Category Archives: Economic development

Great Inversion Update: CarMax Expands Downtown

lady_byrd_hatCarMax Inc., the retailer of used (er, make that “pre-owned”) cars, was a national leader in 2005 when it built a LEED-certified headquarters building in the West Creek office park in Goochland County west of Richmond. Now, a decade later, the company is leasing space in the historic Lady Byrd Hat building downtown.

The 26,000-foot facility will house between 80 and 120 employees working in the digital, marketing and information-technology departments. “Team members have the opportunity to work in a unique environment similar to a startup, but backed by the support of a large, established company,” said Shamim Mohammad, CarMax chief information officer. “We are looking for a variety of experience levels to develop best-in-class platforms and advance our website, mobile apps and associate platforms.”

Why downtown? It’s where the young IT workers want to be. The company hopes that exposed brick, hardwood floors and location on the Canal Walk of the Lady Byrd Hat building will be cool enough to attract the techies, spokesperson Catherine Gryp told the Richmond Times-Dispatch.

CarMax is hardly turning its back on its suburban campus. In expansion mode, the company is hiring another 80 positions at its headquarters location as well. But the expansion to downtown a sure sign that the many suburban-based businesses in the Richmond region no longer defer automatically to the suburban option. Downtown Richmond is more competitive than it has been in decades, and the same probably holds true for other traditional downtowns across Virginia.

–JAB 

A Humble Proposal for Addressing Recurrent Flooding

Flooding in Portsmouth. Image credit: Virginia Newsletter

Flooding in Portsmouth. Image credit: Virginia Newsletter

By James A. Bacon

The recurrence of tidal/surge flooding in Hampton Roads has increased from 1.7 days of “nuisance” flooding yearly in 1960 to 7.3 days in 2o14, and with continued land subsidence and sea-level rise, the flooding will become even more common. So say the authors of “Building Resiliency in Response to Sea Level Rise and Recurrent Flooding: Comprehensive Planning in Hampton Roads,” published in the January 2016 issue of the Virginia News Letter.

Of all the region’s localities, according to the paper, the City of Portsmouth has moved the fastest to incorporate adaptive strategies into its comprehensive planning. The low-lying city of about 100,000 citizens is extremely vulnerable, with 38% of households lying within AE Flood Zones and approximately 50 miles of roadway located less than 4.5 feet above mean high water.

Last year the city interviewed nearly 2,000 households to ask about the frequency of flooding, flood-related loss, risk perception and mitigation behavior. Nearly half the residents surveyed reported being unable to get in or our of their neighborhoods in the past year due to flooding; more than a quarter reported being unable to get to work. More than 18% report suffering some form of damage to vehicles.

“There is strong perception among residents that future economic opportunities will be curtailed by changing sea levels; this view is even more strongly held by residents who experience difficulty getting in or out of their neighborhoods due to flood in or out of their neighborhoods due to flood,” the authors write. “About 30 percent of residents agree that flooding specifically has negatively impacted the value of their homes.”

The authors are less clear about what can be done. They allude to three broad strategies for dealing with flooding: retreat, protection and accommodation. Retreat might entail restricting development in low-lying areas. Protection might include sea walls, living shorelines, improvement storm water drains, better street drainage or ditch maintenance. Accommodation might mean accepting inconvenience, disruption and property loss as the “new normal.” But the paper provides little guidance as to when and where these strategies might be appropriate or how they might be paid for.

Bacon’s bottom line: The authors note that households can adapt by installing pumps and drains, relocating HVA systems or buying higher-riding automobiles. But, other than relocating their residences to higher land, there doesn’t seem much else that individual households can do to protect themselves. Some kind of collective action is necessary.

Here’s the problem: In some areas, improvements will be too costly. In others, the real estate is of such low value, it’s not worth saving even at modest cost. But if local governments spend money on one neighborhood, every other neighborhood in the political jurisdiction will want their piece of the pie. And why not? Their residents pay taxes, too.

hot_spots

Flooding hot spots in Portsmouth. Image credit: Virginia Newsletter.

Here’s an idea I throw out for discussion: Create community development authorities that encompass those areas (such as the yellow-red islands shown in map of Portsmouth to the right) that are most prone to flooding. A flood-mitigation plan is developed for each district, with improvements to be paid for with taxes raised from property owners in that district. Then put it to a vote of the residents of the district. Let those closest to the situation weigh the costs (a higher tax) versus the benefits (less property damage, flood-free streets, etc.) and decide for themselves.

The result would be a public-improvement plan more tightly aligned with the local circumstances and less vulnerable to political log-rolling than anything a city-wide effort could pull off and far easier to sell politically.

How Chinese Hustlers Snookered the McAuliffe Administration for $1.4 Million

lindenburg

Photo credit: Roanoke Times

by James A. Bacon

On Nov. 5, 2104, the McAuliffe administration announced that Lindenburg Industry, LLC, a Chinese corporation, would invest $113 million to rehab an old furniture factory in Appomattox County into an industrial-honeycomb manufacturing operation — the first new corporate announcement for the economically depressed Southside county in 15 years. The deal, crowed the press release, “is a direct result of the Governor’s meeting with company officials in Beijing, China during his Asia Marketing Mission last month.”

Governor Terry McAuliffe and local economic development officials posed with Anyuan Zhu and Yunshan “Stella” Li to present a$1.4 million check from the Governor’s Opportunity Fund to seal the deal.

Just one problem. While Lindenburg did purchase the old factory property, it never upgraded the facility, it never hired an employee, it fell behind in taxes and water service fees, and it accumulated unpaid bills of $450,00, reports the Roanoke Times. The state is demanding repayment of the $1.4 million, but Lindenburg officials, having returned to China, are stalling.

Virginia’s economic development apparatus has a strong reputation for professionalism, and its track record with the Governor’s Opportunity Fund has been overwhelmingly positive, but in this particular case, it stumbled badly. In a devastating article, reporter Jeff Sturgeon details how state and local officials failed to conduct the most elementary due diligence.

Among Sturgeon’s astonishing findings:

  • State analysts relied on a company website produced in China featuring misleading information, including the listing of a North Carolina address where the company never was located and production photographs and text lifted from an unaffiliated American company.
  • Text similar to material on the website appeared in a pre-approval request to the state commerce secretary and a briefing for the governor before his meeting in Beijing with a project principal.
  • Officials also relied on a site consultant who vouched for the company but hadn’t asked basic background questions, such as the company’s address in China, until shortly before the deal was closed.
  • Approached by the same players in 2013, North Carolina officials made checks and asked questions that Virginia officials did not.
  • Only after the project appeared to stall did Virginia officials ask for company financial statements

The article backs up these conclusions with excellent reporting. Read it and weep.

As for the administration’s claim that the deal was “a direct result of the Governor’s meeting with company officials in Beijing, China,” Sturgeon provides a fascinating back story. As the deal was nearing completion, McAuliffe went on a trade mission to China, and his operatives tried to set up a meeting with Li at a Virginia-sponsored tourism event in Beijing.

When Li walked into the Beijing reception, the seller of the Appomattox plant still did not have his money, email traffic showed. A short time later, partnership officials who were closely monitoring their phones received an email from China saying that, according to a representative of Development Advisors also attending the event, a deposit of $1 million was “ready” and the rest would be “cleared” in a few days.

To credit McAuliffe back in 2014 with sealing the deal was ludicrous. Ultimately, Lindenburg did cough up $2 million in cash to take possession of the Appomattox furniture plant, and an unidentified Chinese bank did issue a $1 million letter of credit on Lindenburg’s behalf to guarantee an incentives payment expected from the Virginia Tobacco Commission. Those developments gave the Virginia Economic Development Partnership (VEDP) “comfort to move forward.”

Secretary of Commerce Maurice Jones told the Roanoke Times that the administration has learned from the fiasco. He has ordered the VEDP to conduct more thorough background checks, relying less upon website content and more upon audited financial statements.

Bacon’s bottom line: In terms of monumental screw-ups, the Appomattox industrial-honeycomb deal is small potatoes compared to the McDonnell administration’s $250 million U.S. 460 fiasco. But the incompetence is mind-boggling. Indeed, the incident raises questions of how sloppy the work has been on other economic-development deals, and makes one wonder if Lindenburg is a fluke or just one of many projects that were hastily pushed through. Continue reading

Free Airbnb!

Nancy has lived in her house in Richmond's Fan district for 25 years. She rents out an upstairs bedroom and bath for $89 a night.

An upstairs bedroom and bath in this house in the Fan neighborhood of Richmond rents out for $89 a night.

by James A. Bacon

Let’s say you’re a widow trying to make ends meet. You convert your basement to an apartment and rent it out to out-of-town visitors through Airbnb. Or, let’s say you’re a young couple. You’ve bought your dream house, but you don’t have any children yet, so you rent out a room for short-term stays through FlipKey. Should that be illegal? Well, it is in the City of Richmond.

Why? Because, very simply, hotels don’t like the competition. And hotels, unlike Airbnb participants, have organized in a highly effective lobby to stack the law in their favor. It’s emblematic of how organized special interests nationally have harnessed the power of government to buttress their privileged positions in the marketplace at the expense of the little guy.

Fortunately, the City of Richmond has not enforced the law as aggressively as it could. Airbnb rentals surged during the recent UCI Road World Championships, with several hundred rentals reported, and Airbnb reports 300+ rentals available in Richmond today. Still, the ordinance undoubtedly keeps law-abiding homeowners from participating, and even sporadic city efforts to clamp down on the rentals discourages those who don’t mind operating in the gray market.

Del. Chris Peace, R-Mechanicsville, would dispel uncertainty with proposed legislation, the Limited Residential Lodging Act, which allows Virginians to rent out their homes or portions of their homes for periods of less than 30 consecutive days, or to do so through a hosting platform. To ensure that localities receive any taxes that are due, the bill makes the hosting platform responsible for collecting the taxes and remitting them. Ensuring the payment of taxes would eliminate an unfair competitive advantage that homeowners would have over hoteliers.

Peace told Style Magazine that Richmond is primed to benefit from Airbnb. “In Richmond we are establishing ourselves as a destination for outdoor recreation and a restaurant scene. I think [by] allowing Airbnb, FlipKey and others … we can tap into a whole new generation and offer accommodations to even the business traveler, that otherwise might not be available today.”

Peace’s bill also stipulates hours when guests may receive visitors, writes Style, and includes clauses to honor local noise ordinances and  minimize impact on the surrounding community. Hosts who rent 90 days or more are required to get a business license. Still,  the restaurant lobby says the bill doesn’t do enough to level the playing field. Hosts should meet a stricter threshhold to acquire a license. Says Eric Terry, president of the Virginia Restaurant Lodging and Travel Association: “We just want them pay the right taxes and adhere to the same standards as traditional hotels.”

Bacon’s bottom line: In two of the best vacations the Bacon family has ever taken, we rented small apartments in Barcelona and London. The apartment-rental option adds significantly to the experience of visiting a city, and anyone wanting to promote tourism in Richmond and Virginia should want to make it available to out-of-town visitors. Moreover, there is a moral case for the policy: Citizens should be allowed to supplement their incomes by renting out all or part of their houses. The right to make money from lodging shouldn’t be limited to big corporations.

If Uber and Lyft could hash out their differences with the taxicab industry, surely Airbnb and Flipkey can reach an accommodation with the hotel industry. Peace’s bill is a good place to start. I hope the lodging lobby will approach the legislation in a constructive manner, working to correct legitimate abuses — renting out to loud, drunken partiers in a quiet residential neighborhoods comes to mind — rather than kill it outright.

What Virginia Millennials Are Looking For

indicators

Source: Wason Center for Public Policy. Click for legible image.

by James A. Bacon

Three out of four Virginia Millennials (belonging to the 18- to 36-year-old age cohort) are largely satisfied with the quality of life in their communities. But local quality-of-life indicators often fall short of what Millennials are looking for, and many are open to moving to other parts  of Virginia or even to other states. So finds a new survey of 2,000 young adults in “Virginia Millennials Come of Age” by the Wason Center for Public Policy at Christopher Newport University.

The survey covered a wide range of topics, including political involvement, civic engagement, personal financial outlook and news sources. But of particular interest to this blog are the questions relating to quality of life. Given that creative and educated young adults contribute disproportionately to a region’s innovation and vibrancy, community leaders need to understand the factors that attract and drive them away.

Judging by the metrics selected, Millennials in Northern Virginia are most satisfied with the quality of life in their communities (despite the traffic!), followed by Hampton Roads. They are less satisfied in the Richmond region, and least satisfied in South/Southwest Virginia.

The metrics include: access to public transportation, walkability, proximity to work and/or school, proximity to parks and shopping, a mix of housing, good public schools, safe neighborhoods, proximity to family, a diverse population, and having enough people of their own age. (Those are all reasonable metrics, but I would argue that the list is incomplete and, therefore, gives an incomplete picture. How about the cost of living? Or the quality of the food scene? Or proximity to arts and culture? Or opportunities to engage in the community — a factor rated highly by Millennials, according to the survey?)

The survey asked respondents to evaluate how important these quality-of-life indicators are when thinking about moving somewhere new, and how well each one describes their present community. The "gap" represents the difference between the two.

The survey asked respondents to evaluate how important these quality-of-life indicators are when thinking about moving somewhere new, and how well each one describes their present community. The “gap” represents the difference between the two. (Click for larger image.)

Wason didn’t analyze the data this way, but I find it interesting that proximity to amenities — work, schools, shopping, entertainment, parks and recreation — all ranked in the top half of the list. The desire for compact communities is reinforced by the identification of “walkable areas” as a priority. It stands to reason that neighborhoods in which amenities are “close” are also more walkable.

Virginia policy makers should pay close attention to this finding as they think about transportation and land use priorities.

The desire for proximity and walkability does not translate into a wholesale endorsement of the Smart Growth agenda, however. The desire for a “range of transportation options” — which presumably includes mass transit — was second lowest on the list. The perceived gap between the ideal and reality was negligible.

Likewise, the desire for a “mix of types and values of housing” was only middling. However, I’m not sure that most respondents had a clear idea of what the question meant. Did they think it referred to communities in which housing was integrated with offices, retail and other amenities — the Smart Growth desiderata? Or were respondents focusing on the importance of “affordable” housing? Two very different things A follow-up survey might delve deeper.

Also interesting is the fact that a “diversity of people in the area” ranked lowest on the list. That may not be a topic that preoccupies the average Millennial as much as it does the academic community.

The old-fashioned values of safe neighborhoods and good public schools also rank high. (It would be interesting to see how Millennials without children compared to Millennials with children in evaluating the importance of public schools. I would be willing to wager that parents consider school quality a lot more than singles do.)

All things considered, the survey results suggest that Virginia lawmakers and civic leaders have cause for concern if they want the state to remain an attractive location for young people. Virginia Millennials are highly mobile, with 65% saying they are thinking about moving within the next five years. Of those, 38% say they would consider moving to somewhere else in Virginia, and 27% somewhere outside of Virginia. Within Virginia, Northern Virginia is by far the most popular destination. Regions in the rest of the state have their work cut out for them.

A Moral Choice: Economic Development or Lower Medical Charges?

cfphby James A. Bacon

Building on its plans to establish a Center for Personalized Health, Inova Health System is forging a partnership with George Mason University that will allow physicians, researchers and clinicians to work together on personalized medicine research, the two institutions announced yesterday. (See the Washington Business Journal article here.)

Inova will contribute $2.5 million in seed funding to the partnership and work with GMU to raise more money over the next few years. Much of the activity will take place in the former Exxon Mobil campus in Merrifield that Inova had previously purchased for $180 million. Inova’s plans also include a $250 million cancer institute, to be funded in part by a large donation by real estate mogul Dwight Schar. The larger vision is to build a health “ecosystem” devoted to the research, education and treatment of complex disease therapies tailored to an individual’s genetic make-up.

Meanwhile, GMU has unveiled a $40 million Advanced Biomedical Research building, rebranded its Prince William County location as its Science and Technology Campus, and started construction on a $73 million health sciences building.

These developments represent a welcome diversification of the Northern Virginia economy, which has been overly dependent upon defense, intelligence and homeland security spending by the federal government. Governor Terry McAuliffe understandably praised the latest announcement as a step in developing the “new economy” in Virginia. With characteristic enthusiasm, he said the new personalized-medicine campus could become a world leader. ” I love it because this agreement here is going to take us to the next level. … I want this facility to be the greatest in the globe.”

But the investment spree raises moral questions. For the most part, Inova Health System’s funding comes from its hospital operations. The not-for-profit Inova, which exercises near monopoly dominance in the Northern Virginia health care market, generated operating income of $218 million in 2014 on $2.7 billion in operating revenue. That’s a profit margin of about 8%, more than twice the profitability that non-profits normally need to maintain healthy operations. That translates into about $109 million in what one could classify as excess profit.

Unlike a for-profit company, Inova is not obligated to maximize profits. To the contrary, insofar as the company is exempt from taxes and has a community mission, one could argue that it is morally obligated to (a) reduce charges to patients afflicted by ever-escalating medical bills or (b) provide more care to low-income patients not covered by Medicaid.

To be sure, Inova does provide a significant volume of charity care. Its flagship hospital, Inova Fairfax Hospital, provided $151 million in 2014, according to Virginia Health Information. But the company’s high level of profitability suggests that it could do more.

Instead, Inova has chosen to plow its excess profit into economic development. I have no doubt that the personalized medicine initiative will benefit the Northern Virginia community in the long run by creating a new economic pillar in the region. The funds to do that are not likely to come from any other source. But it’s important to understand the trade-offs that Inova’s board is making here. It is extracting wealth from the community to bulk up the profits that grow the Inova empire. The people paying higher medical bills are not necessarily those who will benefit from the investment in the Center for Personalized Health.

Would I make the same decision if I served on the Inova board? Perhaps I would — I don’t know. But I’d like to hear all points of view presented. It’s a decision in which the public should have a voice.

When’s the Last Time a Virginia Governor Proposed a Business Tax Cut?

mcauliffeGovernor Terry McAuliffe announced yesterday a package of tax cut and credit proposals to improve Virginia’s business climate and stimulate economic growth.

A proposed reduction in the corporate income tax rate from 6% to 5.75% would generate nearly $64 million in tax relief for Virginia businesses over two years, while other proposals would create incentives for research and development and early-stage financing, including:

  •  Creation of a new R&D Tax Credit with a $15 million cap to benefit companies spending more than $5 million annual in research spending.
  • Increasing the statewide cap for an existing R&D Tax Credit by $1 million to $7 million.
  • Increasing the cap on Virginia’s Angel Investor Tax Credit by $4 million to $9 million.

The proposals come at a time when Virginia’s ranking in national business climate surveys has fallen steadily from a once-lofty perch. In a press release, McAuliffe specifically cited competitive pressure from North Carolina, a perennial rival in the competition for corporate investment, which has reduced its corporate tax rate from 6.9% to 5% in the past two years. The rate is scheduled to drop to 4% next year.

Bacon’s bottom line: While these tax cuts may be regarded as incremental and “small ball” in scale, they are cuts. Virginia has seen little but tax hikes over the past decade. Add up these initiatives, and they amount to $84 million. When’s the last time Virginia cut business taxes by $84 million? I can’t even remember. Good for McAuliffe.

One more point: The governor, who loves to wheel and deal, could have proposed an increase to the Governor’s Opportunity Fund, used to sweeten corporate investment deals, but he didn’t. As his press release notes, “The broad-based tax proposal will provide significant benefits for all corporations rather than selecting winners and losers.” Once again, good for him.

Update: Michael Cassidy with the Commonwealth Institute reminds me that there have been several business tax cuts/credits over the past 10 years: elimination of the estate tax ($140 million annually), cutting estate tax for multi-state manufacturing companies ($59 million annually), sales tax exemption for data centers ($7 million annually), and film tax credit expansion ($6.5 million annually).

— JAB