Tuesday, February 2, 2016

Should TIFs be tied to community benefits?

Tax Increment Financing is often depicted in the public as a hand-out to developers. To which developers counter that without a TIF the project  in question wouldn't happen at all and the money given to developers wouldn't be collected in the first place because "the numbers wouldn't work".
Source: CivicLab

With those diverging views it isn't surprising that the TIF debate has entered the Baltimore mayoral contest with a new wrinkle. Adhering to the hand-out idea, Carl Stokes, City Council member and mayoral candidate is promoting a community benefits agreement to be tied to a TIF. The bigger the TIF amount, the larger the requested benefits. Will this work?

First: Both statements about TIFs are right. They are a developer subsidy drawn from money that neither the City nor the developer would have access to without the proposed project. In a way it is the idea that a project can, at least in part, fund itself.

Like when somebody takes up a college loan under the assumption that the higher wage that comes with college education would eventually pay the loan back and one would still come out ahead over not going to College.

In the TIF scenario, the City would get more taxes after the project is built because the value of a certain area or piece of land is assumed to increase in value and therefore yield a higher property tax.

For the TIF a certain portion of that increased tax is up front dedicated to paying back a "loan" (usually municipal bonds). After the TIF expires the loan has been paid back and the City will get the full tax and incremental benefit. The key here is that the developer needs the municipality in order to get that big chunk of money right at the beginning of the project, a chunk that they wouldn't necessarily get from a bank.

Only the municipality can "float" these bonds that yield those chunks of cash. If everything works out ok all come out as winners. A project that would have otherwise not been fundable gets built, more taxes are collected and eventually the City will get to use the additional revenue for the general fund.
Wexford project: Gaudreau Inc. rendering.

As with the college loan, there are unknowns, though. Will the student get a job, will the salaries be what she thinks they will be, will she live as long as it takes to get a net benefit etc. Some of these questions can only be answered in a speculative way.

Same in the case of a TIF. Will the project perform well in the market, will it yield a profit and therefore be assessed as a valuable asset or will it sit around as a white elephant whose value is not what it was projected?

There is very much the risk that a TIF funded project could cost the taxpayer money. The TIF funded Baltimore Convention Center Hilton is a close call. It doesn't perform as projected and has made losses. There is enough fine print around the financing there that there isn't full agreement if this hotel actually has cost the City taxpayer or if it is still at least a wash, too complicated to get into here.

The Harbor East Marriott Hotel, on the other hand, is performing so well that Carl Stokes uses it as his favorite example as a TIF being a handout. He is right, because the TIF period was scheduled too long and the bonds could have easily be refinanced by the developer and they could have paid the up-front money back with the proceeds without any trouble. As it is, the hotel makes tons of money and the city doesn't get any property taxes from it.

Another big question is what TIFs fund. In the case of the Marriott, the City had already paid all the bulkheads, pipes, lights and roadways that make up Harbor East and gave Paterakis ready to develop fully entitled parcels to build on. After a few years of these lots sitting vacant, the City felt more was needed to gte the area going. Then Mayor Schmoke thought that Harbor East could work as a location for a, what he felt, badly needed convention center hotel. So he saw a public purpose in the TIF. Indeed, the hotel, although not an ideal concention center hotel, acted as a catalyst for the whole area and set off an explosion of development that collectively yields so much tax today that the City easily recovered its bond and cash outlays.

In the case of HarborPoint, the TIF is supposed to help the developer with building infrastructure that traditionally was considered to be the City's task to build. Infrastructure on the capped brownfield is extra expensive. Without a TIF, the period it already took to begin development there would have probably be even longer (the site had been cleared as far back as 1992).

How about community benefits? A TIF approved by the City Council yesterday is touted by Carl Stokes as the new standard.
"From now on, every TIF will have to have a community benefits agreement, We should use at least that [the Wexford BioPark deal's] scale. The community will get approximately $4 million, that's hard, cash dollars. They, the community, will decide how that money is spent in their community" (Council member Carl Stokes)
As Anirban Basu, the local economist in charge of giving such answers, judicated, having a TIF beneficiary pay something back for social needs is good.
The fact that money is made available for various social purposes should be viewed as a good thing." (Anirban Basu)
Community benefits agreement are increasingly tacked on as a condition to all kinds of things that developers want to see. Baltimore County, for example, wants to see a community benefit when a developer gets a Planned Unit Development (PUD) granted instead of having to work with standard zoning. In the case of EBDI (the other biopark on the east side near Hopkins) the entire deal was constructed such that the master developer needed to bring about a residential project within a set formula of affordability for each new commercial project. The Baltimore Casino has community benefits built into the formula in which the City receives money from the operation.

These benefits are a way of establishing some balance in a time when the scales seem heavily tipped towards subsidies for big developments.

From the developer's perspective, though, the benefits cost is just added project cost that will simply require a larger TIF to make it all work.

In the case of the Casino, the developer successfully channeled community benefits money into utility relocation that the Casino itself needed. In other words, for community benefits of any kind to really benefit the community, a community be better well organized. Luckily, with the Southwest Partnership that is the case for the latest Baltimore TIF, the Wexford Center that comes with community benefits.

Klaus Philipsen, FAIA

Baltimore SUN: Baltimore officials declare new 'standard' for passing development subsidies