Detroit looks at grim economics of garage sale

In an effort to help pay creditors, Detroit may put city-owned assets up for sale. The list of assets range from 22 square miles of land, public utilities and infrastructure, and collections of animals and art. Kevin Orr, Detroit's emergency manager, believes the city's nine parking garages, two parking lots and 3,404 parking meters should be attractive to outside investors.

By Stephen Foley, Henny Sender and Michael MacKenzie
July 28, 2013 1:13 pm
Financial Times

Among all the helpful suggestions the Motor City has received during its slide into bankruptcy, selling off Belle Isle, a picturesque island park in the Detroit river, to a group of billionaires intent on creating a libertarian city-state ranks among the most outlandish.

Yet Rodney Lockwood, the local property developer who has been pushing his idea for a “Commonwealth of Belle Isle”, is not alone in imagining there is value locked up in city-owned assets, which could be put up for sale to help pay creditors.

With a list of assets that ranges from 22 square miles of land, public utilities and infrastructure, and collections of animals and art, Detroit might seem a candidate for a municipal garage sale of historic proportions.

Ironically, the only assets that might be up for sale are garages.

Kevyn Orr, Detroit’s emergency manager, says the City is open to public-private partnerships and believes its nine parking garages, two parking lots and 3,404 parking meters should be attractive to outside investors.

“It’s one of the easiest assets that someone can underwrite and run more efficiently,” he told the Financial Times.

Elsewhere the scope for further sales looks limited, as Mr Orr concentrates on wringing multibillion-dollar concessions from creditors that put the potential receipts from asset disposals into perspective.

This is especially the case because many assets are losing value as Detroit’s economy continues to go in reverse, as the population drops, manufacturing declines and joblessness rises.

Speaking on the Sunday morning talk shows Treasury secretary Jack Lew reiterated that Washington did not plan to provide Detroit with any financial assistance.

The city owns 22 square miles of Detroit’s 139 square miles, but much is blighted. “The vast majority has limited current commercial value,” its bankruptcy filings state.

Detroit owns the US portion of an ageing cross-border tunnel to Windsor, Ontario, whose municipal authority owns the Canadian portion and has signalled it would bid if Detroit ever tried to offload its half. But the authority which leases the tunnel pays Detroit less than $1m a year and last week its private operator went bust, citing reduced traffic.

Speculation about the future of the fabulous art collection at the Detroit Institute of Arts has been particularly intense.

The collection is managed by a non-profit group that maintains the collection is held in public trust.

The state attorney-general has opined that such assets are “held in public trust for the benefit of the city’s residents”. But some creditors and their counsel say it is ludicrous that they are recovering only a small fraction of the money they are owed while the city is sitting on such valuable items.

While Mr Orr officially says that no decision has been made on the fate of the paintings, people familiar with his thinking say it is unlikely that the collection will be sold.

Detroit’s most attractive assets include its water and sewage operations. But the city does not plan to put those operations up for sale to the private sector either.

Instead, it plans to work with neighbouring, and far wealthier, districts to establish a new unit that would provide services to the city and its environs and that would continue to have access to the capital markets. Such a deal could unlock $50m-$150m, Mr Orr says.

Bruce Katz, director of the metropolitan policy programme at the Brookings Institution, said such collaboration between the city and its suburbs is key to urban renewal.

“That kind of spirit did not really exist in Detroit until recently,” he said. “Detroit really pulled away from its suburbs and the suburbs pulled away from the city. It is an antagonism that is deeply rooted in race and class and many other issues.”

If the city does want to bring in private investors as owners or operators of critical utilities or infrastructure, both its economic prospects and its politics will be key.

In recent years, US pension funds have increased their exposure to infrastructure assets, seeking to match their long-term liabilities with long-term sources of cash flow from toll roads, bridges, airports, utilities and hospitals. Many projects are so-called public and private ventures, with governments seeking to improve the quality of services and boost revenues.

“Forward-thinking governments are focused on providing services more efficiently,” says Chris Voyce, US head of public-private partnerships at Macquarie.

But for infrastructure investors, having local support from politicians and residents is a crucial factor before committing funds. Partners would also want to be sure that Detroit has put years of mismanagement and political dysfunction behind it.

Jon Schotz, managing partner at Kayne Saybrook Municipal Opportunity Funds, says investors interested in owning some of Detroit’s assets should wait, in any case.

“It’s like eBay, you don’t bid at the time of listing. There is a game to be played out on this and it will take a long time.”

Mr Voyce cautions that any forced sale of an asset to raise money does diminish its attractiveness, while there is transaction risk in terms of acquiring an asset via a municipal bankruptcy – as almost every deal is subject to legal challenge and political controversy.

As for Belle Isle, the Detroit city council has balked even at leasing the island to the state of Michigan in order to shift a $6m annual maintenance bill off the city’s books – a proposal that went before the city government in January and was never voted on.

Mr Orr says he will keep pressing for that agreement, but it remains unclear if he will succeed. Hawking the land to billionaires could not be more unlikely.

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