Gee, what could go wrong?
“Another proposal is being advanced to help developers and Downtown property owners convert failing office buildings to residential [in the post-pandemic flight]— a $55 million loan fund to counter high interest rates and construction costs,” reports the Post-Gazette.
The idea, from “a group of stakeholders, including the [private] owner of Gulf Tower,” would create a “Downtown Emergency Impact Fund” that would offer below-market-rate loans to help fill gaps in construction financing.”
How would the fund be stocked? Reportedly through five private and nonprofit “stakeholders” who would pony up $5 million each with the one-half balance coming from “city and state matches,” the P-G reports.
That would be taxpayers.
One backer defends this scheme, noting that “traditional lenders like banks have become more conservative, offering to provide loans for maybe 55 percent of the total project cost rather than up to 75 percent pre-pandemic,” the P-G reports. “Developers typically account for another 20 percent of the funding, leaving a financing gap.”
That is, banks have been seeking to reduce their exposure, an indication that office-to-residential conversions are exceptionally high, and expensive, risks.
That’s the marketplace speaking. It’s not a signal for private developers, aided by the government, to turn taxpayers into venture capitalists. If “private and nonprofit stakeholders” want to seed this “Downtown Emergency Impact Fund,” that’s their risk. But taxpayers have no business being forced to take on such exposure.
But, but, but the tut-tutters of being beneficent with other people’s money wail, as the P-G reports their formal proposal, “the initial $55 million pot could drive as much as $550 million in investment in Downtown by enabling roughly nine conversion projects to get started, including Gulf Tower, City Club Apartments and Three Gateway Center.”
We might have been born at night but not last night. The public should always be skeptical of grand multiplier effects from private developers dipping into the public kitty.
But, again, if these are sound investments, lending institutions would be more than willing to step up to the plate.
And that brings us to an inconsistency in the emergency fund proposal: The P-G also reports that some of the loans out of the fund would be pegged to market rates.
But that’s what banks are for, yes? Oh, we forgot, banks might not even lend for such high-risk projects even at “onerous” market rates and their reduced commitment, right?
Again, if private funders and private foundations want to 100 percent seed such a fund on their own, go for it! And kudos to the initiative. But taxpayers should have no skin in a game in which the odds are high they’ll be skinned alive.
Jake Haulk, president-emeritus of the Allegheny Institute, calls it a “sure-to-fail proposition.”
It’s “not market-based and there is no evidence these converted properties would find buyers but would instead become low-income housing.”
The Ph.D. economist likens it to the promises of “great economic benefits of stadiums”:
“Creative but unbelievable fiction.”
Colin McNickle is communications and marketing director at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinstitute.org).
