Watchdog Group Says TIF Is "Expensive Way" To Pay For Block-Long Extension Of MLK Boulevard

Monday, December 4, 2017

A citizen watchdog group says use of Tax Increment Financing (TIF) would be "an expensive way" to finance a block-long extension of MLK Boulevard.

Accountability for Taxpayer Money says in a white paper, "TIFs and PILOTs have long-term implications for city and county finances and the ability to provide public services. In this TIF, property tax dollars on the apartments, office building and restaurant that otherwise would have been used to fund fire, police, parks, etc. will be diverted for up to 15 years to developers a 5.5 percent interest to pay for the TIF.

"What is being presented as a $4 million TIF will likely result in a loss of at least twice that amount in property tax revenue."

The analysis says the TIF also includes a minor residential street (Fulton Street) "that will exclusively benefit the developer. It is the kind of street routinely paid for by developers."

The group, headed by Helen Burns Sharp, said it "does not understand why the city is proposing or entertaining the idea of subsidizing 36 of the 180 units in the new apartment complex at a cost to the taxpayers of $13,889 per unit or $500,000."

City officials said those units would be available at "work force" rates rather than "affordable" rates.

When the TIF ends, the "work force" rates would go away. 

The group recommends instead of a TIF that the city use money from a $6 million settlement with Alstom to build the road across Riverfront Parkway to the Riverwalk.

Another possibility, it was stated, is to earmark some hotel/motel tax revenue for it. The paper says, "This downtown project relates to tourism." It says the county could ask the Chattanooga Visitors Bureau for a share of funds or the city could consider using some of the hotel/motel tax money set aside for waterfront projects.   

The group said this was a TIF that was sought by the city, instead of the usual way of it originating with the developer. 

City officials say the Evergreen Development group has control of four parcels across from the current end of MLK Boulevard and is willing through the TIF to alter its plans to accommodate the planned boulevard extension, public parking, wide sidewalks and bike lanes.

The developer would build the road extension and be repaid through tax collections on the improved parcels.

Here is the group's full report:

Accountability for Taxpayer Money (ATM) offers this analysis of the proposal by Evergreen Real Estate to extend West MLK Boulevard to the Blue Goose Landing Trailhead on the Tennessee Riverwalk by using a public financing tool known as Tax Increment Financing (TIF).

Using TIF was actually the City’s idea. The developers had planned to build apartments, an office building and a restaurant (and to pay property taxes on them). They had not planned to build a boulevard type street or do intersection improvements.

The Mayor’s administration proposed that they modify their plans to accommodate the extension of West MLK Blvd. through their property, apparently telling them that the city does not have available funds to acquire the land needed to extend, straighten, and widen MLK; to pay for a new MLK road extension to include a bike lane, public parking, & sidewalks, and to improve the MLK/Riverfront Parkway intersection with cross walks and lighting.

ATM earlier suggested allocating money from the $6 million Alstom settlement earlier this year. Or perhaps the City and County could pay for the road and intersection improvements by earmarking some hotel/motel tax revenue. This downtown project relates to tourism—the County could “ask” CCVB--and the 21st Century Waterfront, enabling City expenditures. TIF is an expensive way for paying for the road and intersection improvements.

ATM understands the desirability and the timeliness of working with the developers to create the new alignment. ATM believes that TIF is a legitimate funding tool. However, our organization believes there are several issues that first need to be addressed before the Industrial Development Board, City Council, and County Commission move forward with this TIF as currently structured.

TIFs (and PILOTs) have long-term implications for city and county finances and the ability to provide public services. In this TIF, property tax dollars on the apartments, office building and restaurant that otherwise would have been used to fund fire, police, parks, etc. will be diverted for up to 15 years to developers at 5.5 percent interest to pay for the TIF project.

The “project” is primarily the new one-block road but also includes a minor residential street (Fulton) and “investment in construction of affordable units.” What is being presented as a $4 million TIF will likely result in a loss of at least twice that amount in property tax revenue.

Whether the topic is TIFs or PILOTs or purchasing decisions, citizens want to believe that our local officials have structured the best possible agreements for local taxpayers.  Some previous agreements have seemed one-sided in favor of development interests and appear to be “done deals” by the time they appear on public agendas.  

Process Issues

Both the State and the City have TIF policies. Have all been followed on this application?

1.      Generally, properties in a TIF district fund (through future tax revenues) projects within the public right-of-way (like the new road). The State now requires preapproval (by the ECD Commissioner and the Comptroller) when TIF increment is proposed for privately owned land or improvements. The City and County seem prepared to put $500,000 into the project itself, apparently related to the apartment units. Must this expenditure be pre-approved by the State? If so, has it been?

2.      The City’s adopted Policies and Procedures spell out the approval process. The Mayor's staff could not follow all the procedures because the applicant did not submit their Economic Impact Plan (EIP) and Development Agreement in time to the IDB. It was to have been submitted prior to the meeting of the Application Review Committee (Nov 29) and the publication of the legal notice of the public hearing (Nov.19). Staff "suspended the (Council) rules" so this project could move forward on its December approval timetable. As of Dec. 4, the final version of the EIP is still not available online.

3.      The City’s adopted Policies and Procedures require that the Economic Impact Plan submitted to the IDB include information on the “number of jobs which the Applicant estimates will be created by the Project and the wages, salaries, and other compensation that will be paid to those holding the jobs.” Information provided by applicant has been general on jobs and has not addressed compensation at all.

4.      The City’s TIF application form asks: “Has any other government assistance (funds, tax incentives, or other economic benefits) been provided to the applicant or the property”? The applicant, understandably, answered ‘no.” There are two “other economic benefits” that likely have benefited this developer. First, the City’s decision not to include the Riverfront Parkway corridor in the new Form Based Code meant that these properties--unlike all other properties downtown--are exempt from minimum parking requirements for new apartments. Second, the City recently completed a redesign of Riverfront Parkway from MLK to the Olgiati Bridge. This project created 138 new parking spaces on Riverfront Parkway. The primary beneficiaries will be the Cameron Harbor properties on either side of the street.

5.      The TIF Application asks for a breakdown of the costs relating to the public improvements (street extension, intersection). The applicant left this table blank, with a note: “to be completed after construction documents and approvals.”

The proposed TIF boundary area runs from Canal St. on the north and west, Riverfront Pkwy on the east, & existing West MLK right-of-way on the South. Plans call for a 4,000-sq. ft. restaurant on the former Jones-Blair paint site, a 30,000-square foot office building, and a 180-unit mid-rise apartment complex. (The office building is already under construction.)

Under the proposed TIF, the developer would obtain a bank loan to construct the MLK project. The loan would be repaid, with interest at 5.5%, from future property taxes from a newly designated TIF area. (Boundary outlined on map above.) The developer would reconfigure their original plans to accommodate a new West MLK and build the street. As currently proposed, the City would put $500,000 into the (private?) project. The developer would reserve 20 percent of their apartment units as “workforce” housing until the TIF loan is repaid.

The term of the TIF would be 15 years. This would be the length of time when property tax revenues within the TIF District would not go into the city and county general funds for law enforcement, fire protection, streets, parks, workforce development, etc. The developer estimates the TIF loan might be paid off in year 11. (A September draft estimated year 8.) 

Here is the financial information provided by the developer in October.

Tax Increment Financing Amount $ 4,000,000—15 Year TIF Loan to achieve a 1.3 Debt Service Coverage

Estimated Payoff - Year 11 (Had been year 8 in Sept. draft) Interest Rate 5.50%

Here are the costs for the $4 million TIF proposed by applicant developer:

·         Road Land Acquisition & Loss of Units to Development          $2,000,000 ($1.5 million in earlier draft)

·         MLK Extension, Sidewalks, Bike Lane, On street Parking              800,000

·         Intersection Improvement at Riverfront Parkway and MLK         100,000

·         Fulton Road Improvements                                                                200,000

·         Interest Expense on Loan - 3 years                                                  300,000

·         Closing Costs                                                                                           50,000

·         Legal Costs                                                                                              50,000

·         Subsidy of Affordable Units - 36 @ $13,889 per unit                   500,000 ($1 million earlier draft

36@$27,778 per unit)

SUBTOTAL $ 4,000,000

These numbers for the cost of the project match the information currently online. However, the schedule online provided by developer as part of the “TIF Project Plan and Overview” shows a 20-year repayment schedule, rather than 15.

file:///Users/helanbsharp/Downloads/Dec. 1 TIF Economic Impact Study - Evergreen.docx 

Possible Cost Reductions

1.      If possible, find existing money for the road and intersection from another source (such as Alstom settlement or hotel room taxes or contingency), eliminating interest and perhaps cutting the cost to taxpayers in half.

Regardless of funding source--

2.      Eliminate Fulton Street from the TIF “project.” It is a minor street that will exclusively benefit the developer. It is the kind of street routinely paid for by developers

3.      Remove Housing Subsidy. ATM does not understand why the City is proposing or entertaining the idea of subsidizing 36 of the 180 units in the new apartment complex, at a cost to the taxpayers of $13,889 per unit or $500,000. (In a previous version submitted by the applicant, this subsidy was shown as $27,778 per unit or $1 million. The developer came up with the same project cost by adding $500,000 to the cost of road land acquisition and loss of units to development.) There is no mention of what the rents would be for the “affordable” units and no indication that any would be two-bedroom units suitable for families.

Using TIF for the apartments exacerbates a potential conflict with Section 4.7 of the City’s TIF policies, which reads as follows: “In the absence of unusual or extenuating circumstances acceptable to the Board, Projects that are substantially residential will not qualify for tax increment financing under the Board’s TIF Program.” In the estimate of appraised values in his September document, the value attributed to the apartments by developer represented over 70 percent of the value of the projects proposed in the TIF district (apartments, office building, restaurant.)

This housing piece may be modeled after the PILOT formula developed in 2002 that 20 percent of the units be rented to persons whose income does not exceed 80% of the area median income (AMI). In 2017, that means that developers could rent these subsidized units for about $850 per month. ATM is confused by the City’s use of the term “workforce” housing, a term that is not used or defined in the City’s TIF policies nor in the Housing PILOT policies.

In the past five years, the City Council and County Commission have abated property taxes on five upscale apartment complexes in the downtown area: Walnut Commons (212 Walnut); Choo Choo Passenger Flats (1400 Market); Kore (1400 Chestnut); MacLellan (721 Broad) and Market Center (700 Market). Using the 20%/80% formula, a total of 125 units are to be reserved for persons whose incomes qualify them to rent for about $850 per month. (The rent amount is adjusted annually, based on HUD income data.)

For at least 10 years, the owners of these complexes pay no property taxes for city and county services (except schools. Walnut Commons does not even pay school taxes). Then the developers pay partial taxes for an additional 4 years. Our city and county governments will abate (not collect) about $14 million in property taxes so that 125 persons/small households can pay “only” $850 in rent because of these PILOT agreements.

ATM does not believe that $850 per month rent addresses our very real affordable housing problem. ATM does not see the “public purpose” in this kind of subsidy, be it a housing PILOT or part of a TIF. (ATM favors units at 60 percent AMI that are located in neighborhoods that are struggling, rather than in the sizzling downtown real estate market.)

TIF Policies

In October of 2017, Mayor Andy Berke’s executive staff briefed the Industrial Development Board (IDB) and the City Council on the approval process for tax increment financing. In their presentations, staff focused exclusively on the procedures for how these projects get approved. 

They did not go over any of the policies Council adopted by resolution in 2015, such as maximum term, eligible costs, guarantees of completion, and transfer of TIF. They did not mention state law, they did not mention how the “new” process compares to the 2012 process for the Black Creek Mountain TIF, and they did not mention the 2015 TIF overview presentation to Council by a Nashville attorney hired by the City. (Four current Council members were first elected in 2017. Only one Councilor was around when Black Creek was approved in 2012.)

On June 23, 2015, the Nashville attorney:

·         Said not every project needs an incentive

·         Mentioned the “but/for” test

·         Encouraged city to negotiate the smallest possible incentive

·         Said companies will ask for more than they need--push back

·         Advised city to study pro forma and ROI to see if they need

·         Recommended putting tool in tool box

·         Recommended deciding whether to take out on case-by-case basis

Staff recently told Council that Chattanooga has the “toughest TIF policies in the state.” After hearing this statement, ATM researched other places, beginning with Knoxville, a comparably sized city that has a successful TIF program. Here is what ATM learned:

The policies Chattanooga adopted in 2015 were 99 percent identical to what Knoxville had already adopted. HOWEVER….

·         Someone working on the Chattanooga document in 2015 removed four Knoxville provisions, thus weakening protection to city taxpayers.

·         Someone working on the Chattanooga document in 2015 modified the wording of three Knoxville provisions, thus weakening protection to city taxpayers.

·         Someone working on the Chattanooga document in 2015 added a new paragraph giving the City unbridled discretion if the City (rather than a developer) chose to initiate a TIF, thus weakening protection to city taxpayers.

ATM’s Recommendation: The City Council should adopt the following policy amendments for TIFs by amending the existing TIF resolution (28335) before they review any new applications:

(If they choose to keep the MLK project on a fast track, they could add these provisions to the Development Agreement.)

City Initiated TIF (Introduction)—Delete the paragraph Chattanooga added in 2015, which appear to give the City unbridled discretion if they initiate a TIF: These policies and procedures only apply to any tax increment financing with respect to a specific project being initiated by a private developer and supported by incremental property tax revenues. If the City initiates a TIF arrangement on its own behalf or on behalf of the Chattanooga Housing Authority to finance public improvements in a redevelopment area, the City shall follow such procedures as the City deems appropriate under the circumstances.” 

Maximum Term (Section 4.1). Return to Knoxville wording limiting a TIF to a maximum of 15 years. Delete Chattanooga added sentence; “Under certain circumstances, however, the TIF may be extended for 20 years, or the statutory limit in T.C.A. 9-23-104, whichever is greater.”

Applicant Affidavit (Section 4.).  Add back the following wording from Knoxville 4.8: "The Applicant must submit a signed affidavit certifying that the project cannot proceed without the availability of TIF and must provide supporting documentation justifying the need for and the amount of the TIF, all in accordance with the Application form." (The BUT-FOR TEST)

Disbursement of Incremental Tax Revenues upon Project Completion (Section 4). Add back the following wording from Knoxville 4.9: “The Board will normally require completion of the Public Infrastructure component of the TIF project before disbursing any incremental tax revenues to the Applicant, the Applicant’s lender or any bond trustee.”

Certification by Consultant or Governmental Authority (Section 4). Add back the following wording from Knoxville 4.10: “The Board will require the certification of the completion of the Project before the disbursement of incremental tax revenues. The certification must be from a consultant retained by the Board or a Governmental Authority vested with the authority to approve the completion of the Project or specific components thereof. The form and content must be acceptable to the Board.”

Transfer of TIF (Section 4.). Add back the following sentence from Knoxville 4.12: "Any sale. assignment or lease of the property, which is not permitted in the Development and Financing Agreement, will terminate the TIF."

Application Fee (Section 6.1). Add back the application fee amount from Knoxville: “The Applicant will submit the Application with a minimum Application Fee of $10,000.00 for resources used in the initial review of the Application.” (The amount was reduced to $1,500.00 in the Chattanooga resolution. City staff recently mentioned using outside legal counsel and an economic development firm, who will charge a lot more than that.)

School Taxes.  Add a new provision in Section 4 to make clear that school taxes must be paid in full. (This is current practice on the Black Creek TIF and on all PILOTs.)

A coalition has been working on draft policies and procedures document on Jobs PILOTs. If there is the political will to make the TIF policies better, someone could review these and propose a few as additions to the TIF policies. For example, an IDB member recently recommended adding a policy about corporate responsibility. Other recommended policies address community benefits agreements, targeted hiring, guarantees of completion, exempting city and county from any soil cleanup costs, better clawback language, annual reports….






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