Alamo Drafthouse – In or Out?

Alamo Draft House is famous for its midnight showings of The Rocky Horror Picture Show, among other cult classics. Unfortunately, it appears we are getting our own special version of it as the San Marcos City Council takes its third Time Warp into economic incentives for the now vacant Springtown Mall. There’s a term for what is going on with this whole discussion between Springtown and the City. It is highly technical… but I’m having trouble remembering it. Oh yeah… CLUSTERF***. There is plenty I can talk about with regard to this property and this deal. This blog is still longwinded and I’ve left out my knowledge & opinions of what this property should be and how it should be redeveloped. The following is my understanding and analysis of the situation, parsed together from reports I’ve gotten from folks that are “in the know” on this deal.

The Deal: Basically, the City would provide a $2.5M zero-interest loan to Triple Tap Ventures, conditioned upon them opening and operating an Alamo Drafthouse Theater at Springtown Mall for the duration of the incentives. But the devil is in the details. The draft deal states “the increase above 2009 taxes in the City’s sales tax and ad valorem tax revenue generated from (”Tax Repayment”) from and after the Effective Date will be applied to offset the Loan Amount.”

Allow me to translate: Triple Tap will receive a loan that will not be repaid by their profits or capital reserves—it will be repaid through taxes that the City would have been getting. Triple Tap is left with little financial obligation and no real risk. Plus, these incentives are to an end-user that will hold a lease, not the actual property owner. This is counter to best practices in using economic development incentives for retail users that do not have fee-simple ownership. And apparently these incentives to Triple Tap will allow Lamy-Springtown, LTD to build a beautiful mixed use urban center (that we have not even seen concept drawings of, so I call BS).

So this is a loan, paid back through local taxes and leaving Triple Tap with no financial risk, that will help a property owner already in default (apparently the property owner, Lamy-Springtown LTD has a hot date with the Courthouse steps and a bankruptcy lawyer). Ask yourself this: Would you loan money to anyone that you know is already in default and likely to file bankruptcy? Would you loan money to anyone that says they have a fanciful vision, but doesn’t even have a concept plan/sketch or business plan for how to do it, and the deal doesn’t include any strings to make sure it happens? You would have to be an idiot to sign-up for this, and apparently Lamy and Triple Tap think they have found their idiot(s). If I were Triple Tap though, I’d be worried. At the 2/16/2010 meeting, I watched new Councilman Ryan Thomason vote with Bose and Thomaides to deny incentives for another project (based on voting patterns, Jones would have likely voted against but had to recuse himself). Many predicted he would march blindly to the drum of a certain constituency. Perhaps Thomason really is going to back up his rhetoric about being conservative with economic incentives with action. If so, he is about to prove an awful lot of his naysayers and skeptics wrong.

Strange Circumstances at City Hall: A commenter on the Newstreamz website perhaps said it best, “I am really getting tired of government by ambush from the City of San Marcos.” This time, the City teetered dangerously close to violating the Texas Open Meetings Act. In fact, I would argue they violated the intent of the Act, considering that this was posted as an addendum on a holiday weekend with few people around. The City Secretary’s Office is highly professional–I doubt seriously that this really was an error on their part (perhaps information was not supplied in a timely manner to them).

Ambush has been an ongoing characteristic of economic development incentive proposals involving Springtown Mall, which go back nearly 18 months to the first meetings the city had about the project. This lack of transparency stinks to high heaven and is an absolute disgrace. By my estimate, this is the fourth iteration of an incentive proposal, and the first going directly to an end-user rather than the property owner. That alone would raise flags with me if I was sitting on the dais.

Help! Help! My Hair is on Fire: That 18 months is important. Why? Because the sudden placement of this item on the agenda was justified, in part, on Lamy-Springtown Mall, Ltd facing foreclosure at the beginning of March. My question is, why did this deal suddenly appear in mid-February, when we haven’t heard so much as a peep out of this project since the summer? So what I get from this is that Lamy is an idiot when it comes to investing, and set himself up to end up upside-down on Springtown.

While the City deserves blame for Springtown hemorrhaging anchors, Lamy did an effective job of shooting himself in the foot. Several of the smaller tenants have reported that Lamy chose not to renew their leases, or presented lease terms that were not acceptable under Springtown’s economic realities shortly after JCP departed for StoneCreek. When you don’t have a deal in hand for new anchors or a redevelopment plan, you cannot afford to lose your little tenants. Six months to a year is nothing for a commercial vacancy, assuming you are a smart commercial investor. He grossly overpaid for those two parcels even for the 2006 real estate climate, and there are consequences for that. Let it go to foreclosure. Somebody else will pick it up, but they won’t have near the financial burden and will be able to afford to do quality redevelopment instead of another crappy facelift that becomes obsolete just as the incentives come to an end.

In fact, Triple Tap Ventures & Alamo Drafthouse might stand to benefit from it facing foreclosure and be able to negotiate a sweetheart deal for themselves with the lease (it’s tough to find a negotiating tool that is more effective than knowing the landlord is desperate). Odds are that the non-profit holding the note on the property will renegotiate before this hits the courthouse steps, because they would stand to be a big loser if Lamy files bankruptcy. Bottom line is that Alamo Drafthouse is a natural fit for San Marcos and is desirable. However, the purpose of tax incentives is not to bail out investors that made stupid decisions.

But Wait, There’s More: Triple Tap Ventures and Lamy have suggested that this deal is integral to gaining the financial backing necessary to turn Springtown into a mixed use urban village of commercial, office and residential space. They act like this is some kind of realization they just came to recently, when that simply is not the case. I know this because I provided them with a 40-page report I wrote that assessed the redevelopment potential of Springtown in late 2008. It built a business case for a mixed-use urban center redevelopment comparable to The Triangle in Austin, and it practically provided an instruction manual for how to do it (including discussions of involving the San Marcos Housing Authority as a potential partner to gain connectivity to Bobcat Stadium).

Speaking of Triple Tap Ventures, they aren’t exactly hurting for capital. They are a subsidiary of Restaurants Unlimited, which owns a laundry list of major chain restaurants. Oh, and Restaurants Unlimited is a subsidiary of Sun Capital, one of the largest private investment firms out there. Yes, these guys really NEED an interest-free loan that is repaid by sales and property taxes, rather than conventional repayment. Local government is not equipped to operate as a bank; it should be considered a lender of last resort.

Yet somehow, San Marcos has become the lender of first resort for any retail development recently. This city is already over-reliant on notoriously unstable sales tax revenue, which is a problem that has come home to roost in the form of hiring freezes and sudden belt-tightening. And Triple Tap Ventures is saying that this project won’t happen without this deal. Right. That is why you issued a PRESS RELEASE saying that you purchased the franchise rights to Alamo Draft House in San Marcos and announce your intentions to open a theater here. Sounds to me like they already had a good business case for locating Alamo Draft House here, even without incentives. Of course I’ll call you on your bluff when you’ve already shown me your hand.

What Goes Around Comes Around: And I am not referring to the Justin Timberlake song “Cry me a River.” The council has been extraordinarily stupid when it comes to incentivizing retail. Incentivizing retail is not considered a good economic development strategy to start with. Incentivizing a developer to cannibalize three anchors from an existing development is almost criminally stupid. Ignoring city staff recommendations that the StoneCreek incentives include buying out the non-compete deed restrictions at Springtown was stupid (though I’m not sure those recommendations ever saw the light of day with the Council).

Not immediately working with the Springtown property owner once the planets were aligned to rape the development of all of the anchor tenants was stupid. The StoneCreek incentives charted an unsustainable course for the city. Springtown will, and probably should sit vacant for a long time just to remind everyone of the importance of thinking long-term. Sadly, the actions on StoneCreek virtually guarantee that San Marcos will need to use some incentives to revive Springtown. The key is making sure you get what you want, rather than just settling for whatever comes through the doors of city hall (which is the current trend, for those of you keeping score). That is how you end up with a bland cheese pizza–you get your pizza, but nobody is really satisfied with it. Me? I’d prefer a quality pizza that perhaps takes a bit longer but is something that is satisfying.

Chance Sparks

chance@bobcatfans.com