N

early every U.S. state has tax increment financing (TIF) enabling legislation on the books, designed to capture the future tax benefits of real estate improvements in order to pay for the present cost of those improvements. Some put them to great use, while others let them languish.
   On the same day in November 2006 voters went to the polls across the country – many to decide on ballot issues on funding – development finance professionals and economic developers gathered in the city of Baltimore, Md., to learn about and discuss tax increment financing and the projects it can facilitate at a symposium convened by the Council of Development Finance Agencies.
   "It's ironic that we have this meeting on the day Americans go to the polls to elect the men and women who will spend the millions in the public trough," said Ken Powell, managing director in the public finance department for Stone & Youngberg. "TIF is an optimistic form of finance – if you don't believe you're going to invest in your community and create value, TIF will not work. We do not create a new source of revenue, we create a new source of debt. With that debt we use bond funds and improve real estate, and it is off the balance sheet for state and local governments. It is a dynamic tool, and allows us to do things that before we were restricted in doing."
   There may be no more dynamic illustration of TIF's power than the city of Baltimore itself, whose redevelopment momentum was just one thing factoring into the election of its former mayor, Martin O'Malley, as the new governor of Maryland on the same day as the TIF symposium. During his tenure, which began in 1999, property taxes in the city were cut to their lowest level in 30 years and home values grew by 120 percent. The value of permitted commercial building projects grew from $23 million in 2002 to $488 million in 2004.
   Among the highest profile projects is the East Baltimore Revitalization Initiative, a collaborative 90- acre (36- hectare) project involving the city, Johns Hopkins University and the Annie E. Casey Foundation, which happens to be based in the city. The project involves 2 million sq. ft. (185,800 sq. m.) of life science and technology park space, for which the first of five life sciences buildings is under construction.
   It also involves a host of tax credit financing schemes, including $45 million from a TIF. "TIFs have become a preferred mechanism for funding the gap in projects. We've been able to work with the city and community to pull together $150 million of public investment, which will leverage about $1.3 billion over the next 10 years," said Jack Shannon, president and CEO of East Baltimore Development Inc. Through an open bid process, Forest City Enterprises has committed to over $900 million in the first 30 acres (12 hectares). "The rating agencies are already looking at what we're doing and putting a cap on what we can do," said Shannon, so that the community is not overextending and seeing its bond rating lowered. "We were able, for the first $15 million of TIF, led by the Casey foundation, to guarantee the payment of those notes. That took some of the risk out, and also provided a value- add."
   Shannon and others throughout the symposium noted that foundations like the Casey Foundation are often looking to play a greater role with the community, and in some cases have only to be approached. That foundation's participation has proved crucial in moving forward with redevelopment of an area that included more than 900 parcels of property.
   "Relocation in the wake of Kelo is a very difficult proposition," said Shannon. "The history is a lousy one, but with the help of the Annie E. Casey foundation and others, we've put together a fair and equitable set of benefits. Families are being relocated and, where fair market value was $30,000, they're getting an average of $160,000."    Also among those projects is the Clipper Mill redevelopment, the beneficiary of a site- specific TIF. The 18- acre (7- hectare) redevelopment of the former Poole & Hunt armament, railcar and trolley car manufacturing complex into mixed use residential and office space is being led by leading inner- city developer Struever Bros. Eccles & Rouse, working with Baltimore Development Corp. And the cycles of redevelopment are evident: The nearby streams that were an attraction in the mid- 19th century because of their cooling and power- generating capacity are now quality- of- life amenities. The building that was once a foundry is now home to craft studios belonging to, among others, a glassblower and a metal worker. And what was once stable space for the horses hauling in materials is now office space for BioHabitats, which creates ways to restore wetlands that have been disturbed by highway and other major development projects.
   "The TIF is used for building roads, conduit, sewer, water," said Tim Pula, senior development director for Struever Brothers. "It's difficult to make all this stuff fit. Eighteen acres sounds big, but in a valley with a number of existing buildings, things get tight pretty quickly."
   Keenan Rice, president of public finance consulting firm MuniCap, Inc., said one litmus test TIF has to undergo is the vital "but for" test to determine whether public assistance is even appropriate for a project.
   "You have to look beyond quantitative analysis and use some common sense," said Rice. "One thing I always look for is whether there is something unique that impairs redevelopment so the market won't do it on its own. Most projects have unique characteristics. Many have existing businesses. Usually the value of those is greater than the value of farmland on the edge of suburbia."
   Among other issues to consider are what private investment is in the wings, whether there will be sufficient surplus tax revenues to cover the cost of public services required for the project and whether TIF is being used in a way that will have a positive impact on a city's bond rating.
   Andrew Frank, executive vice president, Baltimore Development Corp. (BDC), said the Clipper Mill TIF is the city's sixth. Cumulatively, the six TIFs are worth $48 million, and are averaging between 15 percent and 20 percent of project costs. The agency's job is to minimize the city's investment and maximize the ROI, Frank said. "The most critical thing is being able to demonstrate that "but for" this assistance, this project wouldn't happen," he said. "Cynics believe we are giving tax dollars away and we're helping the rich who don't need the assistance. We want our developers to make money, but not too much money."
   In this case, said Pula, "This project would not have happened without BDC and the TIF. It could not sustain the additional private debt. The TIF offered $7.8 million, and $5.5 million went directly to capital costs for putting all that infrastructure in the ground."
   For BDC, an effective ROI is six percent, and Clipper Mill is returning at eight percent. Among the factors evaluated by BDC are jobs, piggyback payroll taxes, transfer taxes, permit fees, recordation feeds and spin- off benefits related to the construction phase. The factors related to ongoing operations thereafter include jobs, payroll, real property taxes, personal property taxes, utility taxes, parking taxes, hotel taxes, admissions taxes and payments- in- lieu- of- taxes (PILOTs).
   For Clipper Mill, it took 14 months from idea to development launch, with what Pula characterized as a fair amount of creative tension between the developer and the BDC over what did and did not qualify for TIF money. The battles in this case ensued over surface parking and conduit, drawn- out inspection processes, differing opinions from different city agencies over ADA compliance and $400,000 in increased costs due to unplanned encounters with underground obstructions.
   "We get the sense that BDC looks at us with cynicism – that's just the way the process is supposed to be," said Pula. "At times it was frustrating, because I felt like they felt like we were trying to pull the wool over their eyes, when we were only trying to make this complex situation work."
   "We want to have asked all the hard questions, because we know we're going to be asked them," said Frank of the BDC. And it doesn't hurt to put backstops in place.
   "Our city policy is that we create a special tax district every time we create a TIF," he explained. "If taxes aren't sufficient, the city has the ability to impose a special tax on property – in the case of Clipper Mill, we're in front of $40 million of debt financing and $15 million in equity. If the developer walks, it's likely the bank will step in. That's the belt and suspenders we have in place.
   "Politicians love the TIF, because the city is collecting these taxes, and it's building the public infrastructure," said Frank. "But we want to make sure that after the developer has achieved some reasonable return, we [get] a piece of the upside. If the developer's return is 25 percent instead of 20 percent, we want a piece of that, and we've been able to negotiate profit- sharing in every TIF we have."