TIFS: a Template for Development in the 2010s

I co-wrote this column, published in the Washington Times today, with Kenneth E. Powell, an investment banker with Stone & Youngberg, which sells TIF bonds.

Four years ago, the Coliseum Mall in Hampton, Va., the city’s largest taxpayer, was on its last legs. Traffic was drying up. Tax revenues were wilting. The vacancy rate was approaching 40 percent and major leases were expiring. As a former city councilman put it, the retail center was becoming “a flea market.” But seeing turnaround potential, New York-based Mall Properties, Inc. was prepared to invest $275 million into the property. Just one hitch: The project required a large public investment in infrastructure.

The city found the money by creating a special tax district and issuing $95 million in bonds to pay for new streets, sidewalks, fountains, plazas, utilities and a 750-car parking deck. The bonds will be repaid by means of Tax Increment Financing (TIF): revenue from added sales and property taxes generated by the project, backed up by an assessment on the developer-landowner in the event of a shortfall.

Ground was broken in 2008. Despite the financial crisis and ensuing recession, development has proceeded on schedule. Today, Peninsula Town Center is more than 70 percent full. Fifty retailers signed leases this spring and landowners are investing in nearby properties. A neighborhood in Hampton stands transformed.

TIFs are the municipal financing tool of the 2010s, as state and local governments buckle under chronic fiscal stress. The Center for Budget and Policy Priorities estimates that budget shortfalls for the 50 states will amount to $196 billion this year, $180 billion next year, and $120 billion the following year. The federal government, which is projected to run another $1.47 trillion deficit in fiscal 2011, is in no position to help.

Some may see the growing incapacity of governments to fund economic development projects as a misfortune. We regard it as a positive. With TIFs, municipal governments have an opportunity to change their development paradigm from an inefficient, politically driven model to a transparent, accountable, market-driven model.

The past 30 years saw too much money chasing too few quality deals. Developers bought cheap land on the metropolitan periphery and used political clout to shift the cost of providing infrastructure to taxpayers. The disconnected, helter-skelter development left a legacy of expensive-to-serve transportation, public safety and other government services. Then the collapsing real-estate bubble left billions of dollars in bad deals and stranded infrastructure.

As developers crawl from under the rubble, municipalities now face a dearth of new development. Tax Increment Financing can help cash-starved governments jump-start new projects. Moreover, government leaders will be assured that developers will vet their projects more carefully. Not only do TIF projects have liens on the developer’s property, developers must persuade bond holders that projects make economic sense and likely will be completed. Thus, TIF deals benefit from an extra layer of sophisticated business oversight that government infrastructure projects ordinarily do not receive.

TIFs work for the developer, too. TIF districts can raise the money for upfront improvements. Developers don’t have to wait for municipalities to phase in upgrades as overstretched capital spending programs allow. The TIF tool allows entrepreneurs to jump on business opportunities quickly.

Citizens should love TIFs. All funds are handled in segregated accounts, not co-mingled with other projects in the public works budget where they are impossible to track. TIF projects are required to file public annual reports. If the promised benefits never materialize, the citizens know it. They can hold public officials more accountable than ever.

Best of all, TIFs with backup special assessments put the risks associated with real-estate development where they belong – with private developers. Municipalities are not set up to appraise complex deals and weigh business risk. Driven by the promise of “economic development,” they often approve deals that pose ill-defined risks they don’t fully understand.

Advocates of free markets should love TIFs because they are a mechanism to ensure an allocation of capital to projects that make economic sense. Developers must focus on the completion and performance of their project instead of courting public officials. And for smart growth advocates, TIFs shift the onus of paying for infrastructure from taxpayers to those who benefit from the investment. A development process disciplined by TIFs would finance less of the scattered, low-density development commonly called suburban sprawl.

The halcyon days of real estate development are over, collapsed in a bubble made possible by courthouse cronyism, public subsidies, easy money and rising prices. Good riddance. We welcome the return to sanity. With TIFs, we can resume redevelopment and growth free from the excesses of the past.

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