Have you heard Detroit is bankrupt? It’s true. But that isn’t stopping it from dropping several hundred million on a handful of high-profile and potentially low-yield investments.
As the Motor City finalizes a Chapter 9 bankruptcy to free itself from some $18 billion in debt while continuing to provide basic services and deliver on municipal worker pensions, it’s also planning state-of-the-art urban upgrades. Over the next five years, downtown Detroit will get several new additions, including an above-ground rail system, a $450 million hockey arena, hundreds of apartments and condo units, recreational venues and at least one fancy hotel.
How’s Detroit paying for it all? A mix of billionaire investors undaunted by the city’s money woes, state and local taxes, and bonds that are trading swiftly on Wall Street.
“In Chapter 9, just like in Chapter, 11, you can still continue with normal operations,” says Charles Tatelbaum, a bankruptcy expert and partner at the law firm Hinshaw & Culbertson LLP in Florida. “It really creates this dichotomy: Everything with respect to liabilities is frozen, but everything with respect to assets is within the normal course of business. If there were public-private projects already going on, Detroit can go forward with them.”
Financial experts agree that investing in Detroit can potentially be lucrative and help the city recover. Some of the new projects could make the city more attractive to businesses, residents and tourists, according to these experts. However, residents and policy analysts are calling certain additions (like the arena) superfluous and wasteful, given the current climate of the city: Detroit has lost 50 percent of its population in the past several decades and can’t afford to keep the streetlights on at night, making things particularly difficult for muggers.
“These big public projects are pretty dubious, especially stadium deals,” says Jarrett Skorup, a research associate at Mackinac Center for Public Policy. ”Among economists it’s pretty unanimous that creation of new stadiums doesn’t create wealth.”
So far the groundswell of people who oppose the new arena for the Red Wings hockey team hasn’t found a cohesive voice. ”You have some weird alliances on issues like this,” Skorup says, pointing to the bipartisan support for the project. “If you’re somebody on the left side of the spectrum, you’re talking direct subsidies for a corporate deal.”
Detroit Emergency Manager Kevyn Orr has publicly supported the arena, saying it will bring jobs and revenue to the city.
But Tatelbaum says Orr is trying to take a “business-as-usual approach” to dealing with the city’s immediate and long-term plans. ”He’s got to make the most of what he’s got available to show that the city can turn around.”
This includes capitalizing on the relatively clean slate provided by the bankruptcy. The process involves calculating the exact value of Detroit’s assets—from real estate to parking meters to the Detroit Institute of Arts collection. The city said Monday it had hired famed auction house Christie’s to appraise its DIA collection and offer tips on how to determine the art’s value without selling it.
“[Detroit city leaders] get a big financial boost now,” Tatelbaum says. “All their debts are frozen unless it’s tied to a revenue bond. And revenue is coming in, so they can go and fix the streetlights, hire more policemen.”
The investment might also help ensure that the city’s 10,000 retired and 20,000 current municipal workers get their promised retirement benefits. Orr has estimated the underfunding of the city’s two pension funds at $3.5 billion. Fund managers disagree, saying they are more than 90 percent funded.
Though the bankruptcy judge must approve any new project or bond issuance to pay for new or existing projects, Tatelbaum says it will now likely be easier to attract investors. “Bond sales should not be (adversely) affected. Many sophisticated creditors love to extend credit and give debt to those who have gone into Chapter 9, because they know that they’ll be at the top, because all that old stuff is frozen,” he says.
All this new development is happening in Detroit’s urban core of the Midtown, New Center and Downtown neighborhoods, according to Detroit Economic Growth Corporation spokesman Bob Rossbach. Here’s a rundown of the projects and how they are being funded (not all are dubious, but those that are make up for it).
1. New Detroit Red Wings arena
The same week that Detroit announced plans to file the biggest municipal bankruptcy in U.S. history, Governor Rick Snyder also unveiled plans for a $450 million arena. About 60 percent of that sum is coming from public funds. The rest will be covered by team owners Mike and Marian Ilitch, who founded the delicious Little Caesars pizza chain. But where does a city that might literally be auctioning the art of its walls come up with millions for a hockey arena? Taxes! Sweet, beautiful taxes.
“The state of Michigan issued a preliminary authorization to issue bonds that will fund construction,” Rossbach says. The 30-year bonds will be the be paid back in three ways, he says. First, the contribution of about $167 million from the Ilitchs’ Olympia Development. Second, a property tax levy that will bring in a projected $12.8 billion per year. “It’s not new,” Rossbach says. “It’s the school tax capture. It was a levy for schools and it’s levied only on the properties in the DVA [Downtown Visitor Area] boundary.” Third, an existing property tax that will bring in about $2 million annually from the Downtown Development Authority (DDA). ”It’s a special district fund,” he says. As part of the deal, Olympia Development or its partners must invest in the area surrounding the new arena, hopefully bringing businesses and jobs.
2. New light-rail system (it’s an above-ground train)
Construction on a rail service linking downtown with New Center, a cultural, medical and educational hub a few miles north, is set to begin this year. The project is being funded by $25 million in federal money and $140 million in state and city money. So how’s Detroit coming up with that chunk of change? The remainder has been pledged by civic and philanthropic groups, including $9 million from the DDA. Once built, the 3.3-mile light-rail system will provide 2,000 jobs, according to local and federal officials.
3. New, fancy Aloft hotel
A long-empty historic building smack in the middle of downtown will soon be a hotel that charges about $300 a night. Aloft, a boutique hotel chain under the parent company Starwood Hotels and Resorts Worldwide, started eyeing the 19-story David Whitney building (above) years back, and it’s getting some development incentive through a variety of sources, including tax incentives, according to Peter Van Dyke, a partner with Berg Muirhead and Associates. He said Detroit is moving towards an urban core where people can work and live. “We’re building density within the city,” he says.
4. New retail and recreational complex
Quicken Loans founder and Detroit cheerleader Dan Gilbert was one one of five parties who submitted a proposal to buy the site of an unfinished Wayne County jail (above). Soaring costs during the jail’s building process led local officials to freeze the project…$120 million into construction. Now city leaders are looking to unload the half-finished construction, probably at a loss. Gilbert’s Rock Ventures LLC submitted a bid for the facility, with tentative plans for a mixed-use project in line with L.A. Live, the $2.5 billion development in Hollywood that includes the Nokia Theatre, ESPN broadcasting studios, two hotels, condominiums and several restaurants.
5. New adventure and discovery center
A huge abandoned warehouse on Detroit’s riverfront is being reconfigured into an adventure and discovery center run by the Michigan Department of Natural Resources. The center will link up with two adjoining greenways. The DNR expects 1 million visitors each year when the $13 million project is complete in 2014. “It’s a nice little concentration of public resources,” Rossbach says.
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