SkySong’s ‘sunk cost’ assertion:
Council candidate’s claim examined
The Republic • azcentral.com
October 17, 2014
WHO SAID IT: David Smith
TITLE: Scottsdale City Council candidate
THE COMMENT: “At this point, the $81.4 million investment (in SkySong, the Arizona State University Scottsdale Innovation Center) is a ‘sunk cost’ in economic terms – water over the dam in layman’s terms.”
THE FORUM: Smith’s blog at electdavidsmith.com
WHAT WE’RE LOOKING AT: Whether Smith is correct in his assertion that the city’s investment in SkySong is a cost that has already been incurred and cannot be recovered.
ANALYSIS: The city has invested $81.4 million for property acquisition and infrastructure improvements for the complex, at the southeast corner of McDowell and Scottsdale roads. In return for a 99-year ground lease, signed in 2004, the ASU Foundation agreed to build 1.2 million square feet of office space in phases and share with the city 50 percent of the profit from operating the facilities.
The ground-lease rent payment was due by Aug. 1 of every year. However, the city never received any money because SkySong has not reported any profit. It reported a $2.9 million net loss in 2010 and a $2.5 million net loss in 2009.
In early 2012, the City Council approved an amended ground-lease agreement with the Foundation that established an annual fixed-rate payment based on lease revenue instead of profit, and the city received its first payment for $141,942 on July 28.
Total lease payments over the life of the agreement are capped at about $79.7 million, said City Treasurer Jeff Nichols. The payments will continue for 74 more years, he said.
They started at approximately $139,000 plus interest in 2014 and increase to $1.1 million in 2041. They remain at $1.1 million from 2041 through 2088 and then decrease until the final payment in 2105.
Smith is correct in referring to the city’s past investment in SkySong as “sunk costs,” Nichols said. However, the “deal that we struck with the ASU Foundation is our attempt at recouping some of those costs, if not all of them,” he said.
The agreement does not take into account the time value of money, he said. “It they offered to give you one dollar a year from today you would have to discount what that would be worth today (a discount rate),” Nichols said. “It basically takes into account the effect of inflation on money.”
BOTTOM LINE: Smith’s assertion that the city’s $81.4 million investment is a “sunk cost” is correct because the money received through 2105 will not take into account the effect of inflation. However, the city is continuing to pursue repayment of as much of its investment as possible.
CONCLUSION: Four stars, true.