Math doesn't always add up

Bill Christofferson takes a look at two proposals for projects in the Park East development zone in this XOff Files post.

Competing development firms, Ruvin Development, Inc. and Rana Enterprises, each have their own plans for the site. From the Journal Sentinel article Christofferson links to:

Ruvin wants to buy a county-owned parcel, bordered by N. Old World 3rd St.,
N. 4th St., W. Juneau Ave. and W. McKinley Ave., and create a $104 million
mixed-use development. The Ruvin project would feature a 175-room hotel, 70
condos, 55,000 square feet of offices, 31,000 square feet of retail space and a
330-car parking structure.

Rana wants to build a $34 million development on the same parcel. Rana's
plans call for a 202-room hotel, a gas station/convenience store, 14,000 square
feet of offices, 9,000 square feet of additional retail space and a 400-car
parking structure.

XOff takes issue with the fact that members of a County Board committee are leaning toward the Rana plan.

But what it's really all about, it appears, is participation in the project by minority contractors. Plan A includes a goal of 27% minority participation, Plan B 35%. Goal is a key word; there is really no legal way to hold a contractor to that number, except for looking over his shoulder every step of the way and complaining loudly when he isn't meeting the goals. It appears, if
you read the whole story and read between the lines, that committee members doubt Contractor A's commitment.

I have only one comment: People, do the math.

-- 27% of Plan A's $104-million project is $28-million that would go to minority contractors.

-- 35% of Plan B's $34-million project is $11.9 million for minority firms.

If Contractor A somehow got only halfway to its minority participation goal, it would still be $14-million, more than Plan B.

Not to mention the disparity in job creation and taxes generated by the two projects.

I work in this area and live not too far from it. And while doing the math certainly points to the Ruvin plan being the more favorable of the two, I would argue there's a level of practicality the math cannot grasp.

First off, a gas station in the area would fill a void that's been around for far too long. At present, the next nearest station is located at the very inconvenient intersection of Farwell, Ogden and Franklin, and is arguably one of the most expensive gas stations in the city. A little competition wouldn't hurt. If Ruvin were to add one to its proposal, I might give theirs a little more consideration.

But another thing Ruvin would have to do is remove the condos from the proposal. I've long said that residential development in downtown Milwaukee is a great thing. After all, between the lake and river, it always seemed silly that so much unused commercial space was occupying such great real estate. However, too much of a good thing can be bad. Nearly every warehouse and unused piece of land has turned into a condo development in recent years. With starting prices for many of these properties as much as $300,000, infamously high property taxes, the alternative of owning land in rapidly developing neighboring counties and the recent announcement that Milwaukee's population has declined, I'm forced to ask: who's buying these places?

Those 70 condos may seem like they'll provide an enhanced tax base, but that's based on them actually being purchased. The real-estate boom wasn't just fueled by low interest rates, but also buyers borrowing way out of their leagues, using mortgage practices never really intended for residential lending (flipping) and mortgage programs designed not for the first-time homebuyer but rather investors (interest only loans). Resulting from these bad practices are a rise in defaults and lenders reining in some fairly liberal mortgage lending practices. If it won't be as easy to get a mortgage, it'll be just as difficult to get the home.

For the time being, downtown Milwaukee has enough residential development. And while the math may favor Ruvin at this point, sound judgment favors Rana.*

*Please don't take that as saying sound judgment has anything to do with the committee's decision. It may just be luck.

UPDATE: Rick Esenberg agrees with Christofferson. He feels that if the area needed a gas station, the market would have already seen to it being there. I'm as a big a free market guy as anyone, but I think that in this situation the market has failed us. I can't point to what in particular has stopped a gas station from opening, but pretty much anyone working or living in the area will agree that one is needed.

Addiotionally, while Rick's assertion is that he and the Reddes could easily afford a condo in the area, I should note that the target market has been, in some cases, recent college graduates. Properties at $400,000 are not realistic for this group. And even if a bulk of the properties are purchased by suburbanites, you're gonna really love having that extra gas station around.

Trust me.

UPDATE II: Sykes also seems to agree with Bill. He doesn't explain why. It's probably with good reason, but I bet I disagree with it.