Dallas Economics 101: Building Fancy Things Makes Nearby Poor People Rich

Categories: Schutze

fauntleroy.jpg
Library of Congress
Some attention to hair, a bit of fashion sense, and poor kids all over Dallas could become wealthy overnight.
Today we should learn something more about Yigal Lelah, a real estate developer to whom the city granted $4.5 million five years ago to create a high-end mixed-use development across from the Veterans Affairs Medical Center on Lancaster Road in a poor part of southern Dallas.

That development never happened. The City Council wants to know where the money went. Today as we speak, city staff is expected to provide the council with an accounting.

See also: Dallas City Council Wants to Know What It Did With 4.5 Million of Your Dollars

The debacle across from the VA hospital was the brainchild of council member Vonciel Hill, who represents the district and pushed hard for the project. Her enthusiasm for the project reminds me of former Mayor Laura Miller and her similar conviction about immigrant-owned tire repair businesses in North Oak Cliff. Miller believed the way make North Oak Cliff prosper was to cleanse it of grubby tire repair businesses and replace them with Ann Taylor dress shops and Starbuckses.

Or, while we're on it, Hill's ideas also call to mind the belief of The Dallas Morning News editorial page that the way to bolster the economy and improve lives in South Dallas is to drive out those ugly metal recycling yards and replace them with something ... well ... prettier. It's an idea that would seem raise a corollary question. After the people in the area lose their jobs at the recycling yard, how do they pay for whatever it is that's prettier?

The basic concept here is like spontaneous generation -- the 17th century idea that certain stuff, set in place, just turns into certain other stuff. Spontaneous generation was disproved by the great Dutch biologist Anton van Leeuwenhoek (1632-1723) who, using a greatly improved microscope, demonstrated that decaying wheat does not turn into grain weevils.

By the same token, I would argue that Ann Taylor dress shops do not cause wealth to occur in their vicinities. An Ann Taylor opens a block away. You open your closet door one morning. Oh, my God! It's stuffed with greenbacks! In fact, I think Ann Taylor stores suck greenbacks out of entire neighborhoods, not the other way around.

Anyway during a council debate last week when some members expressed skepticism about high prices Lelah seemed to have paid for land on Lancaster Road -- using city money after all -- Hill took those members to task. She suggested that higher prices paid for whatever reason are always good thing, because things are better when they're higher.

"I want to publicly state," she said, "that I have some concern about comments which say, 'That's too much to pay for land down there.' Rising tides float all boats. Land value follows sales, and as some land is sold for a certain value, it raises the value of properties throughout the area.

"I have some concern about comments about 'down there.' We are building south. And we believe that 'down there' has the same intrinsic value as every other part of Dallas. I would ask my colleagues to be conscious of any language that implies anything different."

The basic idea here is not unique to Hill. A very Dallas idea shared across class and ethnic boundaries, it is that wealth is the appearance of wealth. A person or a shop or an entire city block that appears to be wealthy is by definition wealthy, and therefore the way to make poor areas wealthy is to somehow impart to them a wealthy appearance.

I always have the idea that somewhere somebody needs to be making something. You know, like grinding it or stamping it or shoveling it. Stuff. Everybody can't just be standing round waving la-de-da.

Way off behind a high barrier wall you need a huge factory or a bauxite mine. Something. People producing something or digging something out of the ground. But I grew up in the Rust Belt. What do you expect? I'm just not in on the magic. I'm sure it explains why I look like this.


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70 comments
Subnx
Subnx

Ward politics gets us people like Vonciel Hill who have no business handling money.

kduble
kduble

There's nothing wrong with the city trying to improve the quality of life in the southern sector. There is something wrong with paying an inflated price with taxpayer dollars.

rusknative
rusknative

lots of Ann Taylor clothes on racks at Goodwill,

lolotehe
lolotehe

Is it wrong that I read "prices Lelah" as "Princess Leia"?

MikeWestEast
MikeWestEast

Mayor Miller's intention was the appearance of stability and order, not wealth.  I don't think she gave 4.5 million to anyone to realize her vision.  Her feeling was the city's role was to enforce the codes that many businesses in South Dallas violate and detract from that appearance that we expect north of the city..


Why did it take action by the Council to understand this failed development?  Does the city staff track these investments?

RichGans
RichGans

but you just wrote the article about Pitre and how he can't profit (for now) because of the sewers etc, but here the old landowners do actually profit.... which ending do you prefer?  Again, you like things both ways my man, depending on who is involved.

mavdog
mavdog topcommenter

Jim, I don't think Laura wanted Ann Taylor shops on every block. GAP store maybe, but she knew that every woman doesn't want to wear business suits.

I'll agree with your premise, every street in Dallas can't be NorthPark or HPV. The retail which is put into a building should be geared to the type of demand in the trade area where the building is located. That is why the most common use in a retail project is food related- everyone, no matter their economic strata, eats.

That being said, everyone likes nice and clean. It is difficult to convince an investor to put in a nice and clean new project when next door is a dirty salvage yard, generating noise and dust. That is the idea behind urban planning and land use zoning. A bit of the "broken window" idea, too.

When the city approved Lelah's funding comments were made about the hope for a "high end" project. What this means is a good question-is a Subway what they expect? or do they think they will be getting a Neighborhood Services? the former will work, the later not so much. the pop around that site can't support it.

This is going on in Irving with the former Texas Stadium site. A CA developer is talking about redeveloping, the Mayor is saying "Great, this group can bring high end retail". Do you think the folks in old Irving so of 183 want or need  "high end retail"?

messwright
messwright

So you're against empowering women? Don't you understand that a Dallas woman's career goals include shopping in upscale stores and having daily brunch/mimosas. And we must have valet. Duh. How do you expect South Dallas school girls to achieve the dream of having sufficient outfits and accessories to post on their fashion blogs? I guess they will have to keep driving their luxury cars North until Dallas leaders and developers bring them some boutiques. Meanwhile, you will mock any attempt at making all young women look absolutely fabulous! Continue to promote keeping those girls in poverty, but what a shame.

roo_ster
roo_ster

=====

"I want to publicly state," she said, "that I have some concern about comments which say, 'That's too much to pay for land down there.' Rising tides float all boats. Land value follows sales, and as some land is sold for a certain value, it raises the value of properties throughout the area.

"I have some concern about comments about 'down there.' We are building south. And we believe that 'down there' has the same intrinsic value as every other part of Dallas. I would ask my colleagues to be conscious of any language that implies anything different."

=====


Great googly-moogly, Dallas City government is a cargo cult.

ozonelarryb
ozonelarryb

Thank you all. Good comments today. No bile, though I can sense the jaded disgust at plus ça change.....

Especially Myrna, Ignatius would be proud.

dingo
dingo

'the way to make poor areas wealthy is to somehow impart to them a wealthy appearance.'

I am guessing the original idea, however viable or not, was to siphon off some of the Federal dollars pouring into the massive VA complex, flowing by way of employee salaries or from long term care patient retirement benefits. Or am I missing something here?


Neighboring project:


http://alturl.com/m6vez

LeroyJenkem
LeroyJenkem

"Land value follows sales, and as some land is sold for a certain value, it raises the value of properties throughout the area" That part is absolutely correct. That's about the time when the property owner discovers that the city assessed the value at some ridiculous rate, and the new property taxes will eat him alive. Oh, you can contest it, but that implies having the money and the time to get a lawyer to do so every year. Most have no choice but to sell out to one developer greedhead or another, who either puts in some get-rich-quick "live-work" condo/retail mess that falls apart within five years, or who tells everyone that the property is now worth five times what he paid for it, and who will hold his breath until he turns blue if he doesn't get it. Welcome to Dallas economics, and how the only trickle-down most people get is when the MBAs partying at the clubs that just moved in decide that your porch would make a great urinal.

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

This is why I get very, very  scared when I hear someone in government talking about their "vision" for a particular area.


The purpose of a City government is to provide an environment that is conducive to business of all forms by being open, transparent, treating all participants on an equal basis; and, enforcing ordinances and regulations equitably.


With 14-1 we have received all of the disadvantages of ward politics with none of the advantages.


It is my opinion that our City government is corrupt, not because it was intentionally done, but because the system is managed by personalities and not by the legal framework of ordinances and procedure; and, led by a group of trusted and competent individuals who set policy based upon what is best for all citizens of the city.


If the tire shops in North Oak Cliff meet the zoning requirements for their locations and have a valid certificate of occupancy, they will move out when their business does not provide a profit at that location due to either lack of business or rents rise to the point where the business is unprofitable.


There is no such place Lake WoeBeGone where are all of the men are handsome, all of the the women are beautiful and all the children are above average.

holmantx
holmantx topcommenter

Normal people approach the purchase of land from the other end.  You figure out what those people driving up and down the street want (or across the street at the VA Hospital),  Then you draw up an efficient building plan that supplies what they want.  Then you figure out how much you can rent the space for.  Subtract the cost to operate the space.  This is called Net Operating Income.  You cap that (convert it to Value).  People buy properties based upon a multiple of its earnings. It's fairly organized.  It's called a real estate market.

Then you get a bid to build the building.  What's the turnkey cost to place the building into service?  All the way to the issuance of a Certificate of Occupancy by the City.

Subtract that number from the first number (the Value of the Building) and VIOLA!

That is the most you can pay for the land without going upside down (ouch! - I hate that when it happens) .

It is called a Land Residual, or (gasp!) an economic feasibility study.

Kinda like what the City ordered for the Omni until the feasibility boys and girls sent Gonzales an email and told him it wasn't . . . feasible.  The property, once complete and operating, was not going to be worth what it cost to build it.

Of course when yer the City, you just send the pencilnecks an email ordering them to change the name of the report to a "Market Study".

See that way it doesn't have to be feasible.

Then you purge the emails.


mavdog
mavdog topcommenter

@RichGans

you are comparing the proverbial apples and oranges....

oakclifftownie
oakclifftownie

@mavdog News Shops and Boutiques seem to be the selling point when they get/got  to my end of DAVIS @ Westmorland in Oak Cliff..Last time there was a push we were blessed with new lane stripes on Davis and that was it . There are very few empty storefronts .The last thing we need is for  city to revision our area.The OLD Spartan Atlantic that converted Bargain City Bazaar  has about  60 shops or so that are open two days a week and that place is packed Saturday and Sunday..


But I bet  a lot those Business couldn't even afford to turn the key to open the doors if they were stand alone places.


As for franchises like  Subway they might not be high end but it has to generate enough in sales to keep the doors open .



rusknative
rusknative

@messwrightnice looking girls from south dallas can get housekeeping jobs every day in north dallas homes, if they can speak english, have no tats, do not chew gum, curse, or shake their booties.

ozonelarryb
ozonelarryb

Great reference. Thx for the lift on a crappy day.

rusknative
rusknative

@roo_sterremembering the dismissal verbal phrase...."Uh, whattever floats yo boat, man"

rusknative
rusknative

@dingothat is what gets more money into public education....fantasy arguments.

rusknative
rusknative

@ThePosterFormerlyKnownasPaul


There is no such place Lake WoeBeGone where are all of the men are handsome, all of the the women are beautiful and all the children are above average.

You CLEARLY have not been listening to Obama's SPEECHES!

rusknative
rusknative

@ThePosterFormerlyKnownasPaulThis is why I get very, very  scared when I hear someone in government talking about their "vision" for a particular area.

also, "Hope and Change" and "Yes we can" followed by "You didn't create THAT"

WylieH
WylieH

@ThePosterFormerlyKnownasPaul  


[If the tire shops in North Oak Cliff meet the zoning requirements for their locations and have a valid certificate of occupancy, they will move out when their business does not provide a profit at that location due to either lack of business or rents rise to the point where the business is unprofitable.]


Exactly.  Or... a developer who has a better idea for the land that is a higher and better use approaches the existing land owner and pays him enough money to induce him to sell and relocate of his own free will.  That's the way it seems to work in other cities.

mavdog
mavdog topcommenter

@holmantx

that is not how a development pro-forma is designed, the cap rate (the exit) is not used to determine if the development will pencil. cap rates flucuate by type of property, who  the tenant is, term of the lease and the rates of return investors can receive with alternative investments.

casiepierce
casiepierce

@holmantxIf Vonciel Hill read your post, her eyes just crossed, rolled up into the inside of her head and she passed out.

holmantx
holmantx topcommenter

then you hire Sam Merten.

ThePosterFormerlyKnownasPaul
ThePosterFormerlyKnownasPaul topcommenter

@WylieH@ThePosterFormerlyKnownasPaul 

Assuming that the business owner also owns the property.  If the business owner is just a tenant, the new owner can terminate the lease according to its terms (the lease goes with the property) or raise the rents according to the lease terms until the tenant moves out.


I am very scared with the attitude that our City government has that it can come in to an area and unilaterally change the zoning to force out businesses that it deems "unacceptable".  I point to the rezoning on Ross Ave as a prime example.  I don't think that there were very many nonconforming uses.


What is even worse is that I believe that the City staff does an end run around the Development Code or does not even enforce existing zoning requirements.  For example, see the controversy a few years ago of the "restaurants with out drive through service" on Greenville Ave between Belmont and Ross.  Also see the building on Oram, east of Skillman, that has the "planter boxes" out front so that it is less than 36 feet high above ground.

holmantx
holmantx topcommenter

@rusknative @holmantx @mavdog 

Stocks and bonds may rise and fall and gold can lose its luster, but people will always pay through the nose for real estate. - Lex Luther; 1st Superman

rusknative
rusknative

@holmantx@mavdogYou guys are not paying attention to TV commercials...only GOLD or reverse Mortgages coupled with LifeLock have ANY future in our economy...not real estate and houses.

holmantx
holmantx topcommenter

@mavdog @holmantx You don't know what you are talking about and are trying to blow smoke.

Check your ego, and your creds, at the door.

mavdog
mavdog topcommenter

@holmantx

no, clearly it is you who do not understand what you are saying...

holmantx
holmantx topcommenter

@mavdog @holmantx 

Either you do not understand what I am saying or you are intentionally obfuscating.

mavdog
mavdog topcommenter

@holmantx

so now you are referencing the cap rate as a component of value? good, that is what a cap rate is. not development feasibility, not land vaue, but trade value.

the development will be financed first by a construction loan, meant to be short term until the project is finished and leased. the construction lender doesn't look at the cap, they look at the pro-forma/market data to determine if it will cash flow.

in fact until the project is finished it will be pure conjecture to ascribe a cap rate: first, no one knows the terms of the leases (rate, concessions, credit of tenant, how long a lease) as those leases aren't done. those are critical to determining a market cap. second, cap rates fluctuate over time and what is a market cap today can change by 150 basis points either way by the time the project is finished.

I'm speaking from experience....

holmantx
holmantx topcommenter

@mavdog @holmantx 

If you borrow from a bank to finance the proposed project, they will require an appraisal.

For proposed projects, the appraisal must address feasibility.  If there are no sales of similar land in the area (South Dallas), the appraiser will perform a Land Residual as a test of what the land is worth in regard to what the estimate of Market Value is for the proposed project.  

It doesn't matter if the developer's intent is to build and hold.  The Bank wants to know what the project is worth should they eventually have to foreclose then sell it.

mavdog
mavdog topcommenter

@holmantx

holman, many developers do not build to sell. they build and hold for long term income/appreciation.

the cap rate matters when one sells, not when one builds.

holmantx
holmantx topcommenter

@mavdog @holmantx 

You cap the NOI to estimate total (Market) Value, less the cost to construct = most you can pay for the land.

keep it simple or you will just cause people to run screaming from the UP room.


mavdog
mavdog topcommenter

@holmantx

the cap is used to determine if the development will produce an acceptable return on investment, not to determine of the project is economically feasible.

feasibility is based on cash flow after debt service, the NOI. 

the land is an expense item in the development pro-forma, just like the cost to construct. those costs are added to compare with the income the project will produce.

the value of land is determined by the income potential of the development, derived by the density of product that can be placed on the land (zoning and the market tell you this), and the income that development will generate (again a function of the market). The higher the density and the higher the rents, the higher a piece of land is worth.

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