Politics, like life, is all about timing.
That’s why you would think that the proposal for county government to put $5-6 million into a proposed development on the “Highland Strip” would be problematic; however, it passed 7-2 in a committee of the board of commissioners yesterday.
The vote comes less than a week after Mayor A C Wharton advocated a privilege tax, aka payroll tax, to cope with the county’s dire budget challenge to fund safety net services like The Med. We’ve been advocating a payroll tax as part of comprehensive tax reform for three years, because it requires the 88,000 people commuting into Shelby County to work to contribute to its infrastructure and services.
Dialing For Dollars
But that plea for a new tax on wages was expected to make it hard for the Shelby County Board of Commissioners to join Memphis city government in ponying up its half of $10-12 million at the behest of private developers and the University of Memphis who see a brighter future for the once thriving Highland Street neighborhood business center.
But it didn't create any serious problems, although some questions remain to be answered by the project's champions for the Tax Increment Financing (TIF) district that's at the heart of the Highland Street project, and more to the point, questions about local government policies and guidelines for these kinds of tax incentives in the first place.
After years of handing out tax freezes in their PILOT (Payment-In-Lieu-Of-Taxes) program to essentially all comers, city and county governments finally just now have put the brakes on those runaway tax incentives. Now, those tax freezes for new business and expansions have standards and priorities for the first time, doing more to align the incentives with public priorities and also to "size" the public incentive to the promise of specific economic benefit.
The Missing “I”
The pressure to reform the tax freezes was spurred on by the deepening concern about the loss of taxes by local government, and the TIF would divert future taxes to pay $10-12 million public bonds for the so-called “public improvements,” largely a new parking garage whose fees would apparently go to the developers.
Really, this specific project is more a TF district rather than TIF. That’s because there’s not really an increment in it. In similar districts, the present level of tax revenues continue to go to local government, and it’s the growth in the tax base that goes to the TIF district.
On Highland Street, because the project is on the site of a former church, there is no increment, because the church was paying no taxes at all. In other words, city and county governments don’t even get a tax credit for at least the value of the land.
The Welcome Mat
Impetus for the project appears to come from plans to build a Highland Street entrance for the University of Memphis. Based on what we’ve seen, it would provide our university with a dramatic, much-needed sense of arrival with a striking front door to the west.
Here's the question being asked by leaders of neighborhood organizations across Memphis: The overriding criterion for a TIF district is to improve an area fighting severe blight, and compared to their neighborhoods, they suggest that Highland Street doesn't hit the legal requirement for blight. (The only other TIF in Memphis is the Uptown district, a textbook case for this kind of incentive.)
Even the report by the Community Redevelopment Agency, where the TIF recommendation originated, seems tepid, grasping at a definition of blight that includes faulty lot layout and inadequate parking facilities. That could apply to sections of Germantown, but more to the point, if Highland Street sets the definition of blight, most of Memphis could end up in a TIF district.
More To Come?
Some questions about the Highland Street project stem not from the project itself, but a lingering concern that years of talk in City Hall about the need for more than a dozen TIF districts will result in a flurry of applications for the special tax districts. As a result, there’s the sense that there needs to be an overall battle plan if commissioners are to make best use of this business incentive tool.
The need for an overall philosophy and comprehensive strategy speaks to the nature of government itself. Too often, it’s the nature of the beast for elected officials to be in a reactive mode, acting when proposals come to them, like the one to invest in the development project on Highland Avenue, rather than on the basis of an overall vision for strategic investments. Perhaps, that's what led to one-third of Chicago being turned into TIF districts; in Cook County itself, there are more than 370 TIF districts collecting about $700 million a year.
Because of the lack of a full framework for these decisions, they become one-off decisions. In the context of an overall strategy for neighborhood revitalization, the Highland Street development could well deserve strong board of commissioners’ support, but in the absence of an overall plan for the entire city, it feels a bit like shooting in the dark, a familiar feeling for some commissioners, but nonetheless uncomfortable, in the absence of the big picture.
Payback, Not The Political Kind
While we have no reason to question the economic impact numbers and return on investment numbers in the Highland Street application for a TIF, these kinds of numbers are the grease that lubricates pleas for public money, whether they are used in TIF’s, TDZ’s (tourism development zones) or PILOT’s that promise boosts to the economy.
Most of the time, there’s no accountability in the process for these numbers. With the PILOT program, city and county governments proved that they could inject more rationality into the process; however, with other tax incentives, there’s no requirement that the promises made to get other tax incentives will be met or the public funding will be revoked if it isn’t.
If developers are confident about the numbers that they put out in support of a project, there would be a higher level of commitment by county government – not to mention its taxpayers - if the private sector would sign an agreement that protects taxpayers if those outcomes aren’t met. For example, in return for the public money, perhaps, they should agree to repay the public investment if the private economic spinoffs aren’t realized.
A Good First Step
It would be a step in the right direction - taking a businesslike approach to the public’s business. It’s also the kind of negotiated relationship that experienced developers and business leaders are accustomed to and in which the public sector is routinely outmaneuvered.
As for this particular kind of incentive, Tax Increment Financing dates back to the early 1950’s when it was created in California state government as a way to produce matching funds for federal grants. From that beginning, it has evolved into a popular tool in cities across the U.S. (only Arizona doesn’t allow TIF’s), and they have general requirements: a specific area characterized by blight, a specific plan for improvements, bonds issued to pay for the improvements, improvements that attract private investment which increases values and taxes, which are then used to pay the debt service on the bond.
Got it? Suffice it to say, it’s a gift to developers, but then again, it’s the developers who are often key to making it successful.
Learning From The Past
However, if the lessons of our experience with the PILOT program teach us anything, it is the need to step back, set clear expectations and priorities on the front end for local government and to target incentives to accomplish those priorities. In this vein, the new “but for” criteria being used as the basis for all PILOT’s makes sense for TIF districts, too. In other words, to get the public incentive, the developer has to prove that the property would not be developed “but for” the TIF.
In the end, a TIF is a calculated risk for government, because it is built on the premise that they will be self-financing - more development, higher values and more taxes. When that doesn’t happen, there’s not enough new incremental revenue to pay the bond debt, and costs often fall to local governments. Developers for the Highland Street project say the risk there falls to bond holders rather than government.
But there’s other reason for more thoughtful discussion and decisions about tax incentives generally. According to the Tennessee Advisory Commission on Intergovernmental Relations (TACIR), “though there is some disagreement in the literature, the preponderance of evidence in recent studies show that a TIF is more likely to shift investment from one area to another than to create new investment…among other things, a well-regarded study…concluded, among other things, that ‘evidence shows that commercial TIF districts reduce commercial property value growth in the non-TIF parts of the same municipality.’”
Improving The Incentives
Finally, according to the report, there are a number of improvements that are needed for TIF programs:
* Define “blight” more narrowly
* Require a reasonable showing that TIF revenues will pay development costs
* Increase public involvement
* Increase communications and partnerships between the TIF authority and any affected tax districts
* Exempt certain revenues, such as those earmarked for education, from the TIF capture
* Provide aid for residents or businesses priced out of their own neighborhoods as a result of the development
* Require annual reports from the TIF district
* Cap the amount of assessed value that can be captured by the TIF district
A Vote For Public Confidence
There seems to be plans everywhere these days to seek public money for private developments – Graceland, Fairgrounds and others. That’s why Monday’s vote is important for more than just Highland Street.
With the vote, county commissioners have the chance to insist that there are standards and accountability put in place in the process, and along the way, assure the public that local government has an overall philosophy for strategically investing tax money to turn around Memphis neighborhoods, a goal that should be at the top of both city and county governments' list of priorities.
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14 comments:
We do need a comprehensive plan for TIFs. The CRA was authorized by the state in the 1990s and has been underutilized as a potential tool for redevelopment. And I agree with SCM and County Commissioner Ritz, who opposed the TIF, that the redevelopment will not result in a net economic gain for Shelby County, but rather will shift dollars and jobs from one part of the county to another. Having said all that, I believe the Highland TIF is needed to revitalize what is not only the gateway to our major university but also a potentially new and attractive neighborhood business district. Of course there needs to be accountability and a careful look at the term of the TIF. But we need to keep in mind that incentives are needed to reduce barriers to redevelopment in many neighborhoods, not only those that are the most blighted.
SCM,
As you know, the neighborhood where this is planned is in East Buntyn, which is an upwardly mobile section of the University District, with houses running from $150-200K, and heavily residential. This is NOT the type of neighborhood that requires public investment, except to keep the roads paved.
A TIF district would not be appropriate here; it frankly smells like a developer's grubbing for taxpayer dollars here. I lived in that section for a decade, and it's doing quite well on its own, thank you very much.
Please stay on this; NO public dollars, other than infrastructure, needs to be spent there.
The state code contains a definition of blighted areas (which gives the redevelopment agency the power to use tax increment financing):
"(a) “Blighted areas” are areas, including slum areas, with buildings or improvements that, by reason of dilapidation, obsolescence, overcrowding, lack of ventilation, light and sanitary facilities, deleterious land use, or any combination of these or other factors, are detrimental to the safety, health, morals, or welfare of the community. “Welfare of the community” does not include solely a loss of property value to surrounding properties, nor does it include the need for increased tax revenues. Under no circumstance shall land used predominantly in the production of agriculture, as defined by § 1-3-105, be considered a blighted area."
Emphasis mine.
That area is nowhere close to that definition, nor do I see anywhere in the code itself anything about blight including "faulty lot layout, suffered deteriorated sites and inadequate parking facilities" mentioned in the CA article. Maybe there's a precedent for including bad parking (!!!!) but that passage I quote above was added in 2006.
Outside of the blight game it sounds like a good project though.
(Sorry for the lawgeekery, which could be way wrong since IANAL, but laws are mentioned in the CA article and I would at least like to get closer to the source.)
My first thought was "It's not Downtown...of course tax incentives will be controversial...".
I believe the development will revitalize an area that's relatively stable (though could be destabilized by a vacant church property). There is already development in that area (across the street and at Central and Highland). Are those getting government money?
If this were south of the train tracks on Highland, I would be all for TIFs (as long as they left Pirtle's alone), but this location shouldn't need it. There are worse ways to spend our tax dollars though...
It always is the same. Anything for developers. With all the neighborhoods on life support, our politicians thinnk this is the #1 priority. Keep beating this drum. This is disgraceful.
Regarding "the missing I," the issue is not that there is no increment – it’s that it’s ALL increment, with nothing left behind for the general fund.
The increment is the increase in the assessed value of the properties in the district after improvements are made. The tax revenue generated by that increment goes to pay off the bonds that were sold to finance the improvements, while the tax revenue generated by the original (“frozen”) value continues to flow to the general funds, schools, etc. Since the church property has no taxable value to begin with, the future value will be ALL increment, and the general fund (i.e., the rest of the city) will see no benefit. Actually, it’s worse than that. Right now the property that will be the university portion of the project is generating tax revenue for the general fund because it’s currently regular old residential private property. After demolition and redevelopment, partially funded by the TIF bonds, that property will be university owned and exempt from taxation. So not only will any direct benefit of the TIF district redevelopment be redirected away from the general fund, but the redevelopment itself will actually take money away from the general fund tax base.
There are some potential mitigating variables. Presumably the frozen value of the church property could be set at some amount greater than zero (perhaps the price the developers paid for it), which would mean general fund tax base that did not previously exist. That would help. In addition, the redevelopment could increase property values (and probably already has) in the nearby blocks that are outside the TIF district, which would also mean an increase in general fund tax base.
But if the project would have gotten done without the TIF designation (by P&M or someone else), the mitigating factors are moot – it’s a subsidy. Setting up a TIF where it is not necessary robs the general fund of future revenue it would be getting and redirects it to pay for projects that developers could have paid for themselves.
It seems crazy that a university would be pushing a TIF that takes money from schools. The part of the tax that pays for education should be removed from this deal.
Sure would be good if Shelby County gave all neighborhoods an equal shot at its money. Why not let all of us put in our bid to get their help?
While it is encouraging to hear of SCM’s support for a “front door” to the University of Memphis, it is important for citizens to recognize that a new front door without significant commercial revitalization surrounding it will not get the job done. The Highland Row project would provide exactly the right development at the right time for the community and for the University, enabling a quantum leap forward for recruitment and retention of residents, employees, and University students and faculty. Without a TIF, the Highland Row project will not move forward, but will be reduced to just one more good idea thrown to the curb for lack of vision. But the project is too important to Memphis to let it die.
I am the Executive Director of the University Neighborhoods Development Corporation, a private non-profit neighborhood based organization, distinct from the University of Memphis, working daily to encourage community development and economic revitalization in the University District. Neither I nor my organization will receive any financial benefit from the development of Highland Row. I thought it critical that I attempt, through this posting, to answer some open questions and to ensure that accurate information about Highland Row and about TIFs is available to interested parties.
BLIGHT – IS IT OR ISN’T IT? AND HOW TO DECIDE
On the question of whether the designated area (an L shaped segment of property – the vertical part of the L is from just south of the Junior League on the north to Watauga on the south between Highland and Ellsworth; the horizontal part of the L is east of Highland between Midland and Watauga over to Brister) is “blight” – it is a matter of opinion, to be sure, and opinions should be formed based on the operative definition involved. In this case, the operative definition of blight comes from the Tennessee Community Redevelopment Act, as adopted in 1998. If you would like to see the full text, you can find it at:
http://tennessee.gov/sos/acts/100/
pub/PUBC0987.htm
The section defining blight is as follows:
(8) "Blighted area" means either:
(A) An area in which there are a substantial number of slum, deteriorated, or deteriorating structures and conditions which endanger life or property by fire or other causes or one or more of the following factors which substantially impairs or arrests the sound growth of a county or municipality and is a menace to the public health, safety, morals, or welfare in its present condition and use:
(i) Predominance of defective or inadequate street layout;
(ii) Faulty lot layout in relation to size, adequacy, accessibility, or usefulness;
(iii) Unsanitary or unsafe conditions;
(iv) Deterioration of site or other improvements;
(v) Tax or special assessment delinquency exceeding the fair value of the land; and
(vi) Diversity of ownership or defective or unusual conditions of title which prevent the free alienability of land within the deteriorated or hazardous area; or
(B) An area in which there exists faulty or inadequate street layout; inadequate parking facilities; or roadways, bridges, or public transportation facilities incapable of handling the volume of traffic flow into or through the area, either at present or following proposed construction.
As you see, the definition of blight set forth in the Community Revitalization Act specifically includes faulty lot layout and inadequate parking facilities – and it should. Inadequacy of parking facilities is the NUMBER ONE problem for businesses on Highland between Central and Southern – thus posing a significant threat to any hopes of revitalization around the University’s front door. However, even some of the more traditional notions of what blight is are present in the designated area, such as lots that are impossible to redevelop under contemporary zoning standards, deterioration of sidewalks, driveways, curb cuts, fencing and retaining walls, and poorly maintained structures. While this area is clearly not the “worst neighborhood in Memphis” – that is not the standard for blight under the Community Redevelopment Act, nor should it be. Evaluation for blight should be done on a case by case basis with the correct standard as the yardstick. The Highland Row project passes the test and is eligible for a TIF even though it is not the worst case of blight we can find in Memphis.
ECONOMIC IMPACT
But for TIF approval, the Highland Row project will not become a reality because the developer will not be able to afford to spend their time and resources on Highland when they could be achieving higher returns with less risk elsewhere. Even with the TIF as proposed, the developer is accepting a far lower return on investment than is called for in its business model. This is 100,000 square feet of retail space and almost 300,000 square feet of new apartments and 35 new homes which will either materialize with TIF approval or vaporize without TIF approval. This approximately $65 Million investment will have an economic impact, conservatively, of $130 Million. But in this case, the impact goes far beyond just neighborhood revitalization because it is tied to a long term anchor that will not be going anywhere any time soon – the University of Memphis.
This investment strengthens the University of Memphis, a major regional economic engine with a $2.5 Billion annual impact on Memphis. The University of Memphis already brings significant external dollars into the community, and is aggressively growing enrollment and expanding research goals – aspiring to reach $100 million in 5 years, most of this in new, external dollars; if the University realizes its aims, the result will be over $60 million annually recurring external dollars poured into the local economy – this is not shifting dollars from one project to the other, but bringing in new money to Memphis. But a major metropolitan research university needs an environment that attracts and retains the best students, faculty and staff – the type of environment that the Highland Row project will stimulate. The Highland Row project is more than just a commercial revitalization project - it is an important key to creating the physical and economic environment necessary to enable the University to reach its ambitious growth potential.
OPENING THE FLOODGATES?
Not at all. The concern about a “flurry of new applications” is unfounded, because there are adequate controls in place to ensure that only the “right” projects are selected for the use of this tool. The Board of Commissioners of the Community Redevelopment Agency reviews initial applications on their merits, and has an established procedure and a high level of competence for doing so. Even after passing through that board, applicants must get approval at committee and full body level of both City Council and County Commission. The approval process is not easy, but is a daunting, time consuming, uncertain process which should serve to weed out projects which are not right for the city and county. Applicants are required to submit a series of in-depth studies, projections, renderings and plans, which then become a part of the public record. (The Highland Row Community Revitalization Plan is a matter of public record, submitted on August 13, 2007 to the staff of the Community Revitalization Board of Commissioners.) The same board is responsible for oversight of designated TIFs, and has staff and procedures in place to ensure accountability for the life of the TIF.
In the case of the Highland Row project, there is significant, informed support from elected officials on the City Council and on the County Commission. There is no merit to labeling an elected official’s informed decision to grant the city’s first project specific TIF as a “one-off” decision. Certainly Memphis and Shelby County would benefit from the development of an overall vision for strategic economic development – but that does not mean that we cannot take advantage of the right opportunities when they arise.
TYPES OF TIFS
This is an important topic because the type of TIF needed will vary based upon the area and the development concept involved. There are different types of TIFs that can be created under the Community Redevelopment Act – the project specific TIF (such as the one proposed by Highland Row) and the area TIF (such as Uptown). There has been ONE other TIF approved in Memphis – it is an “area TIF” in which an entire area (in this case, Uptown) was designated as a “Community Redevelopment Area”, and incremental taxes for the entire area go to pay for eligible revitalization activity within that area.
The Highland Row proposal is the first request for a “project specific TIF” in Memphis, though project specific TIFs are the economic development tool of choice in many cities across the country for this type of mixed use development. In a project specific TIF, the specific eligible uses are determined on the front end, a bond is issued to pay for the eligible uses, and the bond is repaid through the incremental taxes. The developer builds public improvements at his expense, and is later reimbursed from proceeds of a bond issue.
The example of Chicago is often cited by professionals for and against project specific TIFs. On the one hand, project specific TIFs unquestionably encourage commercial revitalization without any direct public dollars. On the other hand, if ALL commercial revitalization in a metropolitan area is accomplished through the use of project specific TIFs, then a municipality may experience problems with the tax base despite the commercial revitalization. The logical strategy, then, is to consider TIFs on a case by case basis – not to categorically reject the tool as deficient! Memphis and Shelby County are in dire need of economic and commercial revitalization, but are woefully lacking in tools and strategies to achieve such revitalization.
IS TIF THE PERFECT TOOL?
Of course not. SCM lists some suggested “Improvements to TIF” which were compiled by a staffer at TACIR who recently wrote an informational article about a different type of TIF used by housing authorities in the state of Tennessee. Some of the suggestions may make sense, but their applicability to TIFs under the Community Redevelopment Act is questionable.
IS A TIF A GRANT?
Not even close. To give a grant, or a gift, you must have something to give. A TIF is a true public/private partnership. Without the private developer and private investment, there would be no increment to support the project and fill the gap. To say that a TIF is a grant is to equate a handful of seeds to an orchard – the seeds don’t become anything if not planted, watered and nurtured. In the same way, the “seed” of future incremental taxes would be nothing without the investment of time, money and resources to the planning and development of new commercial opportunities in Memphis. Community minded developers who are willing to make less money by doing an urban infill project, such as Poag & McEwen, are central to the success of TIF as an economic development strategy.
And what if the developer makes a profit? If private developers are going to be partners with the government, they must have some opportunity for profit – that is fundamental to the market system – but government should not be responsible for all development and revitalization. The question isn’t whether a private developer should receive a profit, but whether the appropriate tool for engagement of the private sector is utilized. In this case, TIF is the right tool to stimulate the partnership, which will not come to fruition but for the TIF.
IS NOW THE TIME FOR TIF?
Yes. Strategic public investments with accountability and high standards, in conformity with a broad and visionary plan would be the norm in a perfect world – but there are still some decisions that shouldn’t wait. As SCM stated in his tag line, it is all about timing. The time for a project specific TIF for the development of Highland Row is now. Our elected officials are informed and knowledgeable about the project and the proposed TIF; Poag & McEwen has invested significant money and time preparing a design and a beautiful plan which passes muster for TIF designation; the University of Memphis desperately needs a revitalized environment to strengthen it as an anchor; and the adjacent community welcomes the project with open arms. This is an opportunity to demonstrate how a TIF can and should work.
Thanks, Steve, for the thoughtful, helpful post. Our primary issue is that there needs to be a rationale for what neighborhoods are being chosen for this special treatment and for evaluating the "but for" provisions that should determine if this project does in fact need - different from deserve - public money. As we say, within that overall framework, this project may very well be at the top of the list. But there's the need to make sure that the public feels like this isn't another developer-driven special deal by the public sector.
Again, thanks for the comments.
I don't want to take a pot shot at University CDC. I just want a level playing field for MY neighborhood to get similar special treatment. Based on the research that you wrote about, the Highland Street project just means less chance for commercial development where I live.
Someone explain to me why our taxes aren't already paying for sidewalks and improvements. These TIFs just help to destroy any sense of community that we have, because it pits every one against each other for their own neighborhood's special intaerest.
Steve, will the fees from the parking garage go to the County or will they go to the private developers?
paid parking? did i miss that? they are really going to charge to park? i can't imagine anyone paying to park to shop.
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