At this point, most reasonable people would agree that the purchase of Peary Court doesn’t make a whole lot of sense. What we’re being told is that the City of Key West plans to buy the property for $55 million in order to preserve “workforce housing”. That plan raises a lot of questions.
- The property was purchased for $35 million two years ago by the current owner, Peary Court Holdings. The appraised value is $55 million. So while the property may be “worth” $55 million to somebody, is it worth it to the city for it’s intended purpose?
- Certain folks in Key West are so excited about this purchase that they formed a PAC called Housing First. It’s oddly specific. Obviously supporting affordable housing makes sense, but this PAC is hyper-focused on the purchase of Peary Court.
- The purchase will create no new affordable/work-force housing. The city actually plans to keep the rents about where they are and, according to their pro forma, they will increase them substantially over time. They have to in order to make the payments.
- Only one bank responded to Key West’s Request for Proposal (RFP) for financing the purchase. Key West wants to cover the payments with rental income only. The bank wanted the taxpayers to guarantee the loan. The bank is getting some flak for that, but the bank is a business. If they don’t make money, they cease to exist. The pro forma doesn’t provide much comfort that the city would actually be able to make the payments on rent alone. The bank’s position is definitely understandable.
- Peary Court is not price-competitive when compared to similar apartment housing in the area. A discussion about this can be found here. There is further detail in the appraisal.
Basically if the city buys Peary Court, the current owner would pocket $20 million from the taxpayers. The rents would remain about where they are in the short term, and increase over time to cover the debt service. So there’s zero benefit in terms of creating additional affordable/workforce housing units.
At best this purchase might preserve a few units, and even that benefit is speculative. Who knows? We might see a real estate market slump. We might see a downturn in the economy that affects the tourism industry. This purchase commits the taxpayers of Key West to long-term payments regardless of changes in demand for this type of housing. It’s unclear what exactly would happen if the city were unable to meet its rental income targets for whatever reason.
According to Key West’s pro forma, about $46 million of the purchase would be financed with a bank loan. The debt service would be covered by rent. What about the other $10 million or so?
That would come from the Tourist Impact Tax, I talked a little about that here in terms of Key Largo’s contribution. We always hear that the Keys is an Area of Critical State Concern (ACSC), but it is actually two. Key West is one ACSC, and the rest of the Keys are another. In any case, ACSC are allowed to levy the Tourist Impact Tax (TIMP). As of now, Monroe County is the only one levying the tax. (They never met a tax they didn’t like.)
Here are the authorized uses from the 2015 Local Government Financial Information Handbook, page 260.
The proceeds are distributed for the following uses.
1. Fifty percent is transferred to the land authority to be used in accordance with s. 380.0666, F.S., in the area of critical state concern for which the revenue is generated. No more than 5 percent may be used for administration and other costs related to the exercise of such powers.
2. Fifty percent is distributed to the county’s governing body where the revenue was generated. Such proceeds are used to offset the loss of ad valorem taxes due to property acquisitions.
Very recently, there was a change made to the law to allow the money to be used for affordable housing. Here is that language.
General Law Amendments:
Chapter 2015-30, L.O.F., (CS/CS/SB 1216) amends ss. 125.0108 and 380.0666, F.S., to allow the land authority to contribute 50 percent of the tax proceeds to its most populous city or the housing authority of such municipality at the request of the municipality’s governing body for the purpose of funding the construction, redevelopment, or preservation of affordable housing in the area of critical state concern within the municipality. These changes became effective on May 15, 2015.
I don’t necessarily disagree with this change. As it was before, Key West was contributing to the tax but really wasn’t able to benefit from it. There’s little conservation land to purchase in Key West, so why not use the money for affordable housing? But less than a year after this change was made, Key West officials are chomping at the bit to blow all $10 million of the TIMP on Peary Court plus another $46 million besides. Weird. It’s almost as if the change was made specifically to enable the purchase.
If you look at the Land Authority’s page on the county’s website, you will find an adopted budget for FY 2016. You’ll see a line item for Fund Balance Forward – TIMP Key West ACSC in the amount of $10,409,380. That’s where that additional $10 million is coming from.
There’s another line item above that: Revenues – TIMP Key West ACSC in the amount of $1,805,000. That’s what the county expects to collect this year. The prior year, it was about $1.5 million. In other words it took a while to accumulate $10 million and the City of Key West intends to poof it away with the swish of a pen.
It’s hard to see how 157 units is really going to make a dent in the affordable housing issue, especially if that 157 units takes every penny you’ve got and a lot more besides.