by Joe Sullivan
Developers Earl Worsham and Ron Watkins deserve a lot of credit for their efforts to make Universe Knoxville a reality. Worsham hatched the idea for a virtual reality planetarium patterned after the innovative Rose Center in New York City. And the Worsham Watkins firm has devoted a great deal of time over the past year to shaping plans for a $107 million facility that would also encompass a new children's Discovery Center and exhibitry from affiliations with the Smithsonian Institution and TVA's museum.
The project team has included architects Barber & McMurry, Denark Construction and the Cumberland Securities division of Morgan Keegan. Up to now, only Barber & McMurry has received any compensation for its time from a $200,000 planning grant approved by County Commission a year ago.
The good news is that, through their efforts, the $65 million in private bond financing on which the project is predicated is looking ever more nearly feasible—and on more favorable terms than previously supposed. The entire $65 million is now presumed to be senior debt at an attractive 6.375 percent interest rate, whereas $10 million of the total had been due to be more risky subordinated debt bearing a much higher interest rate.
In the ever-so-guarded argot of bond underwriters, Joe Ayres of Cumberland Securities says, "We've refined the structure since last fall as we've gotten further into the numbers and talked with the developers, the county and investors." He adds that nothing is for sure "until we're actually ready to go and make a firm marketing effort to investors once we've had all of the approvals from the Public Building Authority" and that "subordinated debt is still the backstop."
The PBA figures in the equation because it would be the issuer of the $65 million in private bonds—so called because their repayment would depend solely on Universe Knoxville revenues. Underpinning these revenue bonds, per a financing plan approved in principle by County Commission in January, would be $36.5 million in county general obligation bonds on which taxpayers would be liable, along with a $5 million grant from the city. The county's general obligation bonds would be subordinated to the PBA's revenue bonds, and that subordination is integral to making the revenue-based financing feasible.
Speaking as someone who just attended the Rose Center in mid-April, a Knoxville replica would make a wonderful addition to this community both for residents and for attracting visitors. Whether it will draw the 750,000 to 850,000 annual attendance projected by feasibility studies and needed to cover debt service remains to be seen. But even if it doesn't, and the county's subordinated bonds go into default, I still believe Universe Knoxville represents a worthwhile public investment as long as the facility is built and its operation sustained at high standards. After all, the county has recently granted $18 million for an addition to the East Tennessee Historical Center.
The remaining questions have to do with Worsham Watkins' credentials for developing the facility and its terms for doing so. These are coupled with the issue of responsibility for Universe Knoxville's operation, promotion and enhancement on an ongoing basis.
As originally envisioned, Universe Knoxville was to be overseen from its inception by a not for profit (NFP) entity with an illustrious board of directors comprising many spheres of expertise. The NFP was to select a developer, arrange for all of the financing with limited county backing and then oversee the facility's management. Yet no such NFP has been formed nor board of directors named.
One reason is that legal considerations made it necessary to interject a public body such as the PBA as issuer of the revenue bonds. And once the PBA got involved it became necessary to have a competitive selection process. So PBA promulgated a request for proposals (RFP) to which, predictably, Worsham Watkins was the sole firm to respond.
In its response, the firm was obliged to state the fees it's proposing under a development agreement that's subject to approval by the PBA and County Commission. To the amazement of some public officials, who've seen the proposal, these fees to Worsham Watkins total over $6.8 million. This total consists of two components: (1) $1,990,000 for "project management" and $4,835,000 for "developers risk and profits."
As a benchmark, other developers contacted consider fees in the range of 3 percent to 6 percent of project costs to be reasonable, depending on the degree of risk involved. Worsham Watkins is proposing 9 percent of the $75 million in costs to which its fees would be applicable. (More than $30 million of the $107 financing package goes for things like reserve funds, mainly to protect bond holders, marketing expenses and, of course, the developer fees themselves).
What makes the proposal all the more amazing is its contrast with a statement by Earl Worsham to City Council at a workshop in February where the city's $5 million contribution was being considered. Worsham stated, "I'm not in this project to earn a fee. If the financial structure and the legal structure are proper, we will be buying subordinated bonds as a family. I do not expect to take one dime out of this project personally."
The latest word from Worsham, via an email last Friday is, "That was not a commitment, it was an 'expectation', exactly as I stated it at the time that I stated it. It was with the thought that I would have to invest any fee and perhaps even more than my portion of my fee into subordinate bonds, to which I was and am committed. (Always provided that the return and safety was within the parameters of my family investment portfolio, which at the time would accommodate such an investment.) And I emphasize that it was an 'expectation' not a commitment."
As the old adage goes, when someone says it's not the money, it's the money. To give him the benefit of the doubt, however, Worsham may have been sincere in his numerous professions that he came out of retirement to make a contribution to his native Knoxville after returning to this area to live in the early 1990's.
Whether Universe Knoxville harbors risks that warrant fees that seem exorbitant to a layman is no easy matter to decide. At first blush, the project doesn't contain the elements of risk that typically concern developers. These include the risk of rising interest rates, construction cost overruns and environmental problems. But Universe Knoxville will have locked in its borrowing costs up front with its bond issue; a guaranteed maximum price on construction from Denark is a prerequisite to going forward; and Knox County is being asked to warranty that its State Street site on which the facility will be built is free of environmental problems. Beyond that, there's a $3 million allowance for contingencies in the Worsham Watkins proposal.
Yet Watkins, naturally enough, says, "I think our fee is a very reasonable number. I can't imagine anyone viewing this complex an undertaking as a low risk project. We're dealing with a lot of technology that will be installed for the first time. The virtual reality experience will be designed from the ground up, and if we haven't gotten it up and running and the facility open by a certain date then we have to start making the bond payments. If we haven't finished the project, if we've been delayed for whatever reason, that's our obligation. Those bonds leave us very vulnerable for performance."
A PBA evaluation committee chaired by one of its board members, builder Joe Fielden, will be the initial judge of all of that. But County Commission and City Council will ultimately have to decide whether the developer fees are reasonable in relation to their commitment of taxpayer dollars. When asked whether Worsham Watkins is negotiable, Watkins responds, "Everyone is negotiable to some extent."
Until an NFP and its board of directors are constituted to oversee the entire undertaking, Worsham Watkins retains complete control over the design process. One has to suspect that the firm wants to keep it that way for as long as possible in order to be able to cut costs, not to say corners, if need be in order to avoid cutting into its profits.
The time has come—indeed, it's overdue—for a governing entity to be established with a board in whom both public officials and the public at large can repose confidence. Only then can a major public investment in Universe Knoxville be justified.
April 25, 2002 * Vol. 12, No. 17
© 2002 Metro Pulse
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