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Questioning Crosstown

A critic wonders if the Sears Crosstown project makes financial sense.

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I am old enough to remember going to the Curb Market in Crosstown with my mother and buying a bushel of snap beans for canning. I would have to spend the rest of the day cleaning and preparing them. On many occasions, we then went to the Sears Crosstown store. It was huge and impressive. It was built for a certain time and market, and whether it paid for itself over time I do not know. Looking at the Sears company today, you have to wonder about their long-term business knowledge. The Sears catalog was the Amazon.com of its day, and this store, I believe, was a catalog sales and warehouse center. Too bad they did not keep up.

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Now we have a choice: Tear down the old Sears building or spend at least $175 million to turn it into another non-tax-producing renovation project. Where is the financial pro forma report on this project? If it is available, I would like to see it.

Let's look at how this is currently being financed, according to a recent news report. The Crosstown Development team says it has essentially assured $160 million in funding — $25 million raised privately, $30 million in historic preservation tax credits, $15 million in new market tax credits, $10 million in grants and other sources, and an $80 million loan. Add the $15 million requested from the city of Memphis and you have the $175 million that is the supposed front-end cost.

Let's take a look at a couple of these funding sources and their rationales.

• $30 million in historic preservation tax credits — This is from a legislative incentive program designed to encourage the preservation of "historical buildings." Congress instituted a two-tier tax credit incentive under the 1986 Tax Reform Act. A 20 percent credit is available for the rehabilitation of historical buildings, and a 1 percent credit is available for nonhistoric buildings that were placed in service before 1936. Benefits are derived from tax credits in the year the property is placed in service, cash flow over six years and repurchase options in year six.

• $15 million in new market tax credits — This comes from the New Markets Tax Credit (NMTC) Program, established in 2000 as part of the Community Renewal Tax Relief Act of 2000. The goal of the program is to spur revitalization efforts of low-income and impoverished communities across the United States and Territories.

The NMTC Program provides tax-credit incentives to investors for equity investments in certified Community Development Entities, which invest in low-income communities. The credit equals 39 percent of the investment paid out (5 percent in each of the first three years, then 6 percent in the final four years, for a total of 39 percent) over seven years (more accurately, six years and one day of the seventh year). A "community development entity" must have a primary mission of investing in low-income communities and persons.

If the proposed project goes forward, will it bring tax money to the city of Memphis? If there are new small businesses that rent space or locate in the general area because of new traffic and people live in the renovated building, I suppose there could be new sales-tax money and employment opportunities.

However, it sounds like most of the occupiers of the space will be non-profits and arts enterprises. There will be people living in the building, but many of these will be rent-subsidized people under Section 8 or other federal and state programs. Taxpayers will be funding the whole project through these various federal tax credits.

As far as the building itself is concerned, I think it is aesthetically past its time and conceivably not worth saving. Possibly the architects can make it beautiful but at what cost, compared to tearing it down and doing something else? I would like to see a financial analysis of this proposed project, and no decision should go forward without it being presented to the public for discussion.

Joe Saino is proprietor of the MemphisShelbyInform.com blog, where a version of this essay first appeared.

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