The city’s Olympic Village plan sounds like a work of genius, if not magic: close your eyes, leave it to Mayor Daley and his aides, and—presto!—7,300 new housing units will be built on the south side without using one dime in public funds.
But as I’ve learned over the years, when our esteemed leaders start conjuring visions of something for nothing, they’re usually trying to cast a spell on the taxpayers.
The Olympic Village plan is no exception. “This is a very creative financing solution,” planning commissioner Arnold Randall has said. “We are not laying out any money. We aren’t using any taxes.”
But in fact the deal will pull the city into risky real estate speculation at a time of instability in the market. If things don’t go just right, the city could—meaning taxpayers could—be left with tens of millions of dollars in debt. And even if the plan doesn’t go awry, hundreds of working-class residents of the near south side could be priced out of their homes.
City officials haven’t released all the specifics, but here’s what they’ve revealed: The city will agree to borrow $85 million to buy the Michael Reese Hospital campus, near 31st and King Drive, from its current owner, Medline Industries. But Medline will only get $65 million, because the company has agreed to make a $20 million “charitable contribution” back to the city.
The city will use that $20 million to pay up to five years of interest on its $85 million debt, demolish the hospital, and clean up the 37-acre site. Then sometime in the next couple years it’ll sell the site for at least $85 million to a developer or developers, who in turn will build a complex big enough to house about 15,000 Olympians. After the games the developer will sell or rent out the units.
Now, I can’t say for certain that the city can’t pull all this off without dipping into the public coffers. But I’ll put it this way: I think I have a better chance of beating Bernard Lagat in the 1,500.
Let’s start with Medline’s “contribution.” I initially thought it sounded odd to have the seller return a portion of the cost of a sale right back to the buyer. I mean, either the property is worth $85 million or it’s worth $65 million—what’s the point of this game? But a source in the mortgage lending industry, who, like others in the real estate business I spoke with, didn’t want to be named because of his professional ties to the city, tells me this sort of arrangement is hardly unprecedented.
“You see a lot of it in the subprime mortgage loan business,” he said. “You’ll get a situation where a house is worth, say, $100,000, but the buyer has no money for a down payment, so the buyer says to the seller, ‘I’ll tell you what—you’re only asking $100,000. I’ll give you $105,000. And then you give me back $5,000 so I can pay a down payment.'”
The advantage for Daley is that it lets him hide $20 million in debt in plain sight. We’re not really spending $20 million on demolition, interest, and cleanup—even though we are—because the money’s coming from the seller, even though the seller’s getting it from the city in the first place.
And guess what? The illusion seems to be working. In a July 10 story the Trib even let an area real estate consultant say what a bargain the city was getting “with a net price of $65 million.”
As it happens, the city is getting a pretty good deal even at the real price, according to the realtors and developers I’ve talked to. The $85 million works out to $52.70 per square foot, and it covers the costs of both acquisition and demolition. By comparison, noted a south-side real estate agent, “the Target over at Roosevelt and Clark got their land for about $75 a square foot.”
I’ve ripped Mayor Daley for selling cheap to developers at Wilson Yard and letting the Park District pay too much for its new Streeterville headquarters, so I have to tip my hat to him on this one.
Medline doesn’t fare too badly either. The company bought the Michael Reese property for $24 million just four years ago. I guess Medline was one of those lucky, in-the-right-place-at-the-right-time investors who happened to be looking to sell when Mayor Daley was desperate to buy. The city’s final bid to the International Olympic Committee is due next February, and the mayor can’t make a good case for Chicago unless he’s got somewhere lined up to house the athletes.
Medline says it had better offers (though no one would say how much better), but a company spokesman says it wanted to help the city’s Olympic bid.
But the reality is that no other buyer was going to beat out the city for this property. As folks in the way of the O’Hare expansion can tell you, there’s not much you can do if Chicago decides it wants your land. Any other developer would need all kinds of approval from the city’s zoning and planning departments as well as the City Council, and the mayor has a record of getting what he wants in those places.
Which brings me to my next point. The Chicago Plan Commission and the City Council will no doubt approve this proposal, and as soon as they do, Chicago will owe its creditors $85 million. If Daley can’t sell off the property in the next few years for at least that much, the loan will have to be repaid some other way—say, with property taxes.
Despite the site’s relatively low price, developing it for housing could be problematic. For one thing it will probably be harder to sell the units if buyers can’t move in until after the games in 2016.
“That’s a long time to hold on to property,” one prominent developer told me.
Would you do the deal?
“It’s a risky venture. We’d have to look at the particulars.”
Translation: How much of a handout will I get? The gravy train is just revving up. Developers know that Daley needs to sell in a certain amount of time, and in exchange for helping him out they’ll no doubt be looking for markdowns, subsidies, and tax breaks.
Daley and his staff are baldly minimizing the risk here. They don’t want the public to wake up until after the IOC makes its decision in October 2009, when it will be too late to stop them.
If we don’t get the games, according to terms of the agreement with Medline, the price of the property will rise another $5 million, to $90 million. Regardless, city officials will come up with a reason why the deal was a good idea. There’s always some excuse for commandeering taxpayers’ money, like building affordable housing or reviving the near south side.
But not all near south siders are eager to see what revival will mean. Housing activists fear it will displace longtime working-class and poor residents. “It’s more high-use development that we can’t afford,” says Jay Travis, director of the Kenwood Oakland Community Organization. “It’s part of a larger plan, whether the Olympics comes or not, to make sure the south lakefront is for the affluent.”
I have another concern—I’m not sure we’ll be able to afford it. You may remember that when Mayor Daley unveiled his Olympic dream back in 2006 he promised he wouldn’t spend any public monies on it. Then last year he had the City Council commit up to $500 million for the games, and the Park District another $15 million for the aquatics center in Douglas Park. Now here we are borrowing another $85 million.
This is starting to remind me of the debacle at Block 37. In the late 1980s and early ’90s the city spent about $40 million to buy and demolish the block bounded by Washington, Randolph, State, and Dearborn, then sold it for $12.6 million to a consortium of developers. They never got a project off the ground, and a few years ago the city ended up buying the property back for about $32.5 million. Even as real estate prices were skyrocketing, the city managed to lose millions of dollars on each transaction.
Construction on office and retail space at the site is finally scheduled to be finished before the end of the year. But the mayor’s plan to build a new transit station underneath and run express trains to O’Hare—a plan that’s already cost the CTA more than $250 million, instead of the $130 million it budgeted—has been put on hold while the agency tries to find a private partner.
You’d think the city would have learned by now to stay out of real estate.v
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