The City Council plans a 90-day moratorium on new Tax Increment Financing (TIF) projects, while drawing up guidelines for TIFs.

The moratorium, set to be voted on next Tuesday night, would not affect a controversial $9 million TIF for a group planning a major community on top of Aetna Mountain in Lookout Valley. The Black Creek Mountain group is set to ask the City Bond Board to approve issuance of the bonds next Monday at 11 a.m. at City Hall.

Helen Burns Sharp, a retired planner who drew up a position paper with 15 questions about the project, said she will appear at the meeting and ask the bond board to delay its vote so there can be a public hearing. She said no one was aware of the project when it was first brought up at the bond board several months ago.

Attorney Alfred Smith said the Black Creek group already got unanimous approval of the project from the City Bond Board, then a 9-0 vote from the County Commission and 5-2 vote from the City Council. He said the group has met all the requirements and there should not be "a policy discussion" at the bond board session.

Ms. Sharp addressed both the County Commission and City Council on the matter on Tuesday and  handed out copies of her position paper. She said she had tried to find the date of the bond board meeting from Mike Mallen, an attorney for the Black Creek Mountain group and he told her to hire an attorney to find out. She said she has hired attorney John Konvalinka.

Mr. Mallen said Ms. Sharp asked him a number of questions about the project and he said he told her he had been hired by the Black Creek Mountain group and it would not be ethical for him to also be advising her. He said he suggested that she hire her own lawyer.

At the City Council meeting, council members were given a memorandum from another Black Creek Mountain attorney, George Masterson, that gave answers to Ms. Sharp's document point by point.

On the upcoming TIF study, John Bridger of the Regional Planning Agency said the staff will be coming up with proposed TIF guidelines and then forward those to the mayor's office. He said they would be posted on the RPA website and Ms. Sharp and others could make comments.

On the Aetna Mountain project, the bonds would be used to build a road up the mountain roughly along the route of the old pre-Civil War Aetna Mountain Road as well as pay for a sewer line. Attorney Smith said the bonds would be paid off from taxes gained from the development and all the liability to retire them would be on the developers if there was any shortfall.   

Here is the Masterson memo:    

Mike McMahan, Chattanooga City Attorney
Rheubin Taylor, Hamilton County Attorney

George H. Masterson

October 9, 2012

Black Creek Mountain TIF—Response to Memorandum published in The
Chattanoogan.com

This firm serves as bond counsel to MSBC Black Creek, LLC (the Developer) in
connection with the Black Creek Mountain economic impact or tax increment plan and is
provided in response to an article published in the October 8th edition of The Chattanoogan.com.
That article included the full text of a Memorandum of Ms. Helen Burns Sharp to members of
The Industrial Development Board of the City of Chattanooga in which Ms. Sharp encourages
the members to vote against a resolution approving the Black Creek Mountain tax increment
financing documentation and makes many inaccurate and misleading statements about the Black
Creek Mountain TIF and the procedure that the IDB, the City of Chattanooga and Hamilton
County have followed in approving the TIF at every previous occasion.

As a general response to Ms. Sharp’s request, I point out that the Black Creek Mountain
TIF plan has been previously approved, after publication of all required notices and extensive
discussion, by the Chattanooga IDB, the Hamilton County Commission and the Chattanooga
City Council. Mrs. Sharp now seeks to delay the TIF financing by requesting that the members
of the IDB vote against approval of documents that implement a financing that is consistent with
the prior IDB, County and City approvals, complies with all applicable state laws and expressly
imposes no risk of non-payment or default on the IDB, the City or the County.

Specifically, I provide the following responses to each of the points made by Ms. Sharp,
using Ms. Sharp’s paragraph numbers and headings. (In the interest of brevity (or some
semblance of brevity) I have omitted some of Ms. Sharp’s statements, but have certainly
attempted to include the gist of each of her statements and have noted each omission with
ellipsis.)

Legal Issues

1. Project Eligibility.

a. Ms. Sharp’s Statement: “The Economic Impact Plan for Black Creek Mountain
says that it is an eligible project within the meaning of TCA Section 7-53-101(13)
but does not cite the applicable subsections. The statute requires that the Plan
meet the definition of two [emphasis added] or more subsections. It is easy to see
the subsections that it does not meet. It is difficult to ascertain even one in the list
of 19 it clearly meets.”

b. Response:

i. The subsections of the definition of “project” that are applicable to the
Plan Area include:

1. Section 7-53-101(13)(A)(iii), which includes any land and
building, including office building, suitable for use by “any
commercial enterprise in selling, providing, or handling any
financial service or in storing warehousing, distributing or selling
any products of agriculture, mining or industry.” The Plan Area
will include commercial and retail facilities.

2. Section 7-53-101(13)(C), which includes “pollution control
facilities”, which are defined at 7-53-101(12) as including “waste
water collecting systems.” The Plan Area will include, and the
Economic Impact Plan provides for TIF financing for, sewer
improvements.

ii. Section 7-53-101(13) does NOT require that a potential project meet more
than one of the uses listed in that section, but rather by using the word “or”
permits combinations of two or more sections. The relevant part of 7-53-
101(13) reads: “ Any land and building, including office building, any
facility or other improvement on the land, and all real and personal
properties deemed necessary in connection therewith, whether or not now
in existence, that shall be suitable for the following or [emphasis added]
by any combination of two (2) or more thereof”.

iii. The projects related to the Plan Area clearly fall within the relevant
definitions, but it is also important to note that Section 7-53-102(b) of the
IDB statute calls for the statute to be liberally construed to further the
legislative intent behind the statute of furthering economic development in
the State.

2. Authorship of Economic Impact Plan.

a. Ms. Sharp’s Statement: “State law [TCA Section 7-53-312(a)] states that
Industrial Development Corporations are to prepare Economic Impact Plans. This
is the document that the Industrial Development Board, the County Commission,
and the City Council voted to approve. The resolutions approving the Plan state
that MSBC Black Creek (Developer) prepared the Plan.”

b. Response:

i. The Developer has not attempted to hide or mask its participation in the
TIF process and was actively involved in the preparation of the initial draft
of the Economic Impact Plan, which its representatives submitted to the
IDB and its counsel for review and comment.

ii. The IDB TIF statute does not require that members of the IDB actually
prepare the Economic Impact Plan. Rather, Section 7-53-312(a) provides
that an IDB “is authorized to prepare and submit to the municipality for
approval an economic plan in the manner described in this section.”

iii. Again, Section 7-53-102(b) provides for a liberal interpretation of the IDB
statute and, thus, a narrow reading of “prepare” is not appropriate.

3. Zoning.

a. Ms. Sharp’s Statement: “. . . All of the property is currently zoned R-1, low
density residential. None of these [commercial] uses is allowed in this zone. Is it
OK to presume future zone changes? . . . ”

b. Response: According to the Developer, the property in the Plan Area currently
has an R-1 classification and no improvements will be constructed by MSBC
Black Creek that do not meet the applicable zoning classification at the time of
construction or a variance therefrom.

4. Reservation of Lots Prior to Plan Approval.

a. Ms. Sharp’s Statement: “State law (TCA Section 13-4-306) prohibits transferring
lots in an unapproved subdivision. On October 2011, this wording appeared on
the Black Creek Facebook page: ‘Three of brow lots already gone, better come
and reserve one.’ The Planning Commission has not granted plat approval for this
phase of the development. Was Developer negotiating to sell prematurely?”

b. Response: Neither the statements made by the Developer on its web or social
media sites nor its acceptances of indications of interest in future lots rise to the
level of negotiating to sell lots under an illegal plat or subdivision, as contemplated by TCA Section 13-4-306. Compliance with that section also has
no bearing on the whether a proposed TIF plan has met applicable state law.

Other Policy Issues That Should Be Addressed Prior to Bond Issuance.

5. Citizen Participation.

a. Ms. Sharp’s Statement: “The only public hearing for a $9 million tax subsidy
approved by three governing bodies was held by the Industrial Development
Board at the very beginning of the process (May 1) when virtually no members of
the public were aware of the project or the meeting. . . . ”

b. Response: In approving the Economic Impact Plan and submitting it to the City
and County for further approval, the IDB complied with Section 7-53-312(g) of
the IDB TIF statute, which requires a public hearing prior to the submission of the
Plan to the approving city and county (and, thus, at the beginning of the approval
process), held after two weeks prior notice in a newspaper of general circulation
giving the details of the meeting and the place where a map of the proposed plan
area can be viewed by the public. Such a notice was timely published in The
Times Free Press and members of the public were invited to appear and speak at
such meeting.

6. Decision Making Criteria.

a. Ms. Sharp’s statement: “This was the first TIF request in Hamilton
County/Chattanooga, yet there was no presentation by city or county staff at
meetings about tax increment financing; its origins; how it has been used in other
places; some factors the policy makers might want to take into account in
determining whether or not to approve the request. Two basic criteria might be to
ask the applicants to demonstrate public benefit and to show that the project
would not happen without taxpayer help.”

b. Response: The Black Creek Mountain TIF may be the first such request in
Chattanooga and Hamilton County, but it certainly has not gone without
significant discussion by City and County staff and elected officials and extensive
public debate. Representatives of the Developer discussed the Black Creek TIF
plan with the City and County attorneys on numerous occasions and appeared at
an IDB meeting and public hearing, a County Commission agenda session, a
County Commission regular meeting, a City Council agenda session and a City
Council regular meeting, at each of which it presented details of the Black Creek
TIF and responded to numerous question, including the extensive public benefit
that will come from an early start to the Black Creek development and the
significance of TIF financing toward that development. Ms. Sharp apparently
feels compelled to attack a valid approval process because she is unhappy with
the result of that process.

7. Public Benefit.

a. Ms. Sharp’s Statement: “Given that public taxpayer dollars are involved,
developers should be asked to demonstrate public benefit. For up to 20 years,
new property taxes generated in the project area would go to pay back the
developers, with interest for the bonds they purchased for the road. During this
period, other city taxpayers will in effect pay the cost of providing the new Black
Creek residents with fire and police, garbage and road maintenance. . . . “

b. Response: Under Ms. Sharp’s line of reasoning, no TIF would satisfy the public
benefit test because in each case taxes are applied to service debt for development
projects rather than normal governmental function. The public benefit underlying
TIFs in general and the Black Creek Mountain TIF in particular is the promotion
of early development of the project with funds advanced by the developer or its
lender rather than the governmental unit and will provide public facilities that will
enhance the governmental unit (in this case the road and sewer improvements)
that will lead to more development and more tax collections in the future.

8. The “But For” Test.

a. Ms. Sharp’s Statement: “. . . it is common for local governments to evaluate TIF
requests based on the ‘but for’ test. The applicant is asked to demonstrate that the
project wouldn’t happen at all without the tax subsidy. . . . ”

b. Response:

i. The “but for” test does not apply to the proposed Black Creek Mountain
TIF because the term of the TIF does not exceed 20 years and the proceeds
of the TIF debt will finance only public infrastructure facilities.

ii. Under the Uniformity in Tax Increment Financing Act of 2012” a “but
for” test (described in Section 9-21-101(2) under the definition “Best
interest of the State”) must be met in order to implement IDB TIFs if:

1. the TIF period exceeds 20 years (Section 9-23-103)

2. the TIF revenues are applied other than to public infrastructure and
certain other related costs (Section 9-23-107).

9. Protection of the Public.

a. Ms. Sharp’s Statement. “There is no ‘claw back clause’ in the Development
Agreement to address what happens if the ‘economic development doesn’t
happen. Developers should be required to back up their promises in writing. . . .
The Agreement should address what happens if the project hits a major snag due
to the economy or other factors. . . . ”

b. Response: “Claw back” arrangements are appropriate and often used in payment-
in-lieu-of-tax agreements where a company considering locating in a jurisdiction
agrees that it is only entitled to reduced or no property tax payments if it makes a
required capital investment and/or employs a specified number of people during
the relevant tax abatement periods. Claw back arrangements are not commonly
seen with TIFs because the benefit to the governmental unit is the TIF
improvement, in this case the spine road and sewer improvements. The
Developer will advance the funds to build the road and sewer improvements,
which will be publicly owned and available, through its purchase of the TIF note
and if the Black Creek development does not succeed, the tax increment that is
dedicated to the repayment of the TIF note might be insufficient and the
Developer will suffer a loss. The public, however, will still have the TIF-financed
improvement.

10. Plan Area.

a. Ms. Sharp’s statement: “ . . . why does the Plan Area also include land that is not
on the mountain, including a 10,000 square foot village center within the existing
Black Creek development and the restaurant and banquet facilities at the existing
clubhouse? . . .”

b. Response: Section III of the Economic Impact Plan includes an express finding
that the entire plan area will benefit from the construction of the public
improvements (i.e, road and sewer improvements) contemplated by the Plan. The
inclusion of this area also has the effect of shortening the time period required to
amortize the TIF note, thus potentially reducing the time the City and County
must wait to receive the increased tax revenue.

11. Public Access to Facilities They Are Subsidizing.

a. Ms. Sharp’s Statement: “The existing commercial facilities at Black Creek are
available to homeowners and member and not to the general public. It stands to
reason that if city and county taxpayer dollars are helping to build this public road
up the mountain, the commercial facilities and improvements called for in the
Plan should be required to be open to the public. This could be addressed in the
Development Agreement.

b. Response: All commercial facilities contemplated by the Plan will be open to the
general public.

12. Cost Estimate for the Road.

a. Ms. Sharp’s Statement: “Developer is requesting a tax subsidy in the amount of
$9,000,000for the road and sewer line up the mountain. The ‘Plan’ provides no information on how they came up with this number and how it is split between the
project components. . . . “

b. Response: The Developer based its estimates of the cost of the road and sewer
improvements on the extensive experience of its principals with such facilities.
One of those principals, Douglass Stein, has extensive road building experience
through a family-owned road building company that has operated successfully in
Chattanooga and beyond for over 100 years. Mr. Stein’s company will not be the
road general contractor and, thus, he has contributed his expertise on behalf of the
Developer. The Developer has engaged an independent engineering firm to
prepare an estimate, as well as taking budget proposals from at least four
contractors.

13. Interest Payments Go to the Developers.

a. Ms. Sharp’s Statement: “The loan agreement states that ‘the outstanding balance
of the TIF note shall bear interest at a variable rate per annum equal to the Prime
Rate, as it may change from time to time, plus 200 basis points.’ The public is the
bank through the TIF note and in effect we pay the interest to the Developers.”

b. Response:

i. In reality, the Developer is in the position of a bank because it will
advance the funds to build the public road and public sewer improvements
and will only be repaid, with interest at a reasonable interest rate, if there
is economic development in the TIF area and sufficient tax increment
revenues are generated to repay the TIF note.

ii. Please see the following provisions of the draft Loan Agreement that
clearly provide that payments on the TIF notes will only be made from
TIF revenues:

1. Section 2.7 of Loan Agreement (page 4), which provides that any
unpaid portion of the TIF note is extinguished at maturity (20
years).

2. Section 2.9 of the Loan Agreement (page 5), which provides that
the TIF note does NOT represent an obligation of the City.

14. Timing.

a. Statement: “Also, the state legislature in their last session pursued amendments to
TIF provisions (Public Chapter 605) that become effective July 1. One of the
major changes was to increase the oversight of the state on local TIFS. Perhaps
Developers were trying to beat this deadline.”

b. Response: Contrary to that statement, the provisions of The Uniformity in Tax
Increment Financing Act of 2012 (Public Chapter 605) are fully applicable to the
Black Creek Mountain Economic Impact Plan, which complies with The
Uniformity in Tax Increment Financing Act of 2012 in all respects. The
Developer did not “race” to beat the deadline.

15. Precedent

a. Ms. Sharp’s Statement: “If this project is approved without addressing the issues
raised in this paper, it would open the door to an endless stream of requests for tax
abatement for other general commercial and residential projects. How can you
say no to other requests if you approve an unfettered taxpayer subsidy for a new
private development that does not substantially leverage job growth or urban
redevelopment, the two core principles for tax abatements. . . . “

b. Response: First, to clarify an important point that is obfuscated by Ms. Sharp’s
statement: The Black Creek TIF plan does not abate the taxes on any parcel in the
Plan Area. Rather, full property taxes on each parcel will be collected by the City
and County and the increment described in the Plan (the excess of Plan Area taxes
collected over the sum of (i) taxes collected in 2011, (ii) taxes that benefit
schools, and (iii) taxes collected to service City and County debt) will be applied
to the repayment of the TIF note until the earlier of its payment in full or twenty
years. The precedential effect of the approval of the Black Creek TIF will,
appropriately be determined by the elected City and County officials. I point out,
however, that a significant distinguishing factor between the Black Creek Plan
Area and other developments is the need for a spine road as opposed to normal
subdivision streets. The Developer has not sought TIF financing for those normal
streets.

Thank you very much for the chance to present this memorandum, which I hope you will
share with members of the IDB, the City Council and the County Commission.

Please give me a call if you have any questions about the memorandum.