Let’s Correct the Record

By now you’ve heard that the new Madison Central Library proposal is “dead.” I’m not interested in speculating on why this played out the way that it did. Let's just say that it is very disappointing to our entire team.

However, there have been some inaccurate impressions in recent media coverage about the price and process dispute between Fiore-Irgens and the City of Madison. So I’d like to set that record straight. Here are the facts:

1. Fiore-Irgens never raised its price on the grey-box library shell. In fact, we reduced it in August 2009 from the original price of $27 million to a then-current price of $23.9 million. We stood by this price through the Common Council deliberations and after.

2. Fiore-Irgens never changed the deal. In December 2009, we prepared a discussion memorandum on “Project Issues and Development Roles/ Responsibilities” in which we recommended an alternative delivery approach to the City that would bring process efficiencies and cost savings to the City to help assure completion within the budget. Here’s how we described our position:

The RFP issued by the City of Madison in September 2008 anticipated that a Library Condo Unit would be finished to “grey box” specifications, then sold to the City. The design and build out of the Library Condo Unit would be the responsibility of the City and be subject to the city’s Public Works Contracting Ordinances. Fiore-Irgens remains ready, willing and able to carry-out this request for turn-key development of “grey-box” building shell. However, given budget constraints, timing concerns and the political sensitivity of this project, Fiore-Irgens recommends that a developer services approach be taken, in which the City undertakes the entire Project as Owner and engages Fiore-Irgens as “development manager” to provide services that will mitigate normal development cost risks.

This recommendation was never explored by City Staff, who instead determined that they wanted to undertake the public works approach without our development team.


3. Fiore-Irgens never demanded $2.7 million for services rendered to-date. We did attempt to accommodate the City by offering to sell the site and project work. However, we were very clear that this price must include some compensation to our team for the many thousands of hours that we spent on bringing the project to this point.  We asked for $900,000 for development services to-date.

Fact Check and Chronology: Fiore-Irgens Efforts on behalf of Library

The issues surrounding the Madison Central Library project are complex, and do not lend themselves to “sound bite” answers. So we have created this resource for those interested in factual background.

Price Commitment by Fiore-Irgens
In September 2008 the City requested proposals to build and sell a “Grey-Box Shell” to the City, which the City would then complete as a public works project.

As the Mayor prepared his capital budget in August, 2009, Fiore-Irgens recommended a minimum Project budget of $38.5 million, including the Grey-Box Shell at a fixed cost of $23.9 million (excluding construction period interest and future parking). This revised pricing represented a $3.1 million reduction from the original cost for the Grey-Box, and was achieved by savings under the current construction environment and across-the-board decreases in professional fees. It also anticipated a $1.6 million reduction in the subsequent City costs to complete the project.

We further advised the City that the cost of the grey box Shell could not be reduced by more than this $3.1 million without impacting the conceptual design of the building. Nonetheless, the Mayor and his Staff made a unilateral decision to establish a $37 million budget for the Project. Fiore-Irgens expressed concern about the adequacy of this budget, but affirmed our willingness to help find a way for the City to accomplish it. Fiore-Irgens’ responsibility was to deliver the shell for $23.9million. And it was the City’s responsibility to complete the project within the proposed $37 million capital budget. Here is the relevant correspondence on pricing for the Grey-Box Shell:
Letter_to_Mayor_08-21-2009.pdf
Letter_to_Mayor_08-24-2009.pdf

Madison’s Common Council approved the Mayor’s capital budget request on November 10, 2009, but amended the budget to provide that “The City will not commence any significant portion of the construction of its portion of the project until it has received assurance that the federal New Markets tax Credits are available.”

Fiore-Irgens met with Mayor and his staff on Nov 17, 2009 to discuss next steps. (Here is the meeting agenda.)  We suggested that a approach to consider may be a "developer services approach" for public works construction that could yield significant process efficiencies and cost savings by integrating the shell and interior work. Although questions were raised about the implications of “public works” on the schedule and development roles, the City Attorney confirmed that the City could choose to directly hire the professional services from the Fiore-Irgens team. We proceeded to explore this alternative approach in good faith.
Fiore-Irgens prepared a fairly comprehensive analysis of Project Issues and Development Roles / Responsibilities. This draft was intended as a collaborative document and was distributed to the Mayor and others on December 29th as background for emerging media inquiries.

On January 11, 2010 the Mayor informed us that the City wished to proceed with a public works approach, but without the participation of Fiore-Irgens. We met with City staff on January 15th and were told that the condo approach approved by the Common Council was now "off the table." Fiore-Irgens formally protested this decision in a letter to the Mayor. (No response received.)

Two weeks later, the City sent a draft Letter of Intent that excluded both Fiore and Irgens from any further development role, and required Findorff and EUA to bid for the right to perform their services. No price was proposed for the existing structure and no provision was reflected for pre-development services already performed by Fiore-Irgens. We immediately sent back suggested changes to the LOI that would allow it to be acceptable to our team.

The Mayor responded to our proposal with a written ultimatum on February 9th demanding i) a $2 million reduction in our price for the Library Shell (to $23 million including construction interest and future parking), or ii) sell the site to the City for public works process that would exclude the Fiore-Irgens team. Otherwise, the City would look at other options including remodeling or obtaining a site by “purchase or exercise of condemnation powers.” In order to evaluate these options, Fiore-Irgens requested a specific proposal for purchase of the site including structure in place and pre-development services already provided by Fiore-Irgens. The Mayor asked for clarification on the development services already provided, and we provided this response.

And here we stand today… Fiore has advised the City that we are disappointed to be unable to continue development under the City’s proposed approach, but we do wish to see this project completed. Therefore we have suggested a "project acquisition price" that includes the site (air rights, improvements in place, and underground parking) and compensation for developer services already provided by Fiore-Irgens.

Best Delivery Method for New Library?

You might be wondering what’s been going on recently with the library project. After gaining City Council approval in November 2009, the Fiore-Irgens development team and City Staff have been diligently reviewing i) the relative benefits of various project delivery approaches for the new Madison Central Library facility, and ii) structuring ownership to maximize the benefits available from the New Markets Tax Credit program. Concurrently, the City has been progressing through the selection process for interior design services.

As you may recall, the RFP issued by the City of Madison in September 2008 anticipated that a Library Condo Unit would be finished to “grey box” specifications by a private developer and then sold to the City. The design and build out of the Library Condo Unit would be the responsibility of the City and be subject to the city’s Public Works Contracting Ordinances. Fiore-Irgens remains ready, willing and able to carry-out the requested turn-key development of the library “grey-box” building shell at the price to which we committed. 

Current overall project budget constraints, timing concerns and the political sensitivity of this project have led Fiore-Irgens to suggest that an alternative project delivery method may be better suited for the library project. This alternative project delivery method is known as a “developer services approach”. This approach allows the project to be managed as a whole where the City undertakes the entire Project as Owner and engages Fiore-Irgens as “development manager.”

We believe a public works project utilizing a developer services approach is the best delivery method in order to achieve the $37 million cost target established by the Mayor and approved by the Common Council. Some of the advantages of this approach include:

• Development management will encompass the entire project (both shell and interior) creating a single point of accountability. Full alignment of interests will eliminate potential cross-fire about where certain costs must be borne.
• Time will be saved because fast-track construction processes that overlap shell and interior construction will be enabled.
• The overall project budget can be better understood and managed by the City because all parts of the project are managed as one.
• Value-engineering options will expand because trade-offs can be made across the entire project scope, i.e. shell savings can be applied to interior improvements and/or interior savings can be applied to shell enhancements.
• Financial (and political) risk is mitigated because total Project costs will be fully understood before the City becomes obligated to acquire the site and start construction expenditures.
• Most efficient utilization of New Market Tax Credit funding opportunity due to consistent ownership throughout project development, design, construction, and operations.
• Total development, construction management and owners representation fees will be reduced. (The entrepreneurial return is shared with City.)

The developer services approach recommendation is based on our team’s interest in creating a structure best suited for the project and the City, creating as much value as possible by extending the buying power of the $37 million project budget, and providing a solution to give the project the best opportunity for success. Fiore has a unique long-term interest in the success of the Central Library development and the team we have assembled reflects our care.

We look forward to continue working with the City to create a world class library within the budget approved by the Mayor and Common Council.

This IS The Right Time!

One of the common reactions to the proposed new Central Library for the Madison Public Library system is:

"I support this project, but think it should be delayed for a few years until the economy recovers."

This would seem to be a reasonable, but to further delay action will be costly.

Why? ... Because we have a rare opportunity as a community to build a new library for a small fraction of its usual cost due to a unique confluence of factors:

1. Historically low interest rates. Just as if you were buying a new house, the City will borrow the capital to fund this construction and repay it over time. (Because Madison is so fiscally conservative, it plans to pay this "mortgage" back in only 10 years.) Interest rates on municipal debt are now lower than they've been since Lyndon Johnson was in the White House.

These rates are not expected to remain this low for long.

2. Federal subsidy is currently available under the New Markets Tax Credit program that is expected to range from $6 - 8 million. The City funding commitment is only $17 million - out of a total budget cost of $37 million.

The New Markets Tax Credit program is currently set to expire after 2010.

3. Construction prices are currently depressed. The estimated cost to build the library is $6 million lower today than it was one year ago. However, material costs are already beginning to move upward.

In short, there has never been - nor may ever be - a better opportunity in our lifetimes to make this much needed investment in the Madison Public Library system.

The Mayor's office has estimated that the cost on the average Madison home will average $17 per year starting in 2011. And when the debt is paid off after 10 years, the City will continue to enjoy new tax revenues from the redevelopment of Block 66 for decades to come thereafter.

This investment is worth it. And we owe it to future generations to act wisely now.

A Conservative Economic Analysis

One of the important factors that weighed in Mayor Cieslewicz's decision to support the new Central Library is the impact analysis performed by Andrew Statz, his Fiscal Efficiency Auditor. He described this analysis in a powerpoint presentation to the Common Council on August 27, 2009.

Everyone acknowledges that significant new tax revenues will flow to the City from redevelopment of the existing library site. Indeed, our team estimated that these new revenues could exceed $100 million over a 50-year horizon, including just the City portion of property taxes and room taxes. However, before putting this project in his 2010 capital budget request, Mayor Cieslewicz wanted to take a look at this from a very cautious and conservative perspective.

Statz did this in his comparison of the costs and benefits of the proposed project with those of the remodeling alternative. His conclusion was that in a worst case scenario the net cost to taxpayers over a 15-year horizon would be no greater for the new library than the remodel. Under expected conditions, the new library will actually be $8 millions less.

What makes his assumptions conservative?

1. A 15-year analysis period was used. This timeframe covers repayment of all City debt and results in four years where the tax revenues exceed the debt service costs. However, tax base created by the Phase II development will generate revenues to the City for decades thereafter.

2. Debt service costs were estimated assuming a 5% interest rate. Current ten year rates for municipal bonds are 3.3% - and federal "recovery zone" subsidies could reduce this rate even further.

3. Property tax rates and assessments are projected to decline every year during the analysis period. In contrast, Fiore-Irgens projections reflected a 2.5% average increase in property taxes.

4. The "status quo" value of Block 66 is escalated by 4% annually to determine the increased property taxes. On the other hand, the value of the fully-improved Block 66 is assumed to increase by only 2%.

We are cautious investors ourselves, and generally approve this approach. After all, if a project still makes sense when the assumptions are stacked against it, you know you have a good one!

News: Mayor Cieslewicz Proposes New Library in 2010 Capital Budget

Mayor Dave Cieslewicz has thrown his support behind construction of a new library. This was a very important move forward for this project. Next step: Common Council approval of the capital budget.

We are also pleased to have received strong backing for the new Madison Central Library from Capitol Neighborhoods, Inc., Downtown Madison, Inc. and the City of Madison "Downtown Coordinating Committee."

Wisconsin State Journal, Sunday August 30, 2009:
Madison Mayor Wants to Move Ahead with $37 Million Library

Briefing Memorandum

At the request of the Madison Common Council, we prepared a brief that addresses many "frequently asked questions." Topics covered include:

• Public Library Role
• Central Library Role / Issues
• New Library Development
• Design Questions
• Economic Benefits
• Timing / Funding Concerns
• Rehab of Existing Building Alternative

If you are interested, you can download a copy here.

Should Madison simply remodel the existing library building?

At a minimum, the existing building requires mechanical and structural repairs in excess of $8 million. These expenditures would be funded exclusively by City of Madison taxpayers, and these maintenance expenditures will not make any improvement to the interior or exterior appearance, nor improve the functionality, of the library.

We’ve seen several proposals over the past decade that promised significant improvements to the existing building. Fiore-Irgens estimates that a comprehensive budget for renovation of the library would cost at least $30 million, and this estimate is consistent with the findings from two prior renovation studies by the Madison Public Library, which both estimated renovation costs at $28 - $30 million.

But when comparing options it is important to compare both costs and benefits. Even with $30 million of improvement, the renovated library would perpetuate the following deficiencies:

o Lack of natural day lighting. The entire rear elevation of the existing library is without windows and 40% of building area is below grade.

o Low ceiling heights. The two public floors of the existing library are 14 ft high from floor to floor, which yields a finished ceiling around 9’. This ceiling height is inadequate for effective utilization of natural daylight, will consume more energy for lighting and will still present a dark, institutional environment. It will also continue a displeasing sense of proportion in the space. Larger floor areas demand higher ceiling heights.

o Compromised Functionality and Less Public Space. The remodeled library would consist of two and a half floors (75,000 SF) above-grade including a new third floor addition. The remaining area (23,000 SF) is very low quality storage/mechanical space located in the basement level. A substantial portion of the collection will remain inaccessible to the public in this area.

o Limited Meeting Space. The remodeled library allows just 4,200 SF of meeting space, which is only a modest increase from the existing facility.

o Lack of Parking. The lack of connected parking at the existing Central Library diminishes its ability to serve as a community-wide destination.

o Limited Visibility and Exposure. The building itself is out of scale with surrounding uses, and the Mifflin Street location provides poor visibility within the community.

Most significantly, a remodel "compromise" would cement the existing under-utilized condition of this site for one or more generations and foreclose the opportunity for the City to realize the “highest and best use” of the entire block. This would be a tragic lost opportunity for Madison taxpayers. Based on the City Assessor’s estimates, building a new Central Library on West Washington Avenue will unlock future City of Madison tax revenues on Block 66 to the tune of $25 million over the twenty year period that follows construction.

Excited to Move Forward

The folks at InBusiness invited us to participate in a web video to tie-in with their feature story about the Central Library project in their June 2009 issue. Requisite Video did a really nice job on the production. I think you can sense how excited we are to undertake this project! ... To see it, just click this image link to the IBTV video page:

Our Funding Plan

We understand that the City of Madison issued its RFP for a new library with a "budget in mind" of $30 million. This cost was to be funded with:

• $16 million of City financing (tax-exempt municipal bonds)
  $ 4 million proceeds from sale of existing library site
  $10 million from private section donations
  

However, both new library proposals are in the neighborhood of $40 million - well over the simple cost estimate. And to further complicate matters, the Madison Public Library Foundation seems to be unsure about its ability to raise more than $10 million in donations in order to contribute to this gap.

We have suggested a plan to the City of Madison that would bridge the funding gap by utilizing federal financing subsidies. Our alternate financing plan utilizes two different subsidies: 1) New Markets Tax Credits and 2) bond financing using Recovery Zone Economic Development Bonds or Build America Bonds.

In simple terms, this financing structure would allow the City to get $25.5 million of building for the same annual cost (or less) that would be incurred for $16 million without these federal programs. The New Markets Tax Credits would be structured to provide $8-10 million of "equity" to the Library - meaning that only $15.5 to $17.5 million would need to be repaid by the City.

Block 66 - the library block - is within a high-priority Qualifying Census Tract for New Markets Tax Credits. To learn more about New Markets Tax Credits, please visit www.cdfifund.gov/what_we_do/programs_id.asp?programID=5.

The Recovery Zone Economic Development Bonds are authorized under the American Reinvestment and Recovery Act of 2009. The Federal government will subsidize 45% of the interest on these bonds. Recovery Zone Bonds may only be issued until December 31, 2010.

What is a Library Worth?

At the last meeting of the Central Library Disposal Surplus Property Criteria Selection Committee, City Comptroller Dean Brasser mentioned that the City of Madison currently subsidizes the operating budget for the Madison Public Library System by $11 million annually. This translates into an annual cost to the city's taxpayers of $50 per capita.

If the City issues 20-year municipal bonds to finance $16 million of new library construction, this budget subsidy is estimated to increase by $1.2 million (or $5 per capita).

However, this modest increase in the library budget need not be borne by the taxpayer. If the investment creates new private development, the taxable property generates new tax revenues that will offset this cost.

Under our proposal, the new hotel, retail and parking facility is expected to generate an average of $2 million per year of property and room taxes (and more than $1.2 million in year one.) This represents a net benefit to the taxpayers.

In contrast, if the existing library is simply repaired for $16 million, no new tax base is created and the remodeled library will represent a new net cost to the taxpayers.

I've read a number of reports about the economic return from public libraries suggesting a return of $4 - $5 for every dollar spent... So libraries may well be one of the most productive investments that the public can make!

Curious for more? Here are some links you may appreciate:

Public Libraries - A Wise Investment - a return on investment study by the Colorado Public Library. I would guess that our community's relationship with the library may be consistent with these interesting survey results.

The Economic Contribution of Wisconsin Public Libraries to the Economy of Wisconsin by Northstar Economics. The title says it all.

Economic Benefits - Block 66 Plan

We've been promoting our response to the Library's RFP as not only a better library facility but a superior land use plan because it takes an integrated approach to the development of Block 66 (bounded by West Washington Avenue, Henry Street, Mifflin Street and Fairchild Street). See Top Five Design Advantages

After construction of a new Central Library at the corner of West Washington and Henry Street, we propose to redevelop the "old" library site along Mifflin Street into a mixed use structure comprised of 250-270 hotel rooms, 400 structured parking stalls, and new sidewalk retail.

This land use puts additional parking where it is needed in the Central Business District, fulfills unmet demand for higher-quality hotel guest rooms in the Downtown, and will help catalyze additional activity at Overture Center, the 100 block of West Mifflin, upper State Street and the Capitol Square.

This new project will also generate economic benefits in the form direct and indirect employment, and significant direct property taxes, sales taxes, and room taxes for the City of Madison. Here are our best estimates:

Tax Revenues
We expect to invest $46 million in the Phase II development and forecast that property taxes will average $1 million annually through 2011.

Sales taxes directly generated by the hotel are estimated to total approximately $650,000 annually by the third, stabilized year of operation.

Room taxes are expected to reach $1,100,000 annually by the third year of operation.


Job Creation
The proposed hotel is projected to generate direct employment for 82 full-time equivalent employees. In addition to the direct employment created by the hotel, we would estimate that an employment multiplier of 2 would be applied to the direct employment to indicate the number of additional “indirect employment” jobs that are created in the economy. That is to say that for the 82 direct jobs, we would estimate that an additional 164 jobs will be created in the community through the activities of vendors and the purchases of goods and services by the permanent employees.

In addition, the construction of the hotel will produce approximately 266 construction jobs, which are considered basic employment. Applying an employment multiplier of 2.4 for construction jobs, approximately 640 additional indirect jobs will be created in the community.

Potential Federal Funding?

On January 15th, we heard from Governor Doyle that he expects Wisconsin will be granted some federal money in the form of a Stimulus Package. We also understand that Mayor Dave Cieslewicz has included the Downtown Public Library on the list of stimulus projects to be considered for the City of Madison.

The Downtown Public Library may well be positioned perfectly for President Obama's Stimulus Package. Here is why, based on four key measurements for Stimulus funding as described by the Governor:

1. Get people back to work quickly. Our proposal for the Library is "shovel ready" and more. The foundations are already in place. We can start work on the new Library within 60 days. Selective demolition could occur as we initiate steel detailing and fabrication. A local workforce of architects, engineers, sub-contractors, fabricators and trades workers could be working promptly, and steel could begin placement within just a few months.

2. Affect many areas of the State. The public library system has a significant and broad economic impact in our region. A new central library not only will strengthen this system, but increased visitor activity at the new facility will stimulate economic activity at surrounding businesses. The second phase also adds value and uses that will compliment existing businesses around the Capitol, on State Street and Mifflin Street, providing better adjacent uses to Overture Center with a hotel complex, and sidewalk shops and restaurants for the Bassett neighborhood.

3. Include small businesses and contractors. This project will be designed and built locally with small to medium sized businesses. The economic impact will hit the street immediately.

4. Long-term value. The value of a new downtown library, relocated to a major Capitol axis street and vacating a site that allows even more private investment in a key downtown location will bring phenomenal long-term value to current and future generations. By any measure, the Fiore-Irgens proposal, designed by Eppstein Uhen Architects and built by J.H. Findorff & Son, will exceed any other alternative that leaves the Library on its present site.

This project should be placed very high on any list prioritizing where best to invest federal, state or local dollars with the purpose of achieving prompt, measureable and long-term value to a community.

Steve Holzhauer