TIFs, Economic Development and Social Equity
Baltimore's Mayor says that other cities would be salivating at the opportunity of having a successful corporation drop $5.5 billion to build its global headquarters and a mixed use new town around it. Even if that corporation would ask for public bonds of over half a billion dollars through tax increment financing (TIF) and receive $760 million in tax credits for building on a brownfield, in an Enterprise Zone and by utilizing general city apartment tax credits.
Memorial Hall, many wore t-shirts provided by BUILD, Baltimoreans United In Leadership Development, an interfaith coalition of churches that has been advocating for better housing and more jobs for 35 years. Others wore yellow t-shirts provided by Sagamore Development, the development arm of Under Armour. It was almost like in the wars of old where each side showed up in a distinct recognizable uniform, only that the armaments were words. Some in the audience had been paid by their unions to show up in support. TV trucks lined the streets, cameras trained on the City Council up on the stage.
Local questions are embedded in a national debate about TIFs. Is TIF financing an appropriate vehicle for cities in desperate need of broadening their tax base? Is it appropriate for a corporate project? The financing tool, initially thought to be an economic development tool for blight removal, is used widely used across the US (except in Delaware). Its application in flush downtown areas or for corporate development has come under scrutiny.
This Corporation isn't a foreign auto company that wants to come to Baltimore like BMW came to Spartanburg, or Volkswagen to Chattanooga or Daimler Benz to Tuscaloosa, each receiving significant subsidies. The corporation in this case is Baltimore's own Under Armour Corporation (UA) a company that grew from modest beginnings here in town to overtake competitor Puma and then Adidas North America. The company grew so fast in such a short order that it is now bursting at the seems of its current waterfront headquarters. The company's CEOKevin Plank sounds sometimes a bit like Donald Trump, except that his company so far is a roaring success. In 2015 he was quoted in a local business paper with these words:[...] Port Covington is an amazing opportunity for Baltimore. It’s an amazing opportunity for job creation, for community building. To stabilize one of the fastest-growing companies in the world with Under Armour and to make sure that they continue to have a headquarters here. When cities around the country take a look at the pushback that some in the community are giving to this development they’re salivating, they would love to have Under Armour to invest billions in their community.(Mayor Rawlings Blake on WYPR)
ULI graphic explaining Tax Increment Financing
"Why not make it great?' "The one thing I'll tell you is I just want to do great things. I just want to be involved in projects that are great and build things that have people go 'wow.' One of my passions in life is I love blowing people's minds."TIFs are not the same as subsidies, especially those that pay for infrastructure, an item that traditionally has been funded directly by a municipality, i.e. out of public funds and that they are a form of self funding.
TIF’s distinctive feature is that it provides a means to access new tax revenues to support the creation of these same new revenues, and more. Public investment increases private property values, which increases property tax revenues. Those new revenues can be leveraged to pay for the improvements that attract the private investment, setting up a virtuous cycle of increasing development that pays for itself and increases the tax base. (The Planning Report June 2014)But not everybody agrees with the mayor. Several hundred citizens that came out for the first public hearing of the TIF bill held by the City Council had a different view. Almost filling Baltimore's War
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| Record crow at the first City Council hearing |
Local questions are embedded in a national debate about TIFs. Is TIF financing an appropriate vehicle for cities in desperate need of broadening their tax base? Is it appropriate for a corporate project? The financing tool, initially thought to be an economic development tool for blight removal, is used widely used across the US (except in Delaware). Its application in flush downtown areas or for corporate development has come under scrutiny.
Built on a foundation of growing tax revenues, TIF is vulnerable to both national and local economic downturns. Indeed, as the Great Recession spread throughout the United States, TIF districts became weak at just the time they were needed most. Moreover, as local governments cut budgets to the bone, the revenue generated in TIF districts came under close examination. In states where both TIF and education spending depend heavily on revenue from property taxes, TIF’s impact on education became a frequent flashpoint for controversy. (ULI)
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| Port Covington massing model: a city inside the city |
Is Under Armour’s planned new 45 acre headquarters and 200 acre city-in-the-city a godsend for the ailing economy of the old smoke stack legacy city and the turning point towards a new economy where some of the "making" returns to the shores or is it just another example of the rich getting richer while resources are siphoned away from the poor neighborhoods?
BUILD speaker Reverend Glenna Huber clearly thinks the latter is the case. "Here we go again," she began, "It is as if Baltimore has its own version of Groundhog Day." She alluded to the promises made and then continued: "They said the same thing when they built the Inner Harbor, Harbor East and Harbor Point. We are still waiting for promises that were never fulfilled. It is impossible to trust when you have been played so many times." Thundering applause. Addressing the council members she asked: "Are you going to stand this time to support the tax paying residents? Under Armour says: We protect this house. Who is going to protect this house that we call Baltimore?"
As it seems to be the case across the nation, there is little middle ground between what the Mayor, the business community, and many professionals say and what the "man in the street" says and what all the self-appointed community advocates proclaim.
In Baltimore after the death of Freddie Gray and the unrest the entrenched poverty rate of nearly 25%, the discrepancy in the life expectancy of 21 years between the poorest and the most affluent neighborhood in town, the 16,000 vacant houses (or 40,000 if one believes the 2010 census), and the sky-high murder rate are on everybody's mind at all times. Fertile ground for populist claims that the rich get the money shoved up their rear end while the poor are dying in the streets fall on fertile ground.
The ACLU, who years ago brought suits against Baltimore Housing for unfair housing practices and achieved a consent decree in which Housing must avoid anything that leads to further concentration of poverty, has determined that the Under Armour proposed development in Baltimore's Port Covington would exacerbate Baltimore's divide between the rich and the poor. The ACLU also testified that the TIF deal would be "fiscally irresponsible". ACLU spokesperson Barbara Samuels echoed the populist denouncement of the Under Armour development as containing many features that are too frivolous for Baltimore.
TischlerBise, the analyst, presented a list of critical observations in its own report: that no market analysis was done, that the operating costs of the City in the proposed development were "underestimated", that public capital cost outside the TIF are not included and that it would be prudent to represent several scenarios not just one baseline case as Sagamore had done. The consultant cited an example of one of their own TIF reviews they had done in a similar case where they had used "stress tests with four scenarios". Overall, though, the analyst concluded in his testimony that the project could very well be "transformative" and would "likely have benefits for the city".
An accurate estimate about how much value the infrastructure adds, how well the market will absorb the verticcal development (offices, retail spaces and dwellings), how land and structures will appreciate and be assessed in each step of the process in which more and more development will be added is hard to do but is key to the determination whether tax proceeds can pay debt burden. The peer reviewers suggest, therefore, to do estimates for a variety of scenarios above and below the baseline estimate.
A model that doesn't finance any portion of the infrastructure over the full absorption period of a project is the "pay as you go model". There will be other revenues than the taxes, obviously: For example the value of development lots with infrastructure and entitlements is clearly higher than the initial raw land, the sale of development lots can be a revenue source, so can the sale of completed buildings. Those two revenue streams fluctuate highly with the economy and market conditions. One way to ensure equity between the public and private side is a profit sharing agreement. The more profit, the more benefits would come back to the city, potentially making up for the long period of not seeing the tax benefits.
The complications of those funding models can make one's head spin and one can hardly expect that the Planning Commission or the Council will fully understand all the options, alternatives and implications even if they plowed through all nearly 500 pages of the application. That's why a slow and thorough public vetting process conducted by independent professionals allowing questions and conversations would have been so incredibly helpful.
Having sat through the public design review of the Port Covington masterplan that lasted over several months and resulted in many changes based on a very robust and qualified exchange between the Sagamore consultants and the professional reviewers, I regret that the review of the economic analysis isn't done in the same manner. Thorough, steady,professionally and fully public.
If the Baltimore Development Corporation (BDC) had reviewed the application in a series of public meetings in which economists and financial experts would have had a chance to ask the relevant questions and the applicant would have come back each time with amendments and improvements just as the design consultants had, show-downs like the one at the War Memorial Hall could have been avoided. Instead, BDC deliberations were kept secret.
The process is further complicated by the fact that the developer convened its own non-public meetings with six disenfranchised communities surrounding the development area (the “SB 6” communities) which include some of the poorest neighborhoods in Baltimore.
A memorandum of understanding (MOU) between the developer and the communities had been announced right before the final meeting of the Planning Commission which met twice and is advisory to the City Council. The Planning Commission had little opportunity to evaluate the MOU with the communities. The MOU includes direct financial support for the SB 6 communities as well as profit sharing of the kind I noted earlier. In Sagamore's (SDC) fact sheet it says this:
Critics immediately denounced how small those amounts are in light of the overall investment. However, representatives of the SB6 communities who had used professional legal assistance while drafting the MOU seemed satisfied and so were a State Senator and a State Delegate who participated in the process.
BUILD speaker Reverend Glenna Huber clearly thinks the latter is the case. "Here we go again," she began, "It is as if Baltimore has its own version of Groundhog Day." She alluded to the promises made and then continued: "They said the same thing when they built the Inner Harbor, Harbor East and Harbor Point. We are still waiting for promises that were never fulfilled. It is impossible to trust when you have been played so many times." Thundering applause. Addressing the council members she asked: "Are you going to stand this time to support the tax paying residents? Under Armour says: We protect this house. Who is going to protect this house that we call Baltimore?"
As it seems to be the case across the nation, there is little middle ground between what the Mayor, the business community, and many professionals say and what the "man in the street" says and what all the self-appointed community advocates proclaim.
In Baltimore after the death of Freddie Gray and the unrest the entrenched poverty rate of nearly 25%, the discrepancy in the life expectancy of 21 years between the poorest and the most affluent neighborhood in town, the 16,000 vacant houses (or 40,000 if one believes the 2010 census), and the sky-high murder rate are on everybody's mind at all times. Fertile ground for populist claims that the rich get the money shoved up their rear end while the poor are dying in the streets fall on fertile ground.
The ACLU, who years ago brought suits against Baltimore Housing for unfair housing practices and achieved a consent decree in which Housing must avoid anything that leads to further concentration of poverty, has determined that the Under Armour proposed development in Baltimore's Port Covington would exacerbate Baltimore's divide between the rich and the poor. The ACLU also testified that the TIF deal would be "fiscally irresponsible". ACLU spokesperson Barbara Samuels echoed the populist denouncement of the Under Armour development as containing many features that are too frivolous for Baltimore.
“They want that first $64 million ASAP and the only use for that ‘tranche’ is parks – not streets, not sewers, not streetlights,....Oh, and an archaeological pier. Does anyone here know what that is? I don’t.”UA's development arm Sagamore has submitted an over 500 page thick TIF application to the City, which then was reviewed on behalf of the City by MuniCap, a technically independent consultant who often advises cities in matters like this. To have something of substance to critique the application, BUILD hired its own consultant who in turn analyzed MuniCap's analysis.
TischlerBise, the analyst, presented a list of critical observations in its own report: that no market analysis was done, that the operating costs of the City in the proposed development were "underestimated", that public capital cost outside the TIF are not included and that it would be prudent to represent several scenarios not just one baseline case as Sagamore had done. The consultant cited an example of one of their own TIF reviews they had done in a similar case where they had used "stress tests with four scenarios". Overall, though, the analyst concluded in his testimony that the project could very well be "transformative" and would "likely have benefits for the city".
Opponents quickly made the TischlerBise analysis the basis of their criticism, especially after the analyst noted that he had never seen a TIF application like this and that it was "a house of cards". Of course, the finding that the arrangement is financially risky and not sufficiently buffered for more adverse conditions than the assumed baseline is at odds with the demand for more profit sharing, more affordable housing and higher contributions in the community benefits agreement. All those added costs could be better absorbed if the analysis would have shown very healthy returns on investment, which they didn't.
One has to wonder if the Maryland TIF model is really the best way to proceed: Even though only 50% of the infrastructure of the entire project is funded via TIF, the other half is funded by the developer, the city would see the full tax benefits only 40 years from now. Financing half a billion dollars over such a period is not only very costly (interest and fees) but also full of unknowns well beyond the issue of how accurate infrastructure cost estimates are.
One has to wonder if the Maryland TIF model is really the best way to proceed: Even though only 50% of the infrastructure of the entire project is funded via TIF, the other half is funded by the developer, the city would see the full tax benefits only 40 years from now. Financing half a billion dollars over such a period is not only very costly (interest and fees) but also full of unknowns well beyond the issue of how accurate infrastructure cost estimates are.
Another issue is phasing and in which order expenses and proceeds occur. A TIF is for dealing with non-profitable up-front costs such as those for infrastructure. The high up-front cost of infrastructure of any kind is most frequently the reason why a TIF is requested in the first place. The cost of clean-up, piers, bulkheads, streets and utilities cannot yet be paid from any type of existing revenue stream because any vertical development that produces those revenues is depending on those investments to be in place. Covering those costs with debt makes sense and provides typically the "but for " reasoning, i.e. that development couldn't occur without a TIF. Unless a private investor would be willing to credit hundreds of billions of dollars for decades, that is.
Depending on the phasing and when the expected revenues start to flow, there may be periods when serving the debts will be difficult. In the case of Port Covington, even the baseline estimate projects that tax proceeds wouldn't be sufficient to serve the bonds for a period of 20 years. This triggers a special tax assessments on those early users in the development district that pay taxes. Not a good prospect in a city that has already twice the property tax rate of surrounding counties.
The peer reviewers considered this a red flag. To avoid the special assessments either the size of the TIF would have to be reduced or revenue generators have to be brought on line faster.
An accurate estimate about how much value the infrastructure adds, how well the market will absorb the verticcal development (offices, retail spaces and dwellings), how land and structures will appreciate and be assessed in each step of the process in which more and more development will be added is hard to do but is key to the determination whether tax proceeds can pay debt burden. The peer reviewers suggest, therefore, to do estimates for a variety of scenarios above and below the baseline estimate.
A model that doesn't finance any portion of the infrastructure over the full absorption period of a project is the "pay as you go model". There will be other revenues than the taxes, obviously: For example the value of development lots with infrastructure and entitlements is clearly higher than the initial raw land, the sale of development lots can be a revenue source, so can the sale of completed buildings. Those two revenue streams fluctuate highly with the economy and market conditions. One way to ensure equity between the public and private side is a profit sharing agreement. The more profit, the more benefits would come back to the city, potentially making up for the long period of not seeing the tax benefits.
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| Discussing Port Covington under a sign that says "Made in America" |
The complications of those funding models can make one's head spin and one can hardly expect that the Planning Commission or the Council will fully understand all the options, alternatives and implications even if they plowed through all nearly 500 pages of the application. That's why a slow and thorough public vetting process conducted by independent professionals allowing questions and conversations would have been so incredibly helpful.
Having sat through the public design review of the Port Covington masterplan that lasted over several months and resulted in many changes based on a very robust and qualified exchange between the Sagamore consultants and the professional reviewers, I regret that the review of the economic analysis isn't done in the same manner. Thorough, steady,professionally and fully public.
If the Baltimore Development Corporation (BDC) had reviewed the application in a series of public meetings in which economists and financial experts would have had a chance to ask the relevant questions and the applicant would have come back each time with amendments and improvements just as the design consultants had, show-downs like the one at the War Memorial Hall could have been avoided. Instead, BDC deliberations were kept secret.
The process is further complicated by the fact that the developer convened its own non-public meetings with six disenfranchised communities surrounding the development area (the “SB 6” communities) which include some of the poorest neighborhoods in Baltimore.
A memorandum of understanding (MOU) between the developer and the communities had been announced right before the final meeting of the Planning Commission which met twice and is advisory to the City Council. The Planning Commission had little opportunity to evaluate the MOU with the communities. The MOU includes direct financial support for the SB 6 communities as well as profit sharing of the kind I noted earlier. In Sagamore's (SDC) fact sheet it says this:
SDC will provide $10 million in baseline funding to support the operation of the New Entity over the next five years ($5 million in direct payments; $5 million in raised funds). SDC and SB6 will work together to raise an additional $10,000,000 in funding for the New Entity in the subsequent five years.
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| A new day for the Port Covington industrial area? |
The agreement sets up a 30 year partnership. Community leaders in these six neighborhoods fought incredibly hard and reached an excellent deal..... I watched these communities come together and fight for their future. They didn't sit back and post on social media, they organized together, engaged in respectful yet pointed negotiations, and established a historic partnership to aid their efforts to improve their communities. I was also impressed with the folks from Sagamore throughout the negotiations. They were honest, thoughtful, and creative. (Senator Bill Ferguson on Facebook).What should the City Council to make of all of that and how should it move forward?
- The key question the City Council should ask themselves is this: Would any part of Baltimore be better off if the TIF would not be granted and if Port Covington would not be built? That is what the ACLU suggests and this question should be the basic litmus test, or as engineers sometimes say, the "fatal flaw" inquiry. If the answer is yes, then the deal certainly needs to be held off. With all costs properly accounted for, the City should not have to carry any new burden from the new development, not even in the worst case scenario.
- The next set of questions should be if the City at large benefits, when and how much. That would include the question of initial tax benefits when most of the taxes go towards bond repayment. How much should remain with the City early on? At-large benefits should also be accrued through profit sharing on any transactions that the master developer undertakes when selling off entitled development lots or buildings. Will this project make Baltimore grow, will it become a more competitive location? The application and the MuniCap report answer some of these questions but only for one scenario. How could one hedge against a worst case scenario?
- Then there is the issue of affordable housing. How much of it should be in the overall development and at what rate of area mean income (AMI)? Although there is a discrepancy what is in the application and what was stated during hearings, there is a goal of 10% affordable units at a verbally presented rate of 60% of area median income (AMI). The issue is how to make this binding? By comparison, Forest City one of the large master developers for the redevelopment of Stapleton (Denver, Co), a project even larger than Port Covington (4,100 acres, 14,000 dwelling units), committed to 10% affordable units at 80% AMI (4-person: $64,080). However, to date Forest City actually built only 5%. To avoid such delay in compliance, Sagamore agreed to meet the 10% goal for each phase individually. Denver also has exempted the Stapleton Development from its municipal affordable housing ordinance.
- Finally, the issue of the community benefits agreements. Will the surrounding disinvested communities benefit and are those benefits sufficient, are they guaranteed and will they be monitored? Will the benefits accrue in all scenarios or only in the baseline?
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| Under Armour's experimental local production facility dubbed "Lighthouse" |
In other words, the project shouldn't be overloaded with up front horizontal cost. On the other hand, horizontal design must be better than the bare functional minimum. The only way such a large development can work in a regionally strong market with weak demand inside the core city is by delivering a product that is better than anything else in the region.
To have a strong investor willing to put a large chunk of money into the deal (Under Armours is talking about $.5.5 billion in private investment) is an ideal starting point for excellence. The Mayor is right: This is a situation many other places wished they had. However, the phasing of horizontal and vertical development should be such that they go hand-in-hand, step-by-step and that eventually the early development parts begin to pay not only bonds but also some of the later infrastructure. That model is what Hafen City in Hamburg seems to have employed (from how it was explained when the CEO's were here in Baltimore).
Finally, by way of explanation: The desire of disinvested communities to see those the types of investments in complete streets, trails, and habitats in their own neighborhoods is totally understandable. However, in the poorer neighborhoods where there is no market for development of almost any kind, the cost would have to be born from the City General Fund, not from a TIF. For a TIF to work the initial investment must be followed by revenues (in the form of property taxes) to pay the bonds back. Those revenues only materialize if some folks with money participate and also move into the area. That, too, is a characteristic of a TIF, it can't be used where there is no market and no increased tax revenue stream.
History shows, that simply investing in the public space through streetscape improvements and infrastructure in itself won't create a market. Many cities have spent significant money on widened sidewalks, street furniture, ornamental lighting and the like, without that any of it ever spurred any development.
History shows, that simply investing in the public space through streetscape improvements and infrastructure in itself won't create a market. Many cities have spent significant money on widened sidewalks, street furniture, ornamental lighting and the like, without that any of it ever spurred any development.
The new community of Port Covington should be excellent but also diverse and inclusive. The balance needs to be such that there will be enough revenues generated to pay the bonds. The cow has to live, grow, and be healthy before it can get milked. Plain and simple.
Klaus Philipsen, FAIA
edited by Ben Groff, JD
An Elected Officials TIF Guide, 2005, Government Finance Officers Association
Sarah Jo Peterson, Tax Increment Financing - Tweaking for the 21st Century. ULI 2014
Stapleton Redevelopment, Denver: Affordable Housing
edited by Ben Groff, JD
An Elected Officials TIF Guide, 2005, Government Finance Officers Association
Sarah Jo Peterson, Tax Increment Financing - Tweaking for the 21st Century. ULI 2014
Stapleton Redevelopment, Denver: Affordable Housing
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