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Council needs help judging tax breaks

The DC Council will vote on three breaks for developers today, on taxes and affordable housing requirements. But if I were a Councilmember, I'd have a really tough time deciding whether any of them are a good deal or not, because we simply don't have enough information.


Photo by erin.kkr on Flickr.

First is the Adams Morgan hotel tax break. A developer wants a $46 million property tax break to build a 174-room hotel. It would replace empty space owned by a church with something generating hotel taxes and patrons for nearby businesses, but as Lydia DePillis notes, "How do we know that they couldn't make it happen with [less of a break]?"

The giveaway was already reduced from $61 million to $46 million, which apparently still works for the developer. That means the developer was initially asking for more than they needed, and Jim Graham was supporting them. The DC Council would be best off having some independent sense of what it would really take to build a project, but usually they can only take the developer's word for it and decide how much to trust it.

In this case, at least there was some independent analysis by the CFO, which raised some questions like predicting the break would take away from other hotels' revenue and therefore the taxes they pay. Even with the analysis, it's still unclear whether it's a good deal, but at least people have some numbers, which is often not the case.

At the very least, I hope the Council would ask for a Transportation Demand Management (TDM) plan, or a reduction in the number of parking spaces. The project has as more spaces than rooms, and Adams Morgan already has more cars driving around than space on streets. The neighborhood could use more foot traffic, but really doesn't need a lot of people just driving to the hotel only to then drive downtown for their meetings. The hotel needs to plan to have at least a large percentage of its visitors and employees use the many buses that serve the area.

Then there's the Southwest Waterfront deal, which Cheryl Cort wrote about yesterday. A developer promised to build some housing and some office on public land, and agreed to include some low- and moderate-income housing as part of the deal. Now, they want to take some of their office space and convert it to more housing, but without the affordability requirement.

They say that they can't afford to have the same affordable housing in the new portion, and that this change is the only way to get financing for the project. We can believe that it's harder to get financing now and perhaps they need some change, but how much of a change? At the very least, for example, DC could probably insist that the new housing contain some housing at 80% Area Median Income, which is still "workforce" housing for fairly well off families, rather than 100% AMI as the developer has suggested.

But how much negotiating room is there? This is public land, which means that DC ought to try to get the best deal it can. The problem is that we don't know what is the best deal or what's even relatively close. The developer is likely to push for more than they need, figuring they might as well try for a little more. On the other hand, if nothing gets built, it doesn't help DC at all. What's the right balance?

Third, the Union Station payment in lieu of taxes (PILOT) will come back today. The Union Station Redevelopment Corporation theoretically owes taxes on the commercial activity happening on their land equivalent to what private properties would pay, but they aren't paying it. This bill would permanently excuse them from the tax in exchange for a much smaller payment.

USRC says that they are already spending lots of money that they wouldn't if they were private, like paying for elevators that get used by Amtrak and the Metro. As with the other two, though, the bigger problem is that we have little way of really evaluating how much of the break is reasonable given USRC's special circumstances, versus how much is just a request for special treatment that a for-profit organization thinks it can get out of elected officials.

The only Councilmembers who seem to know for sure how to vote are those with firm ideological attitudes toward tax breaks. Jack Evans, for example, seems so sure about the Union Station break, despite calling it "dead as a dog" last time, that he plans to introduce it as emergency legislation. There's no word on why there's suddenly an emergency on legislation that's been brewing for months.

Even the most well-meaning Councilmembers find themselves in a serious quandary when these votes come up. Do they push for more, risking that a project might then never materialize? Or do they give the developer what they want, knowing that there's a huge chance that developer will be patting their lobbyists on the back for pulling the wool over the Council's eyes and getting a big windfall out of the public till?

Advocates have called for a fuller analysis of the Waterfront tax break. As DCFPI has suggested, the Council should systematize the process for these breaks to require some analysis of each one and set an overall cap. Perhaps also it's worth requiring that some analysis be conducted afterward, to determine which ones actually paid off and which didn't. That could help watchdog groups create a sort of scorecard for long-serving Councilmembers about how much their tax breaks either added to or detracted from the District's overall fiscal health.

Some tax breaks make sense, while others don't. But right now, our leaders are flying blind, which isn't a good way to make decisions.

David Alpert is the Founder and Editor-in-Chief of Greater Greater Washington and Greater Greater Education. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He loves the area which is, in many ways, greater than those others, and wants to see it become even greater. 

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Definitely YES on the first two, and definite NO on the last one. Union Station is already a productive and attractive place to locate businesses. It's the best station in the country, bar none.

As for the Adams Morgan hotel, we need to do whatever needs to be done for this project to move forward. It has so many ancillary benefits (jobs, daytime activity, clout for the city and the area, and bringing the only other productive use to a church other than maybe condos or of course another church) that it must go forward. With the exception of the City Paper building, none of the land is generating tax revenue to begin with, and no other use would generate nearly as much going forward. So the number itself is really a moot point since it wouldn't exist to begin with without the hotel.

The Southwest Waterfront project... I think it's an absolute blessing to get more residential into it. It had entirely too much office to begin with, so I am happy they're converting it to residential. I think it makes total sense that it's difficult for developers to justify a switch from a more lucrative product in the long run(offices) to far less luctrative product (housing with an affordable element). Given that it's a much better project with more housing and less office (don't need another SW dead zone office ghetto), I think this is a fair tradeoff.

by SG on Dec 21, 2010 9:52 am • linkreport

Agreed 100% with SG's comments about the Adams Morgan hotel.

by Tex on Dec 21, 2010 10:35 am • linkreport

Definitely yes on the first two, now on the last (like SG).

The Adams Morgan hotel has been in the works now for what...5 or 6 years. The deal didn't pencil (or barely did) then, it is guaranteed to not pencil now. The whole thing about taking revenue from other hotels is hogwash as it related to the District. Hotel revenue is the same to the treasury whether it comes from a hotel in Chinatown, or one in Adams Morgan. The land it sits on is currently in tax abatement status. Its a win win.

I also would take exception to the fact that the city is "flying blind", and if they are, then it is their own fault and lack of oversight that is the cause. Any generic commerical real estate analyst that I would hope the City Developement office employs could do a rough back of the napkin calculation as to the costs and ROI and get within 15% plus/minus.

Or the city could actually "gasp" do what any commerical developement company does when they enter into a joint venture and spend 20K having Costar (or equal) put together a due diligence based on the basics of the deal and proposed build out with local construction, financing and entitlement costs thrown in.

If the city was doing this, they could get to within the margin of error, or +/- 5%.

If the city is entering into these negotiations blind, its their own fault.

by freely on Dec 21, 2010 10:40 am • linkreport

I will add that I wish David would offer an additional viewpoint beyond the DC Fiscal Policy Institute. I understand it may be an editorial decision, which he has full rights and authority to do since it's his site, but I do wish there was another viewpoint- maybe even a (reasonable) developer or former employee in the CFO's office- who could share some insight that goes beyond rhetoric.

by SG on Dec 21, 2010 10:48 am • linkreport

There's not a single "business person" on the city council --and I mean someone who ran anything or did anything other than beg for dollars from donors or grants. There is a knowledge gap. I wouldn't expect a developer to know how to run a community activism group and vice versa.

by John Doe on Dec 21, 2010 11:08 am • linkreport

Tax breaks don't make a sense when the city has a massive budget deficit.

by Jasper on Dec 21, 2010 11:38 am • linkreport

I will add that I wish David would offer an additional viewpoint beyond the DC Fiscal Policy Institute.

Yeah, I'm with you there. I find DCFPI's recommendations on tax policy slightly less interesting than Grover Norquist's. In both cases, the conclusion is always the same, only the justification changes. But at least Norquist is occasionally entertaining. Wrong, dangerous, and pathetic--but occasionally funny.

by oboe on Dec 21, 2010 12:08 pm • linkreport

The Council is holding a final vote on the consent calendar today (bill 18-1010, agenda item B 10) for Kelsey Gardens' (Addison Square, Met-Dev.com) tax abatement.

Metropolitan Development now has their financing in place. So in terms of going forward, they are going to begin digging in earnest in the 3rd Quarter of 2011. Right now they are putting their money into architect drawings and permits (apparently, developers never do this unless its really moving forward).

Razing the current buildings before development begins formally is unlikely; apparently, there are potential liability issues, but enhanced safety lighting is definitely going to happen in the next month or so.

Tax abatement makes this development and its market rate/low income housing and ground floor retail possible.

by CCCA Prez on Dec 21, 2010 12:21 pm • linkreport

I will add that I wish David would offer an additional viewpoint beyond the DC Fiscal Policy Institute.

this reminds me of this awesome Ed Helms clip -- "Ed Helms explains that conservatives are here and control the entire government, most major corporations and many media outlets" -- but when some group suggests that the recipients of taxpayer largess should have to explain why they should be rewarded so handsomely for doing nothing at all, and a blog writes about it, it's a vast left-wing conspiracy by that Major Media Magnate, David Alpert.

that said, this is an excellent post -- having rich people explain why they should be given tens of millions of dollars in free money (a massive transfer of wealth from the non-rich to the rich) would be a step in the right direction.

once we 'systematize this process' (and this really would be a tremendous achievement), then we start asking more fundamental questions like, oh i dunno, why should we be working so hard to redistribute wealth so aggressively upwards to the top 1% when DC already has one of the highest rates (the highest?) of wealth inequality in the country? it seems like the AP or the Times is writing about this stuff every other day. the dreaded DCFPI has been issuing reports on DC's shameful inequality for years. maybe somebody should do something? or, if you like violent crime and want to see more of it, especially on the train, then don't do anything.

if it was determined that DC just had to succumb to the extortion scheme and have DC taxpayers pull money out of their pockets and give it to rich people just to help build a profitable business to primarily benefit those rich people, then i could see something like a taxpayer-financed or taxpayer-guaranteed loan to developers as something much more palatable -- the hotel/developer/bank could then repay the city's taxpayers over time at graduated rates, and DC taxpayers would be rewarded appropriately for undertaking the risk.

p.s. the Cheryl Cort link is broken.

by Peter Smith on Dec 21, 2010 1:06 pm • linkreport

Thanks, Peter.

I don't understand the knee-jerk reaction to linking to DCFPI. In their article on Adams Morgan, they don't say anything very extreme. They don't say that absolutely no way no how should there be the tax break. They just say that we need to be able to judge these better since really we don't know when they are a good deal and when not. How is that extreme, one-note, Grover Norquist-like?

by David Alpert on Dec 21, 2010 1:13 pm • linkreport

Will the patrons of a 5-star hotel really use public buses? I'm very concerned about the amount of traffic that that Adams Morgan hotel would generate. It's rather far from Metro, and the idea of tax breaks for big businesses in an already-affluent neighborhood rubs me the wrong way all over.

Why can't I get a tax break to start a big business? Why does DC hand out so many case-by-case exemptions?

That all said, it looks like the Union Station deal is (thankfully) dead.

by andrew on Dec 21, 2010 1:14 pm • linkreport

As a D.C.-based employer with D.C.-resident employees, I wish we could all see where the District is spending money for economic development and how its deals are panning out. But we can't, and therefore we can't really have an informed debate: as we at Good Jobs First revealed recently, D.C. and 13 states still keep taxpayers in the dark. That is, D.C. has no online disclosure of even the most basic facts: who got an economic development subsidy, how big a subsidy, in exchange for creating how many jobs and at what wage and benefit levels, and how is the deal actually playing out over time? See "Show Us the Subsidies" at: http://www.goodjobsfirst.org/showusthesubsidies

by Greg LeRoy, Good Jobs First on Dec 21, 2010 1:23 pm • linkreport

Will the patrons of a 5-star hotel really use public buses?

i was thinking almost the same thing, but i wasn't thinking about whether the patrons would be '5-star types' -- i was more thinking, if they are '0+-star types', they're not going to ride the bus. Nobody rides the bus voluntarily.

Kristen Lee -- the influential-wife who is taking her own and her husband's talents to Philly -- is all about Philly because of its trains, not its 'transit':

She prefers Philadelphia for the cultural opportunities and the dining, she said.

But mostly -- she really likes the trains.

She liked taking the Broad Street intra-city subway/train to the stadium (Citizens Bank Park), and she liked taking the commuter train w/ the kids up to NYC.

I'm very concerned about the amount of traffic that that Adams Morgan hotel would generate.

If DC continues moving in the direction of allowing people to get around by foot and bike, DC will have no problems with traffic in the future -- at least, nothing like what currently plagues the city.

Any large hotel should receive automatic consideration for a bike-sharing station. And the more possible and pleasant you make a city for walking, the more people will walk, and be happy to do it. And people will walk and biker further. A lot of talk about walk/bike/transit-sheds ignores the fact that many places make it difficult-to-impossible to do any of these things -- that's before we even get to the possible 'interesting-or-even-enjoyable' aspects of walking/biking/transit. How far would you walk/bike, for instance, if you weren't constantly stressed about getting run down, especially when you had to traverse/cross various dangerous streets/intersections/etc.?

(Motorized-) Transit-shed distances are a bit more complicated b/c then you have to talk about rapid transit vs. streetcars, sustainability, 'smart growth', etc. If you build right, then travel distances go down for every mode.

A comparison of London and Toronto is interesting, and talks a bit about making a place interesting/pleasant to walk/be around -- I particularly like the Fisher-Price dig:

Linked to its walkability is London’s dedication to the details of its streetscape. The sidewalks, lamps, rubbish bins and curbs are built with a solid elegance that is largely unknown here. Upon returning to Toronto, our street furniture seems like it’s Fisher-Price, the sidewalks rough and patchy. London invests in fit and finishes more than we do. Here, we now call spending on such things “gravy,” because we don’t yet believe we have the makings of a great world city. London knew what it was from the beginning and never forgot it.
Does DC have the making of a great world city?

by Peter Smith on Dec 21, 2010 2:20 pm • linkreport

Why should we be working so hard to redistribute wealth so aggressively upwards to the top 1% when DC already has one of the highest rates (the highest?) of wealth inequality in the country?

This is kind of meaningless when you're talking about DC proper. The US as a whole has had a massive increase in inequality over the last several decades, and that's been a tragedy. It's largely a combination of wage stagnation at the bottom, and gutting of taxation at the top.

In DC we have a completely different dynamic. We have inequality in the District because the middle-class has been driven out of the city. What's left are the desperately poor and the wealthier-than-average.

Inequality in the suburbs is less egregious because the very poor have been isolated in urban ghettos.

You see this kind of imprecise thinking a lot when talking about the District versus the greater DC metro area. The wealthy in DC sure as Hell didn't get their wealth by taking it from DC's poor. Generally speaking, the poorest of the poor in DC never had any wealth to begin with.

by oboe on Dec 21, 2010 2:44 pm • linkreport

This is kind of meaningless when you're talking about DC proper. ... In DC we have a completely different dynamic.

i read your comment several times, and it still doesn't make sense to me. am i just reading it wrong? what am i missing?

it seems like you disagree with my assessment of things, but i can't understand how.

for instance, wealth inequality has been growing in the US over the past few years, maybe the past few decades. ok.

DC wealth inequality has also been growing, too. ok.

DC has possibly the worst wealth inequality of any bigger-than-small US city. ok.

now - does this mean you disagree with my pov somehow?

as in, should DC work harder to give more money to developers/rich people through various subsidies/tax relief abatements/giveaways, or should DC work harder to fix the wealth inequality situation?

and/or are you saying that tax abatements for developers have nothing to do with wealth inequality in the district?

and/or, is the process of gentrification in DC different ('a completely different dynamic') than, say, the process of gentrification in SF? or Oakland? or any other city in the US or world?

by Peter Smith on Dec 21, 2010 3:10 pm • linkreport

Wealth inequality in DC is entirely a function of the vanishing middle-class in DC. That's almost tautological. Give me any sub-population in the United States, anywhere, and remove everyone making between $20k and $100k and you will have massive inequality.

That's completely different from when we talk about US income inequality. The middle class in the US is not shrinking because they moved to the US' suburbs (Canada?). It's shrinking because there are fewer and fewer well-paying blue-collar jobs, so those folks are falling into the working poor category.

as in, should DC work harder to give more money to developers/rich people through various subsidies/tax relief abatements/giveaways, or should DC work harder to fix the wealth inequality situation?

If this results in a big increase in middle-class housing stock in the city, then "yes", that's exactly what we should be doing. And that will also address the type of inequality that DC suffers from.

by oboe on Dec 21, 2010 3:33 pm • linkreport

@Greg Leroy,

I don't exactly how much has been given in subsidies, but lets look at two of the largest examples, if not THE largest examples.

1. MCI Center (now Verizon) - Between the property tax abatement for 13 years and the discount on the lease of city-owned land of about $4 million to $5 million, a waiver of $1 million in construction fees, and $2 million in sales tax exemptions for certain events. Add it up, and it's not hard to get to $100 million so far, and counting.

But look at what its done to Chinatown and Penn Quarter. Chinatown was a rat infested dilapidated blight in the middle of the city. The new property tax revenue from every new office, condo and rental building down their alone pays the bills a few times over. The retail activity is on top of that. I would venture a guess that the 100 million dollar investment has returned 20-30 times that in property value and probably 3 or 4 times that value on a yearly basis in collected sales and business tax.

2. Columbia Heights - DC via the vehicle DCUSA spent 43 million in subsidies to underwrite the project.

Do we even have to discuss this. More than a billion dollars in new commerical, residential and retail construction all in a ~5x3 block area.

Is EVERY subidy a good idea? Of course not, but the District recent record is full of succesful examples.

by freely on Dec 21, 2010 4:44 pm • linkreport

Wealth inequality in DC is entirely a function of the vanishing middle-class in DC.

i'd suggest that this is almost certainly false and/or misguided.

and, i think it's besides the point. i mainly care about 'wealth inequality' b/c it implies that some significant percentage of people is probably living in poverty -- and that's unacceptable.

so, whether the middle class just up and vanished, or a large group of extremely wealthy Martians landed on the White House lawn and decided to stay, all that matters is that we still have wealth inequality/poverty.

If this results in a big increase in middle-class housing stock in the city, then "yes", that's exactly what we should be doing. And that will also address the type of inequality that DC suffers from.

now this is what we're talking about - finally, a disagreement! :)

i think giving tax money, from what is a regressive tax system already, to wealthy people, for free, to make profits by building 'middle-class housing stock' in a city (allegedly) without a middle class, could only be characterized as 'misguided' and, quite possibly, 'immoral'.

if new housing was somehow rent-controlled or price-stabilized, then it could be good-ish for non-rich people. then the question becomes, was the taxpayer investment worth it?

a note from the Kelo case -- if you don't get it in writing, and sometimes even if you do, there may not be a guarantee that a developer will actually follow through on their promises -- so make sure a developer has plenty of skin in the game.

citizen groups in DC should collaborate with citizen groups in all of Greater Washington and come up with a plan to pressure their governments to openly collude to stop the 'race to the bottom' when trying to lure development. just make it a blanket policy -- no more tax giveaways -- we can do loan guarantees with payback schedules, we can appoint a special liaison to help you navigate city red tape, we can advise you on your TDM plan, we can help coordinate outreach with various community groups and stakeholders, but no more giveaways on the backs of taxpayers. let's have a race to the top -- of good, responsible, responsive governance, not a race to the bottom to see which city's citizens are most exploitable via their compliant city government.

by Peter Smith on Dec 21, 2010 5:19 pm • linkreport

What DC should do is move more toward insurance and away from tax breaks. Tie the tax breaks to revenue. If they make above x in revenue, they get no tax break. If they make below that then the tax breaks kicks in and gets larger the shorter they come, up to some cap. That way the developer has the security they look for, but DC is giving anyone a windfall. [They might need to make it income rather than revenue oriented, but you get the idea].

by David C on Dec 21, 2010 10:09 pm • linkreport

should read "...DC isn't giving anyone a windfall."

by David C on Dec 21, 2010 10:11 pm • linkreport

to freely: when Good Jobs First analyzed 13 big D.C. Industrial revenue Bond and Tax Increment Financing projects eight years ago http://www.goodjobsfirst.org/sites/default/files/docs/pdf/dc.pdf we found real problems. To sell the Gallery Place TIF bonds, the District had to pledge *half of DC's incremental sales tax revenue*! We could find no evidence that D.C. was enforcing its local hiring rules for IRB-financed projects. Beneficiaries included upscale private schools and a big law firm. The Verizon deal was indeed stingy; it occurred at a time when DC had little to spend, and it suggests other cities' stadium/arena deals are over-subsidized. And there are additional subsidies to Columbia Heights like the Target TIF (I can't retrieve the amount just now; was it $72 million?). Yet when I once asked DC officials if they were tracking sales tax revenues in the surrounding area to gauge their success(a major justification for subsidizing the anchors and addressing DC's sales tax leakage problem), they said DC is unable to track sales tax by location/establishment.

by Greg LeRoy, Good Jobs First on Dec 22, 2010 12:45 pm • linkreport

@ freely: lets look at two of the largest examples

The question is not whether those subsidies have had any yield. The question is whether that effect could have been reached with less, or without that subsidy. A related question is whether IF those subsidies are needed, why tax rates aren't lowered for everybody. Why do only certain large developers get them? Is it fair that the stores neat he Verizon Center have pay the full load, while the Verizon Center gets a discount?

by Jasper on Dec 22, 2010 1:50 pm • linkreport

Well, people can spend the time if they like putting together financial and economic models if they want to try to justify it. Would Chinatown have developed without MCI acting as the anchor? Would the literal billions spent in the following decade have come anyway? In that location, I am sure it would have, but it would have been delayed at best by half a dozen years.

Columbia Heights? Again, eventually sure, the question is timing.

The metro stop was in by 1999, and the rest of the city was enveloped in a full scale real estate boom by late 2000, yet nothing happened until 2005 when Target agreed to anchor DCUSA (with a 45 mil subsidy). After Target signed, the rest fell into place including Giant which while it opened 18 months before Target was waiting for an anchor to get started.

The way the credit markets dried up, had DCUSA been delayed by even a year, you would see significant less development in Columbia Heights right now. My opinion is had DC not provided the subsidy to attrack a national retailer to anchor it, and will the following economic crash, Columbia Heights wouldn't have reached the point it is today until 2015 or later.

And why do large developers get the largest subsidies? Because they are taking the largest risk, investing hundreds of millions of dollars on an unproven area and as any retailer will tell you, they won't risk a new location without some assurance (i.e. an anchor) as a guarantee.

None of that inline retail, none of the residential development that took place in Columbia Heights would have happened without DCUSA.

by freely on Dec 22, 2010 2:40 pm • linkreport

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