We have been talking about the impact of Economic Development in Davis for nearly a decade now and as such, we have mound of material to pour back over. There is a reasonable chance at this point that Mace Ranch Innovation Center will come forward with a new proposal that could be voted as perhaps as soon as some time in 2019.
The city has actually done a number of different studies on the fiscal impact – the most recent being a 198 page report by EPS that examined the revenue impact of both MRIC and the smaller Nishi project.
To me there are three critical points here. First, that we should look at Economic Development as part of a package of solutions to the city’s ongoing revenue shortfall. Second, that the EPS report estimates around a $2.1 million net revenue generation from a fully built out MRIC – and while those are healthy numbers – we believe them to be a very conservative estimate. Third, while some of that revenue is estimated to be from a hotel – there are reasons to believe we should build a hotel on the site even with the Marriott being built across the street.
Finally – while the city has already had EPS look into the revenue generated by MRIC, my suggestion given the centrality of the issue of revenue to this project (as opposed to a housing project), the city would be best off having EPS or another outside firm doing further analysis should MRIC come forward again and do so with sufficient time to allow the Budget and Finance Commission fully weigh in.
Fiscal analysis was an important issue in both Nishi and WDAAC – while fiscal criticism did not prove decisive – for a project intended to generate revenue, it will be all the more important.
To my first point, the city of Davis as we have previously have showed is at a competitive disadvantage in that it generates less in the way of sales tax per capita than most comparable cities (See this for just one example). As we see the increasingly precarious nature of retail (see Gap is closing), we cannot count on building up our sales tax base simply by adding peripheral malls – and most people, myself included, would balk at such a development.
How do we address what is at least an $8 million shortfall in the funds to provide for things like pensions and infrastructure? The first answer starts with cost containment – without containing the expansion of cost for the city no amount of taxes or economic development will solve the problem. The second answer is that in the short term we will have to generate additional revenue through taxes – we have a half-cent sales tax that is about to expire in 2020 and we failed to pass a road tax in 2018.
The point here is that we are not proposing to rely on economic development to address the full deficit but rather as a package of solutions that helps us becoming fiscally sustainable into the future. That not only seeks to address deficits, but it also looks at prosperity, at jobs, at the jobs-housing mix, etc.
That brings us to the key question – what can we reasonably expect from a 2.18 acre, 2.4 million square foot project like MRIC?
Here I will rely on the 2015 EPS report (see the 2015 analysis here), but there are several caveats here. One is that the numbers include a 160,00 square foot hotel and do not include the possibility of housing units. Second is that I have argued that the EPS report was extremely conservative in terms of its revenue projects.
I see two sides of the coin with that. On the one hand, EPS cannot be accused of overly rosy projections. On the other hand, it probably reasonably sells the revenue projections short which will be fodder no doubt for opponents of such development.
EPS projects around $3.79 million in ongoing annual revenues but $1.59 million in ongoing annual expenditures from the project for a total of $2.2 million in net revenue at buildout.
There are a number of problems with the analysis, and one is that the estimation of costs $1.59 million annually would seem very high. The other is that, once again, the $3.79 million estimated revenue is probably on the conservative side – one of the proposals was to have a $2 per square CFD which by itself could generate another $4 to $5 million in annual revenue by itself.
That leaves a conservative baseline for the project at $2.2 million in revenue. If you then want to project housing many acres it would take to get to $8 million in net revenue, you would be looking at about 800 acres or roughly four parks.
However, we believe that the expanded direct benefit could be upwards of $6 or $7 million depending on a number of factors including perhaps a CFD.
The low end is basically the equivalent of a modest sized parcel tax or sales tax.
However, while those are necessary quick fixes, there are other advantages namely: commercial and economic development generates revenue for the city, it does so without harming the economic like a tax would and without increasing the cost of living, moreover, there is the added economic and fiscal benefit of jobs production which creates a multiplier effect that can actually generate additional revenue not measured in these analyses.
This point is quite important for as the EPS report notes: MRIC creates a huge ripple effect for both the Davis and Yolo County economies.
“The report estimates significant positive economic impacts resulting from the projects — approximately 3,400 jobs, $605 million in income from goods and services generated, and $271 million in labor income. That’s impressive,” said then-City Manager Dirk Brazil. “The projects will likely generate positive regional economic impacts as well, but the most significant benefits will be experienced here in Davis and in Yolo County.”
The report also evaluates the long-term economic effect of the two projects after buildout. “The innovation center projects have the potential to add 11,000 jobs, $2.9 billion from goods and services generated, and $706 million of labor income on an annual basis,” said Mr. Brazil. “The innovation centers will not only create high-wage jobs for Davis residents, but will also provide the financial resources that will allow the City to address maintenance needs and provide high-level services for our residents.”
Finally let us address the issue of the hotel. As one person points out the loss of the hotel reduces the annual net revenue from $2.2 million to $1.47 million. If we assume the loss of the hotel, we still end up with nearly $1.5 million in revenue generation on 2.18 acres of land.
That leaves aside other avenues for revenue generation including the CFD mentioned above and it also assumes that there will not be a hotel – which I’m not sure why we would want to make such an assumption.
It is true that the city of Davis is adding two hotels – the Hyatt House and the Marriott, with the Marriott going in across the street. In addition, the University Park Inn is expanding to become the Richards Hotel, however, originally that project was to have a conference center but that has been scaled back.
The city approved those hotels as a way to generate additional revenue from TOT (Transient Occupancy Tax) and reports that suggested a substantial amount of leakage from Davis into surrounding cities (see PKF Consultant study here).
They write: “the YCVB [Yolo County Visitors Bureau] and a number of tech businesses surveyed indicate that the Davis market is currently leaking hotel demand due to a lack of higher end offerings and/or due to a lack of extended stay offerings. Depending on the market segments targeted by a given hotel project, new hotels included in the innovation park projects may capture currently unmet demand without affecting demand available to support existing hotels.”
There is some debate over those numbers, but the basic concept seems legitimate.
Moreover, that ignores possibilities for expanding the hotel market. For instance, during his campaign Mark West suggested expanding athletics tournaments are a way to generate more hotel stay. And without the hotel conference center at Richards, the need for a hotel conference center and the possibility of large scale tech conferences in Davis creates a renewed need for a hotel on the innovation center that would become a revenue generator not just for the center, but for surrounding hotels.
Bottom line: the report shows sufficient revenue generation even without a hotel, the report is modest in its revenue projections and why assume that we cannot utilize a hotel and especially a hotel conference center in the innovation center?
—David M. Greenwald reporting