When city officials decided to create a $5 million
tax-increment financing (TIF) district for Bart Blatstein’s Avenue North
project near Temple University, in 2005, they had a few figures in mind.
The property at 1600 N. Broad St., then valued at $800,000,
would increase in value by $7 million after improvements, which included the
construction of a movie theater and retail space. It would create 178
construction jobs, 225 permanent full-time jobs, and generate $21.7 million in
tax revenue over the 20-year life of the TIF.
Today, the property is valued at $5.6 million, and it has
produced around $1.6 million in property tax revenue since 2008, the last year
for which data is published. That’s about $230,000 more than expected over that
period.
But in outperforming the projected property tax revenue
figure—year-by-year projections are a required component of TIF
proposals—Avenue North is nearly alone. Only one other TIF, for the PNC Bank
headquarters on Tinicum Boulevard in Southwest Philadelphia, is meeting or
exceeding property tax revenue expectations.
The rest lag behind.
PlanPhilly compared actual property tax revenues against projected
property tax revenues in 12 of the city’s 13 TIF districts. (The Aker shipyard
was left out because property tax records could not be located.)
Property tax revenues in ten of the TIF districts are lower
than the projections; in a few cases, they are significantly lower. In total,
the 12 TIF districts have produced about $20 million less in property taxes
than projected, over the last six years alone.
Sam Rhoads, an executive vice president at Philadelphia
Industrial Development Corporation, which manages the Philadelphia Authority
for Industrial Development, isn’t worried by that figure.
“I think everyone got what they bargained for,” Rhoads said.
“People both in the public sector and the private sector aren’t naive. These
things got approved with a lot of public process and comment; everyone realizes
that projections are projections. We got these various projects built that
wouldn’t have otherwise been built.”
Perhaps it’s not surprising that year-by-year projections of
property tax revenues don’t align with the actual tax bills. Economic
development is not a science. But the projections are part of the package used
to sell these subsidies to the bodies that must approve them—City Council and
the School District.
To be clear, it’s not that the city is losing money it gave
to developers for these projects, only that it’s not gaining as much in
property taxes as it had hoped. And records for other types of taxes that could
conceivably make up the difference aren’t made public, and can’t be compared
with the projections. But with Council set to vote in the coming weeks on
whether to authorize a $33 million TIF for a proposed W Hotel at 15th and Chestnut,
it raises questions of whether projects that benefit from TIFs are delivering
the revenue growth that was expected.
Incremental revenue
Tax-increment financing was authorized in Pennsylvania in
1990 and first used in Philadelphia in 1995, to keep PNC from shipping 1,100
jobs outside of the city. It’s a bit more complicated than other forms of
public subsidy and, proponents say, much less risky to the city’s budget.
It works like so:
The city—in the
form of the Philadelphia Authority for Industrial Development—identifies a
parcel for redevelopment, in cooperation with the developer, and settles on a
dollar amount, which represents the amount of would-be tax revenue that can be
diverted to project costs over the ensuing twenty years.
City Council and
the School District approve the TIF, or not.
The developer then
secures a loan from a private source for the amount of the TIF.
The improvements
to the property increase its value, and the project starts producing more
revenue, in the form of property, wage, sales, use & occupancy and other
taxes.
The city continues
to collect all of the taxes produced from the property, but only keeps the
amount the property was paying prior to the creation of the TIF, called the
base value.
It then forwards
the difference to PAID, which passes the money along to the lender.
Councilman Wilson Goode, Jr., has compared TIF subsidies to
allowing a developer to keep his taxes so he can pay his mortgage. Goode meant
it as a criticism, but the analogy is essentially correct.
TIFs are intended to spur development of blighted areas, the
formal definition of which includes any economically or socially undesirable
use. In Philadelphia, they have been used mostly on a project-by-project basis,
like the $33 million W Hotel TIF package, which was approved by a City Council
committee last week.
If they work as intended, the city gets new development,
rising property values, and more revenue after the TIF period ends. In
exchange, proponents say, the city gives away nothing: it keeps collecting the
base value, and after the TIF ends, it stands to collect much more. If they
don’t generate the expected revenue growth, it’s the developer and not the city
who is responsible for paying off the balance of the private loan when the TIF
period ends.
Sam Rhoads emphasized the lack of risk for the city.
“The city’s not guaranteeing the funds; the developer is,”
Rhoads said. “One of the first conversations we have with the developer is, I
say to them, ‘I’m just guesstimating these taxes.’ … Whether my projections end
up being accurate or not, they’re the ones who are on the hook.”
Still, Councilman Wilson Goode, Jr., a TIF skeptic who plans
to vote against the W Hotel subsidy, said that developers and PIDC should be
held accountable for the projections they make about revenue growth.
“It’s my general sense that the economic development
bureaucracy, for years, came [to Council] and told us just to vote for
projects, because they create jobs,” Goode said. “And they threw numbers at us,
not expecting us to examine them.”
Goode acknowledged that the city needs to be involved in
economic development, but said that it should get guarantees that projections
for tax increases are met.
“We know subsidies are needed,” he said. “But there’s a
smarter way to do it and part of that involves clawbacks, so when people put
things on paper and present them to Council, we have to find ways to hold them
to it.”
Fixing assessments
One potential reason that property tax projections for TIF
districts have been overstated is that the city’s property assessment system
has been dysfunctional for the past several decades. Mayor Nutter’s Actual
Value Initiative (AVI), which goes into effect next year, is intended to fix
that. The Office of Property Assessment recalculated the market value of every
property in the city, and the assessment for many of the TIF districts has
risen substantially for 2014.
But the actual property tax bills have shrunk.
According to PAID projections, the total 2014 property tax
revenue for the 12 TIFs included in this analysis was estimated at $13.9
million. Next year, based on each TIF property’s assessed value and the settled
tax rate of 1.34%, the districts will bring in only $5.6 million in property
tax revenue, or $8.3 million less than projected.
Lee Huang, director of the local economists’ group Econsult
Corporation, said that even with the shortfall in 2014, AVI will end up being a
boon for the city, and will help it to reap the intended rewards of the TIF
districts.
He said that without regular reassessments, the city misses
out on the “positive feedback mechanism” created by TIFs and other development
subsidies, in that new development not only generates new tax revenue, but also
increases the revenue that can be collected from surrounding properties that
rise in value because of the new development.
“Now that we’ve unbroken the assessment system, it has
created a system in which TIFs actually work, by giving the city the proper
incentives to invest in things that improve areas and cause property values to
go up,” Huang said.
Councilman Bill Green, who supports the W Hotel subsidy,
thinks the city should use tax-increment financing more often, even if the
initial tax projections are overly optimistic, as long as the developer and not
the city is on the hook for any shortfall.
“We’re disappointed it doesn’t bring in as much additional
revenue as we’d hoped, but still we’re far better off with any increase in tax
revenue,” Green said.
‘Tool of last resort’
There is no shortage of options for developers who feel they
need subsidies in order to build in Philadelphia. The easiest, a by-right
subsidy, is the 10-year property tax abatement on all new construction and
improvements. There are also tax-abating “opportunity zones,” “empowerment
zones,” the state Redevelopment Assistance Capital Program, federal Community
Development Block Grants, and so on.
Tax-increment financing is designed to plug the financing
gap for projects that simply can’t be built without it.
“Generally speaking,” said Sam Rhoads, “a TIF would be the
tool of last resort.”
TIFs were used in the 1990s to turn the nearly-empty PSFS
building into an upscale Loews Hotel, and to convert the former City Hall Annex
into the Courtyard Marriott, and, most recently, to finance a retail shopping
center at 52nd and Jefferson streets. They’ve also been used twice to finance
parking garages in Center City.
PIDC believes none of these projects could have been built
without the subsidy. For the purposes of calculating the tax benefits of the W
Hotel project, they also assume that the property at 15th and Chestnut, in the
heart of Center City, would sit undeveloped for the next twenty years.
Councilman Goode said that since the mayor’s economic
development team is staffed with city planners, the city shouldn’t have needed
to wait for the developer to propose a luxury hotel that needs tax-increment
financing.
“There should have been a plan for a site like [15th and
Chestnut], if they were seriously concerned about it being vacant for that
amount of years,” Goode said. “So we should already know what should go there,
and that type of work should be done in advance.”
Councilman Green said the hardest part about TIF financing,
for the developer, is proving that the project “won’t pencil” without the extra
subsidy. He said that the crucial evidence is the difference between the cost
of a project and the expected financial return, and he acknowledged that the
city has to partially rely on the developer to say what those figures will be.
“With respect to real estate,” he added, “the good news is
you generally know what people should be able to get for the space.”
Connected developers benefit
If it’s not surprising that revenue projections aren’t
completely accurate, it should be no more surprising that the developers who
benefit from tax-increment financing districts tend to be well-connected.
Brook Lenfest, the W Hotel developer, is the son of the
philanthropic Lenfest family, and his father H.F. “Gerry” Lenfest is part-owner
of the Inquirer, Daily News, and Philly.com. Brook Lenfest has given around
$30,000 to local political campaigns since 2007, including to Mayor Nutter’s,
according to city records.
The two parking garage TIFs, at 1501 Spruce and on the 1200
block of Filbert Street, were developed by Parkway Corporation, which is led by
Joseph Zuritsky and his son Robert. Together, the Zuritskys have given more
than $200,000 to local political campaigns since 2007.
Two other TIF projects were developed by Liberty Property
Trust, which is directed by Bill Hankowsky, also a part-owner of the Inquirer
company. Hankowsky was the director of PIDC when the two Liberty TIFs were
created, and he joined Liberty after leaving.
Lee Huang, of Econsult, pointed out that TIF projects tend
to be very big, and very big projects in turn tend to be undertaken by big-name
developers. The important thing, he said, is that the process for creating the
subsidies is public.
“Do you have some analytical process and some public
response process to make sure these subsidies are not handed out in a
smoky-room, handshake-transaction sort of way?” he said.
The W Hotel is the first proposed TIF district during Mayor
Michael Nutter’s administration. The bill was approved unanimously by Council’s
finance committee last week, after a series of behind-the-scenes negotiations,
though at least one Council member—Wilson Goode—is opposed to it. The bill
could come up for a vote before the full Council in early December. If
approved, the TIF will begin January 1st, 2014.
Source: PlanPhilly
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