Now that we know that Port Washington has the worst data center deal in the state, let’s take a look at another: Beaver Dam.
First, the developer agreement
Cutting out all the distracting words from the agreement language in the image, the text reads:
"The Company has agreed to pay for these public improvements ... in exchange for the Company being reimbursed." Really, it says that. "I will pay, you will pay me back, and then I will brag that I paid." Phase 1, reimbursement is $10M. Phase 2, it's $100M.
The $10M is for the public improvements, ok, fine. But the $100M is "...for certain private project costs and as a developer incentive to locate the Project in the City."
…because "the City [of little ol' Beaver Dam] believes that unless the City provides the incentives to the Company, the Company will not undertake development of the Project in the City." Trust us, says the big company, this tech business is rough, whereas making a living in Beaver Dam is like Easy Street.
And that's how big corporations extort little towns to pay to have big corporations build in their community. “It’d be a shame if I just walked away.” And so the Beaver Dam city council approved it.
Maybe the benefits are so good they couldn't say no. Let's look:
The TID
The standard TID project plan document starts with a revenue plan (new buildings = new valuation = new tax revenue, or tax increment as the cool kids say). Here's what Beaver Dam's says.
$57M in 2026, tax on which first gets paid in 2028.
then a big slug in 2027 of $216M
then a couple of smaller years
then another big slug of $195M
then the remaining $28M in 2031
Six full years of construction
$567M in valuation total
No break in the action
The tax revenue also gets a schedule that lines up with the construction schedule. Each tax year is as follows:
2027: $1.1M
2028: $5.4M
2029: $5.7M
2030: $6.8M
2031: $10.7M
2032 and every year thereafter: $11.2M
Before you Beaver Dammers (btw, just what is the right way to identify a resident of your fair town? Beavers? Dam Beavers? Dam Beaver Dammers?) start planning your summer town party, remember that it's TID money, not your money. You can't touch it until the TID closes. And anyway, we need to see how realistic the assumptions are first. Before we do that, though, let's look at the "money page" where costs and revenue are put together and you can see the pot of gold awaiting you.
This looks rather good, maybe even worth voting yes for … well, assuming there were no other problems like destroying pristine land, impact on energy costs, etc. If you aren't a numbers nerd, the first column after the year is the amount of tax payment the TID gets every year (the revenue). The next 4 columns are the TID's expenses. Take the revenue, subtract the expense, and you get an annual balance. Red means expenses exceeded revenue. Black means revenue exceeded expense. Black is good. Red early on is expected. When you switch from red to black is important.
The total balance column is the headline story. It starts red, which is fine, but how quickly does it go black, because a positive total balance is money waiting for Beaver Dam (and the county and the school system) when the TID closes. And the answer is, it goes black really quickly, in 2029. You still have to wait until 2046 for your largesse, but that pot of gold is $58M at the end. (Beaver Dam's cut of the pot of gold is 43%, btw.)
If that's all you saw, and you didn't know any better, and you didn't want to know any better by asking tough questions, and you forgot that your parents told you "if it's too good to be true, it probably is," and you might be fooled by a Nigerian prince asking for your bank account number, then heck yeah, vote yes and start planning the 2046 party. While you plan, though, let's look closer at the data...
A Closer Look
Red flag #1 is the smallest number on the page -- $10K year in city costs. This is a professional firm that put this proposal together. The word Professional is even in their name. Here's what you have to believe for that number to be true:
Protecting yourself against one of the biggest tech firms in the country who spends more on lawyer lunches than you spend on legal services all year will not need more than about 20 hours of high-priced legal advice all year.
The city will be able to manage their side of a multi-year project building $567M in new valuation with a couple of hours of employee time a week.
Current staff has enough idle capacity for inspections, disputes, open records requests, amendments to agreements, and any other issues that will happen early and often to simply absorb the work with no additional help.
This number is small and even adjusting it much higher doesn't change the TID performance that much, but it screams we are in over our heads. It also begs the question, why didn't you check the Mount Pleasant project to see what their actuals were, maybe even call them and ask for some advice? What were their actuals? Last 2 years, $425K. Budget next year, $800K+. So yeah, $10K is a wee bit light.
Next thing, seen in all these proposals, and seen in most TID proposals of any kind, is an overly optimistic construction schedule. Microsoft will take almost 4 years start to operational on data center #1 in Mount Pleasant. Seems like a good barometer for what will happen here. So let's make a couple of modifications to the proposed plan to fix the schedule and the city costs.
First change, just insert a year delay after phase 1, before phase 2. And 2nd, change the naive $10K/yr to just half of what Mount Pleasant spends on its Microsoft TID. Just with that change, the TID now doesn't go in the black until 2035. And your nest egg goes from $58M to $37M.
Now let's get even more realistic/pessimistic. Let's make Phase 1 4 years long and Phase 2 4 years long and put a 2 year gap in the middle where building can happen but where no new tax revenue is produced. And let's use Mount Pleasant's actual TID expense of $400K/yr.
Uh oh. Now we don't go black until 2043 and Beaver Dam ends up waiting 21 years for 43% of $17M, or $7M.
Did anyone on the Beaver Dam city council do this scenario analysis? Did they discuss whether it was worth waiting 20 years to get the first dime of benefit from buildings that likely would be going obsolete when you got there? Or were they enamored by the big pot of gold in the project plan?
Final Comments
Please note that Beaver Dam is protected against getting stuck with debt. If the developer walks away the developer still has to pay the outstanding debt.
They do not have to do phase 2, though, and if they don't these numbers will be quite a bit smaller, but still positive.
Port Washington's deal makes this one looks like genius. At the very least this one breaks even in the pessimistic case close to TID closure. PW's in the best case slides into home base just under the tag.
And suffice it to say, if Beaver Dam wasn't funding $100M of "certain private project costs" the financial benefit would be large. In fact, a TID wouldn't be required and Beaver Dam could happily borrow the $10M in infrastructure costs and pay it back with new tax payments in a couple of years.
Lastly, it's still hard to see why a municipality would do this with the developer incentive: permanent jobs are limited, obsolescence risk is high, revenue benefits are far away, concentration risk is high when they do arrive, legal risk is high, and indirect economic benefit is weak. It's easier to argue that the developers should be paying the city to use the land rather than the other way around.
Beaver Dam gets the award for worst turn of a phrase: "The Company has agreed to pay ... in exchange for the Company being reimbursed...." You just can't beat that, even if the terms of the deal are much better than Port Washington's.