Another Harsh Lesson about TIFs for Retail

In the late 1990s and early 2000s, tax increment financing (TIF) became an oft-used financing scheme for local governments to use on development projects they wished to pursue.  This was viewed as a way to repurpose property by using the future value of incremental tax payments to pay off a redevelopment bond.  However, we warned at that time in our Policy Briefs (Volume 4, Number 3 and Volume 6, Number 48) that a TIF should not be used to subsidize retail projects.  Our logic was simple: retail is an industry with little or no multiplier effect.  Furthermore retail tends to do nothing more than shift dollars from one part of the community to another as shoppers pursue the newest strip malls and outlets leaving older ones to struggle.

 

The way a TIF works is simple. Suppose for example the local government taxing bodies wish to develop a parcel of property that is currently generating $100,000 in tax revenues.  It is believed that once developed and repurposed, it will then generate $200,000 in tax revenues—providing an increment of $100,000.  An authority (usually a redevelopment authority) then issues a bond in the appropriate amount to fund needed infrastructure and other site improvements to proceed with the project.  Once the project has been completed and tax revenues reach $200,000 the taxing body will still keep the original amount ($100,000) but can use the increment (the additional $100,000), or any part thereof, to pay off the TIF bond that was issued.

 

Taxing bodies regard this financing option as relatively “risk free”.  However, if the project fails to live up to its projections, someone has to pay for the bonds that were issued.  One such backstop is the Pennsylvania Department of Community and Economic Development which administers the TIF Guarantee Program providing up to $5 million per project.  Otherwise the bonds become the responsibility of the authority issuing them.

 

One decade ago, in September 2006, we wrote a Policy Brief (Volume 6, Number 48) that discussed the Pittsburgh Mills mall project and the $50 million TIF the developer had received as part of a financial assistance package.  The mall had opened in 2005 and we noted in that Brief its impact was being felt as local businesses had closed blaming a loss of customers to the mall.  But we also said the following:  “But none of this is to suggest that Pittsburgh Mills is booming.  It still deals with the same constraints facing the region in the way of sluggish population growth and the necessary redirection of limited disposable income.  A planned go-cart track never materialized and its upscale bowling alley attraction has already announced it will close.”

 

That quote proved to be quite prophetic as the mall and the entire development struggled to hold onto tenants.  According to recent local news articles, the mall is currently only 58 percent occupied, which is down from 65 percent from just last fall.  In 2012 it was reportedly occupied at 85 percent.

 

And of course the high vacancy rates have affected its market value.  While the entire project was built for $350 million, the mall itself was built for $226 million.  The mall had a market value reportedly at $190 million in 2006—more than half the value of the whole development.  According to news articles, its value plummeted to $30.8 million in February 2016 and by the end of August that value sank even further to $11 million.  In fact, the mortgage holder of the mall foreclosed last November.

 

So what does this mean for the TIF project?

 

Looking at the assessed values for the project, the pre-development value (2002) of the entire 340 acre area was $1.3 million and the property tax revenue collected by Allegheny County ($6,242), Frazer Township ($2,063) and Deer Lakes School District ($30,613) totaled $38,918.  These values became the base revenues that each taxing body would continue to collect after the development through the TIF package.  They also agreed to keep a portion of any increment to the property taxes at a rate of 25 percent (Allegheny County and Frazer Twp.) and 20 percent (Deer Lakes SD).

 

Records show that the assessed value of the parcels in the area after development reached $215.13 million.  The mall’s assessed value was $127.97 million.  In 2006 the County’s millage rate was 4.69 and thus they collected $1,008,943 in property taxes on the development.  Frazer Township (1.55 mills) collected $333,446 while Deer Lakes School District (23 mills) collected $4,947,908.  The total property tax collection from the three taxing bodies came in at $6,290,298.  Less the base amount ($38,918), the incremental property tax revenues were $6,251,379.  As mentioned above each taxing body elected to retain some of the increment ($1,316,980) which left $4,934,399 to be placed in the TIF fund to repay the bonds.  According to the debt service schedule, payments that year (2006) were only $2,729,850.  Adding administrative costs of $581,312 (comprised of an annual public safety payment to Frazer Township ($500,000) and other fees) raised the payment to over $3.31 million.  So at that point the increment was more than enough to pay the annual debt service and administration costs.

 

In 2016, the development’s assessed value had increased by 10.4 percent to $237.59 million.  The mall’s assessed value increased eight percent to $138.36 million.  Although millage rates had changed, Allegheny County (4.73 mills) collected $1,123,804, Frazer Township (1.42 mills) collected $337,379, and Deer Lakes (21.953 mills) collected $5,215,831 for a total of $6,677,014—a 6.14 percent increase over the 2006 amount.  Once again, removing the base ($38,918) and the percent of the increment each taxing body elected to retain ($1.4 million) left $5,237,833 for debt service ($4.9 million) and administration expenses on the TIF bond (roughly $5.4 million).  As can be seen, the increment to the property taxes collected falls a bit short of what is required.  However in years where there was an excess collection, it was placed into a TIF fund presumably to cover any years in which there was a shortfall.

 

But the important point here is the struggling mall and its’ assessed value versus its market value, along with other establishments which have already closed, leaving vacant structures.

 

As mentioned above the reported market value of the mall is currently $11 million—well below its’ assessed value of $138.4 million.  What if the mall’s owner appeals its property assessment?  What if the assessed value drops to $50 million?  The assessed value of the entire project falls from $237.59 to $149.23 million.  Keep in mind that the free standing Sears store (2016 assessed value of $7.5 million) closed as has a Smokey Bones restaurant ($1.94 million).  This would drop the assessed value of the project even further if the property owners appeal.

 

If we assume an assessed value of $149.23 million, the property taxes collected from the three combined taxing bodies would fall from $6,677,014 to $4,193,802—a decline of $2,483,212.  Less the base revenue amount and the amount of the increment retained by the taxing bodies, the funds left for the debt service obligation plus administrative expenses would be $3,278,434.  According to the debt service schedule, that amount alone is just more than $5 million for next year and is to rise gradually to $5,660,160 in the payoff year of 2023.  According to the Redevelopment Authority of Allegheny County’s financial audit, for period ending December 31, 2015, the amount outstanding on the TIF bonds is $33,155,000.  With the mall being placed into foreclosure and other ancillary establishments closing, the ability to repay the TIF bonds comes into question.  And even worse, the tax revenue of Frazier and Deer Lakes schools will take a major hit.  Not Good.

 

This just calls into stark relief the problem with subsidizing retail ventures. The Lazarus debacle should not be forgotten either.  For the first few years Pittsburgh Mills appeared to be a success.  But vacancies became an issue early and plagued the mall over the last few years.  Now the mall has been foreclosed and its market value has plummeted to just $11 million.  If the assessments are lowered to reflect the market value of the mall, the ability to repay the TIF bonds will be in doubt.   How this saga will play out remains to be seen.  But is should serve as a warning to development officials seeking to go down this road again.

Something’s Missing in Mall Accord

When the County, Robinson Township, and the Montour School District signed off on a tax increment financing deal way back when (the feasibility study for the site was in August of 1999 and the time of approval was December 1999; even the mention of the "Kaufman’s Department Store" seems like a relic) they probably never thought going to court would be the way the mall and its peripheral development would arrive at the assessed value needed to retire the TIF bonds on time.

But that’s just what happened as the taxing bodies and the mall agreed to boost its assessment from $76 million to $108 million and retroactively for tax years 2010, 2011, and 2012 so to ensure the assessment throws off enough property taxes to pay the debt. It was mentioned in the article that the $108 million value will last until the "bonds are paid off". While the taxing bodies like the deal because it will accelerate the payoff they must be wondering (unless it is spelled out in the deal) what happens to the assessment once the payoff is over; after all, the TIF is sort of a "deferred gratification" model of development: some or all of a new development’s incremental taxes are diverted to pay off debt for that new development’s infrastructure or public costs and then, once the debt is retired, all of the incremental taxes flow back to the taxing bodies who agreed to the diversion in the first place.

Lots of questions, but this deal does not address a big one: why is the mall and its "peripheral development" still not producing the direct job count that was promised in the feasibility study?

By 2005, the study predicted that 5,455 direct jobs would have been produced by the anchors, the mall, three outlots, and the peripheral development. When the Allegheny County Redevelopment Authority completed its TIF evaluation in 2008 it showed the projected job count of 5,455 from the study and placed its current estimate at 3,811; about 1,644 jobs short of projections. The Authority noted "…180 acres remains undeveloped within the TIF district. Commercial activity on these parcels would bring the job creation figures closer to the projections". The same job count and rationale was repeated two years later in the Authority’s 2010 evaluation.

Perhaps the total has improved from the measurements the County took in 2010. That would be a positive for the taxing bodies that participated in the TIF and for the boosters of the project. The issue is that the feasibility study projected that 578 jobs would be produced each year from 2001 through 2005 on "peripheral development" on which "construction…will proceed immediately and continue until full buildout over the next four years (2005)". What happened?

Why No State Reports on the TIF Program?

“The Department of Commerce, in cooperation with other State agencies and local governments, shall make a comprehensive report to the Governor and the General Assembly every two years commencing January 1, 1992, as to the social, economic, and financial effects and impact of tax increment financing projects.” –53 PS 6930.10, Tax Increment Financing Act

 

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SEA, TIF, and OPM

The Sports and Exhibition Authority (SEA) has announced it is seeking $3.1 million from the Commonwealth to pay for design work necessary to begin the redevelopment of the 28 acre Civic Arena site. And we all thought the Penguins would have the redevelopment rights. But that obviously does not mean they will be expected to pay all the costs of the redevelopment-no matter how much money they stand to earn from the site’s redevelopment.

Then, after the design work is completed, the SEA will want tax increment financing (TIF) to help fund the new construction on the site. Did it ever occur to these folks that the site is a very valuable piece of real estate and maybe should be sold to a developer who will fund the new construction itself? But having assigned the redevelopment rights to the Penguins, the SEA obviously feels compelled to find the money to help them redevelop the site. Call it the urban renewal project that never ends.

Now what all of this actually reveals is the unfortunate mindset of public officials and coddled sports team owners who hold the view that they have an inherent right to use other people’s money (OPM) to subsidize their pet projects. Nice deal if you can get it but it fosters a cynical and ultimately destructive view of government. Favoritism creates calls for more favoritism and it engenders a sense of entitlement in private sector players who are constantly looking for taxpayer money in the form of economic assistance. It weakens the very fabric of the free market entrepreneurial system. It makes for cronyism and mutual backscratching between business and politicians, the exact opposite of what should be happening.

Mt. Lebanon Condo Plan Falls Through—Again

Mt. Lebanon’s controversial condominium project known as Washington Park, to be built on property formerly owned by the municipality’s Parking Authority, has officially fallen through.  Officially, because the developer, Zamagias Properties, sent a letter to municipal officials asking to reapply for a different project on the same site.  After years of tortuous efforts by elected officials to put high end condos on the site, municipal and school district taxpayers now have nothing to show and years of forgone tax revenues that might have been collected if the site had been sold to a developer without a bunch of strings on the development. 

 

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Pittsburgh Tax Revenue: A Better Approach

 

When Pittsburgh’s plans to use projected tuition tax revenues were denied by the Oversight Board, the resulting loss of $15 million in projected revenue for 2010 necessitated some reworking of the budget to meet the balanced budget mandate.  One of the revenue sources picked for enhancement was delinquent tax collections. Instead of the $4.4 million anticipated in the earlier budget, the City boosted the amount to be collected by $2 million. The amended budget notes that “in anticipation of aggressive collection from a new agent,” the 2010 collection would rise to $6.4 million.

 

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