Austin Contrarian

Economic rents and the Longhorn economy

I didn't have time to comment at the time, but the Statesman had a good piece on the Longhorn economy in Sunday's paper.  This year, the University of Texas athletic department will spend more than $100 million.  A lot of the AD's budget is spent on things like team travel (but chartered jets for the basketball team?), equipment, and medical care.  But a lot of it gets spent sustaining the high life:

• For the football team, after its Rose Bowl victory, "a $200,000 renovation of its players lounge, a retreat with four TV projectors (screens drop from the ceiling at the push of a button embedded in a six-foot replica of the UT tower), six flat screen TVs, four X-boxes and three PlayStations."
• Another new lounge area for the football team, with five flat-screen TVs and a three-dimensional, lighted 20-foot Longhorn on the ceiling.
• $380,000 to rehab Athletics Director DeLoss Dodds' suite overlooking the football field.
• $9 million for the football stadium's new high-definition video and sound system, much of that for the new scoreboard, and $3.9 million to buy out the company that owned advertising space on the old board.

A couple of UT professors predictably called the spending an "extravagance" and an "embarrassment."  I was disappointed nobody mentioned the key phrase:  "economic rent."  The athletic department has these millions to spend on luxury items because it belongs to a cartel that fixes the price of labor.   

Of course, some of the rents are returned to the players as soft compensation; that's what those fancy lounges really are.  But that $200,000 would almost certainly generate more utility if given to them in cash than if spent renovating a lounge to add barcaloungers and flat screen TVs.

This is a good illustration of the twin harms caused by the NCAA's price-fixing:  (1) It redistributes money from student athletes to coaches and middle-aged administrators; and (2) it ensures that much of the compensation that athletes do get is wasted through inefficient barter. 

What's really at issue with CWS's request for a variance

The development fight du jour is CWS Development's request for a variance from the 200-foot Town Lake setback requirements.  It wants to build some condo towers within 150 feet of Town Lake; the Save Town Lake crowd says "Never!"  For background, here is Shilli's latest post at the Austinist; my previous posts on this subject are here, here, here and here.

Let's first talk about a couple of things that really aren't at issue.  The first is, Will the developer  extend the hike-and-bike trail if it does not get the variance?  I agree with CWS's opponents that CWS will probably extend the hike-and bike-trail no matter what, even if the extension is just via boardwalk.  A boardwalk surely will add more to the condos' value collectively than the $1.2 $1.7 million or so it will cost to build.  A developer won't leave money on the table just for spite.

I disagree with the opponents who claim that "precedent" is also at issue, though.  Opponents argue that if CWS gets its variance, other developers will be able to insist on a variance, too.  Wrong.  This is an extraordinary case:  In exchange for the variance, CWS has offered to move large apartment buildings out of the setback zone -- structures that extend to within 20 feet of the water -- and provide a badly needed hike-and-bike trail extension and dedicate land for Town Lake Park.  It will be a rare case where a developer can offer all three.    

What is really at issue, I think, ought to be obvious from these aerial shots. 

This shot of the western parcel (222 E. Riverside) was generated from the City of Austin's GIS viewer.  The 200 foot setback is outlined in red.  Thanks to the GIS viewer's measurement feature, it is pretty accurate.  The lot line for the rest of the lot is outlined in magenta.  (I used an editor to brighten the lines, but made no other changes.)

Note that the parcel now has three buildings.  Two of them (B & C) are entirely within the 200-foot setback zone.

Now take a look at this aerial shot:

That blue line is supposed to be the 150-foot setback line that the developer wants.  (I estimated this one, unlike the 200-foot setback and property lines.)

If the developer gets the variance, it will demolish buildings B & C, and everything to the right of the blue line will become green space.

If the developer does not get the variance, it will have to decide whether to demolish B & C for green space or instead rebuild them as townhomes/condos.

This forces the City to make a pretty interesting decision.  If it grants the variance, we are assured of getting green space from the blue line to Town Lake.  If the City denies the variance, we might get extra green space in that 50-foot wide strip between the blue and red lines.   But we might also get no green space at all if the developer leaves buildings B & C in place. 

So the real issue is:  Do we risk 150 feet of green space for an extra 50 feet? 

I think the answer to that question is "yes" only if we are really confident that the developer will turn buildings B & C into open space no matter what. 

There is no question that the condos CWS will build at A will be worth more money if B & C are demolished and replaced with green space.  Is that increase in value worth more than the value of townhomes occupying the footprints of buildings B & C?  I don't know.  And I don't see how the answer to that question can be obvious to anyone other than the developer.   

The developer, of course, says it will keep buildings B & C if it doesn't get the variance.  It's got some credibility problems, though.  It initially insisted it absolutely had to have a variance for an 80-foot setback; now it says 150-feet.  It says that it won't build the hike-and-bike trail without the variance; I think the opponents are correct when they say this is a bluff.  It also turns out it has also started its own astroturf campaign, which makes it look sneaky.

But let's do our own back-of-the-envelope calculation.  TCAD's numbers are a little confusing, but I think buildings B & C have over 50,000 square feet combined.  Let's suppose the developer replaces them with townhomes that fetch 300/sq. ft., which is conservative given prices in Travis Heights.  Redeveloping B & C would bring in an extra $15 million in gross revenue.  The developer's margin would probably be as high as 30-40%, since it will have to incur the land and marketing costs anyway.  This means the developer might realize an extra $5-$6 million in net revenue by redeveloping B & C.

On the other hand, redeveloping B & C would hurt the value of the units in A.  A will have roughly 100 units if it is 17 stories tall and has 6 units per floor.  In order for CWS to forego B & C, it would have to get an extra $50-60,000 per unit in A.  Is that realistic?  Again, I don't know.  And that means I'd rather take the sure thing than risk it all for an extra 50-foot wide strip.

These numbers are speculative, I freely admit.  But if you think it is a lock that the developer will leave us with 200 feet of green space no matter what, how are you so sure?