Posts about TIF

Although TIFs have proven to be successful in a variety of situations around the country, they have long been criticized as corporate welfare for wealthy developers, politically motivated giveaways, or risky propositions that wager public funds on an uncertain real estate market. In the wake of the national recession the latter argument has come to the forefront. Since TIFs only work if the valuation of the properties within the district rises, declines in property values could lead to financial disaster.

Fairfax County has long been reluctant to use TIFs. The Community Development Authority approved in 2009 for the Mosaic District in Merrifield represents the county's only TIF to date. Although Fairfax County's Board of Supervisors enthusiastically supported the Mosaic deal, county leaders have not expressed enthusiasm about replicating the Merrifield model elsewhere.

The ongoing saga of how to pay for the improvements needed to fulfill the county's plans for Tysons Corner demonstrates county leaders' ambivalence. Though the Tysons issue is not yet resolved, the proposal currently on the table calls for a mix of private developer "contributions," a special tax district, and other as-yet-unidentified public funding. While the public and private sectors will be technically sharing the costs for building the infrastructure to support the new Tysons, this arrangement cannot really be called a partnership, as the public sector is not sharing in the project's risks.

In response to the county's activities, landowners and corporate interests in the Tysons area came together in early 2011 to form the Tysons Partnership. This "private-private partnership" includes representatives from some of the largest development interests in the region, including Lerner, Macerich, AvalonBay, B.F. Saul, General Growth Properties, and Federal Realty. The members of the Tysons Partnership will be coordinating efforts to fund their share of Tysons' future infrastructure improvements.

Elsewhere in Fairfax County a different sort of private-private partnership model is coming to the forefront, as developers team up with longtime landowners to undertake revitalization projects. This trend directly responds to rising land costs for parcels along older suburban corridors, which presents a strong challenge to redevelopment. For example, the asking price for redevelopment parcels in the Penn Daw/Groveton area along Richmond Highway is in the range of $3 million per acre. At this price, the land acquisition cost of an apartment development with a relatively high density of 50 units per acre would average $60,000 per unit, even before considering infrastructure and site development costs. Current rents in the area simply do not justify this sort of investment in the acquisition of a property.

A proposed revitalization project in this section of Richmond Highway presents an excellent test case for this new partnership model. Developer Capital Investment Advisors LLC has signed a joint venture agreement with the longtime owner of a small strip retail center at the corner of Richmond Highway and Shields Avenue in the Penn Daw area. The proposed project, The Grande at Huntington, will include about 300 apartments and 30,000 square feet of ground level retail and dining space. While the developer will not realize as great of a return on its investment due to its partnership agreement, its level of risk will be far lower.

The emergence of these partnership agreements represents a shift in how revitalization is being achieved in Fairfax County. If these models succeed they will likely lead to the formation of additional private-private partnerships for future revitalization efforts.

But TIFs only work when there's an increment to be found. In other words, they work in areas that will likely see a big improvement in value, and thus tax revenue, from the public investment. If there's no increment, then the only way to pay off the bonds is to cut into the taxes that would arise from the property without the public financing. In that case all you've really done is give free public money to a private developer.

According to the Current article, the argument goes that if there's no TIF for the mall, then Vornado won't be able to land Bloomingdale's and will instead lease to a store like T.J. Maxx. So, the theory goes, the "increment" of having a Bloomingdale's instead of a T.J. Maxx is enough to justify a TIF for the mall.

The twist with this proposal is that a part of the incremental tax proceeds (i.e. the difference in sales taxes that Bloomingdales would pay over T.J. Maxx) would be directed to tax breaks to attract retailers to less established retail districts in DC. Chairman Brown called this a potential "win-win."

This is completely backwards.

If the District wants to get into the TIF game again, it should be directing the TIFs to those less established areas, not the mall. That's where there will be an actual incremental increase in value. That's where we'll get much more bang for our buck. If Vornado, which owns the mall, can't put together a package to attract Bloomingdale's with its own resources, then so be it. Maybe that means they and their partners paid to much when they bought the mall at auction last year. That's not our fault.

I don't want a T.J. Maxx to move in to the mall, but using public funds to help attract one tenant over another is unacceptable. And it's shameful that the Mayor and the Chairman are even thinking about such a ludicrous proposal.

Cross-posted at the Georgetown Metropolitan.

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.