The improving U.S. economy is creating more opportunities for developers and retailers to move forward on projects funded in part by the public sector — but nobody says the process is getting easier. Forming public-private partnerships that hinge on incentives such as tax increment financing is an art and a science unto itself, says Katie Kramer, vice president of the Council of Development Finance Agencies, which has worked with ICSC for nearly a decade to promote successful public-private collaboration.
Tax increment financing, started in California in 1952 and now an option in every state except Arizona, is widely used to fund retail, mixed-use and other development and infrastructure projects, typically by capturing property-tax increases or other incremental taxes.
To bolster the odds of winning TIF incentives, developers and retailers need to understand the complexities of securing buy-in from both public officials and private stakeholders, experts say. They must thoroughly understand state and local regulations related to TIF bonds or other financial tools in play, and, depending on the size of the project, may also have to work with local officials to establish a special-assessment district. In these, businesses agree to pool dedicated taxes to fund various improvements, such as outdoor-seating areas, green spaces, bike trails or performing-arts centers.
Tax Increment Financing (TIF) Tax increment financing (TIF) is a public financing method that is used as a subsidy for redevelopment, infrastructure, and other community-improvement projects in many countries, including the United States. Similar or related value capture strategies are used around the world.
Public-Private Partnerships
Though public-private partnerships can bring tremendous benefits, executing them properly requires a high level of financial acumen and due diligence, along with the need for careful documentation, monitoring and regulatory compliance at every step of the process, Kramer says. Specialized consultants often tackle the most complex analyses and logistics in TIF arrangements, but all the parties need a thorough understanding of the proven best practices related to these incentives, she says.
This is why ICSC works with CDFA to produce a suite of educational resources geared toward helping members and nonmembers alike to navigate TIF complexities, says Cynthia Stewart, ICSC’s vice president of community development. CDFA represents hundreds of public, private and nonprofit development entities, and its members include public officials, bankers, underwriters, attorneys and financial advisers. “When it comes to knowing the ins and outs of TIF, we at ICSC wanted the top people, the very best, to be our partners in producing these educational resources for our members,” Stewart said.
“We recommend that you always plan for at least one recession during the lifecycle of a TIF,”
Tax Increment Finance Best Practices Reference Guide
One recent effort to tackle the issue comes in the form of the second edition of the Tax Increment Finance Best Practices Reference Guide. This 382-page book, published this year, is intended to be a comprehensive overview of the TIF world, with contributions from 32 experts. The first edition, published in 2007, needed updating in part because of changes that came in the wake of the recession, including new state and local regulations designed to make TIF more transparent, Kramer says.
For many TIF-backed projects created in the years preceding the recession, overly rosy assumptions about the economic future led to disappointing results, says Robert J. Gibbs, president of Birmingham, Mich.–based Gibbs Planning Group. “A number of them were built, but failed,” he said. “They didn’t deliver what they promised, because it seemed at the time as though the economy would never slow down.” Gibbs, who teaches urban mixed-use development at Harvard, is now working with the city of Troy, Mich., and with real estate firm Core Partners to develop a master plan for 127 acres in downtown Troy. The site includes City Hall and several other municipal buildings. Initial plans for the project, which is likely to include TIF funding, call for new stores and restaurants, a 300-room hotel and some apartments, condos, town homes and other residential buildings. In developing a pro forma for such a project, it is critical to be conservative about its performance, says Gibbs. “We recommend that you always plan for at least one recession during the lifecycle of a TIF,” he said. “We assume there will be one recession every 10 years. You have to count on a three- or four-year period where it is not going to perform as you hoped it would.”
Nonetheless, Gibbs is bullish on realistically structured TIF financing. “The basic model really works well,” he said. “There are probably thousands of TIFs across the country that have performed as well as or better than expected. They give the community new assets and amenities, with a nice financial return.” These days, in fact, the majority of mixed-use town centers built in urban areas will involve a public-private partnership of some kind, Gibbs says. “It has become pretty standardized that a TIF, or some sort of public financing, will help finance about 20 to 30 percent of a large, mixed-use town center,” he said. “But I have seen it go as high as 50 percent.”
Second edition of the TIF guide
The second edition of the TIF guide provides an in-depth look at the financial structures and other details of 24 new case studies, including shopping centers, urban mixed-use projects, brownfield redevelopments, transit-oriented developments and more, Kramer notes. The book also includes new information on how TIF can be used in conjunction with special-assessment districts to bolster funding and reduce risk. “Tax increment financing is being used more and more along with special-assessment districts or techniques,” Kramer said. “We wanted to be sure our best-practices guide reflected the combination of those tools. The guide walks readers through what it would look like to use tax increment financing with a special-assessment district in a comprehensive financing approach. It’s an important best practice to consider.”
South Baltimore is one place in which developers and public officials are using TIF financing and special assessments to bring about major improvements. A case in point is Port Covington — a 15 million-square-foot, $5.5 billion development now in the planning stages. Under Armour CEO Kevin Plank’s Sagamore Development Co. is reportedly seeking $1.1 billion in public financing for Port Covington, including $535 million in TIF. In return, the blighted industrial zone will benefit from new parks, streets and sewers, along with the addition of offices, residences, retailers, a mixed-use project and, possibly, a new Under Armour campus.
“It is really fascinating how large-scale this whole reinvestment is,” said Kramer. “It is huge: The specific geographic boundaries of Baltimore’s Inner Harbor district, the city’s biggest TIF investment to date, could actually fit in the Port Covington district three or four times.”
The new guide also highlights the role of TIF and special assessments in another Baltimore project: Harbor Point, a mixed-use brownfield redevelopment on a 27-acre waterfront site formerly occupied by a chrome-ore-processing plant. TIF funds, the book’s authors note, are helping the $1 billion development move forward by offsetting some of its high remediation and infrastructure costs.
“Higher expenses aren’t included in that sales number. They reduce your profitability for that store. Every store has to stand on its own”
$3 million for a 75,000-square-foot Dierbergs grocery store
But TIF can be useful also for smaller projects, says Kramer. The book highlights the role of public incentives at a single retail property: the 15-acre High Point Shopping Center, in Osage Beach, Mo. Despite a beautiful view of the Lake of the Ozarks and excellent road frontage, the center was an eyesore, the book says, with a long-vacant Walmart. But $5.1 million in TIF — $3 million for a 75,000-square-foot Dierbergs grocery store and $2.1 million for additional retail development — helped revitalize the center. Among other single-purpose case studies highlighted in the guide are the Galleria at Pittsburgh Mills, in Tarentum, Pa.; the Shops on Butterfield, at Yorktown Center, in Lombard, Ill.; and the St. George Place redevelopment, in Houston. TIF is used for single-purpose projects just as often as it is for larger districts, Kramer says. “Some smaller cities don’t have the ability to invest in large-scale development, perhaps because of investment caps,” she said. “But for project-specific TIFs, you can follow all of the same best practices that we outline in this document. They really are universal.”
But this is not to suggest that TIF is universally understood. In fact, dispelling misconceptions about TIF among critics or among public officials not well versed in the process is a perennial challenge, sources say. This is particularly true away from the major cities, says Gibbs. “Generally, the urban communities get it, but a lot of rural communities don’t,” Gibbs said. “They see TIF as a giveaway or direct subsidy rather than as an investment.” Some officials from nonmetro areas have sought to tighten TIF regulations or even banish the incentive outright, he says. “They are challenging the whole fundamental TIF idea and trying to withdraw it,” Gibbs said. “It’s just because of a misunderstanding. You’ll flash a big number like the city contributing $15 million for the roads and infrastructure on a project, and it will be seen as a $15 million gift. But really, the numbers speak for themselves — it’s just a straight business model: You invest x, and you’re going to get a return of y over z number of years.”
Little wonder the latest edition of the TIF guide puts so much emphasis on clear and transparent communication among all parties. “One of the things that we want to see is really transparent and accountable investments across the board,” Kramer said. In addition to weighing such questions as when a municipality should use TIF or how to draft appropriate TIF policies, the book includes a whole chapter on boosting community buy-in, with best practices related to communications and marketing. “Developers, in addition to the city, need to step up their game and be transparent,” Kramer said.
The book also includes a discussion of what Kramer calls the “but for” analysis of a TIF project. “Everybody should outline that this development would not occur but for the investment of TIF,” she said. “The guide explores some of the best due-diligence approaches for outlining how that analysis occurs and why you should make that a transparent and public process.” In addition to seeking lots of community input, the city and the developer should be sure the pro forma for the project is handled by an objective, outside source, Kramer says. “There are several professional firms that are thinking critically about what the 20- or 30-year outlook is for retail,” she said. “The city cannot undertake a pro forma by itself, nor do I believe a developer should take it on by itself.”
One of the biggest misconceptions
One of the biggest misconceptions among officials who lack much experience with public-private partnerships is the idea that retailers will choose to open stores wherever markets meet their basic criteria, regardless of whether incentives are on the table, says Myriam Simmons, director of credits and incentives consulting for Dallas-based Ryan, which provides tax services to local, state and federal governments. Having set up the public-private partnerships group at Target, where she worked for seven years, Simmons encountered this notion repeatedly as she traveled the country negotiating TIF and other incentives.
While nearly every state now allows for TIF, much work remains on promoting its adoption at the local level, Simmons says. “You’ve got a lot of states that have passed legislation to allow for TIF, but so many jurisdictions have never done this before,” she said.
In working with inexperienced officials, it is critical to go in with an understanding of any state regulations and local ordinances, Simmons says. In the case of a major retailer, the team should also take the time to explain to the officials the way the site-selection process works. The officials may not understand that an expanding chain will scout twice as many stores as it actually intends to open, and that each prospective location is in intense competition with similar places around the country. “Just because your location meets the standard threshold for the retailer, that does not mean that the deal is going to get done without incentives,” Simmons said.
