TIF Financing

[cdub]

Some of the talk recently has brought up some questions with myself about the TIF financing that's going on. Here's a decent article that summarizes it and lists some pros/ cons.

TIF Basics

Of note, I find it interesting he suggests TIF financing occur in areas that would see no development otherwise. Is this really a problem downtown? I'd hope not. I see this as a nice little gift to the developer as they are not the individual that will be repaying the loan, but are the ones receiving it.

Is the city's proactive use of TIF to redevelop the streetscape in the Gulch a much better use of TIF that then brings developers in instead of giving cash straight to the developer? Would this money be better spent to do the same thing in SoBro, create the infrastructure that benefits the city and show developers you're serious about an area?

My gut feeling is we're getting a little towards the shady gift to developers that the article mentions as being a pitfall. All along Encore was touted as not needing TIF or presales and now that seems a new priority. What caused this, I noticed that in the NBJ? I don't buy that development would not happen downtown without it. Thoughts?

[Nashvillain]

Thanks for linking to the article cdub. This is the first i've heard about a TID. Up until now i've understood the use of TIF to only apply to a specific project, like the Encore, and not an entire district, like the Gulch or SoBro. I also understood the article to say that a developer is required to pay two property taxes, the original pre-development assessment of the property and the increasing post-development assessment. In which case the city is not giving away anything to the developer. I wonder how closely metro has adhered to this guideline or if our use of TIF is different.

[cdub]

Actually, if I'm understanding it correctly, the developer pays nothing back unless they continue to own the development (ie. office, for-rent apartments). The increase in property value above what the tax was set prior to development is what pays back the TIF loan. Once the developer has sold all units in a condo development, he has cut ties with it and does not pay back the loan. The individuals buying the units are paying it back. Seems like they're paying the developer twice. Once for the unit and once for the loan from the city, which greatly benefits the developer.

I kind of equate it to the city giving me a loan to renovate my house with the idea that my increase in property taxes pays it back. I immediately sell may house and the 'loan' transfers to whoever is buying my place. I get the benefit of not having had to pay the full cost of construction out of my pocket, yet I'll be the one directly benefiting from the sale.

I understand the property taxes will increase anyway with the development but I feel the developer is getting off with quite a bargain. Maybe as part of the TIF process it must be disclosed the expected profits to the developer? Why give TIF to a developer who can make 10% without it, but wants 20%, hypothetically speaking? Without TIFs, would development in downtown be nonexistent?

[bwithers1]

I understand the property taxes will increase anyway with the development but I feel the developer is getting off with quite a bargain. Maybe as part of the TIF process it must be disclosed the expected profits to the developer? Why give TIF to a developer who can make 10% without it, but wants 20%, hypothetically speaking? Without TIFs, would development in downtown be nonexistent?

I agree with you that it seems that some developers are getting a sweet deal, what lefties sometimes call "corporate welfare." It would definitely seem to put a strain on the tax base for schools and things like that, which cannot always wait for ten years for a repayment. I can see using TIF financing for brownfields, but does Tony G really need a big TIF to get Encore off the ground, to use one example only? Or else what, it would need to be 40 stories tall to be feasible? Seems a little hard to believe. Now, I really do not understand economics that well, but sometimes I do understand why constituents are concerned that the schools are so bad, there is inadequate police protection, etc., but there is money to go around for developments like this.

[Kheldane]

I understand the property taxes will increase anyway with the development but I feel the developer is getting off with quite a bargain. Maybe as part of the TIF process it must be disclosed the expected profits to the developer? Why give TIF to a developer who can make 10% without it, but wants 20%, hypothetically speaking? Without TIFs, would development in downtown be nonexistent?

I think you understand the issue very well cdub, and you are asking the right questions!! If you break it down to its most essential elements, TIF can be classified as a subsidy for downtown developers. In theory, property taxes pay for city services/infrastructure. Take the Encore for example, there you will have 100+ new residents, who will (in theory) require police protection, use public roads, public transit, schools, metro courts, etc. Basically, all their city services will be subsidized by taxpayer from all over davidson county.

A quick mental exercise will allow us to understand this concept: What if all of davidson county south of I-40 were given a break from metro taxes for 1 year? Do you think people living north of I-40 would have anything to say about that? It's pretty obvious that the north part of the county would be subsidizing all city services to the south side - - - the same thing occurs with downtown developments, but on a much smaller scale.

One thing I must dismiss is the idea that the increased property tax payments (related to increased property value) would "pay back" the TIF subsidy. You have to remember that the whole idea behind basing property taxes on assessed value is the idea that more valuable properties are using more city services. The Encore, which will have 100+ residenst, is in theory using up more city services than an empty lot at the same location. Or what if it were an office building, or an industrial site? The reasoning is the same - if building improvements drive up the land value, chances are those buildings are housing/employing people who will consume city services - so they are taxed accordingly.

So now apply that to the Encore - Yes tony (or whoever owns it when the TIF period runs out) will be paying more taxes after encore is built than before it was built, but the people living there will be consuming a corresponding share of city services - so it nets out. The TIF period is in fact a tax free period, wherein the developers/residents have their services subsidized by the rest of the county.

As to your question about "what would happen if there was no TIF?" - - - -try to think of it in terms of a "real" market for downtown real-estate and a "distorted" market for downtown real estate. Downtown real-estate is in demand - for some price. That much is certain. The problem arises when there is a gap between the price of the real-estate, and the potential profit that can be earned from that real-estate. If taxes, zoning, or other aesthetic properties of a particular lot are so high/restrictive as to prohibit a developer from buying and developing that lot profitably, then it will sit empty, or as a parking lot.

Again, let's look at Encore. The powers that be have said "Without TIF, Encore could never happen". Ok, well, what does that really mean? It means the taxes are making development prohibitive in that part of the city, so they remove the taxes to remove some of the market distortion (perhaps even creating a distortion in the opposite direction because since when is any property owner exempt from taxes?) and convert the asking price into a market clearing price.

Of course, this is just theory - the political reality is probably more sinister - as you pointed out. I bet the encore could be done, but probably would be less profitable without TIF.

And then you also have to consider what FieldMarshal said, maybe the height restrictions are making development prohibitive in some instances. What if a developer could afford to pay 100% of the property taxes for the encore site, so long as they could build up to 40 stories? If that were the case, then you might say that TIF is being used to make up for the loss the developer would otherwise suffer for building a condo tower that is below the market dictated minimum height. Think about Hong Kong - where all new condos are over 50 stories. This minimum height is dictated by high land prices - not the Hong Kong government (someone correct me if I have this story wrong - I read this from another post a year ago ).