Council to Citizens: You Don’t Need Risk Analysis Before Voting on the Referendum
Council to Citizens: “Take a Leap of Faith” that Financial Assumptions Are True
Council to Citizens: Forget Our Responsibility for Financial and Schedule Mess at Mt. Daniel
By Mark Kaye MBA, JD
Mr. Kaye is an analyst and his son graduated from George Mason High School
The City has done a superb job conceptualizing a mega-sized new George Mason High School. Unfortunately it has demonstrated gross negligence in not conducting any risk analysis of the financial and economic harm that could fall on the City and homeowners if the very tight scheduling of construction and land development is impeded or any number of financial assumptions unravel.
Well compensated and professional consultants have laid out a number of major risk factors that any organization – public or private – would typically analyze by modeling ‘what if’ questions. For example: What if the City cannot obtain the desired sales price of the 10 acres of GMHS land slated for commercial development?
We have received a well-honed sales pitch from the City Council members (Tarter, Duncan, Hardy, Connolly, and Snyder) that the City can manage a complex set of transactions and actions – premised upon the Plan going perfectly!
Obviously these City Council members have limited exposure to real world issues and no demonstrated ability to manage and control such complex transactions.
A savvy sales pitch and slick brochure by an architectural design firm (Perkins Eastman, September 14, 2017) – is devoid of any consideration of financial impact on the City. There is no substitute for real world financial and risk analytics.
The City’s financial advisor (Davenport & Company) and GMHS land development consultants (Alvarez & Marsal) have articulated several major risk factors, any of which, could jeopardize the City’s finances and harm homeowners through much higher real estate taxes.
Land Sale Timing and Market Conditions
The City’s financial advisor stated things succinctly (November 30, 2016, Opinion Letter):
“Factors influencing the value of commercial real estate in Falls Church are too numerous to mention and beyond the scope of this memo, but it should be noted that there is a risk to the City that it might not receive the land sale proceeds in either the amount or timeline assumed in the funding model. Similar to a shortfall in real estate assessment growth, a shortfall in land proceeds or a delay in revenue realization may lead to the need for changes to the tax rate or other spending in order to accommodate fixed debt service costs.”
We already know that the “guess estimated” $40 Million project proceeds (spread over many years) is of dubious value. The best data from sales of commercial land in the City suggests the 10 acres is worth $25 Million – before taking into account cost of utility infrastructure.
No one knows future demand for the GHMS 10 acres. There are a myriad of factors that can come into play – for example – some of us remember the economic mess of 2009. The City financial advisor summarized things in saying “… the local real estate market is not immune to the laws of supply and demand.”
GMHS Cost Control
The City’s financial advisor stated in the November 30, 2016 Opinion Letter:
“In light of significant amount of borrowing for the total CIP, there is little flexibility to accommodate major cost changes. If the City and School Board are not well coordinated about the scope of the school construction parameters, if major change orders are needed, or if construction bids come in higher than expected this could substantially increase the project cost and lead to unplanned borrowing.”
Similarly, if the CIP is revised upward in the near future after the initial rating reviews, the additional planned debt could lead to an adverse rating action.
The City’s development consultant in the 9/1/17 GMHS Commercial Development Strategic Roadmap stated:
“While the City has expressed a desire to embrace density, without legal guardrails to help define and protect the Site’s development potential, a developer will likely price this risk into its offer, thus reducing the value of the Site to the City.”
Pursuant to a FOIA request to the City, we learned that meetings with VDOT (Virginia Department of Transportation) staff have occurred but that no formal reports are on file.
VDOT is crucial to the proposed development of the 10 acres of GMHS land (a linchpin of the City’s financing scheme) since it controls whether new entrances and exits can be constructed. Route 7 is considered a major evacuation route and VDOT is sensitive to impacts on Route 7.
Once again, the “magical thinking” financing scheme for this $120 Million bond is based upon perfect timing of land deals and assumptions that the City will receive a stream of funds as described in their untested financial model.
VDOT will not render any legal opinions prior to a formal application (not yet filed by the City) and can take up to 2 years to render a judgement. Needless to say, any developer will not buy or lease the land without knowledge of the entrance/exits permitted for the planned 1000 apartments and other dense development.
Land Site Construction
The City’s land development consultant stated the City has not conducted detailed due diligence of the GMHS site:
“…for environmental, geotechnical, or other conditions that may increase the cost of site development, and thus decrease value.”
We know for a fact that the cost of construction of Mary Ellen Henderson rose due to soil issues. This was noted in the Perkins Eastman promotional materials:
“Bad soils containing old, disposed debris and waste were encountered during the construction of Mary Ellen Henderson Middle School. The 2004 geotechnical analysis noted this area as not suitable for the use of conventional concrete spread footings because the soil was not capable of bearing standard structural loads.”
The First Cost Overrun Already Identified
When the City was queried if a soil/geological study had been conducted, the response was:
“No Current Reports. Environmental Study, ALTA (technical review body) survey to be conducted during design.”
The City knows it had soil problems in the past BUT has decided to wait until after the bond referendum to do due diligence on the land that could easily impact cost of construction of GMHS and value of the 10 acres for development!
Growth in Home Values
Another key leg of the magical thinking financing scheme for the $120 Million bond is that City real estate taxes will rise and assessed value of home growth assumptions will be achieved.
Once again the City’s financial advisor stated:
“However, property assessments do not rise, by whatever rate of growth assumed, in perpetuity, as evidenced following the recession only a few years ago. The City’s location within the region and its excellent school system have contributed to a fairly steady trend of property appreciation over time, but there have been instances, such as during the last recession, where values either declined slightly or stagnated for several years. Therefore, in evaluating how much the tax rate might need to rise to meet the new debt service for the CIP, there is a risk to the City that property values might not rise by the 2.5% per year assumed in the City’s funding model. Since the debt, once issued, is a fixed obligation, any shortfall in assumed tax base growth would result in the possible need for additional tax rate increases, other expenditure reductions, or both.”
But, the City Council believes that path is paved with gold and all financial and construction assumptions will be achieved. This is “Magical Thinking” at its most apparent and delusional.
The City’s own experts have advised the politicians of the tremendous risks. In turn, the Council has committed itself to gross negligence by not conducting the appropriate economic and financial modeling to fully inform itself and the citizens of these risks.
The taxpayers of the “Little City” and the students in the classrooms will ultimately carry the burden of this negligence.