By. Brent Wilson, Field Officer
Last week, the Greene County Board of Supervisors, in a split (3-2 Durrer, Cox opposed) vote, choose to spend $1.7 million dollars of Transient Occupancy Tax (TOT) to fund the purchase of a property (AKA the John Silke Property) on the west side of U.S. 29 just north of the intersection with Route 33 for use as their visitor center. An existing farmhouse on the property would be converted for the Visitor Center use and several ancillary buildings may have uses as well. Currently a small space (1,000 sf) is rented adjacent to the Blue Ridge Café for use as the Greene Visitors Center.
Virginia state code is very clear what TOT funds can be used for and who is involved in determining their use:
If any locality has enacted an additional transient occupancy tax pursuant to subsection C of § 58.1-3823, [which Greene County does-nw] then the governing body of the locality shall be deemed to have complied with the requirement that it consult with local tourism industry organizations, including lodging properties. If there are no local tourism industry organizations in the locality, the governing body shall hold a public hearing prior to making any determination relating to how to attract travelers to the locality and generate tourism revenues in the locality.
Last month, the Economic Development Authority (EDA) held a public hearing to get citizen feedback on the potential Visitor Center acquisition. Citizens had strong opinions on both sides of the issue. After the EDA public hearing, the Authority voted unanimously to recommend the purchase to the Board of Supervisors.
Tuesday, July 23rd the Greene County Board of Supervisors held a public hearing to decide whether to purchase the property or not. Economic Development/Tourism Director Alan Yost indicated his opinion that the the parcel being considered represents Greene County well – a large farmhouse, shade trees in front and an inviting front porch.
The TOT revenue earmarked for marketing in Greene County has grown during Yost’s tenure to $169,000 this past fiscal year. Those TOT funds have been used in previous years to fund the current Visitors Center rent – $1,800/month or 13% of the TOT funds generated in FY18.
County staff have arranged for the Silke property acquisition to be financed through a US Department of Agriculture (USDA) loan program at a discounted interest rate of 3.5% with no prepayment penalty. The loan payments would be $4,059/month or $48,703/year. Using the FY18 TOT revenue the Visitor Center mortgage would use 28% of TOT funds generated .
Yost also addressed recessionary concerns reducing local TOT tax revenue. He stated that the target tourist market for Greene County lodging is eastern Virginia, DC and Maryland and thinks that a recession may actually have the inverse affect in that families who may not have the money for a distant vacation and would be more likely to take vacations closer to home.
Yost also indicated he is committed to paying off the USDA loan as early as possible and plans on recommending to the Supervisors that future annual growth in TOT revenue each year be dedicated to payment of the loan and believes that by doing so the loan could be repaid in 20 years or less.
It is anticipated that TOT revenues will continue to rise. Yost pointed to Lydia Mountain Lodge is adding 20 cabins since they are booked full which will increase TOT tax revenue in the future.
Chairman Bill Martin (Stanardsville) was the last speaker before the public hearing and he estimated that the rent to be paid over the 40 term of the mortgage would be about $1.7 million (estimating a 3% annual growth of rent expense). But there is no guarantee that rent would only go up 3% per year, it could be more.
Comments from the public came next (33 speakers) and they were nearly evenly split – for and against. Those who spoke against the purchase of the property felt that $1.04 million was too much, an alternative suggestion was to have a mobile visitor center, it was felt that most people use their PCs and I-Phones for information and what happens if TOT funds aren’t enough to pay the mortgage.
Those in favor of the purchase sited that the purchase would provide the county an asset rather than just cancelled checks, the site is great, visible and has easier access than the current location, all the EDA and Tourism Council members are in favor, no Greene citizens taxes will be used to pay the loan, the county will have $160,000 immediate equity since the assessed value of the property is $1.2 million. Further the property could be sold if TOT revenue dries up or inversely if a great offer is made. Lastly, the mortgage provides a “ceiling” on the payments that would have to be made for the property.
The meeting then came down to the discussion among the Supervisors. Martin was encouraged by the growth in tourism in Greene County and hopes that the new Visitor Center will host events and consider a police substation for the Ruckersville area.
The key issue that Martin brought up was that even though the current rent for the Visitor Center is only $1,800, there is no long-term lease making it impossible to accurately estimate the rent over 40 years. For comparison purposes he used an annual 3% inflation rate. That calculated the rent expense for 40 years approximately $1.7 million or an annual average of $42,500 per year vs. the $48,696 annual mortgage payment, just a little over $500/month average over 40 years.Supervisor Marie Durrer (Midway) expressed concern that the building being considered for the Visitor Center is one of only three original buildings left in Ruckersville. But she also expressed concern that in the future a real Visitor Center may not be needed and is not convinced that bigger is better and for those reasons could not support the purchase.
Supervisor David Cox (Monroe) expressed concern that no other alternative buildings were considered. He believes that visitors preplan their activities on their PCs and I-phones and, while he understands the TOT tax revenue, he is not sure how much of it is due to a Visitor Center and therefore he cannot support the purchase.
Vice-Chairperson Michelle Flynn (Ruckersville) pointed out that no one from the public said we should not have a Visitor Center. She also stated that there were several misconceptions from citizens that she was able to clarify. Flynn does not believe in paying rent and supports the purchase of the new Visitor Center.
Supervisor Dale Herring (At-Large) also corrected some misconceptions including that TOT tax funds cannot be used for the Broadband Project. The fact that all whose livelihood depend on tourism support the purchase of the new location was key for him. Tourism in Greene County has a low impact on the county – people come, spend their money and leave the county. Furthermore, the purchase would still use less than a third of TOT tax revenue and he is supporting this purchase.
The Supervisors voted 3-2 to approve the purchase with Cox and Durrer voting against the purchase.
FREE ENTERPRISE FORUM FISCAL ANALYSIS
The citizens opposing the purchase brought up the purchase price ($1,040,000) and the total loan payment of nearly $2 million ($1,947,889). The current assessed value of the property is approximately $1,200,000 so, if we accept the assessed value as an accurate valuation, once the deal is completed the county will have equity of $160,000.
After 5 years of payments, the principal would be $974,000 and after 10 years the principal would be down to $896,000. So, if TOT tax revenue dries up, the fall back position would be to sell the property to get out from under the mortgage.
Opponents were correct in their criticism that this parcel will no longer pay property taxes. This loss of tax revenue is not included in the calculations below.
The total estimated rent for 40 years is approximately $1.7 million (assuming 3% annual rent escalator) vs. $1.948 million total purchase cost for a premium of $248,000 to buy the new Visitor Center. Yost made the commitment to apply annual increases in TOT tax revenue as a “principal only” payment which he believes will pay off the loan at the 20 year mark, thus saving over a $275,000 in interest and lowering the total loan payout to less than the $1.7 million rent payments of 40 years – making the two options about equal in price.
Using Martin’s 3% rent escalator the Free Enterprise Forum created two graphs highlighting the differences between cost of rental vs. ownership.
The first graph show the annual costs of each option. In this graph the rent line exceeds the mortgage in 2046.
In the EDA meeting, Yost indicated the new visitor center would provide 50% more square footage for offices displays and other tourism uses. As the current space is ~1,000 square feet, we extrapolated the new space would be ~1,500 square feet. Using this information and Martin’s 3% annual rent escalator, we found the lines cross significantly earlier near 2033.
Regarding use of TOT increases for early payment of mortgage principal. Think of it as you want to buy a house and you are trying to decide on how long a mortgage to take out. You would like to sign up for a 15 year mortgage but you aren’t sure if you can make the higher monthly payment every month for the 15 year mortgage. So, you play it safe, take out a 30 year mortgage with a lower payment but as you get raises you will be able to make extra payments to pay off the loan faster and save a lot of money on the interest you won’t have to pay. This is how Yost envisions Greene County paying off the purchase of the Visitor Center early.
Staying with the rented space without a long-term lease leaves a lot of uncertainty for 40 years. What if inflation in 20 years is 7%, 9%, 13% instead of 3%? With the national debt at $22 trillion and the debt ceiling about to be raised to over $23 trillion, interest rates will go up. Inversely, locking in a 40-year loan at fixed interest rate of 3.5% through USDA is below market rate with no prepayment penalty is a good deal. In 35 years, odds are your grandchildren will say how smart they were in 2019 to lock in that crazy low rate of 3.5%
If TOT tax revenue continues to increase at the same rate as the past 4 years, Yost’s projection of paying off the loan in 20 years would be attainable. So, in the most optimistic scenario, which is the current trend, Greene County owns a building with growing equity and the cost is, in total, no more than the renting of the existing, smaller structure. Effectively you get the property for free and save the last large farmhouse on the Route 29 corridor.
Eliminating variables in life is a good thing.
Brent Wilson is the Greene County Field Officer for the Free Enterprise Forum a privately funded public policy organization. The Free Enterprise Forum Field Officer program is funded by a generous grant from the Charlottesville Area Association of REALTORS® (CAAR) and by readers like you. To support this important work please donate online at http://www.freeenterpriseforum.org
Photo Credit: Greene County