Tuesday, September 02, 2014

7 Things To Look For In Feasibility/Impact Studies

Supply-side economic developers often latch on to tourism as a rationale for mega-facilities such as theaters, stadiums and civic/convention centers, even though that demand-side form isn’t remotely their forte.

They do this as a means to siphon off visitor-related taxes as a means of financing things that will avoid voter scrutiny, masking that the real purpose for the facilities is to prop up nearby private property values so as to better enable development.

Flattered to have tourism acknowledged at all, in some places, demand-side community destination marketing organizations have played along, or worse, failed to grasp the inherent supremacy of demand-driven economic development.

Fortunately, as was almost pathetically apparent recently at the 100th annual conference of DMO execs, this clique is a dying breed.

It is easy to find fault with feasibility consultants, who in a perfect world, should be brought in to do a needs and impact assessment unfettered by the “push and pull” agendas of advocates and local officials who have already made up their minds and only seek cover.

So increasingly, the ability to dissect feasibility studies both to keep them objective and as probing as possible, and then later, to further dissect reports for news outlets, concerned residents, neighborhood groups and any still-objective officials, is a requirement of being a demand-side DMO exec.

The importance of learning to fulfill this thankless task first emerged as a “best practice” nearly three decades ago (1985) when a handful of DMOs began to circulate a ground-breaking essay coining the term sense of place.  They also began to grasp the risks inherent in mega-facilities.

Central to what had become a movement a decade ago is the increasingly irrefutable mountain of evidence that if mainstream mega-facilities such as these are not proportional in scale and very delicately feathered into the ecosystem of what makes a community distinct, they rapidly hollow out its appeal.

Why does this responsibility fall to demand-side destination marketing organizations?  First of all, it’s because they must be intimate with sense of place to craft appeals to visitors, including more than 8-in-10 newcomers and relocating executives.

This also makes them, by default, responsible as the guardians of sense of place.

The second reason this responsibility falls to DMOs is that this is the organization in a community charged with spearheading overall visitation, including any portion necessary to pay off the debt on these facilities, as well as that which can be harvested by these facilities to make them sustainable.

Here are 7 things I learned to look for during my now-concluded four-decade career when assessing feasibility/impact assessments for mega-facilities:

Residential Burden from Visitor-related Taxes

Just because they are called visitor or tourist taxes does mean there isn’t a cost to residents and other local businesses.

This is far more than the small amount economists have identified through research that will be absorbed by the businesses collecting these taxes (e.g., lodging, prepared food, admissions, car rentals or special business districts’ property taxes.)

The impact is also far more than the visitors who will be lost at the margins due to the tax, something economists can also compute.

Far greater is the fact that any time a tax is assessed on a visitor, it subtracts from funds they have to spend in local businesses during the trip, an amount that adds up very quickly.  It can also be computed in advance during feasibility/impact analysis.

If spent on marketing to draw more visitors to a community, a visitor-related tax is offset by more than a 6-to-1 increase in visitors, and tax revenue generated from their spending that can offset the local tax burden through more visitor spending.

But when spent on debt service to finance a facility, that amount immediately leaves the local economy to pay off bonds.  Even the amount ineligible for marketing will still take away from availability to fund roads, trails, wayfinding, and the operation of other cultural facilities and events underwritten by local government.

The public has a right to know how much this will remove from the local business climate.

People who say financing something is painless because a visitor tax will pay for it may not realize it, but unless it is reinvesting in community marketing, they are deceiving local businesses and residents.

Insist On Estimates of Downstream Improvement Costs

Also beware of studies that cite the impact of similar facilities in other cities without showing the differences between what was projected by consultants on those projects and how hey have actually performed.

Studies should also reveal ongoing costs for renovation and upfit, which will ultimately far transcend the original construction costs.

An example is the Charlotte Coliseum.  It opened in 1988 but was demolished and replaced by another in 2007 before its original construction cost, $104 million in today’s dollars, had been paid off.

Now just nine years old, the newer $265 million facility is already in need of a $28 million upfit.  While a bit extreme, this example isn’t unusual for other mega-facilities there and elsewhere.

The downstream costs should be estimated in preliminary studies of feasibility and impact.

Don’t Settle Just For Estimated Activity

Be sure the study reveals three trend lines:

  • Percentage of visitor participation across the nation over time in the related activity as a proportion of overall visitation;
  • National estimates of the time Americans devote on average to the related category; and
  • Percentage of their income spent on that activity.

Economists know that these three factors rarely change over time.  They may keep pace with population but not capacity.  Time devoted to leisure today for example is the same as it was in 1900.  In fact, “pure leisure” has declined since 1965.

About 1-in-10 hours on weekends is available for events.

Instead, new facilities create a transfer or substitution within a category, e.g. leisure, not detectable in direct competitors but at more vulnerable levels.

This is why performances in non-profit theaters increased by 5,000 annually between 2004 and 2007, but attendance declined as the number of theaters doubled.

Often this effect is masked as it is in commercial touring Broadway shows where playing weeks and revenue increased during a similar span, but attendance, while up and down, is essentially what it was twenty years earlier.

This is why mainstream facilities are always a two-edged sword.  There may be a visible bump in participation, but the hollowing out at other levels that are even more distinct to a community’s identity are barely detectable, until it’s too late.

Most developers and related consultants dismiss this because many depend on “churn” to justify their developments.  But a community that ignores this is destined to lose its soul, if it hasn’t already.

A staggering number of cultural facilities were built in the United States between 2000 and 2007, especially performing arts centers, and yet the percentage of visitors participating in and/or prompted by these events along with overall attendance remained flat.

The index for ticket sales to commercial concerts increased from .73 to 1.38 driven by the 5% of performers who are driving 90% of concert revenues.  But it was flat to slightly down when compared to the index for capacity.

Good studies for a new theater, for example, should show not only how capacity has increased overall through the years but that the percentage of adult Americans attending various types of concerts collectively over the past decade has been flat to down at 22%.

Yet of the nearly $16 billion spent by communities on 725 new cultural facilities between 1994 and 2008, most were spent on performing arts centers during just five years between 1999 and 2004.

Look Carefully At Trend Lines

A decade is not enough to spot decline.  For example, a chart of the last 15 years for attendance at conventions will show only a valley, a peak and a slightly lower valley.

Some consultants for convention centers add a trend line at the end going straight up.

But to see the long, slow decline in this segment of visitation requires zooming out to at least 1974.  Suddenly, it becomes clear that over the past three decades, both the valleys and peaks gradually each became lower and lower than those past.

Of course, conventions and meetings are still an important visitor segment, but any community looking at a convention center must also ask to see the corresponding trend line for the number of groups using convention centers.  This is about 30%, broken down further by cohorts of average size by both overnight and daytrip, e.g. 80-85% are 2,000 or fewer in size.

Charts should also overlay a trend line for capacity, showing the more than doubling of convention space during that decline as well as the explosion of major convention hotels with meeting space.

Durham and Raleigh are a case study of comparison.  The former built what we call a “boutique convention center” as the decline became apparent, while Raleigh erected a mega-convention center several years ago.

Yet during the five years they have co-existed, Durham and Raleigh have continued to draw the same proportion of overall visitors to each community who attend conventions, with Durham actually exceeding Raleigh during some years in the proportion attending other types of meetings.

Similarly, Durham opened a new performing arts center during that period—its twelfth—which supplanted one in Raleigh for touring Broadway and other performances.

Yet, this has not decreased the proportion of visitors to Raleigh who take in that activity or changed the proportion of residents so inclined in either community.

Mega-facilities increase supply, but not necessarily demand.  Those that succeed are often due to anomalies.  Make sure feasibility studies detail downside risks beyond those that are merely financial.

Beware Of Including Resident Impact

Research economists uniformly disregard resident spending as part of a facility’s economic impact.

This is not only because a new facility will result in a transfer, or substitution of leisure time use and spending rather than an increase.  It is also because residents would have been spending the same amount of discretionary income somewhere else in the economy if not there.

Still it isn’t uncommon for downtown advocates or local officials to shop for consultants until they find one that will inflate projected impact by including residents.

This may because downtowns have a win/lose inferiority complex born of years of neglect, but it may also have to do with adopting the “churn” mentality of some developers.

But anyone credibly evaluating a feasibility study should back out resident spending or show it merely as “economic contribution” but not value-added.

However, a growing trend is to try and compute “retained tourism” which is “locals willing to travel” for similar events but because of the proposed facility, will now keep that spending local.

We attempted to calculate it in Durham for facilities during the last decade.  It must be customized to each community because “locals willing to travel” will fluctuate greatly on how close or far away alternative communities and facilities may be.

It is a legitimate calculation if very carefully done based not on conjecture, but sound research.  Of course, as with visitor impact, this should distinguish between attendees prompted by events from those who take them in on trips for other purposes.

New Visitors Attributable To Vs. Required For A Proposed Facility

Consultants usually make an attempt to quantify the number of visitors who will travel for the main purpose of taking in events at a proposed facility either in lodging room-nights or admissions or car rental days or meals, versus those who may happen to take in events during trips for other purposes.

But it is just as important to also make sure there is a calculation of how many additional visitors the destination overall will be required to draw to make up the amount needed to pay for the facility either by direct subsidy or from revenues fueled into government coffers.

A good estimator will suggest, based on this calculation, a corresponding increase a community should simultaneously invest in community marketing to generate this increase in visitation.

A good performing arts venue hosting a mix of concerts and touring Broadway productions may generate up to 15,000 hotel room-nights from cast and crew, which to officials, may seem like a lot.

But remember that the tax is paid on the rate paid for the room, not the room itself.

Even for a destination such as Durham, where rates are the highest of its comp set, this means that such a facility will generate less than 1% toward a debt service requirement of $1.5 million.

So good business dictates an increase to overall community marketing of $250,000 to $500,000 annually to generate the rest of the revenue needed.


A good feasibility study won’t just calculate the raw impact of a facility but also the return on investment to local government from non-resident visitor spending.

This should be net the cost of the land and any costs related to relocating existing businesses or services as well as the cost of construction.

This will include taxpayer return on investment from any parking and concessions or revenue-sharing.

Local governments are notorious for accounting practices that make it difficult to trace revenues related to expenses but especially beyond just operations.  A study might go so far as to recommend a special account to do this.

The ROI should include related visitor spending broken down by prompted vs. those taking in the event on trips for other purposes as well as the induced value added to the economy.

The best practice economic model will also calculate unavoidable “leakage” specific to a community; e.g., supplies that must be ordered from vendors outside the community.

It should also make it practical for a community to institute policies and metrics that encourage use of local vendors and the hiring of employees who live in the community or otherwise deduct that from the impact of the facility.

A “best practice” community destination marketing organization can re-calculate these numbers annually using the same model.

In summary, communities that value the importance of sense of place not only for appeal to visitors and new business relocation or expansion, but also for resident attachment and passion should carefully evaluate any proposal for mega-facilities.

Preservation of sense of place and community revitalization require strategic decisions as much or more about “what not to do” as they do about “what to do.”

Those most appealing in the future will be communities that learn to say “thanks but no thanks.”

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