An Assessment of Tax Increment Financing as a Tool for Economic Development

1. An Assessment of
Tax Increment Financing
as a Tool for Economic Development
Seth Capron
Nick Federowicz
Eric Nyman
Add photo of Evanston?
Brandon Strong
December 2012

2. Objectives
• Draw lessons by examining Evanston’s experience with TIF and
the
experience of TIF districts elsewhere in the U.S.
• Make recommendations on ways to improve the use of TIF as
an
economic development tool
2

3. Agenda
1. TIF Districts in Evanston
2. Major Findings
3. Recommendations for General TIF Policy
4. Recommendations for Specific TIF Districts
3

4. Agenda
1. TIF Districts in Evanston
2. Major Findings
3. Recommendations for General TIF Policy
4. Recommendations for Specific TIF Districts
4

5. Summary of Evanston TIF Districts
Size Beginning Bond
TIF District Begin/End 2011 EAV Major Projects
(acres) EAV Proceeds
Church St.
Plaza, Hilton Garden
Downtown II 1985/2008 35 $1,835,672 $145,470,000 $23,144,579
Inn, Maple Ave.
Garage, Optima
Sam’s Club, Ward
Southwest 1990/2013 13 $1,007,606 $8,223,329 $2,100,000
Manufacturing
Retail Center:
Howard and
1992/2015 24 $7,034,353 $23,747,973 Target, Jewel, Best $9,069,445
Hartrey
Buy, Office Max
Park Evanston, Whole
Washington
1994/2017 21 $25,727,379 $103,106,568 Foods, Sherman $52,061,429
National
Plaza & Garage
Howard and 415 Howard St.
2004/2027 11 $5,978,279 $11,808,477 None
Ridge apartment building
Church St.
Townhomes, Greenwo
West Evanston 2005/2028 116 $37,477,570 $45,084,553 None
od Lofts, LSL
Industries
Dempster-
2012/2035 16 $10,816,879 N/A N/A None
Dodge
5

6. Three well-established TIF districts provide lessons for
Evanston today
• Southwest TIF district provides lessons for the newly created
Dempster-
Dodge TIF district
• Downtown II and Washington National TIF districts provide lessons
for
the proposed TIF district at Chicago and Main
6

7. A brief history of the Southwest TIF district
• City combined parcels to
attract a large development
• Sam’s Club opened for
business in 1992
After Image
• Ward Manufacturing
relocated
from downtown Evanston in
1995
Thriving retail
7

8. Key observations for the Southwest TIF district
• Addressed impediments to development
• May have created positive “spillover” effects by drawing traffic to the
neighboring retail center
• Concern: Has the success of the Southwest TIF district come at the
expense of retailers elsewhere in Evanston?
Financially successful, but benefits for the broader community are
unclear
8

9. A brief history of the Downtown II and Washington
National TIF districts
• Downtown II, the first TIF
district in Evanston, evolved
from the Research Park
• Downtown II closed in 2008,
After Image
releasing significant property
tax revenues to taxing
authorities
• Washington National
resulted
in two large developments:
Park Evanston and Maple Street rejuvenated
Sherman
Plaza
9

10. Key observations for the Downtown II and Washington
National TIF districts
• Transformed and significantly expanded downtown Evanston
• Utilized competitive bidding processes
• Projects attempted to align with community strengths, market
demand, and demographic trends
• The city successfully reassessed goals midstream
Both TIF districts benefitted from adapting to market conditions
10

11. Agenda
1. TIF Districts in Evanston
2. Major Findings
3. Recommendations for General TIF Policy
4. Recommendations for Specific TIF Districts
11

12. TIF has the greatest impact when used as part of a
broader economic development plan (1 of 8)
• TIF is a tactical tool that can be effective at furthering a city’s overall
economic development goals
• TIF projects that are not in sync with the city’s objectives are likely to
fail
• The Market Square TIF in Houston is an example of positive
alignment with economic development goals
Economic Development Goals
Strategic
Initiative
TIF Selection Alternative Tools
12

13. TIF produces greater benefits when it is used to catalyze
rather than create demand (2 of 8)
• TIF can catalyze demand by removing barriers to development
• Municipalities should listen to the market when choosing TIF projects
Peninsula Town
Center, Hampton, VA
Market
Indicators
Houston
Pavilions, Houston, TX
13

14. TIF is viewed more favorably by the community if a clear
and objective approval process is in place (3 of 8)
• Following an objective and scripted process encourages
trust, generates buy-in, and ensures projects are financially and
strategically sound
• Gallery Place in Washington, D.C. is an example of a well-designed
process
Structured Approval Process
Proposed TIFs Strategic Assessment
TIF certified by city
assigned to a official or department
city official or before presentation
department Financial Analysis to elected body
14

15. TIF projects tend to require less public subsidy if the city
leverages competitive market forces to choose developers (4 of
8)
• This option is most practical when municipalities own or control the
land
• Competitive bidding ensures the smallest amount of gap financing is
provided to the developer
• This process is illustrated by the Maple Avenue development in
Evanston’s Downtown II TIF district
Bid
Bid #1
#2
Bid
#3
Select
Optimal
Project Bid
15

16. The most successful use of TIF resources provides
benefits to the broader community (5 of 8)
• Financial performance is easy to measure, but community benefits
are the ultimate goal
• Important to include measurable goals and metrics that capture
community benefits
• Essential to hold developers accountable for benefits to the
community
16

17. development in a TIF district, the city can protect its
financial integrity (6 of 8)
• Depending on the specific structure of a TIF deal, the municipality
can bear either very little or a lot of the risk
• Lynnhaven Mall in Virginia Beach, Virginia and Peninsula Town
Center in Hampton, Virginia are examples with financing structures
that put the risk on the private sector
Lower Risk Higher Risk
Note Bond
Back-Up Backed only
Assessment by Increment
Clawback No Clawback
Pay-as-you- Pay Upfront
go
17

18. TIF success is less debatable when clear metrics are in
place to track and monitor performance (7 of 8)
• Agreeing upon clear metrics from the onset of a project ensures
goals remain in sight
• Creating metrics should be a joint exercise between the city and the
developer
• Holding developers accountable for performance is critical to
ensuring success
Meet Jobs Goal
or Pay Penalties
Coca-
Example: Chicago Cola
Northwest Industrial
Subsidized
Corridor TIF Rent City of
Chicago
Goal: Create 240 Jobs Develope
r
Tax
Abatement
18

19. TIF can be managed more effectively when overseen by
an advisory board of community stakeholders (8 of 8)
• Providing an opportunity for stakeholders to be involved promotes buy-
in
• An advisory board of community stakeholders ensures local
community needs are met
• Community members can hold developers accountable for promised
community benefits
Community
School
Organizatio
District
n
TIF
Local Advisory Local
Business Board Resident
19

20. Agenda
1. TIF Districts in Evanston
2. Major Findings
3. Recommendations for General TIF Policy
4. Recommendations for Specific TIF Districts
20

21. Evanston should approve TIF districts only after specifying how
they help the city achieve its economic development goals (1 of
4)
• Make sure that the city’s economic development goals are
clear
• Describe targeted areas of prioritization
• Define how the TIF district will help the city achieve its goals
• The objectives of the district should be aligned with the city’s
economic development goals
Alignment with economic development goals increases the likelihood of
success
21

22. Evanston should implement a more rigorous process for
TIF approval, oversight, and accountability (2 of 4)
• TIF approval should require official certification
• Delegate the responsibility to a specific individual within the
city, such as the CFO
• The individual’s responsibilities include conducting a financial
gap analysis, projecting economic impacts, and ensuring
strategic alignment with the city’s overall economic development
plan
• Create metrics and dashboards to monitor performance
• Consider appointing an oversight body of local stakeholders
• Hold recipients of TIF funds accountable for performance
• Link subsidies received to performance
A rigorous process leads to greater trust and better performance
22

23. Evanston should shift financial risk to the private
sector (3 of 4)
• Structure deals to minimize financial risk to the city
• Structure financing so that the private sector bears up-front
costs
• Create guidelines requiring a minimum level of performance
before the city reimburses TIF-eligible expenses
• Possible structures include:
• TIF notes
• Claw-back provisions
• Back-up assessments
• Pay-as-you-go funding
Shifting the risk to the private sector protects the city
23

24. Evanston should maximize the usage of competitive
market forces (4 of 4)
• When the city owns the land, require proposals from multiple
developers
• Proposals must include financial information and an assessment
of how the project will further the city’s strategic goals
• Multiple proposals decrease the need for public subsidies
• When a private entity owns or controls the land, other
precautions are necessary
• External validation of pro forma financial statements
• A financial structure that places the risk on the private sector
• Extra emphasis on identifying concrete benefits for the
community
Taking advantage of competitive market forces improves the chance of
success
24

25. Agenda
1. TIF Districts in Evanston
2. Major Findings
3. Recommendations for General TIF Policy
4. Recommendations for Specific TIF Districts
25

26. Dempster-Dodge TIF District
• Determine the root cause of the decline of the shopping
center
• Our research suggests West Evanston faces intense retail
competition
• Evanston Plaza is now a convenience center rather than a
destination that draws traffic
• Address issues in the surrounding neighborhood
• Ensure plans for Dempster-Dodge TIF district do not ignore the
surrounding area
• Coordinate with the West Evanston TIF district
• Create a specific plan for short-term stabilization
• Explore earmarking some of the initial $2M of TIF funding to
subsidize new tenants
• Identify desired effects of TIF expenditures
26

27. Proposed TIF District at Chicago & Main (1 of 2)
• Assess the viability of the project’s financial goals
• Ensure projections appropriately reflect market conditions
• Assess the risk of relying on a single project to generate tax
increment
• Focus TIF expenditures on projects that benefit the broader
community
• Ensure the goals of the proposed project are aligned with the
city’s economic development goals
• The vacant lot is a viable candidate for larger office
space, however, few current tenants in Evanston occupy more
than 10,000 sq. ft.
• The city should carefully consider the challenges and potential
consequences of attracting office tenants to a new
development out of the core downtown
27

28. Proposed TIF District at Chicago & Main (2 of 2)
• Mitigate financial risk for the city
• Utilize a pay-as-you-go structure to provide tax abatements or
subsidized rents only if tax increment materializes
• Consider issuing Special Service Area bonds backed by a
guaranteed stream of revenue from the property owner
28

29. Summary
Usage of TIF as an economic development tool in Evanston is
more effective and accepted when:
• It is aligned with the city’s economic development goals
• Financial risks to the city are mitigated
• TIF expenditures benefit the broader community
29

30. Thank you!
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