Redeveloping the Lower Hill

Late in the summer, the Mayor of Pittsburgh announced that he wanted to establish the largest ever Tax Increment Financing district (TIF) in the City of Pittsburgh’s history.  The proposed TIF will stretch from the Lower Hill through the Upper Hill to the City’s Oakland neighborhood—in all seven neighborhoods are anticipating benefits.

 

The centerpiece of this TIF project will be a plan for the redevelopment of the 28 acre parcel of land where the Civic Arena once stood—a plan that was finally agreed upon by all parties involved, including the Pittsburgh Penguins, the Hill District community, and local government leaders.   According to the spokesperson for the Urban Redevelopment Authority (URA), formal resolutions of Intent to Participate will be sent to the three taxing bodies involved beginning in November.  If approved, which is a strong possibility since the Mayor and County Executive pushed for the plan, a TIF Committee will be formed and the TIF Plan will be created.  They are forecasting this to be completed sometime mid-2015.

 

The redevelopment project will be placed in the hands of the Pittsburgh Penguins as per an agreement which awarded them their new home in 2007.  Naturally, the officials and community leaders involved are lauding this plan as they are projecting that a twenty year TIF from this development will generate a minimum of $22 million to perhaps as much as $50 million to be used for public improvements in the other six neighborhoods.  The problem for analysts is that it is unknown as yet how much of the TIF funds will be used on the original 28 acre site.  And, the total amount of TIF borrowing has not been specified and the details of the plan have yet to be released to the public—but should be before the taxing bodies agree to participate.  Presumably, total TIF borrowing will be above $50 million.

 

According to the URA, who will be involved in the project, the TIF proceeds will help with “public improvements in support of commercial and/or residential development”, along with housing in the area, both for sale and rental properties, property stabilization to repair and preserve structures, and neighborhood parking solutions.  In a full length report from 1999, Report 99-06, we wrote, “a TIF project allows for “public improvements in a slated area (to be) financed by the increase in property taxes generated by private development.”  It is used in a blighted area where property tax receipts are flat or declining.  A bond is issued for the project.  As the development takes place, property values rise as do the subsequent property tax revenues.

 

In order for the TIF to proceed, a government body must issue a bond for the specified plan amount.  That is, the money is borrowed up front and repaid over time from the increment in tax revenue. However, if the development fails to generate enough of an increment in property taxes to satisfy the debt issue, taxpayers could then be on the hook for the bonds, or bond insurance would pay, resulting in a down grade of the issuing body’s credit rating. Either way the sponsoring government would suffer from the default. The Department of Community and Economic Development does offer a guarantee program for TIFs that guarantees $5 million per project.  However, this program is not available for projects located within cities of the first or second class, thereby excluding Pittsburgh.

 

One glaring example of a City TIF project gone awry comes to mind—the Lazarus department store.  As was noted in our 1999 report, the Lazarus project failed to deliver the promised increase in property taxes.  Of course, fifteen years later, Lazarus is sadly but a distant memory for most Pittsburghers and development officials.

 

But of course the Lower Hill development is different from the Lazarus project, especially in the scope of the project.  It encompasses property that has not been paying property taxes as the Civic Arena was owned by the City-County Sports and Exhibition Authority.  Thus, there isn’t a base amount of property taxes being collected.  Instead the agreement entered into by government and community leaders is that the resulting property taxes generated from the development will be split between the taxing bodies (35 percent) and the bond repayment (65 percent).  While highly doubtful, it is still possible that one or more of these bodies, school district, City, or County, will decline to participate—most likely it would be the school board since, as mentioned above, the Mayor and Executive were involved in the negotiations.  However, the County did decline to participate in a retail/residential development in Mt. Lebanon, which never got off the ground and the municipality relied on DCED’s guarantee program, i.e. the taxpayers, for reimbursement.  Indeed, the County had taken a position not to involve itself in residential TIFs several years earlier.

 

But does the project meet the letter of the TIF law?  According to the TIF law, the project’s main intent should be to remove blighted areas.  The Lower Hill, Crawford Roberts, the Bluff, and Greater Crawford Roberts districts were designated as blighted years ago and, under the original Urban Redevelopment Law of 1945, that designation has not been removed (Act 35 of 2006, which amends that law, set a twenty year time limit on such a designation going forward).  Secondly, TIFs have a “but for” requirement.  That is, the project would not be financially viable without the TIF funds.  With real estate overlooking the Downtown area, it is hard to believe that a private developer would not jump at the chance to develop these 28 acres without government subsidies.  Finally, and perhaps most importantly, TIFs were envisioned to be used primarily as a means to promote developments targeting high value added, high multiplier activities and jobs such as manufacturing that could create family sustaining jobs for the community, renew blighted areas with economic vitality and generate ample long term benefits to justify the taxpayers’ investment—not for retail and residential development, which is the crux of the Lower Hill plan.

 

For the residential portion of this plan there is a further complication for the TIF, or at least the size of the TIF.  The previous mayoral administration created tax incentives to lure residents into the Golden Triangle.   There are three programs from which potential buyers can take advantage; whether or not they will be extended to condos/residences in the Lower Hill will have to be determined, but on the URA website they acknowledge “parcels that developers choose to use the abatement or economic stimulus program on would have to be removed from the TIF district, removing potential TIF proceeds and requiring formal action by all three taxing bodies.”

 

Keeping in mind that since public money will be used, prevailing wages will have to be paid on the entire project.  Prevailing wages will increase the labor cost of the project significantly above what market wages would cost.  A recent study conducted on behalf of the New York State Economic Development Council noted that statewide the average increase in project costs due to prevailing wages was 36 percent with a range of 23 to 52 percent in the state’s metro regions.  While, the Pittsburgh percentage of increased costs has not been determined through detailed study, it seems reasonable to believe it is at least 20 percent, which would put the cost extra cost of the forecast $400 million in construction on the site at $80 million.

 

As mentioned earlier, the original intent of TIF was not to support retail or residential development, but rather manufacturing or other high value, high multiplier projects.  The City has not had much success with retail TIFs; Lazarus, immediately comes to mind, and even the Southside Works has had its struggles with retail as several stores have turned over in its short existence.  Interestingly and somewhat ominously, the economic analysis completed on behalf of the team, commented that “retail provides a challenging environment” and that on-site residents “do not typically generate demand for substantial new retail space.”  So why are they so eager to go down this path?  This 28 acre site represents a great opportunity for the City of Pittsburgh.  The best thing government officials can do is get out of the way.  The team was already provided an excessively sweet deal by getting development rights to this area.  Let them pay market value for the lots and develop them as they see fit—and use their own money, not taxpayer money.

What’s a Six-Letter Word for Handout?

The City’s Planning Commission has declared a section of land (176 acres altogether) next to the Summerset Park home development blighted. Doing so allows for the City and its related entities, along with the County and the Pittsburgh Schools to sign off on a tax increment financing package for the developer.

Only officials want to redefine the term because, of course, nothing says move to a housing development like a blighted area. The Commission chairman said in a newspaper article that "the term blight is the wrong term…I think it’s really an area in need of redevelopment."

That’s what previous planning officials, redevelopment advocates, and elected officials said when the Summerset project began over a decade ago. By now, with 256 high-priced homes built and more planned on the now blighted area, the public should expect that the time for subsidies and special tax treatment would be over.

But that’s not the case, since a URA official noted that the TIF package will be necessary since the state’s help through the Redevelopment Assistance Capital Program-which provided close to $18 million to the development-is likely dried up. What the official did not note is that during the 20 year life of a tax increment package part or all of the incremental taxes won’t go to pay for the public services necessitated by new homes, families, vehicles, etc. but will go to pay off the debt to build the new high-priced homes.

In fact, the new phase of development might be in line for an $11 million loan from PENNVEST, which is another arrow in the state’s development quiver.

Remember that lots for the new development were once decided by a lottery. The Mayor at the time noted that the housing plan was "going against the popular misconception that people don’t want to live in the city". As recently as 2008 an official of the development company indicated "we’ve continued to have steady interest and good sales despite the economic downturn…we sell about two units each month just as we’ve been doing for years. I currently have a list of over 20 perspective buyers from around the region who want to move into the city." So when does the public get to opt out as a silent development partner?

Times are Tough, But, It’s State Money

We’ve written about the Redevelopment Capital Assistance Program (RCAP) before: it is one of many arrows in the state’s quiver aimed at eliminating blight and stimulating economic development. The General Assembly not long ago authorized increasing the cap on how much the state could borrow to fund projects through this program, and in July the Governor handed out $600 million through the Commonwealth.

Just yesterday City Council discussed entering into various cooperation agreements with the Urban Redevelopment Authority, who acts as the applicant for RCAP dollars.

Perhaps City, state, and URA officials are aware of some good economic news as several RCAP requests were amended to reflect increased dollar amounts:

  • A grant for Phipps Conservatory was increased from $250k to $500k
  • A grant for the Pittsburgh Ballet was increased from $750k to $1,250k
  • A grant for the Pittsburgh Zoo and Aquarium was increased from $875k to $2,000k
  • A grant for the Carnegie Library modernization project was increased from $7,500k to $8,500k

And although it was not specifically amended, a grant for the Connelly Tech project-which was announced as an $8 million project in July-is now up to $12 million.

Parking Authority: A Shell of Itself?

If we connect the dots between two documents-the July 15th presentation made by the Mayor to members of the public on the parking lease and today’s official press release on the "final parking proposal"-the City’s Public Parking Authority would remain in place to monitor the lease but would be forbidden from building new parking facilities in a "no compete area" that constitutes much of the Golden Triangle.

Someone-either the Authority or the City-will own the garages according to the July presentation. Presumably that means the garages will continue to be exempt from real estate taxes. That same presentation assures Authority employees that they "are protected". The lessee is to honor collective bargaining agreements in place and those not offered employment with the Authority will be offered a job with the City. The July document also states that the authority will remain in place to monitor the lease.

The Parking Authority is prohibited from adding new parking in Downtown, but the door is open for the City’s development arm, the URA, to enter into the parking business (it presumably still owns garages at the South Side Works). The press release states "new parking can continue to be built in this area by private developers, the Urban Redevelopment Authority and the City/Authority for use by municipal buildings such as a courthouse, police station, fire station, government administrative building, correctional facility, public school, public library, public parking or recreational facilities". If there is a new garage built, the lessee has to prove it has been harmed in order to be awarded financially.

So what will the post-lease Parking Authority look like? It may or may not actually own any parking facilities, it may or may not be debt free depending on how much the lease nets, it will have minimal staff to monitor the lease, its other employees will either be working for the lessee or the City, and it won’t be permitted to add parking for the next five decades.

Will Too Many Boards Spoil Parking Lease Concoction?

Last week we wrote about City Council wanting to have lead time on the decision to accept proposals from firms interested in entering into a sale agreement or long-term lease for the Parking Authority’s garages and lots. Now that an official timeline for the transaction has been published (all business related to the deal is to be done by November 1, 2010) there comes another interesting wrinkle.

Here’s what the article said: "On April 1 [of 2010], companies would be formally invited to bid to control the authority’s garages, totaling 8,874 spaces, and around 8,500 meters and lot spaces. Lots controlled by the Urban Redevelopment Authority and Sports & Exhibition Authority may also be included". Now the wrinkle is not the date, indicating a very expensive April Fools’ Day joke, but the fact that the deal might include parking owned by the URA and SEA.

Perhaps the parking is located in lucrative spots: a 2005 consultant’s report to the oversight board on the SEA and the Stadium Authority states that the SEA owns the North Shore Garage (it was operated by a private entity at the time of the report) but no value was placed upon it; the 2008 City CAFR list no parking facilities owned by the URA under capital assets, but it is possible they have control of facilities somewhere. Adding other authority lots into the mix may be the City’s way of ensuring they meet the 50% minimum funding ratio that would avoid a state takeover of their pension plans. Recall too that the Mayor indicated he wanted to retire the Parking Authority’s $108 million debt as part of the deal; the overage goes to the pension funds.

But with Council wanting a say that might drag out the process, what does adding the boards and officials of these two powerful entities do? Certainly they won’t just hand over the parking lots, they will want compensation. Maybe that means the Parking Authority has to purchase them first to get a unified package deal to a bidder. What if the other authorities don’t play nice? Is the City overstepping on an already complicated deal?

The City’s New Architects

A coalition of community activists, environmental groups, and labor unions are becoming increasingly vocal on how development is supposed to look in Pittsburgh-one City Council member called them "a politically powerful force to reckon with" and we can see firsthand the result of their efforts. The URA tells a hotel developer to seek a higher classification of a "green" certification; demonstrations on the North Shore and at the Mayor’s office over community benefits; and now calls to mandate a living wage for projects taking public money are just the latest instances of action by this coalition.

Let’s take the living wage: it is back again after the City and County both resisted enacting it in the early part of the decade. With no discussion of a Countywide provision the City would make itself an island, a point noted by developers. And of course developers who don’t come begging for assistance (not many of those nowadays) would not have to comply with the regulations should they become law, a point noted by union activists. But it is a sure bet that this coalition would stage protests and file complaints if a large-scale development (built without public money) did not pay a living wage or was not environmentally friendly-they would be accused of "skirting the law".

But here is the bigger point that merits debate: after numerous public-private partnerships, state financed developments, tax increment finance projects, stadiums, a convention center, a new casino, etc. when do the private developments that were supposed to create family sustaining wages-without more government intervention-start popping up? We were told that doing the big subsidized developments would create a critical mass that would attract private spin-offs-now nearly a decade after the late 1990s rush of activity we still see elected officials and interest groups jockeying for ever more special provisions. And they will be anything but a "silent partner".