Posts about Gallery Place

First wave of subsidies reap healthy return

Most pre-recession subsidies were made through tax increment financing (TIFs), in which future gains in sales and/or property taxes from a development are used to repay bonds that finance a developer subsidy.

Each of these TIFs are repaying to the city well ahead of schedule, providing needed funds for schools, social services and other cash-strapped priorities in DC.

Many of these projects were harshly criticized at the time as corporate giveaways. So the speedy repayment of these subsidies lends credibility to the arguments of their proponents, such as Councilmember Jack Evans and former Mayor Williams, and to TIFs in general.

Project	Year	Subsidy	Performance
Spy Museum	2001	$6,900,000	Paid in 2007 instead of 2014
Gallery Place	2002	$73,650,000	Returned $15,175,861 to city above debt payments
Mandarin Oriental Hotel	2002	$46,000,000
Embassy Suites	2003	$11,000,000	Paid in 2011 instead of 2016
DC USA	2004	$40,000,000	Estimated to be paid in 2015 instead of 2026
Capitol Hill Towers	2006	$11,500,000	$2.4 remaining, matures in 2029

These TIFs were successful because they were designed in accordance with two principles of effective corporate subsidies. As will be seen below, present-day corporate subsidies haven't always followed one or the other of these two principles.

1) Focus on knock-on benefits: Advocates for corporate subsidies often appeal to the tax revenue that would be lost if a developer doesn't build a building or a company chooses not to locate in one's city. Successful subsidies, however, are more focused on knock-on benefits that are strategically important to a city's finances.

Granting subsidies so that a company's activities—developing a property, locating in one's city—will yield tax revenue only encourages rent seeking by all companies who develop a property or choose to locate in the city.

When the desired activity is to locate in one's city, a "race to the bottom" ensues between states which only hurts their collective ability to pay for education and social services.

That's why effective subsidies are designed to yield knock-on benefits that support a city's strategic goals, like developing a particular sector or a particular part of the city.

The first wave of TIFs were intended to steer the development of downtown away from office buildings and towards multi-use. As Councilmember Evans explained it, "The highest [revenue] use is an office building but then you end up with a Crystal City complex which I can't stand."

The knock-on activities—more downtown residents and more downtown shoppers—the downtown TIFs triggered are not only strengthening those investments, but also producing tax revenue from downtown in many other forms. That's what happens when knock-on benefits are the goal, not the direct tax revenues of an investment.

2) Narrowly target subsidy to yield knock-on benefits: There are always risks with corporate subsidies. The company could pick up and leave without it, or maybe they would have completed the project even without the subsidy.

That's why it's critical to limit a city's exposure. Subsidies are investments, and investments have risks. The DC CFO narrowly targeted the first wave of TIFs to be only as much as is needed to stimulate the intended knock-on benefits for the city.

For each TIF application, the CFO conducted a gap analysis. This analysis compares the amount of private financing that should be available for a development to the costs of the project. The CFO would only certify TIFs at that subsidy amount. The head of economic development finance for the DC CFO, John Ross, explained the process this way:

CFO had to do a certification, and that certification had to include a list of issues. One of them was whether the TIF would cover the debt service payments. One was whether the project would move forward without government support. One was the level of benefits of the TIF that would go to the community. Without that, the TIF could not even go to the Council.

While time-consuming, such a process ensures that subsidies are narrowly targeted to yield the benefits intended.

Present-day subsidies often veer from principles of early TIFs

If the District's first corporate subsidies have reaped such healthy returns, several present-day subsidies veer from the principles behind the successful subsidies.

Some recent large TIFs, like Southwest Waterfront and O Street Market, as well as the proposed LivingSocial tax break, don't follow these principles.

There has been no financial gap analysis for more recent TIFs. Without ensuring that any financing gap actually exists, DC doesn't know if development projects would have happened anyway and it risks overpaying.

The first wave of TIFs were granted under the TIF Authorization Act of 1998 which required a thorough financial analysis and certification by the CFO.

Though no longer empowered to certify TIFs, the CFO still provides financial assessments of TIF applications to the Council and Mayor. These assessments raised particular concerns about 2 TIFs: City Market at O Street and the Southwest Waterfront.

Project	Year	Subsidy
City Market at O Street	2008	$46,500,000
Southwest Waterfront	2014	$198,000,000

The CFO, in his assessment, complained that both the O Street and Southwest Waterfront TIFs were being granted with less information about the project than would be required to issue a complete financial evaluation. There were no final plans or cost estimates for either project.

In fact, neither application included a specific financial commitment from the private developer, making impossible any analysis of the necessary size of the subsidy. The O Street application said that the developer for the hotel hadn't even been identified yet, even though the hotel was supposed to provide 44% of the incremental tax revenues to repay the bond.

While the CFO's office was included in negotiations with the developers after raising concerns in their analyses, the process for granting these TIFs was clearly intended to increase speed at the expense of financial scrutiny.

More recently, the proposed LivingSocial subsidy of up to $32 million to remain and consolidate their operations in the District also veers from proven principles of corporate subsidies.

Proponents of this subsidy often appeal to the tax revenues from LivingSocial that will far exceed this subsidy. Paying for tax revenue, however, only rewards companies who threaten to leave while encouraging a race to the bottom between states competing for companies.

The LivingSocial proposed subsidy is intended to be targeted. The subsidy doesn't begin until 2015 and scales based on the number of DC residents employed, which must be at least half of LivingSocial employees.

But are these jobs that we should be paying for? They aren't strategically aligned with the needs of the city's unemployed, and most of the jobs won't contribute to building a tech sector.

According to a source, only 15% of LivingSocial jobs are in technology, IT, and product development. A subsidy that was targeted to generate knock-on benefits that are strategically important would thus focus on retaining that 15% of LivingSocial positions.

The debate around corporate subsidies is too often dominated by loud voices at the extremes. But experience shows that corporate subsidies can work, and they can also be a waste of precious dollars.

The next time you read of a proposed corporate subsidy, avoid these hyperbolic extremes and ask if the subsidy adheres to these two proven lessons for effective subsidies. If it does, defend the administration that proposes the subsidy, If it doesn't, as recent subsidies have not, then ask questions.

President Lincoln's second inaugural party in March 1865 took place at the Old Patent Office Building at this intersection. Today, that structure is home to the National Portrait Gallery.

The corner is also home to the Martin Luther King, Jr. Memorial Library and an entrance to the Gallery Place-Chinatown Metro station.

In the old image, streetcars prepare to head northbound on 9th Street NW, now a one-way southbound street. Clumps of snow are melting in the street. American flags hang between the columns of the Old Patent Office Building. Across the street a dentist and cigar shop are where today is a YWCA and a Segway tour company.

The city would benefit greatly if so. Not only in the strictest sense of increased sales tax revenue, but also in a more cultural sense: People might start to think of the whole of downtown DC as a destination, as opposed to thinking that way of just a few specific places downtown.

Consider this interesting pair of maps, produced as part of the CityCenter design guidelines (pdf):

The maps show the same section downtown before (left) and after (right) completion of CityCenter. Mount Vernon Square is at the top, Gallery Place is at bottom right, and CityCenter occupies the large block in the left image that's broken up into several smaller blocks in the right image. The colors indicate the number of entrances to retail establishments visible from that location on the sidewalk, with brighter colors being more. Essentially, the brighter the color, the more retail is on that street.

Unfortunately, it appears that the heaviest concentrations of retail along 7th and I Streets won't be well connected, mainly because the intersections at H and 8th and I and 7th are too sparsely retailed. There are already large, contemporary buildings at both those intersections, so it's unlikely the solution will be full redevelopment.

What might work? Complementary signage would help, but probably wouldn't be enough on its own. Outdoor sidewalk vendors might do the job, but both I and H have sidewalks that are too narrow; the city would have to rebuild the streets to accommodate booths.

One idea I'm fond of would be to take the signage idea a few steps further and install a series of matching public art displays along all the streets in the area, connecting the two nodes. If the art installation were large and visible enough (ceramic pandas probably wouldn't do the trick), shoppers would soon get the message that seeing that art display meant "shops and entertainment are here," which might be enough to persuade more people to walk between CityCenter and Gallery Place.

London's Regent Street uses this strategy to great effect. As the photos below show, anyone who sees the light installation knows exactly where they are and what to expect.

Even that may not be enough, though. There's really no substitute for providing people with a real destination between CityCenter and Gallery Place.

There's got to be an answer. Have any ideas?

Cross-posted at BeyondDC.