At the last Village Board meeting, the main topic discussed was the proposal by the Board to enact eminent domain proceedings on the former Metro Enviro site down next to the rail yard (see: “Not So Imminent Eminent Domain in Croton”). The opposing attorneys and Croton resident Mr. Kauderer had some very valid points financially, legally, and procedurally.
Without getting into the nuances of the latter two I figured I would follow up on Mr. Kauderer’s analysis of what it could end up costing me and you (a.k.a. - THE TAXPAYERS of this village) and the potential future ramifications of those actions; should the board somehow decide this is the best alternative.
By looking at this transaction strictly from a credit analysis point of view it is very difficult at best to see how it could fly. To obtain financing to execute it, predominantly through debt, may not be possible. Here is why:
To begin, I go back to the Elliott Administration when Metro Enviro was paying the village an annual usage fee of some $600,000. When I then think about Mr. Kauderer saying he estimated their annual profit from the site to be $3MM-$4MM he is on the right track (no pun intended). I frankly think the profits are much higher for this business for several reasons (uniqueness and location are the primary ones) but we’ll use Mr. Kauderer’s number for our analysis here. If we used my numbers the amounts are even more dizzying for a village of our size.
Let’s assume the midpoint of $3.5MM for this exercise. We’ll use a cap rate of 7%, which in real estate terms is probably more than a fair rate of return. It is also about 250 basis points above Treasury Bonds; so it logically seems fair. Using these parameters and plugging them into a straight income valuation equation you get a property value of $50,000,000.00 on the nose. At lower cap rates, you start to get an exponentially higher valuation reflecting the steadiness and low risk of this income stream. In other words, the more stable the cash flow the higher its value.
Our Village’s budget is only about $13.2 Million. Of this amount, I believe that about two-thirds is supported by residential property taxes which is about $8.7 Million. This info is all found in a letter dated March 20, 2005 from Mr. Richard Herbek to the Village Board outlining the 2005-2006 fiscal budget for the village. The mil rate in our village is .0195177, which means that for every $1000 you have in ASSESSED property value you pay $195.177 in taxes.
A loan officer would be hard pressed to not only approve this deal but to even take it to an investment committee. To give a loan out of $50MM on an equity base or income stream (in this case our taxes) of only $8.7MM is simply not feasible. That amounts to leverage of more than 5.75 times. A staggering number indeed even for the riskiest of Wall Street hedge funds. Most hedge funds run leverage of no more than 1-2 times their equity because of risk management purposes.
I fear that if the Village Board were to go this route they would need to prove annuity type income (in other words our annual taxes) of at least $35MM. To get to that number, this generically means that either our mil rate would need to be increased by more than 4 times or our assessed property values would need to be increased by a similar amount. In other words if you now live in a home that is assessed for say $150,000 you are paying about $3,000 in property taxes. Under the new scenario, you could expect taxes of about $12,000 per year. When I think of our neighbors living in bigger homes and/or on bigger lots the numbers are even scarier.
If such a loan were granted to the village, the annual interest cost alone on this debt could prove to be quite onerous on the village given the fact that we are still in the early years of the fire house improvement and school enlargement bond acts. When you consider these three things together our long term liabilities could approach $100 MILLION. The debt rating of our village would be severely impaired as a result of taking on this additional debt burden.
Of course the quantitative side to this story also has a qualitative side which Mr. Kauderer eloquently laid out when he addressed the Board: laid off municipal workers and policemen, lower standard of basic municipal services, significantly lower property values, and negative stigma placed on the village as a result.
In this era where many in our country, and this town, have tapped out significant portions of their home’s equity to either add on to their homes or pay down revolving debt; many people are already severely stretched in the wallet. This new tax burden would most definitely cripple many here in Croton-on-Hudson and force them to sell at significantly lower prices than their homes are presently mortgaged for. And in this cycle of rising interest rates those with adjustable rate mortgages or home equity loans would be bankrupted, period.
Is all of this financial and emotional turmoil really worth it? We need to ask ourselves that question and let our Village Board know how we feel FOR REAL. This is an action not to be taken lightly. It is not like they are buying a new fire engine or something. Once they take this land it will produce no income for the village if used either as a DPW site or community center or recreation center. It has value now BECAUSE of the type of business that operates there.
From my capitalistic point of view, I say it is far better to go to the table with these guys hammer out a deal that regulates the dickens out of them and brings in $1MM per year in fees to the village. Money makes everyone happy.