Simon family’s interests helped city thrive, but taxpayers paid the price

It's hard to imagine Indianapolis without the Simon family.

The mall owner Simon Property Group Inc. is one of the city's most prominent corporate citizens, the company-developed Circle Centre mall acts as downtown's heart, and the Indiana Pacers franchise—owned by members of the Simon family—gives a basketball-loving state a stake in the sport's marquee league.
 

But the family's business successes and its role in building the city have come at a steep price for taxpayers. Simon and its business interests in the last 20 years have collected local government incentives worth more than $400 million, an IBJ tally of those deals shows.

The city footed most of the $320 million tab for Circle Centre and owns the land, yet Simon operates it rent free. The city kicked in $23 million for Simon to build a 14-story headquarters just six years after giving the company another deal worth $15 million to stay downtown. And the city, having financed at least $158 million 10 years ago to build Conseco Fieldhouse for the Pacers, now is working on plans to provide the team with a $15 million annual subsidy.

The city could play hardball. The Pacers haven't been paying a $3.45 million annual fee for using 1,400 parking spaces in a city-owned garage. And even if the team exercised an option to break its fieldhouse lease after 10 years, the Pacers would owe the city at least $50 million in penalties—and probably much more—the original lease shows.

But the sway of the Simon name and its influence on the city's business and convention prospects are too strong. Local government officials are scrambling to implement a mix of tax increases that will cover a $47 million annual deficit for the Capital Improvement Board, which owns both Conseco Fieldhouse and Lucas Oil Stadium. That will allow CIB to pick up the cost of operating the fieldhouse for the struggling Pacers organization, which says it is on pace to lose $30 million this year.

The team says it has lost $200 million since brothers Mel and Herb Simon, the founders of Simon Property Group, bought the Pacers in the early 1980s. The publicly traded company and its current CEO, David Simon (Mel's son), have no involvement with the Pacers organization, which now is led by Herb Simon. Simon Property Group officials declined IBJ's invitation to discuss whether the incentive deals over the years have been good investments for taxpayers.

There's no question the city has changed for the better because of the Simons' investments over the years; all the evidence you need is to take a walk downtown during a major event like the Big Ten Tournament.

But is the contribution worth the $400 million taxpayers have sunk into Simon entities, along with untold millions in potential revenue the city has given up as it catered to the city's most powerful family? Many civic leaders, including Steve Campbell, a former deputy mayor who served under Mayor Bart Peterson, believe the answer is yes.

"That total would be conservative given the company and the team's contributions," Campbell said. "They're one of those families—it's just in their DNA to give back to the city."

Testing the limits

Over the years, the Simons and the Pacers helped put Indianapolis on the map—dispelling the city's reputation as "Indiana No Place," said former Mayor Bill Hudnut, who now runs a public affairs consulting firm in Maryland.

But asking a city of Indianapolis' size for $15 million more, especially at such an inopportune time, is a tough request, he said. Every city has a "choke point" where it can't afford any more big subsidies or tax breaks, and Indianapolis may be nearing it.

One consideration, Hudnut said, should be how much the Pacers franchise has appreciated since the Simons bought the team for its liabilities—about $11 million—in 1983. The most recent estimate from Forbes, in late 2008, pegs the team's value at $303 million. That's a roughly 14-percent annual return on the original investment, far better than the stock market. (The same magazine has featured both Mel and Herb on its annual list of billionaires.)

"On one hand, you want to be hard-nosed about these things," Hudnut said of negotiating incentive deals. "On the other hand, you want to be grateful for people like the Simons who have helped this town."

The benefits of Simon Property Group and the Pacers to the city's bottom line aren't easy to calculate, but they are significant, Hudnut said. Simon stepped up to build Circle Centre mall when it seemed the only other option was to "let downtown die." Simon deserves a chunk of the credit for years of rising sales tax revenue and dollars spent by convention visitors.

"What kind of magnet for new business would downtown have been without Simon?" Hudnut asked. "There's no magic formula. But I feel, on balance, that Indianapolis is a lot better off with the Simons' contributions to the economic base than if they walked away and did nothing. It's sort of a gut feeling."

Paul Ogden, a local attorney who writes a political blog called Ogden on Politics, said the city often is too quick at "giving away the store" to private entities like the Simons.

Some of the money is well-spent, but dollars spent on professional sports don't pass Ogden's cost-benefit analysis. He wonders why CIB started with the assumption it would foot the $15 million in operating expenses for Conseco Fieldhouse without probing the team's books or considering whether the venue could be managed more efficiently.

"At what point do you say too much is too much?" Ogden said. "While the Simons have given a lot to the community, I think we've given them back a lot in the form of tax abatements and free real estate."

A sweet deal

Simon Property Group already had a site picked out at Keystone at the Crossing before city officials in 2004 persuaded the company to build its new headquarters downtown instead.

The company constructed the $57 million building on part of a grass-covered, city-owned public plaza that hadn't been generating revenue for the city, giving the tax base a phased-in boost.

But the deal wasn't exactly charitable on Simon's part. The city put up $4 million for site work and $4 million in tax abatements, and gave Simon a piece of land worth $3.4 million based on comparable sales. Simon leases the land from the city for $1 per year, meaning it doesn't pay taxes on the ground.

The city's largest expense was to line up parking for Simon headquarters employees. In October 2004, it spent $11.5 million to buy the eastern half of the parking garage below the headquarters from Chicago-based Urban Growth Property Trust.

The land under the garage already was owned by CIB, which had agreed to a long-term land lease with the garage owner.

The Simon deal turned the government-owned land below the garage from a cash generator into a balance-sheet liability.

As part of the deal, CIB agreed to extend its ground lease with the owners of the remainder of the garage from 30 years to 99 years, starting when the Simon building opened in 2006. The deal also gave the company the responsibility of managing Simon's portion of the garage, for a price at least partially paid by the city.

The original construction of the garage was privately funded and governed by a 1986 agreement that entitled the city to base annual rent payments of $50,000 plus 50 percent of the garage's cash flow after expenses. The agreement yielded payments of $598,000 in both 1986 and 1987.

Today, the city loses money on the garage. CIB collected about $83,000 from the privately owned side of the garage in 2008—an annual rent of $25,000 plus 2 percent of gross revenue—but paid about $172,000 in expenses related to the city-owned portion of the garage used by Simon during business hours, CIB officials said.

It wasn't clear whether the Simon deal alone was responsible for the city's shrinking share of garage revenue.

Despite CIB's losses, the garage remains a profitable venture for its private owners, which charge customers a daily rate of $25 and a monthly rate of $125. Last June, Urban Growth Property Trust sold the remaining privately held portion of the garage to Chicago-based General Parking Corp. for $30.5 million.

Changing dynamic

Simon Executive Vice President John Rulli said the city's contributions to the company's headquarters were not worth more than $20 million. He said the company sunk $9 million of its own into improvements to the garage (including an epoxy floor treatment), even though it doesn't own the structure.

If the company instead had put the money into its publicly traded shares, he said, the dividends alone would've covered parking downtown for all its employees. (To conserve cash, the company this year began paying its dividend mostly in new shares.)

"The value of this deal is an illusion," Rulli said. "It just is not an accurate depiction."

The negotiations over Simon's new headquarters represented a turning point of sorts in the relationship between the Simons and the city—prompted in part by a changing leadership dynamic at Simon Property Group, civic leaders said privately.

While founders Mel, 82, and Herb, 74, had been more freewheeling and less profit-centric in their dealings in both the mall business and in negotiations with city officials, current CEO David Simon, 47, applies a laser focus on the bottom line.

A former Wall Street investment banker who returned to Indianapolis in 1990 to help the company through a period of turmoil, David Simon quickly developed a reputation for driving a hard bargain. His discipline put the company in a strong financial position and helped make it into the nation's largest owner of shopping malls.

A hidden gift

The headquarters deal wasn't the first time taxpayers paid up to persuade Simon to remain downtown. Six years earlier, the company got the goods to renew its lease at the office and hotel complex known as National City Center.

The state agreed to put up $1.2 million in grants after Simon promised to add more than 250 local employees within three years.

But the city's contribution was more valuable, although no one at the time attached a value. In part to persuade the building owner to give Simon a cheaper rent rate, the city under Mayor Steve Goldsmith agreed to give up ownership of the four-acre city block on which the 22-story hotel and office complex sits—land that today has an assessed value for tax purposes of $13.8 million.

The property owner, California Public Employees Retirement Fund, also had to spend $3 million renovating the property and drop an ongoing tax dispute with the city.

In the early 1970s, the city under Mayor Richard Lugar had assembled the properties at the southwest corner of Washington and Illinois streets on the site of the old Lincoln Hotel into one of the city's first public-private development projects.

The city allowed private investors to build the project on city-owned ground and also invested $300,000, records show. In return, the developers agreed to a 60-year ground lease calling for $30,000-per-month rent payment and a revenue-sharing arrangement that entitled taxpayers to roughly 5 percent of all earnings in excess of $10 million per year. In 1984, for example, the city took in a total of $958,000 from the partnership.

It isn't clear how much of a break Simon got on its lease agreement in exchange for the city's giving up such a substantial revenue stream.

In 2001, in a deal facilitated in large part by the city's move to give up the property, CalPERs sold the mixed-use plaza as two separate parcels, one with the Hyatt hotel and the other with the office complex. The retirement system collected $60 million for the office space, but did not disclose its sale price for the hotel. It had paid $85 million for both in 1987.

Returning the land to the tax rolls helped the city recoup a portion of the revenue it gave up. But the deal also used up a potential bargaining chip in negotiations with future owners of the prime downtown property.

Fieldhouse myths

The city's strategy in building Conseco Fieldhouse was to wean the Pacers off public subsidies by giving them a brandnew facility with luxury suites. The fieldhouse lease allows the team to keep all venue revenue in exchange for paying for its operation.

To that end, the city funded almost every dollar of the $183 million fieldhouse. The team was credited with a $50 million contribution for agreeing to forgo subsidies it had received at Market Square Arena, but it contributed nothing in cash. The team also was allowed to keep $40 million Conseco Inc. paid for naming rights.

CIB also built the $25 million, 2,400-space Virginia Avenue Parking Garage east of Delaware Street primarily for use by the Pacers, along with WellPoint Inc. and various city departments.

In its 1999 lease deal, the team agreed to pay CIB $3.45 million per year for the use of 1,400 spaces in the garage. On game days when pass-holders don't take all the spaces, the team gets 60 percent of the revenue from its unused spaces. But since the team has failed to reach a prescribed 18-percent profit margin during its tenure at the fieldhouse, the contract allows the Pacers to offset the fee against its operating expenses.

"Technically, they are in compliance with the contract," said CIB Vice President Pat Early.

Though the Pacers never made the annual garage payment, they still collect the 60-percent share of game-day revenue from the 1,400 spaces. In 2008, the team earned $233,000.

The notion that the team covers all its own maintenance is a bit of a myth. CIB already pays for major expenses at Conseco Fieldhouse including new carpet and maintaining the HVAC systems. And in 1999, when the arena opened, CIB spent $62,600 on uniforms for the Pacers staff, including 580 button-down shirts, 472 pairs of pleated khakis, and 15 blazers. It also spent more than $15,000 on six NBA Fastbreak Pinball Machines.

Another misconception is that the fieldhouse contract gives the team the right to renegotiate its lease after 10 years—it actually gives the team the right to cancel the lease after the first 10 years if it doesn't reach certain profitability targets.

Voiding the lease, though, would cost the team dearly. It would be obligated to pay CIB a termination fee "based on a formula sufficient to reimburse the city for the economic effects of such early termination," the contract says. The minimum penalty is $50 million, but the contract says the Pacers' cost for terminating the lease in 2012 could be as high as $144 million.

"No one has exercised that right or given us any indication they're going to," Early said. "Rather than put our head in the sand, we've chosen to enter into discussions with them."

Balancing act

There's no question the city's professional sports franchises help drive economic development efforts and tourism, said Deputy Mayor Nick Weber. And even if the Pacers were to leave, the city still would have to pay to operate and maintain the fieldhouse.

But is it worth the cost?

"It's worth a cost," said Campbell, the former deputy mayor. "It depends on what path you choose. It's like a balloon: You push in one area and the balloon pushes out on the other. It's a delicate balance. You don't want to get crazy on it."

The Pacers point to a study completed in March by the Center for Urban Policy and the Environment at IUPUI that shows Conseco Fieldhouse in the last five years generated $215 million annually in economic contributions to the city, along with 3,000 jobs and $87 million in wages.

The problem for the Pacers is, the public has just about had it with bailouts of any kind, said Brian Howey, who publishes the newsletter Howey Politics Indiana. At least with the federal TARP program, there's a mechanism for repayment in actual dollars—not so with sports-team subsidies.

"I cannot think of a worse time for a professional sports franchise to be going to the taxpayers seeking some kind of bailout," he said. "We may be coming to the point of no return."

Greg Schenkel, the team's vice president of corporate relations, said discussions about additional funding for operation of the fieldhouse were initiated by CIB, not the team, and that the $15 million annual figure also did not originate with the Pacers.

The team wants the city to cover losses connected to the stadium's operation, not those stemming from the team's troubles, including the roughly $21 million it must pay the inactive guard Jamal Tinsley through the 2010-2011 season.

The Pacers have trimmed their staff about 7 percent this year and a total of 19 percent since 2001, Schenkel said. The operation now employs 201.

"We're delighted there are so many people working on this, trying to resolve the issue," Schenkel said. "We're partners in this deal. We've had a wonderful relationship with the CIB for 30 years."

To keep its professional sports franchises now and in the future, the city has no choice but to subsidize them to a certain degree, said Early, the CIB board member.

"You're trying to put the team in a situation that's workable for them, and from the city standpoint, you're trying not to give away everything," he said. "It's really not an easy balance."