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Dividing by Zero

Why the Fairgrounds and Graceland Hotel Projects fail common sense.

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I'm all about creativity, but it seems our civic imagination has gone wild. The Fairgrounds and Graceland projects have fundamental flaws that would render them untenable as private investments, so why should the public invest?

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Memphis Housing and Community Development Director Robert Lipscomb dazzles politicians with PowerPoints and distracts us with ghostly promises of private investment, jobs, and kids playing. He says all the public money is sales tax that otherwise would go to the state. While true, the effect is to get everyone so jazzed they forget the project's premise is extremely risky.

The Fairgrounds Tourism Development Zone (TDZ) application justifies a $176 million public investment by claiming a private investment of $133 million. The application leaves unsaid that the investment consists of money already spent by Loeb Properties and others on privately financed development projects and anticipated dollars from a to-be-determined private developer.

The project relies on a major retailer swooping in to anchor a massive new retail and hotel development. But there is no lease. There isn't even a named prospect. At the Fairgrounds, the best location is the corner of Central and East Parkway, which is currently occupied by a school and the Kroc Center. If Target or Walmart was interested, they'd tell us. We don't need to build it and then see if we can entice them to open in a sub-par spot.

There's probably rebuttal evidence and "proof" that youth sports is the future in the studies Lipscomb commissioned. Of course, the people who provide these studies are the same ones who are later paid to consult on the development, and their advice can be boiled down to something entrepreneur Richard Branson would say: "Screw it, let's do it." Of course, when he says that he's talking about using his own money, not yours.

As for the Graceland project, there is certainly a public benefit to creating jobs in Whitehaven and improving a major tourist attraction. The Commercial Appeal reports that a public investment of $125 million in the Graceland Hotel project might yield 282 jobs. From a return on investment (ROI) perspective, this does not seem to shake out for taxpayers. From the developers' perspective, it's fine, but I can't calculate their ROI because real numbers aren't divisible by zero.

Investors use the phrase "skin in the game" to refer to putting something of yourself into the project — usually cash. It gives them comfort to know the risk they're taking is reciprocated. Apparently, the Graceland Hotel developers are putting zero capital into this project. While they stand to earn all the profits from the venture, they risk nothing. Any investor would be nervous, so why aren't we?

Public investment has its place. Without it we wouldn't have the Grizzlies. I can even justify Bass Pro —  at least there's an actual company with a plan, investing money of its own. The Fairgrounds and Graceland projects represent a $300 million public investment with virtually zero committed private money. Compare that with Crosstown and Overton Square, where public money represented less than 10 percent of the total investment. In these cases, taxpayer investment is secured not only by public oversight but by the natural inclination of private developers to protect their investments.

When Memphis plays developer without market checks and balances, the result is seldom good. The smart play here is to pause and take a breath. The Fairgrounds and Graceland are tremendous assets for our city. The right projects will surface when the time is right. It's the government's job to recognize that reality and get out of the way when it happens. Invest incrementally. Instead of huge, risky, public debt-financed projects, invest in many small, neighborhood-level private projects and iterate off what works.

Private money doesn't flow to projects that don't make sense, so why should public money be any different? No one I know supports these proposals in full, except the politicians. Of course, if these projects go through, millions of dollars will find their way to lawyers, contractors, bankers, and consultants — the very same people who line the campaign war chests of our local politicians. So, no, nothing's likely to change here in the city famous for building an upside-down triangle arena inside a right-side-up triangle. Common sense ain't so common around here.

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