Accountability for Taxpayer Money (ATM) recently learned of a proposal 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).
The concept, as proposed by Mayor Andy Berke’s Administration, is to work with a private developer and use TIF financing to create a straight boulevard-type street to replace the existing curved road into the trailhead. This straightened alignment would provide visual sightlines directly to the river from Riverfront Parkway and, proponents believe, would increase the usage of the Riverwalk and make MLK the most important east-west street to the river.
ATM understands the desirability and the timeliness of working with the developer to create the new alignment. ATM believes that TIF is a legitimate funding tool. However, our organization believes there are questions that first need to be answered before approving a TIF for this project. Whether the topic is TIFs or PILOTs or purchasing decisions, ATM wants to be convinced that our local officials have structured the best possible agreements for local taxpayers. Many past agreements have seemed one-sided in favor of development interests.
Here are our questions:
1. Why not use a portion of the existing funds ($6 million) GE/Alstom paid the city and county earlier this year as settlement for their failed PILOT? Their plant was located immediately south of this proposed street. That approach would mean no loan and no interest. Property taxes from the proposed adjacent apartments, office building, restaurant, and exchange(?) would go to the city and county for services such as law enforcement and fire protection rather than be diverted to pay off the loan at 5.5 percent interest for up to 15 years.
2. Why require taxpayers to pay to subsidize apartments units in an area where the housing market is sizzling? If 20 percent of the units (36) are reserved for persons who make 80 percent of median income, developers can charge $850 per month in rent. Chattanooga has a very real affordable housing problem. Many citizens might question whether $850 is truly affordable and if the riverfront is an appropriate location.
3. How does the City justify using TIF for the apartments? Section 4.7 of the policies adopted in 2015 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.”
4. Why require taxpayers to pay to improve Fulton Street? This is a minor street that will exclusively benefit the developer. It is the kind of street routinely paid for by developers.
5. Has the developer been made aware of Hamilton County’s practice on TIFs and PILOTs that school taxes must be paid in full every year? The answer is not clear from the application.
6. In the negotiations, has the city emphasized that the current public construction project on Riverfront Parkway from MLK to the Olgiati Bridge will result in 138 additional on-street parking spaces? “Cameron Harbor” interests will be a primary beneficiary of the road narrowing project because they own most of the property on either side of the parkway.
1. Why did the Mayor’s staff represent to City Council that Chattanooga’s 2015 TIF policies are the “toughest” in the state when they are not? ATM research shows that Chattanooga copied Knoxville’s policies and then gutted them by removing or modifying eight (8) provisions designed to protect taxpayers. For example, someone working for the City removed the “applicant affidavit” policy requiring the applicant to “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 amount of TIF…” (BUT FOR TEST).
2. Will the City Council reinsert the missing Knoxville policies before voting on any new TIFs?
The land needed to straighten and widen West MLK is currently privately owned and slated for private development by the developers of Cameron Harbor. If the City does not act to secure the land at this time, it will likely be privately developed and the opportunity to realign West MLK may be lost. The current property owner is Newton Chevrolet and the prospective property owner is Evergreen Real Estate of Nashville (a Cameron Harbor developer.)
The City apparently has told developers that it does not have immediately available funds to
· Acquire the land needed to extend, straighten, and widen MLK.
· Pay for a new MLK road extension to include a bike lane, public parking, & sidewalks.
· Improve the MLK/Riverfront Parkway intersection with cross walks and lighting.
· Improve Fulton Street and create sidewalks.
The “solution” apparently informally agreed upon by the Mayor’s office and the developer is for the City to form a TIF district. The developer would obtain a bank loan to construct the MLK project. The loan would be repaid, with interest at 5.5 percent, from future property taxes from a newly designated TIF area. (See map below.) The developer would reconfigure their plans to accommodate a straightened and widened MLK and build the street. The developer would reserve 20 percent of their apartment units as “workforce” housing (not defined) 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.)
ATM Question: Has the applicant/developer been made aware that Hamilton County policy is that school taxes must be paid in full? Nothing in their application alludes to this.
The proposed TIF boundary 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 other TIF district property is labeled “Exchange—Mixed Use” (??—not mentioned in earlier draft).
Annual property taxes, if paid to the city and county, would be about $861,568 in the first year of the possible 15-year TIF. Here is the financial information provided by the Cameron Harbor developer in their October application.
Tax Increment Financing Amount $ 4,000,000
15 year TIF Loan is needed to achieve a 1.3 Debt Service Coverage
Estimated Payoff - Year 11 (Had been year 8 in Sept. draft) Interest Rate 5.50 percent
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
Funding Source—TIF or Alstom?
ATM believes there is a more appropriate and less expensive way of paying for the re-configuration of West MLK than tax increment financing. Use a portion of the $6 million GE/Alstom recently paid back to the City and County after their failed PILOT project. Negotiate with developer to reduce the overall cost by about one million dollars by eliminating interest payments and removing the apartment subsidy.
ATM is puzzled at how this project become a funding crisis. The new trailhead has been in place over a year, as has the existing access road (West MLK/9th). Cameron Harbor has been steadily moving south towards MLK. The new sense of “urgency” puts public officials and members of the public in the awkward position of being perceived as against the project if we raise questions about the funding source or project components. ATM wishes the project had been discussed as part of the City’s budget process, which just recently concluded.
TIF is an expensive and complicated solution that robs city and county departments of needed revenue for up to 15 years. ATM believes TIF should be reserved for private sector projects that provide public benefit and that would not happen without the TIF (the “but/for” test). In this case, the Cameron Harbor developers were prepared to build the restaurant, office complex and apartments without the realignment of the street. And to pay property taxes.
Two caveats. First: the developers probably were not planning to build a grand boulevard through a prime piece of their property. Thus, the rationale to talk about public financing. Second: A current city project will remove two travel lanes on Riverfront Parkway from MLK to the Olgiati Bridge. This public project will result in 138 additional on-street parking spaces. The primary beneficiary is the Cameron Harbor development, which owns most of the property on either side of the parkway.
The application asks if the proposed project removes blight (they say “yes” because of a chain link fence and overgrown lot), results in the generation of new jobs in excess of Chattanooga average annual wage (they say “yes”—puzzling, given restaurant & office pay) or furthers the pursuit of an existing community plan. (They say “yes,” but the project is not in the City’s Capital Improvements Program. The developer references the City’s “Original Plan,” whatever that is.)
If the City Council determines that the MLK extension is an important and timely project—and it may be--why not take the cost of a paired down project out of revenues from the Alstom settlement ($6 million paid to the city and county earlier this year for not meeting their commitments on our other tax break program--PILOT)? The MLK extension project is even in the Alstom neighborhood. It might send a positive message to taxpayers to see a tangible result from a failed PILOT project.
Scope of the Proposed Project—Reduce by Removing 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 Cameron Harbor 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.)
This benefit 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—Add Now
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.
In both presentations, staff was enthusiastic about the TIF tool, saying they anticipated applications in 2017 and 2018. They mentioned using outside legal counsel and an economic development consulting firm to help in the review process. They described the role of the Application Review Committee.
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 and have no experience with TIF.)
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.” Hearing this statement, ATM decided to research other places. We began 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.
The City Council should adopt the following policy amendments for TIFs by amending the existing TIF resolution (28335) before they review any new applications:
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 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.
Accountability for Taxpayer Money-Chattanooga
(ATM is a non-partisan public interest advocacy group focused on tax incentives and government transparency. For more information, please visit www.atmchatt.com.)
Helen Burns Sharp