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Introduction

Cheat Sheet

What's the masterplan?

What are these buildings going to look like?

Who's going to run all these things?

How are we going to pay for all this?

What's going to happen to Market Square?

How can the public give input? And who's listening?

Worsham and Watkins: Who are these guys?

Plan Map

  Recreating Downtown

How are we going to pay for all this?

The Convention Center and Tourism Development Financing Act of 1998 didn't get a lot of attention when it was adopted by the state Legislature. But now it looms large in Knoxville's future.

By letting the city keep state sales tax dollars to pay for its new convention center and "related" downtown development, the act alone has the potential for covering more than half of the cost of the $160 million convention center and the $130 million in city outlays proposed last week to support downtown development. At least, these conclusions can be drawn from projections made for the Public Building Authority.

These projections require some sophisticated number crunching, but they show that the city could expect to retain $364 million in sales tax revenues that would otherwise have gone to Nashville over the 30-year life of $290 million in bonds financing the total package. If so, this would cover 55 percent of the $667 million in projected interest and principal payments on these bonds. A key assumption here is that sales tax retention would be applicable to debt service on the entire $290 million.

In its report last week, the PBA assumed that retention could only be applied against the $160 million in convention center debt and that $222 million would be generated for this purpose. "We were trying to be conservative on this and all of our other assumptions," says Mike Edwards. However, the 1998 act provides for retention to cover debt service not only on a convention center but also on "any related infrastructure and utility improvements for public or private peripheral development included in a master development plan for the tourism development zone." All of the $130 million for infrastructure included in the PBA's master plan falls within an area that would seem to meet the definition of a tourism development zone.

"There is a compelling case that that would be the case, and that was certainly my intent," says former Senator Bud Gilbert, who was an architect and sponsor of the act. The one catch is that the zone must be certified by the state. Hence, the PBA's reluctance to assume inclusion until the state has done so.

When the downtown development plan is viewed in isolation, sales tax retention, property taxes, amusement taxes and other revenues to the city are projected to more than cover an assumed $10.3 million in annual debt service on the city's $130 million outlay. As shown in Table 1, these revenues are projected to grow from $11.9 million in fiscal year 2004 (when the project is completed and bonds issued) to $24.4 million in fiscal year 2033 (when repayment is completed). The amount by which these revenues exceed the $10.3 million in debt service would be available for contributing toward an assumed $11.4 million in annual debt service on the convention center's financing.

Table 1
Projected Downtown Development
Revenues and Expenses

(000 omitted)
REVENUES FY 2004 FY 2033 30 YEAR TOTAL
Sales Tax Retention $8,260 $16,904 $363,987
Property Taxes $1,986 $4,065 $87,598
Amusement Taxes $685 $1,402 $30,210
Property Leases $358 $732 $15,780
Parking Fees $531 $1,088 $23,455
REVENUE TOTALS $11,800 $24,191 $526,446
Debt Service Expense $10,318 $10,318 $309,565
Contribution to Convention Center Debt Service $1,482 $13,873 $216,881

 

In addition to the city, Knox County will also gain revenues from the plan, according to PBA estimates. For fiscal year 2004, $2.3 million in county property taxes are projected along with $2.3 million in sales taxes (representing the portion of city sales taxes that is earmarked for Knox County Schools).

All of these projections are, of course, only as good as the sales and other assumptions on which they are based. Sales assumptions for the various elements of the PBA's plan are shown in Table 2. Just how good are they?

Table 2
Projected Sales Generated by
Downtown Development Plan
Sales Category Assumptions Sales
(000 omitted)
Retail 215,000 square feet @ $290 per sq. ft. $62,350
Restaurants 84,000 square feet @ $400 per sq. ft. $33,600
Hotel 270 occupied rooms @ $117 per room plus 40% food & beverage $16,128
Cineplex 1,250,000 attendees @ $7.25 each $9,062
Destination attractions, special events, and other various $13,860
TOTAL   $135,000

 

Analyses provided by PBA consultants suggest that some of them may be on the rosy side. According to a feasibility study by Economic Research Associates, a Chicago-based consulting firm, "Based on our initial analysis, it appears that the amount of net new retail space proposed (approximately 215,000 square feet of retail space) may be somewhat optimistic." The study estimates new "supportable retail space within the downtown district" at 152,000 square feet yielding $300 per square foot. ERA also assumes annual attendance of 800,000 at a 16-screen cineplex, well below the 1,250,000 projected by PBA—but at somewhat higher prices than the $6 per ticket and $1.25 in concessions that PBA assumed.

On the other hand, PBA's restaurant assumptions are lower than ERA's. And neither takes into account prospective growth in sales that the convention center may spur at existing downtown restaurants, hotels, theaters, and stores. Moreover, PBA's hotel consultant, PKF Associates, foresees a need for yet another new downtown hotel later in this decade.

The state sales tax retention legislation allows the city to keep 5 1/2 percent of the state's 6 percent sales tax (the other 1/2 percent is dedicated to the state's Basic Education Program). Retention is on sales throughout the Central Business District in excess of a base amount set initially at the current level of collections. That base is adjusted annually to reflect changes in countywide collections. Hence, the growth in retention projected in subsequent years seems problematically based on an assumption that downtown sales will continue to grow more rapidly than in Knox County as a whole. The PBA's sales tax revenue projections also include .625 percent of the city's 2.25 percent sales tax that the city retains after distributing 1.625 percent to the school system.