ISSUE: PALLADIUM?S CLAIMS ABOUT PROJECT VALUE and ECONOMIC IMPACTS

In summer 2001, Palladium?s Phase 1 Project was defined as:

580,000 S.F. Office
675 hotel rooms (2 hotels)
520,000 S.F. Retail
713 Residential units

This was the Phase 1 project that was the subject of the Ernst & Young "Economic Impact Study", that reached the following conclusions:

Project Assessed Value = $600 million
Construction Jobs = 10,052 ("full and part-time")
Taxes to City of Dallas
Real estate = $ 4 million
Hotel = $ 3.6 million
Sales = $ 3.0 million

Today the Phase 1 Project is defined as:

350,000 S.F. Office
350 hotel rooms (W hotel)
500,000 S.F. Retail
600 Residential units

QUESTION:  CAN YOU EXPLAIN WHY YOUR VALUE/COST ESTIMATE FOR THE RETAIL COMPONENT IS MORE THAN TWICE WHAT VERY RECENT HIGH QUALITY PROJECTS HAVE BEEN BUILT FOR --- INCLUDING PAYING FOR THEIR OWN PARKING?

WILL YOU BE CHARGING DOUBLE THE RENTS??

PAGE 15 OF Palladium?s project application shows the value of the 500,000 S.F. of retail to be $160 million, about $320 per S.F. excluding the cost of the retail parking and on site plazas.

The total development costs of new high quality retail projects in Dallas such as West Village and Mockingbird Station were less than ? of this ? including parking.

Palladium?s office and hotel costs are also out of line, but less so.

Sedway Group estimates the approximate "project value" of Phase 1 to be $410 million, as follows:

350,000 S.F. office = $58 million (using Hillwood?s 2001 estimates from previous TIF documents, adjusted for inflation)
350 Room W Hotel = $52.5 million (using $150,000 per room)
500,000 S.F. Retail = $92.5 million (using cost of $185 per S.F., a 33% premium over recent local high quality retail projects including parking)
600 Residential units = $180 million (assuming average sales price of $300,000).
Total "Private Improvements $383 million*
Internal Project Streets,
Plazas and Utilities = $27 million (Palladium estimates)
Total Public and Private $410 million

*NOTE: This very close to $385 million figure in TIF document.

ISSUE: PALLADIUM?S CLAIMS ABOUT PROJECT VALUE

The Amended and Restated and Amended Victory TIF Project Financing Plan (approved May 6^th) estimates the appraised value of the Phase 1 project to be $407.7 million. Furthermore, Palladium only has to build $385 million in improvements before they can begin to be repaid for the "public improvements" (really their retail project parking and plazas).

ISSUE: PALLADIUM?S CLAIMS ABOUT CONSTRUCTION JOBS

QUESTION:  CAN YOU EXPLAIN HOW THE "10,000 FULL AND PART-TIME CONSTRUCTION JOBS" FIGURE WAS ARRIVED AT?

AND HOW MANY FULL TIME EQUIVALENT (FTE) JOBS PER YEAR WILL THERE BE?

BACKGROUND FACTS

Based on a substantially larger Phase 1 project, and taking Palladium?s $600 million number as a given, Ernst & Young estimated that there would be 10,052 "full time and part-time" construction jobs, without explaining how many of each, or how the number was derived ? except to refer to a modeling system named IMPLAN. IMPLAN is a fine model, but only as good as the assumptions it is given (the old garbage in-garbage-out adage).

Palladium is still using the 10,000 number, without noting that it?s now a 20% smaller project or that they are not all full time jobs.

Using common sense assumptions about what a Full Time Equivalent (FTE) construction job is worth (e.g. $30-40,000 for annual salary and benefits), and a more realistic project value of $400 million, Sedway Group estimates that the Palladium project will generate:

3,750 ? 5,000 FTE construction jobs, spread out over 3 years, or about 1,250 ? 1,667 jobs per year.

ISSUE: PALLADIUM?S ESTIMATE OF HOTEL TAXES

QUESTION:  CAN YOU EXPLAIN HOW THE $3.5 MILLION OF ANNUAL HOTEL TAXES WAS ARRIVED AT, ESPECIALLY SINCE THERE IS NOW ONLY ONE PHASE 1 HOTEL?

HAVE YOU ANY IDEA HOW MUCH OF THIS WOULD COME FROM EXISTING DOWNTOWN HOTELS?


BACKGROUND FACTS

Current market conditions in the CBD:

Average daily room rate (ADR) is about $140 per night.

Occupancy is expected to average 56% for 2002

Assuming 70% occupancy (25% above the current market) and $160 ADR (15% above current market) for a 350 room W hotel, would yield $1.3 million in annual hotel taxes. About ? of this, or $992,000 would go to the City (the rest goes to the Arena). This figure is about ? of the $3.5 million being claimed by Palladium.

Even at $200 ADR (40% above market), the taxes to the City are only about $1.25 million. To get to the $3.5 million at a 70% occupancy would take over $400 ADR.

Finally, it is important to remember that s portion of these hotel taxes are not new, but are coming from the W taking business away from existing hotels, like the Adolphus, Magnolia or Aristocrat.


ISSUE: PALLADIUM?S ESTIMATE OF PROPERTY TAXES

QUESTION:  YOUR ESTIMATE OF $ 4 MILLION OF NEW CITY REAL ESTATE TAXES SEEMS TO BE BASED ON TAKING THE $600 MILLION ASSUMED PROJECT AND MULTIPLYING IT TIMES THE CITY?S RATE OF .0067.  IS THIS CORRECT?

SO TO THE EXTENT THAT THE PROJECT VALUE IS CLOSER TO THE $400 MILLION IN THE VICTORY TIF PLAN, THEN THOSE TAXES WILL BE PROPORTIONATELY LESS? OR ABOUT $2.7 MILLION?


BACKGROUND FACTS

Sedway Group estimates the Palladium?s project value as follows:

350,000 S.F. office = $58 million (using Hillwood?s 2001 estimates from previous TIF documents, adjusted for inflation

350 Room W Hotel = $52.5 million (using $150,000 per room)

500,000 S.F. Retail = $92.5 million (using $185 per S.F., cost a 33% premium over recent local high quality retail projects including parking)

600 Residential units = $18o million (assuming average sales price of $300,000).

Total "Private Improvements" = $383 million*

Internal Project Streets,
Plazas and Utilities = $27 million (Palladium estimates)

Total Public and Private $410 million

*NOTE: This very close to $385 million figure in TIF document.


ISSUE: PALLADIUM?S ESTIMATE OF SALES TAXES

QUESTION:  CAN YOU EXPLAIN HOW THE $3 MILLION OF ANNUAL SALES TAXES WAS ARRIVED AT?  

HOW MUCH OF THIS DO YOU EXPECT TO COME FROM EXISTING CITY SHOPPING VENUES LIKE WEST VILLAGE OR NORTH PARK?

In order to generate the $3 million in sales taxes to the City, the project would have to generate $300 million in annual sales. This would require retail sales per SF. of $600 for the entire 500,000 S.F. of shops.

This is not a credible figure in the Dallas market. For example, highly successful shopping venues like North Park and West Village do about $400 per S.F. So Palladium would have to be 50% better.

Sedway Group estimates that sales taxes are more likely to be about $2.3 ? $2.5 million.

However, some of these sales will come at the expense of existing businesses, so the net new taxes will be less than that.


ISSUE: JUSTIFYING MORE TAXPAYER SUBSIDIES

WHY SHOULD THE TAXPAYERS PAY FOR YOUR RETAIL PARKING AND ON-SITE PLAZA IMPROVEMENTS WHEN OTHER PROJECTS LIKE WEST VILLAGE AREN?T BEING PROVIDED SUCH BENEFITS?

Since no pro forma was made available to Sedway Group to analyze, we can only speculate based on market conditions and general construction cost parameters. Based on these, it seems likely that:

• the retail project by itself is financially feasible. West Village and Mockingbird Station are fairly relevant comparables. Palladium should be able to cover slightly higher costs with slightly higher rents;

• the residential component, especially the condo/townhomes should also be feasible, based on success of other central Dallas projects and market conditions;

• the office, if built in the near term, would require subsidy because current rents do not support the cost of construction; and

• the hotel, if it is positioned as indicated, might also require subsidy.

Two final points. 1) Overall, further subsidy is not likely to be defensible; and 2) a subsidy to the office and hotel components would help them take away business from existing CBD properties like Banc One or the Magnolia.

WHY HAS PALLADIUM CLAIMED THAT THEIR PROJECT PRO FORMA IS "PROPRIETARY" WHEN THEY MADE NO SUCH CLAIM IN SAN JOSE?

DOES PALLADIUM BELIEVE THAT THE CITY SHOULD PROVIDE TAXPAYER SUPPORT FOR A PRIVATE PROJECT WITHOUT A COMPREHENSIVE "DUE DILIGENCE" REVIEW OF WHY THE PROJECT CANNOT BE BUILT WITHOUT MORE PUBLIC MONEY?

Sedway Group has worked on many similar transactions over its 25 years in business, where a private developer is seeking public financial assistance for a project. However, we have never encountered a situation wherein a developer requesting such help, has been unwilling to share the project (not personal) financial information needed to allow the public agency to rationally determine whether the assistance was needed and justified.

Palladium was asked for such information in their recent San Jose negotiation, and provided it. To quote San Jose?s economic advisor, "we wouldn?t sit down to discuss the project without that information. Information sharing and detailed reviews of pro formas is the conventional practice. It can involve extensive negotiation about estimated costs, projected income or appropriate rates of return.

Here in Dallas until very recently, Palladium had refused to share their project pro forma, yet expected the City to fund $40-50 million of the project?essentially "no questions asked?.

Finally they agreed to allow KPMG (but not the City) to review the pro forma in order to provide some level of general comments. While a modest improvement, this is not remotely the same as providing the City with the information it needs to conduct a thorough "due diligence" before agreeing to provide $85 million ($43 million in construction cost plus $42 million in financing costs) to a private developer.

Sedway Group can provide the Council and staff with many names of local government officials and developers who will confirm our representations in this matter.