The Dangerous Game of Subsidy

Crossposted at streets.mn and Thoughts on the Urban Environment

Our current system of attracting jobs and growth to our region is fundamentally flawed, unsustainable and damaging our urban environment. Policies at the State, regional and local levels are not creating jobs, but merely juggling them from one municipality to the next; and doing so at great expense to taxpayers [and we’re destroying our urban environments in the process].

Case Study: Mankato, MN [population 40,000]

 Mankato’s HECO Building redevelopment is the best local example of the trivial pursuits of contemporary “economic development” and its effects on the urban environment.

While subsidizes can further public policy and promote efforts of downtown revitalization, they can also shift scarce tax dollars away from necessary public services [e.g. local fire stations]. In particular, Mankato has been good at providing one subsidy that has often gone unnoticed: free, convenient and abundant parking.

Like a lot of mid-sized American towns, Mankato really wants a vibrant downtown. They’ve pulled out all the usual stops: promote mixed-used development, improve street, pedestrian and bike connections and, most notably, reacquaint the town with its once-lost industrial riverside.

The City of Mankato is painstakingly aware of the diminishing returns of auto-dependent commercial development patterns and has taken the proactive measure of creating and implementing a City Center Renaissance Plan. The plan concentrates on broad measures like land use changes (e.g.: promotion of traditional neighborhood design) while not ignoring the more microscopic details such as traffic mitigation, pedestrian connectivity and enhancements to street facades and alleyways.

In creating such a plan, the revitalization of downtown is paramount and the HECO building is a key element. The building’s $2.5 million renovation will attract professional firms to Class A commercial space in the heart of downtown. This is a good thing, but it is coming at an unusually high cost to taxpayers.

The HECO building redevelopment is slated to benefit from the following subsidies [Source]:

- $25,000 City grant
– $408,000 in tax increment financing
– $400,000 low-interest loan

And, the icing on top of the cake:

The $3.2 million tax-payer funded parking garage for the HECO building consists of:
– $825,000 from the State of Minnesota
– $2,375,000 from the City of Mankato

I’m curious to know if anyone stopped to ask the question: Why is the public spending over $4 million to attract $2.5 million in private investment?

[See above: "Economic Development"]

The usual response to such a claim is that the development will “create new jobs.” This however is unlikely. The HECO building will see new tenants – the largest will be I&S Group. The problem is that the subsidy is unlikely to create new jobs beyond the initial construction.

The I&S Group isn’t moving to Mankato and expanding the city’s tax-base – they are already in Mankato and merely moving 1.2 miles down the road. The other new tenant, US Bank, is moving from a much shorter distance: from across the street.

Let me reiterate that: Mankato’s local US Bank branch is moving across the street and leaving their current building vacant. How again does this benefit downtown? US Bank has already removed the logo on the side of their old building [photo]. 

The bulk part of the subsidy is the City built parking garage attached to the newly renovated building. Here’s the financial rundown of the parking garage -

- $3.2 million for the construction of 154 Total Spaces
– $3.2 million / 154 Total Spaces
- $20, 779 per parking space

To get an idea of the sheer expense of this project, the cost $159 per square foot is approximately the equivalent cost per square foot for an office building to be constructed within Washington D.C. ($162) and Denver, Colorado ($152) [Source].

Furthermore, the cost of $20,779 (or $159 sq ft) per parking space doesn’t tell the whole story. One needs to consider that 77 surface parking spaces already existed on the site prior to the construction- and the ramp is simply creating a “net gain” of 77 spaces. When the “net gain” is considered – the numbers look even worse:

- $3.2 million construction for a net gain of 77 spaces
– $3.2 million / 77 added spaces = $41,558 per space

Is $41,558 per additional parking spot created a worthwhile public expenditure? The cost per square foot for the construction of the parking garage is staggering, especially considering how cheap the HECO parcel was sold for by the City of Mankato to the developers in early 2010:

“The parcel sold Monday was appraised based on similar sales in the downtown area. The appraiser looked at four sales of land that ranged from $5.37 per foot to $11.87 per foot. The HECO parcel was set at $8.75 per foot, which was a judgment that compared this parcel’s quality to the others using factors like location, site improvements and size.” [Source]

Let’s not forget the already existing abundance of parking in the immediate area.

This map isn’t perfect. It is only a snap-shot of about 1/2 of downtown parking and it fails to include the abundance of free on-street parking. The blue rectangle is the location of the newly constructed $3.2 million ramp and the red outlines existing off-street parking within walking distance. Click on the map for a larger image.

In the case of Mankato, government subsidies shifted jobs from point A to point B at a great cost to taxpayers while simelentously damaging the urban environment. I wish I could say this was an anomoly. I wish I could say it was the exception. It’s not. It’s the norm.

Perhaps the greatest cost for Mankato has come at the loss of its urban form, architectural beauty and a sense of history. All of the buildings in the photograph below (taken in 1939) have been razed. Today it is a parking lot.

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