Inspired by Memphis

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We've had the good fortune to be able to do some work for the City of Memphis, TN, helping them to chart a path to become a strong town. We just finished a report for them and, while I'm not able to release the entire document yet, I'm going to share an excerpt today that touches on some univeral themes that will interest our readers. I have a secondary purpose here too; I'm trying to cover a lot of ground and speak to a wide audience. Let me know where you think this hits home and where it misses the mark for you.

When the entire report is completed, I'll make sure and share it here on this site. 

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The Traditional Pattern of Development 

The pre-World War II pattern of development – which I will refer to as the “traditional” pattern – differs from the suburban pattern not just in its form, but most strikingly in its financing. The traditional pattern was generally financed privately and at small increments while suburban expansion relies on public financing and large projects . 

The City of Memphis has tried to recapture some of this traditional pattern with investments in a trolley line. This approach not been as successful as hoped because it applies a modern approach to inducing growth to an area bound to an old model. In the modern approach, we build the trolley line at tremendous cost and expect it to create new growth and investment. The traditional approach would have us first focus on getting the growth and investments in place that can support a trolley line, at which point its construction and operation will be logical, not artificial .

To get growth and investments in place, the approach of the city needs to be more incremental, fine grained and experimental. Instead of one multi-million dollar investment (a trolley line, a pyramid-shaped stadium, re-purposing a pyramid-shaped stadium, redeveloping the fairgrounds, etc…) that is supposed to transform an area, the city needs to make many more, small investments. These small experiments need to happen at the neighborhood level. They need to be focused on incrementally improving that space. These are opportunities to learn from successes and failures, with the best approaches spreading from neighborhood to neighborhood, informing the next round of improvements.

It is understandable that cities embraced horizontal expansion following World War II. After the Great Depression, war and the inflationary period that followed, suburban expansion created immediate growth and opportunity. Continuing this pattern in the late 1970’s and early 1980’s  even when it required a shift from investing present dollars to borrowing from the future should have created more questions, but it is understandable how that transition was made. This was an approach that was subsidized and encouraged by the federal and state governments, by Wall Street and the investment class and by residents seeking what they saw as a better life. 

None of this changes the fact that it is an experiment that has failed. Memphis needs to reach an understanding that its post World War II horizontal expansion has created a long term solvency problem. Even if it were desirable, continuing in this approach is simply not possible. The notion that somehow more “mega-projects” are needed to help Memphis “catch up” is not grounded in an understanding of the city’s economics. To the extent that Memphis has actually “fallen behind” in its plans for horizontal expansion, it is simply fewer insolvent areas that need to be addressed in the coming decades.

SHORT TERM VERSUS LONG TERM PAYOFF

While local government is called on to do many things, at the end of the day, the City of Memphis is essentially a corporation with assets, liabilities and a roughly $700 million annual operating budget. The mayor serves as the CEO while the city council functions as the board of directors. Looking at the city through this prism reveals a balance sheet that is staggeringly out of proportion, particularly when it comes to physical assets.

Investments in roads, streets, sidewalks, sewer systems, water systems, transit and other municipal infrastructure is much like a company investing in equipment. We don’t make these investments just to create jobs (paying someone to dig a ditch and then paying them to fill it back in is beyond the capacity of local government) but to generate sustained growth. When investments are made, there is an expectation that there will be a return on that investment. While governments are not expected to make a profit, in order for infrastructure to be sustained, enough money needs to be returned to the city to offset the long term costs.

That is not happening in Memphis, largely because the city has focused on projects and initiatives for their immediate, short-term benefits and has not adequately analyzed their long term liabilities.

Consider two businesses, Company A and Company B. Company A makes $1 million per year for five years but then, in year six, loses $10 million. Company B makes half a million dollars a year for all six years. Graphically, this would look like the following.

THIS GRAPH REPRESENTS TWO APPROACHES TO GROWTH AND IS ESSENTIALLY A VERSION OF “SLOW AND STEADY WINS THE RACE”. MAXIMIZING EFFICIENCY AND GROWTH IS IMPORTANT, BUT IT IS A SECONDARY CONCERN TO BEING FINANCIALLY SOUND OVER THE LONG RUN. THE POST WORLD WAR II DEVELOPMENT APPROACH EMPHASIZES EFFICIENCY AND GROWTH WHILE THE TRADITIONAL DEVELOPMENT PATTERN – THE PATTERN OF THE CORE NEIGHBORHOODS OF MEMPHIS – IS BUILT USING A MORE CONSERVATIVE, RESILIENT APPROACH. WITH GOVERNMENT, BECAUSE THERE IS NO BANKRUPTCY OR OTHER NATURAL RESTRUCTURING PROCESS, IT IS CRITICALLY IMPORTANT THAT WE COMMIT TO A RESILIENT APPROACH.

Based on just these facts, a third party examining these two companies after five years would say that Company A is obviously the more successful enterprise. It has greater profits, has shown a higher return and has generated more cash. What doesn’t become obvious until the sixth year, when Company A “blows up”, is that the gains they realized came with long term negative consequences. Now the slow and steady growth of Company B is not looked at as being the underachiever, but the wise and prudent approach.

Any city or business can look good in the short term by robbing from their future prosperity to make the present appear more prosperous. It is much more difficult to create something that can generate sustained prosperity over a longer period of time. And while a business has the capacity to declare bankruptcy, abandon things that are not successful and retool their systems to respond to changes in the market, cities generally do not have this flexibility. This means cities must be very rigorous in their evaluations, and quite conservative in their tendencies, when deciding what investments to make and which obligations to assume.

BROAD AVENUE

The transformation of Broad Avenue is a great case study from Memphis on how an incremental approach with only modest amounts of resources can be used to generate high rates of return.

Property owners of Broad Avenue, fed up with the stagnation and decline of their two blocks, decided to take matters into their own hands. They held what they called a “New Face for an Old Broad”  and set about making improvements themselves to the street.

Primarily, this involved some temporary painting of the street to define things like bike lanes, parking lanes and crosswalks. If these things had at one time existed, they had not been maintained. In conjunction with this, business owners made a concerted effort to clean up their storefronts and respond to an “activated” street.

TEMPORARY STRIPING ALONG BROAD AVENUE WAS A LOW COST EXPERIMENT THAT DEMONSTRATED HOW THIS BLOCK IS READY FOR GREATER PUBLIC AND PRIVATE INVESTMENT.This low cost, low risk experiment produced results. The improvements stuck and many of the businesses along the street have remained active following the project, employing a number of people and empowering many local entrepreneurs. The viability of the neighborhood prompted a larger investment in a mural. With just these modest interventions, these three blocks have experienced an estimated $8-$12 million in new investment.

While the City of Memphis spent no money on this project, many things were learned. First, there is a spatial problem with the design of the street. It is simply too wide and auto oriented in its design and that poor design has negatively impacted the adjacent property owners. When modest steps are taken to correct that design, there is increased demand for property, which will ultimately correlate to greater property values and investment. There were no negative impacts to traffic flow. 

Second, there is unmet demand for products and services within the surrounding neighborhoods. While many of the patrons of these establishments arrive by car, a large percentage walk or bike, despite a surrounding environment that is not very conducive to walking or biking. If there was a greater degree of connectivity throughout this neighborhood, particularly across Sam Cooper Boulevard which is very difficult for a pedestrian or biker to cross, it is likely that more unmet demand could be captured locally.

These insights, obtained at no cost to the city, reveal an approach the city can use here and I other neighborhoods to improve the overall value and increased the public’s return on investment in this area. That approach would include:

1. Immediately striping the street in the configuration used at the Better Block party. The city should utilize permanent markings and then commit to maintaining them over time. This is very low cost and has already shown to have a dramatic impact.
2. The next time the city does a maintenance project along this street – which will likely be soon given its condition – the street should be redesigned to be much narrower. This will actually be cheaper than fixing the street with the over-sized section currently being used.
3. As infrastructure in the surrounding neighborhood is maintained, emphasis needs to be given on providing pedestrian and bike connections to Broad Avenue. Auto connections alone have shown to be insufficient to sustain the private sector investments here. Again, it is likely that these improvements would be cheaper than the current auto-exclusive design and, as an interim step, Memphis should investigate the cost of simply striping.
4. There seems to be demand for mixed-use buildings  on Broad Avenue. It may be possible to further activate this street by allowing a “holiday” from some aspects of the city’s building and land use codes. This, again, would be a low cost initiative for the city.
5. There are some vacant stores and vacant lots still in place along Broad Avenue. A plan for improving the area, along with a timetable, may give local investors more confidence to proceed. 

There are dozens, probably hundreds, of areas similar to Broad Avenue within the City of Memphis. The level of investment they need to be reactivated is modest. The potential for high returns on those investments is great. These projects empower local neighborhoods, local entrepreneurs and help create a culture of shared prosperity, where slow and steady decline is not acceptable. These projects are well within the grasp of the City of Memphis and are low risk/high reward endeavors.

Incidentally, it should be noted that neighborhoods like Broad Avenue experience disinvestment and decline when the focus of public expenditures is on peripheral expansion, fighting congestion and increasing mobility. If money could be taken from those projects and diverted to higher return investments like Broad Avenue that would be to Memphis’s advantage. If that can’t happen, however, simply not spending the money on those low return projects will give neighborhoods like Broad Avenue an increased opportunity to thrive.

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Comments

[Shannon Dixon]

Love this! I sent you some thoughts via email. Thanks for your continued work and interest in our fine city.

[gml4]

What do you mean by 'Holiday' from land use and building codes?

[Charles Marohn]

Something like a moratorium, only instead of excluding some development it would exclude some regulations from being applied. Basically as small experiment here to see what would work. Don't make it permanent or city wide but just allow the experiment to happen in this area and see what the good/bad that results is.

[Ryan]

Great blog and the points about Broad Avenue revival definitely stick when considering the many other microcosm urban neighborhoods of Memphis. Although, not limited to, especially when considering Downtown & Memphis Medical Center. Also, the Broad Avenue revival is in part due to the City of Memphis’ greater Binghampton revitalization with civic investments such as the Benjamin Hooks Central Library, the new Memphis Police Dept. Central Precinct & Dr. William H. Brewster Elementary School. Recently extending Sam Cooper Blvd all the way to East Parkway, eliminating interstate highway traffic flows from Broad Avenue & its’ effects are a source of debate. Former retailers & service providers would argue the ghost town affect, while the enclave talked about in the blog enjoy a newly carved niche separated from a pocket of poverty directly to the south of Sam Cooper Blvd.

The MATA trolley service was an investment for the City of Memphis that was somewhat ahead of the curve. It's not uncommon for light-rail systems in mid-sized markets to be subsidized. Admittedly, I would shelve any near-future plans to expand the system, but I will give credit due to MATA trolley service because ridership increases as Billions of dollars of private investment flow into Downtown & the Memphis Medical Center. From 2000 - 2010, Downtown Memphis saw over $600 million in residential development with its population increasing over 20% including offsets from housing project removal in the area. Then there are the commercial developments such as St. Jude's continuing $1 Billion expansion, the under-construction $450 million UT-Baptist Research Park, Le Bohneur Children’s Hospital’s $350 million expansion, the $50 million Court Square Center, the $42 million University of Memphis Law School and the list goes on. Not to mention 2 of the largest mixed-use urban developments in the southern U.S., Peabody Place & Memphis Ballpark Neighborhood. Sure, the enclosed mall portion of Peabody Place failed, but is slated by Belz Enterprises for a $75 million redevelopment into Peabody Suites which consists of more hotel rooms, meeting space & less retail. The $200 million Memphis Ballpark Neighborhood mixed-use development including the beautiful $80 million Autozone Park baseball stadium is nothing to shrug at either. All of these investments are serviced by the MATA trolley system and all have been built since its' service began. Other areas served by the MATA trolley are burgeoning with private development too. The South Main Street Historic District has a rapidly growing plethora of retailers, restaurants, museums, art galleries & residential options. The district even boasts a popular weekly-seasonal event, "trolley night" art tour bringing out thousands of local patrons. The Edge neighborhood on the Madsion line is seeing significant gains in residential & commercial property & development. On the north side, the Convention Center District is awaiting a massive transformation that will see the Pyramid redeveloped, Pinch District revitalized, Cook Convention Center upgraded & Downtown Marriott expanded.

The case of the Pyramid’s redevelopment is not a lone project, but only a piece of a much larger private/ public partnership. Its’ original run as Pyramid Arena, which lasted from November 1991 until 2004 when NBA (since 2001) & NCAA basketball moved to the FedEx Forum, left it with a $30 million debt service. The original $65 million price tag was divided amongst a Shelby County/ City of Memphis partnership. The debt service on the bonds released by the City of Memphis for the initial cost of the Pyramid’s redevelopment will be paid for by Tourist Development Zone (TDZ) funds which are collected from state sales tax that is generated in the neighborhood, isolating it from the state’s general fund. The City’s bond release covers financing for demolishing inside & seismic retrofitting the Pyramid. Memphis will then lease the empty shell to Bass Pro Shops for their own construction & investment of $120 million into the facility & surrounding area. The bond release also finances buying out Shelby County’s interest in the Cook Convention Center, buying Lonestar Concrete’s property and their relocation costs. A later bond release will finance Pinch District infrastructure improvements (paving the way for private development) and park amenities for the “dead zone” area between the Pinch District & convention center/ hotel. That release will also finance upgrades to the Cook Convention Center itself, including a major exterior overhaul. In anticipation, Marriott will build a 10-story expansion tower onto their “anchor” convention center hotel adding 160 hotel rooms for a total of 760 and generating more TDZ “hotel bed tax” revenues in the process. It was recently confirmed Bass Pro Shops will include a 3-story “4 star” hotel inside the Pyramid with 210 hotel rooms generating more TDZ revenues beyond their state sales tax with the mentioned hotel bed tax. The entire area will be tied together with pedestrian friendly park-like amenities & the existing trolley service. It is also expected to synergize with the Main Street Mall further south on the line.

Remember, all City expenses listed in the previous paragraph involving the Pyramid, Convention Center & Pinch District are financed by city bonds and the debt service is paid for by said TDZ fund generated by state sales tax collected in the neighborhood. After being enacted by state gov’t, that expanded TDZ fund generated more than $12 million in the partial calendar year 2010, continued growing by the millions & was just waiting to start making payments. The first payment being due this year (2012) is just over $5 million. Once up & running, Bass Pro Shops will generate another $9 million a year for that fund with projected sales tax alone. Also, all direct revenues to the City of Memphis from Bass Pro Shops over course of the initial 20-year lease term are projected to be worth $250 million dollars. Bass Pro Shops is rated the world’s #1 destination retailer with rising sales & profits straight through the Great Recession. They will be a successful tenant in a building, also a civic icon, that demands it. Also, the greater plan will grow the convention market & revitalize one of the city’s oldest & most historic neighborhoods bringing with it private development, wages for locals, property tax & sales tax revenues. It’s a great opportunity & good deal for Memphis.