because of its proximity to Fountain Square, Dunnhumby’s new headquarters and his $78 million apartment tower and grocery store at Fourth and Race. Cincinnati retail consultant Kathleen Norris said she has been approached by “a handful” of retail brokers who say they have tenants in mind for the site.

I say that’s wonderful. Let’s open up the bidding at the auditor’s appraised value and see where it takes us. With $202 million in downtown land value, Cincinnati won’t miss this one parcel. And if it turns out there is demand for downtown land, we could put more parcels on the selling block. Even if it fetches only 50 percent appraised value, that $100 million would hire a lot of cops, plug a lot of pension holes, maybe even get that streetcar all the way up the hill to Uptown.

Copyright 2014 Scripps Media, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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