Park and Recreation Department Assets Are Valuable to Potential Partners

January 21, 2021, Department, by John L. Crompton, Ph.D.

2021 February Finance for the Field Park and Recreation Department Assets Valuable to Partners 410

For an enhanced digital experience, read this story in the ezine.

Nearly all park and recreation departments have a list of desired capital projects that far exceed their available capital resources. The only way some of them will ever come to fruition is if outside capital can be attracted. Private capital can be made available relatively quickly once it is clear there is a reasonable probability there will be a return on the investment (ROI). So, the challenge for a department becomes: What can we offer to make this project a viable opportunity to attract outside investment?

Park and recreation agencies have four major assets that are potentially powerful incentives that can be used as a foundation upon which to build partnerships and attract investment from businesses: (1) a substantial land bank, (2) the ability to access low-cost capital and to raise funds from the tax base, (3) the capacity to convey tax incentives, and (4) control of zoning and permit applications.

Successful synergy from collaboration requires fusing the complementary resources of the partners in a project to the mutual advantage of all parties involved. Most of these department resources are “in-kind.” This has the important political advantage of being less controversial than directly committing tax dollars toward a facility.

Land Bank

From the perspective of a business, land is a prerequisite for building projects, but it is an unproductive cost. It is not depreciable; it adds to property taxes and it yields no revenue flow. If its cost can be reduced or removed, then it may make an otherwise infeasible project viable.

It is common for a substantial portion of a community’s open space to be under the jurisdiction of a park department. The agency could offer some parkland or use of an existing facility to a business under a nominal lease arrangement (e.g., $1 a year) to encourage the development of an amenity that the department lacks the resources to develop. A lease likely will be for 15 to 20 years to allow a partner sufficient time to obtain a reasonable ROI.

In my community, this was the incentive needed to persuade a private investor to build an ice rink. Most ice rinks lose money — at best, they are marginally profitable. Certainly, they are a high-risk business proposition. The city wanted to attract an ice rink to expand its recreation offerings to residents, but the recreation department had no expertise with ice rink facilities. A partnership with a company with expertise in this area seemed to be the best way forward.

An experienced operator was approached. The city offered a 15-year lease with the option of a five-year extension on a prime four-acre site, agreed to waive the cost of all utility connections and contribute to the landscaping. The removal of both the capital cost of land and the annual property taxes since the land was owned by the city led to an acceptable ROI. Our community members now have an attractive ice rink, and the city does not have the challenges and costs of operating it.

Low-Cost Capital

Public jurisdictions can borrow money at a lower interest rate than a commercial organization because its bonds are tax exempt. In the past, the most common way to facilitate commercial access to public-sector capital was for the two parties to sign an agreement under which a public body built a facility with its capital to the business’ specifications and leased it to the operator at a price that enabled the annual bond repayments to be met.

This type of arrangement is no longer legal. However, with the ice rink example, the city, as one of its contributions to make the project viable, agreed to assist the project by using its tax-exempt money to develop associated infrastructure for the project relating to roads, sewers, water and utilities, and landscaping, and to build its recovery into the lease agreement.

Tax Abatements

Public jurisdictions have the authority to abate a proportion of or all property and other local and/or state tax payments for a given number of years. A reduction in this operating expense in the early years, in which a venture is building a clientele base, can be a powerful inducement for businesses to engage in partnerships.

Like most cities, my city has a standard scale for negotiating tax relief, depending on the magnitude of investment by the partner and the number of jobs the venture provides. In most states, there are limits on the maximum length of time a tax abatement can be granted. Most commonly, the limit is 10 years.

Although the use of tax abatements is widespread, they are, sometimes, controversial because they may discriminate unfairly against established businesses. Consider the following example:

A new $3 million health and fitness club is granted a tax abatement for 10 years, meaning it does not have to pay the annual property taxes of $50,000. Because similar clubs in the city do pay property taxes, the new facility is able to offer its services at a lower price than the long-established clubs, which threatens the survival of some of them.

Control Over Permit and Zoning Processes

The development of a recreation project by a private company is subject to myriad regulations and requirements that are administered by multiple departments within a city and by government agencies outside the city. Invariably, negotiating these is a challenging and time-consuming chore of the development process.

The adage “time is money” is highly relevant in development projects. In a recent venture that involved a marina on a reservoir and an associated restaurant, securing permits from state and federal agencies took a year longer than anticipated. As a result, the operator had to pay interest on his financing for an entire year with no revenue accruing, and the viability of the project was in doubt. When a business partners with a government agency, the city often is able to expedite permit applications more quickly than a private firm operating outside the structure of government.

John L. Crompton, Ph.D., is a University Distinguished Professor, Regents Professor and Presidential Professor for Teaching Excellence in the Department of Recreation, Park and Tourism Sciences at Texas A&M University and an elected Councilmember for the City of College Station.