by Joe Sullivan
I, for one, am grateful to developers Earl Worsham and Ron Watkins for their efforts over the past year to make Universe Knoxville become a reality. The concept, it seems to me, has a lot of potential for making Knoxville a more inviting, vital city. And realizing this potential may, in turn, be vital to the viability of the city's new convention center as well as its efforts to revitalize Market Square in particular and downtown as a whole.
Thus, there are compelling reasons for the city to make a financial contribution to the undertaking to complement the $36.5 million that Knox County has already committed toward covering UK's $106.5 million total stated cost. Mayor Victor Ashe has recommended a $5 million grant up front (or its equivalent over time) plus dedication of the city's sales tax revenues generated by UK.
Before City Council acts on these recommendations, however, there's a need for more disclosure as to what the money's going for. UK's backers have furnished financial pro formas showing how an assumed $5 million in annual net income (along with $1.5 million in other, still unspecified contributions) would cover debt service on $65 million in private financing plus the county's $36.5 million subordinated debt. The net income assumption is based, in turn, on a feasibility study conducted for the county by a California-based consulting firm.
But there's never been any public explanation of the components of the $106.5 million total cost. How much of it would go for construction of the 114,000-square-foot facility that would house a virtual reality planetarium, a children's museum, other exhibit halls and a garage? How much for their design, equipment and exhibitry? How much for various contingencies and how much in fees for the designer, architect, bond underwriter and last—but by no means least—Worsham Watkins as the county-designated developer?
When asked for such a break-out, the man who's become the project's chief booster, Tom Ingram of the Knoxville Area Chamber Partnership, responds that, "The document is changing almost daily." So if it's still a work-in-progress, how can commitments of taxpayer dollars be justified at this point? To which Ingram further responds that, "We have confidence that it can be built for $106 million. Design, architect, management and underwriter fees will have to come out of that."
It may be pure coincidence, but the $5 million that the city is being asked to contribute exactly equals the amount that Earl Worsham maintains his firm is entitled to as developer.
I have nothing against the profit motive. Indeed, I believe that it's contributed a lot more to mankind's well being than altruism. From Thomas Edison's light bulb to Henry Ford's Model-T to Bill Gates' Windows, the prospects for reward have kept innovators toiling a lot harder than they would have otherwise. Worsham is clear that his firm has already toiled considerably to get UK to where it's at and will toil a lot more to oversee its implementation over the next two years.
Still, where public dollars are involved, the public's representatives need to be satisfied that what they are paying for services rendered is reasonable. County Commission, in authorizing a $36.5 million bond issue to cover its assumed share of UK funding, left it to the Public Building Authority to make that determination. In a last minute amendment to the authorizing resolution that Commission adopted, Worsham and Watkins managed to make sure that the determination would be made with them: "The Authority shall enter into a development agreement with Worsham Watkins International for the development of the Project upon such terms and conditions as are acceptable to the parties...," the resolution states.
The PBA has itself overseen most of the public building projects in Knoxdom over the past generation, typically for a fee of 2.5 percent of the cost of the large ones. Its CEO, Dale Smith, insists that "Worsham Watkins couldn't possibly make any money on a 2.5 fee" on a project of UK's scope and complexity. He declines to venture an opinion on what would be reasonable except to quip that, "Whatever it is, a lot of people are going to think it's too much."
My own soundings with several other developers yield a sense that a 3 percent fee is par for the course on projects on which the developer isn't at risk for cost overruns or rising interest rates. The approach that the PBA takes in contracting and the way in which financing costs are due to be locked in from the outset would appear to insulate Worsham Watkins from these forms of risk. But Worsham insists that developer fees received on the front end (as is typically the case) will be reinvested dollar-for-dollar in risky UK bonds on which repayment is subordinated to the claims of senior creditors.
Of the $65 million in private bond financing on which the entire deal is contingent, $55 million would have this senior status while $10 million would be subordinated. Knox County's claim on UK revenues to service its $36.5 million debt would be subordinated to both of the above, but in the event of a default, the county could be secured by ownership of the facility. So if Worsham Watkins turns out to be a long-term, high-risk investor in the project, perhaps it's entitled to a larger payout.
I don't purport to know what the fees ought to be. But I do know that City Council ought to get a full accounting of how the money is going to be spent before contributing to the project. Ingram insists that public officials can rely on the due diligence that will be exercised by prospective private bond buyers to keep all costs in line. But if Worsham Watkins' claim is subordinate to theirs, maybe they don't care how large it is. In any event, it's time to end the obfuscation.
January 10, 2002 * Vol. 12, No. 2
© 2002 Metro Pulse
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