Guidelines for Selecting TIF-Based Funding of Urban Development Projects

7 June 2013

Housing

201206120we-gregory-paul-johnson-201x261Summary. As an advocate for mixed use developments and new urbanism approaches, I’m often asked whether I support TIF-Based funding for high-end private development projects. As with other issues where I’m asked to answer either “Yes” or “No” my answer is “Neither.”

To find out why, read the article below.

DiscussionClick here to join the discussion on the FromDC2Iowa blog (comments can be posted at the bottom of the page).

Resources. These are some resources for further reading about this topic.

Traditional TIF Use. The use of TIF-Based funding is traditionally limited to restoring areas of urban blight. The rationale for this is that poverty is too expensive. That is to say that illiteracy, homelessness, unemployment, substance abuse, crime, incarceration, and other social problems caused by poverty cost society much more than simply eradicating poverty. Some would call this socialism. Others would describe it as simply being fiscally responsible with capital by seeking the maximum return on investment. This, of course, isn’t a practice that all people condone, but it’s embraced by a majority of people, so municipalities are not required to have a vote for using tax revenue in this way. Wikipedia describes the founding principles of TIF usage:

“TIF was designed to channel funding toward improvements in distressed, underdeveloped, or underutilized parts of a jurisdiction where development might otherwise not occur. ” [Source: Wikipedia]

Experimental TIF Use. In recent years, municipalities have implemented experimental uses of TIF-Based funding to include urban development projects that are private business ventures. Without taxpayer consent, city council members are taking tax revenue and giving it to private business owners. This has resulted in public protests from groups that, given the chance, would otherwise vote down such initiatives were they bonds to raise funds for public projects. In theory, the rationale for giving tax revenue to private enterprise is that the initial loan will be repaid in substantially higher property taxes. Once repaid, the ongoing tax revenue will be a benefit to the city.

The goal of experimental TIFs is a long-term increase in property tax income that should recuperate the original investment. Additional financial support allows developers to build beyond what they might have otherwise been able to. This may include aspects of sustainability, urban beautification, and mixed use space that might typically not be considered. Developers seeking maximum profits may create single-use ugly buildings with little consideration of sustainability. Developers given additional financial support may create multi-use attractive buildings with a greater investment in architectural design and sustainable practices.

Usually the only developers who get selected for such experimental projects are those who have a past record of success in the community, and a base of community support for their projects. Communities should be leery of special financial incentives extended to unknown out-of-town developers who have not demonstrated any commitment to the local community and may skip town when the going gets tough.

For communities considering experimental uses of TIFs as an investment, it is advisable to use a dollar cost averaging approach to their implementation, particularly when their use involves giving tax payer money to private enterprise. Because this use may be a risky investment, and because they typically involve tax-free contracts that extend decades, a city can quickly get overextended if the city government becomes “TIF-happy” and erodes the public tax base.

TIF Qualification Assessment Checklist. In general, people are either in favor of experimental TIF use or against it. I would propose that people should be neither “For” or “Against” the use of TIF-Based funding. Instead, communities should utilize a checklist to determine when a TIF should or shouldn’t be used. Below are some questions that should be asked which should rule out about 99.9% of all requests for TIF-Based funding of private projects.

  1. Previous Interest. Has the developer previously shown an interest in the community, or is the TIF a bribe to get an otherwise uninterested and uncommitted developer to build in your community? If the developer has previously shown an interest in the community, without any special favors, then continue to question #2, otherwise TIF should not be used.
  2. Mixed Use. For the other projects the developer has in the community, are those utilizing best practices of mixed use spaces that will enrich an area by having retail space, office space, and residential living? If YES, then continue to question #3, otherwise TIF should not be used.
  3. Past Success. Have the other projects of the developer been successful? If yes, continue to question #4, otherwise TIF should not be used because that would not be a TIF it would be simply TF (tax funding) without a guarantee of an ‘increment’ in tax revenue if the project fails.
  4. Architecture Evaluation. Certainly there are many genres of architecture, and just as many opinions about what is attractive. For the style of architecture being proposed, is the building considered to be attractive by those who appreciate that style of architecture? For example, if the proposed development uses modern design, do people find it to be an innovative and attractive example of modern architecture? If yes, continue to question #5, otherwise TIF should not be used.
  5. Beautification. Businesses and investors generally look at the bottom line and profits when planning a project. An ugly poured cement building or unimaginative brick facade would be popular choices. Similar to question #4, does the proposed development project place value on the aesthetic appearance of the building in a way that demonstrates the developer’s passion to look beyond profits to envision ways that architecture can be a form of habitable art and community beautification? If yes, continue to question #6, otherwise TIF should not be used.
  6. Property Management. Is the developer simply looking to turn a quick profit by constructing a cheaply-made building and then selling it without making any long-term commitment to ensure the property is cared for and the businesses within it are profitable, or, instead, is the developer taking a personal interest in the long-term management and oversight of the property? If the developer is taking an interest in the long-term care of the property, then continue to question #7, otherwise TIF should not be used.
  7. Commitment. If the developer thinks their project is so wonderful, ask them this simple final question: “Would you be willing to actually live in the buildings you are constructing and reside in the neighborhood where you develop?” Most developers will say no, and you can tell them to seek private funding. However, if you have a developer who has answered yes to all of the above questions, then such a developer should probably be retained and well supported by the city because developers like this would be very hard to come by and can be a huge asset to any community.

The above list of requirements may seem like an impossible set of requirements for any developer to meet. However, there are developers that meet such requirements. The Moen Group would be one example of a developer that would pass the above requirements.

There is a commentary and response to the above found at the bottom of this page. In summary, those opposed to giving public tax revenue to private developers would conclude that no decision tree will change the fact that taxes aren’t meant to support private business.

Case Study – Iowa City. In Iowa City, we’ve had several experimental uses of TIF-funded development projects that fall outside their traditional use and best practices. This has raised a significant amount of public outcry, partly because tax payers did not vote on or approve this private enterprise business use of their tax dollars. Interestingly, the developer being awarded the experimental TIF money (MoenGroup.com) would actually pass the above 7-question qualification assessment test.

Dollar Cost Averaging. Because TIF funded private projects represent some risk, the principle of dollar cost averaging should be used. By waiting 7 to 10 years between TIF funded projects, there is enough time to reassess their success, and spread out risk, and spread out the depletion of the municipal tax base revenue.

TIF Concerns. The remainder of this document will explore TIF concerns and potential problems with TIFs. As mentioned above, in recent years, TIFs have been used as a mechanism for taking tax payer money and handing it over to wealthy developers and private business. These are some additional concerns about TIFs that makes their use for private enterprise prohibitive in any circumstances. I believe these are valid concerns that may take precedence over any possible benefit of experimental TIF use.

  1. Infrastructure Needs Come First. Roads, schools, libraries and other shared community infrastructure are traditional government undertakings. Funding private enterprise with tax payer dollars is not.
  2. Public Input is Essential. Although voter approval is not required, citizen participation is essential and any city government that does not seek citizen input does so to the detriment of the entire community. TIF funding is similar to public bonds and should be treated the same way.
  3. Enhancing or Expanding Wealthy Developments Isn’t Essential. When TIFs are used to make posh and upscale living even more decadent, they run the risk of broadening the gap between the working poor and wealthy in a community. Initially TIFs were intended for urban renewal and low-income housing. The intension was to give the underprivileged a leg up. Giving the wealthy a financial boost at the expense and sacrifice of the poor seems backwards.
  4. Free Marketplace. Most of us believe in the power and effectiveness of the free marketplace to produce equitable and responsible outcomes. Businesses answer to consumer needs and wishes, or they feel the results in their bottom line. Providing tax payer funding reduces or eliminates these marketplace checks and balances. Additionally, TIFs create an imbalance in the marketplace giving some businesses an immense advantage over others.
  5. Disparity of Profits and Losses. A TIF funded project distributes risks of loss and opportunities for profit inequitably because profits are guaranteed to be received by the developer, but if there are losses (if a business folds) the taxpayers will bear the brunt of that outcome.
  6. Business and State Partnership. TIFs intertwine government and business in something that’s neither socialism or capitalism. TIFs represent an erosion of the democratic process whereby the tax payers are stripped of their autonomy, self governance, and money for the benefit of private enterprise. When officials give millions in taxpayers’ money to private, for-profit businesses, the temptations for good-old-boy corruption are great — and virtually impossible to uncover.
  7. Business Incentives and Accommodations. It’s not necessary to give handouts to businesses to gain their approval. Changes in zoning regulations and building codes (for example) can help give businesses a boost without using taxpayer money. Municipalities compelled to bribe business as a means for pleading to win developers is a losing downward spiral that only ends after the last parcel of land is TIFed away. TIFs can devastate a government’s credit rating, thereby increasing the cost of future legitimate projects. Instead, municipalities should be firm and financially conservative when approving what businesses they allow to develop in a given area. Rather than asking, “What can we pay to convince you to develop in our community?” municipalities should be posing the question, “What will you give our community for the privilege of having a business here?”
  8. Impact on Public Funds. Money shifted over to TIF use is pulled from the same collective pot that would otherwise fund schools, programs, and other government units. In the short-term, this creates a deficiency, and in the long-term, if profits are not as expected, there may be a permanent negative impact on other community funding needs.
  9. Difficult to Determine Needs. In some situations, a city will be told by a potential developer that they can’t proceed with a project unless they receive a certain amount of funding from the city. It is difficult for a city to determine the actual needs of that developer, so the city will end up trusting the foxes to guard the henhouse as the money is trustingly handed over.
  10. Higher Risk. Much of the ‘risk’ in business outcome success has to do with those governing and guiding a business. In a traditional business model, all those involved are equally committed to ensuring success. With TIF funded projects, public officials may lack the business experience required to ensure success, and having no personal financial money tied up in a project, there is little incentive to oversee and ensure the success of a project.
  11. Payoffs to Win Business. Sometimes municipalities get into a bidding war trying to win over a certain business or developer. If a developer isn’t adequately committed to your community, and requires that you bribe them to come to your community, that’s not a good place to start a relationship. Choose only businesses and developers who are sufficiently ‘invested’ in your community that you need not bribe them to come. Businesses pick cities for reasons other than TIFs: workforce, local economy, schools, transportation, communication, quality of life. Focus on investing in those assets instead. Otherwise, the money you give to business will be diverted away from the infrastructure that would otherwise attract more business. Indeed, it’s in the best interest of many businesses to depress the local economy and reduce the quality of life in order to attract people who might fill low-wage jobs. So, businesses aren’t always the best friend of a local community or economy.
  12. Risk of Corruption. When officials give millions in taxpayers’ money to private, for-profit businesses, the temptations for good-old-boy corruption are great — and virtually impossible to uncover.

More information about TIFs can be found online on the FromDC2Iowa blog where the inspiration for much of the above content is available.

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Feedback. Please use the contact page to provide any comments, corrections, or suggestions to the above document.

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About Gregory Johnson

Greg Johnson is a freelance writer in Iowa City and also the founder and Director of the ResourcesForLife.com website. He also manages IowaCityWebDesignArtist.com and many other topic specific websites.

View all posts by Gregory Johnson
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