How to Finance Incentives to Stimulate Quality Redevelopment —
The City of Spokane has $1,795,000 to partner with a developer to improve the derelict Macy’s block into a premier mixed-use project. The mayor’s office just doesn’t know it yet. Otherwise known as incentive money, it can be used to finance eligible public improvements that may happen in or around the Macy’s block as a result of redevelopment.
At the end of this post is a link to the raw spreadsheet used to develop the above estimation. I invite you to download it, perhaps make it better.
A developer is responsible for many public improvements regardless of incentives, hence the motivating factor to partner with the city to off-set those costs. If public incentives are involved, some public improvements may go above and beyond requirements of the zoning code but are subject to negotiation between the city and the developer, such as architectural (façade) improvements. Eligible public improvements may involve a whole range of things: parking, façade and architectural improvements, installing or updating utility infrastructure, new roads, new rails, or even compliance with state and federal regulations such as the Americans With Disabilities Act or environmental remediation. In fact, there are so many eligible public improvements, it is really quite simple to find eligible costs when partnering with a developer for any given project.
In the case of Macy’s, a long list of public improvements may be identified to modernize the structure and will quickly devour the city’s incentives. Whatever public improvements are identified, in the end, it’s all a shell game in the developer’s pro forma. Thus, call them what you will.
If we’re looking to avoid simply dipping into the city’s general fund, writing a grant, asking the State Department of Commerce for money, fundraising, or raising taxes or fees or assessments to pursue a quality redevelopment, then the tool for the job is tax increment financing (TIF).
TIF is simply the difference in property value before development verses after. Below is a diagram of how TIF works in Washington (every state is a little different).
The Revised Code of Washington has a few sections on TIF.* Tax increment areas last 25 years. When the 25-year clock begins, the tax base is established. Up to 75% of property tax increment thereafter is captured to finance public improvements. These are foundational numbers when modeling the present value of incremental improvements.
The calculation of $1,795,000 is a present value of future TIF dollars based strictly on the city’s proportion of the property tax increment. Without going into the dirty Revised Code of Washington details, this is the path of least procedural assistance to create incentives for a quality project. If, for whatever reason, city council develops an appetite to increase the total value of incentives, there are ways to do so but it involves expanding the tent to include other decision makers, and I just don’t think we have that sort of time.
Macy’s Redevelopment Assumptions
In every financial model there are base data and assumptions. The base data in our Macy’s model was pulled from the Spokane County Assessor’s office to establish assessed square footage and assessed taxable value. The 25-year projection is run from this foundation.
For instance, total taxable square footage of all structures appears to be 393,015. For comparison, that’s just short of three Walmarts. The total 2016 taxable value of all structures is $8,777,780. This number is critical because it begins to give us a sense of how much it will take to purchase the property. Equally important, it also establishes a tax increment base value. Macy’s will certainly sell for something north of the assessed value but the question is by how much. I’ll place the over-under at $12,000,000.
Our projection’s assumptions are based on industry standards. The most significant assumption is placing a value on the cost of construction per square foot. These days, for new construction, $200 per square foot is normally a fair estimate. But this isn’t new construction, it’s rehab construction. So we’ll assume $100 per square foot. Don’t be fooled by this assumption, however; it will be an expensive proposition to fix Macy’s. One-hundred dollars per square foot is very conservative. Even then, the total price tag is about $40,000,000.
One final assumption of note involves the interest rate to establish the increment’s present value. I’m assuming either the project developer or the city (via fancy fund accounting) will lend the increment’s present value into the project and, as taxable new construction occurs, the lender is paid back over time with a negotiated interest rate. In our model, the interest rate is 2%. Generous, to be sure, but we’re only looking to preserve the time value of money, not create a profit for the lender.
If you made it this far without falling asleep, here’s where you can download the raw spreadsheet that illustrates all data, assumptions, projections, and amortization: Macy’s Tax Increment Present Value.
As redevelopment proposals may arise, assumptions may tighten and the projected tax increment value will become more accurate. The bottom line being, the city has tools at its disposal that enable it to influence pro-active redevelopment that stimulates positive multipliers on the surrounding environment. A contract with a developer to provide public improvements enables the city to stipulate extraordinary land-use controls onto the property (or just outside of it within the right-of-way). But this isn’t just about good urban planning, it’s also about developing a market-driven approach in-tune with industry standards but totally outside the norm of Spokane’s mostly dysfunctional economic development environment. If we want Spokane to compete at a higher level, this is the game that all the cool kids are playing.
*Our own Jeff Nave, the best finance attorney in town, authored a comparison of TIF laws in Washington State.