Thursday, December 11, 2008
What should citizens of Lawrence expect from its City Commission for the development of its housing stock?
The City Commission failed to reign in the excessive growth of the housing stock brought on by the developers. The taxpayers now pay the price for this excessive growth.
In any community, it is the goal of a city to maintain balance between the demand for housing and the supply of housing. If the supply runs ahead of demand, values fall. If the supply runs ahead of demand for a long period of time, whole neighborhoods lose value and blight occurs. Older neighborhoods suffer especially hard. This is what has happened in Lawrence.
Growth in the population is a good measure of growth in demand for housing
From1990 to 2000, the population grew:
· About 700 households per year,
· About 2.0 percent per year.
From 2000 to 2007, the population grew more slowly at:
· About 400 households per year,
· About 1.7 percent per year.
Growth in the number of housing units is a good measure of growth in the supply of housing
From 1990 to 2000, the housing stock grew:
· About 900 units per year,
· About 3.0 percent per year.
Since 2000, the housing stock grew:
· About 800 units per year,
· About 2.1 percent per year.
Matching the growth of demand and the growth of supply
In a well-planned market there should be a close correspondence between the growth in population and the growth in supply of housing. Developers have added units at a much greater rate than the growth in population:
· During the 1990s, the growth of supply outpaced the growth of demand by 200 units per year.
· Since 2000, the growth of supply outpaced the growth of demand by 400 units per year.
· The surplus stock totals to about 5,000 units. This means that developers have built surplus units that are more than the size of Eudora, all within the city limits of Lawrence.
· The surplus has brought about an out-migration from older neighborhoods, mostly in the eastern parts of the city, resulting in a loss of units.
· The loss of units resulted in a loss of value and deterioration in
the city’s older neighborhoods.
What should citizens of Lawrence expect from its City Commission?
· In a growing community, there is no need for any neighborhood to suffer a loss of population, housing units, or property values.
· In a growing community, the City Commission and its planners should manage growth to keep the pace of growth of supply in balance with the growth in demand for that housing.
· The City Commission and its planners should direct sufficient investment into older neighborhoods so that they maintain value and attract new families.
Monday, November 17, 2008
The current City Commission has favored developers and builders to the point of harming the community. The City Commission confuses growth in the supply of real estate with economic development. It is easy to be confused because a coalition of developers, builders, and others engaged in the real estate development industry incorrectly equate growth in supply with growth in demand. This coalition also gives lots of money to the election campaigns of pro-developer candidates who will listen to this false claim and act upon it by approving virtually every development proposal.
The truth is that economic development is the growth of the aggregate income within the community. This can be the result of increasing income among the existing population, usually from wages growing faster than inflation. This can also be the result of increasing the population itself with the new residents bringing new spending to the community.
With growth in aggregate income in the community comes growth in demand for real estate. More households seek more housing. More income increases demand for retail goods and services.
Without growth in aggregate income in the community, there is no growth in demand for real estate. More housing without more households simply causes neighborhoods to compete for a finite, and insufficient, number of households. More retail space without increased income simply spreads the finite amount of retail spending very thinly, with weaker shopping centers failing and becoming blighted.
The community is in need of a City Commission that understands the most basic tenet of real estate economics, that real estate development must be supported by growth in demand for that real estate. If real estate is allowed to grow faster than growth in demand, the older space and the older neighborhoods lose value. Developers make money when they overbuild, but the community suffers. The City takes on the costs of new infrastructure that is not needed. Older neighborhoods lose value and deteriorate. Older shopping centers lose value and become blighted, reducing the value of surrounding neighborhoods.
The next City Commission needs to call for, and act upon, good planning from its planning staff. This means monitoring the pace of growth and ensuring that the developers are not allowed to add subdivisions, shopping centers and other developments that are not needed.
Over the next few weeks, I will itemize some of the specifics of the overbuilding that has taken place in Lawrence along with the harm that this overbuilding has created.
For more on this pace of growth in Lawrence see my recent study at:
Tuesday, September 23, 2008
Lawrence has grown in population and income, and that is good. But the growth in real estate development has outpaced the demand for that real estate, and that is bad. It causes disinvestment and blight, and all too often the taxpayers suffer.
Since 2000, developers added about 800 units per year while the population growth would support only about 400 units per year.
The surplus has brought about an out-migration from older neighborhoods resulting in a loss of units. The loss of population and units resulted in a loss of value and deterioration in the city’s older neighborhoods.
Inflation adjusted growth in retail spending since 2000 is growing at 0.2 percent per year, enough to support about only 25,000 to 30,000 additional square feet per year.
From 2000 through 2007, the stock of retail square feet is growing at 3.1 percent or about 150,000 square feet per year.
The developers added about 1.3 million square feet beyond what the growth in retail spending could support. This is approximately the size of the retail space in the entire downtown or about one-fourth of the total stock of space.
The situation is rapidly becoming worse as an additional 750,000 square feet of space have been approved for West 6th Street from Folks Road to the South Lawrence Trafficway. If all of this space is built, it will swell the stock of surplus space to over two million square feet.
The surplus development has stalled redevelopment plans downtown and has pushed the vacancy rates so high that disinvestment and blight now threaten several older shopping centers.
Industrial, Warehousing, and Office Development
Employment growth, like population growth, has slowed since 2000. It has declined for manufacturing and warehousing jobs but continues to grow slowly for office jobs.
Manufacturing space grows in incremental steps as facilities are added. However, there have been no significant additions to the stock of manufacturing space since 2003. Manufacturing space has stabilized with no additions because demand for the space is contracting rather than growing. This means that empty space is available on the market.
The supply of warehousing space is growing at about 2 percent per year, adding about 85,000 square feet each year. Warehouse space is growing despite declining employment. This means a surplus condition exists.
Office space is growing at about 2.3 percent per year, adding about 67,000 square feet each year, a rate close to the rate of growth in employment. The office sector is reasonably balanced with growth in supply closely matching growth in employment, but the market is negatively impacted by the surplus of retail space that is being offered as office space.
Allowing the supply of real estate to grow faster than growth in demand adds to costs. Unneeded roads, sewer lines, water lines are built to service this space. Police and fire protection must be provided even if the space is empty.
Growing supply faster than growth in demand does not stimulate more demand. Lawrence has been overbuilt for years. Yet, surplus housing has not attracted more population. Surplus retail stores have not attracted more vendors. Surplus industrial and warehouse space has not attracted more employers.
Growing supply faster than growth in demand causes older areas to deteriorate. Older neighborhoods are not receiving sufficient investment in the form of replacement homes and improvements to existing homes to maintain their value. Older neighborhoods are losing value, schools and people. Downtown, which is one of Lawrence’s strongest attractions, is stagnating and failing to attract vendors into its newly renovated shops.
Employment centers sit empty while the City rushes to build more.
Lessons to learn
Growth in supply is not growth in demand.
City and county leaders, and their planners, should view it as part of their job to fix a failure in the marketplace, which is the propensity to overbuild. These leaders should keep the growth of supply in balance with the growth in demand. This means limiting growth to just that amount that can be absorbed without harm to the community at large.
The community is overbuilt, and a long cooling off period is needed. The city should stop adding to the problem and work toward redirecting growth into existing space.
The community needs to stop the overbuilding and permit only very selective development that can clearly demonstrate that it responds to an unmet need, despite the surplus stock that exists.
In the housing sector, the city needs to take steps to redirect growth away from new sprawling subdivisions on the perimeter of the city and toward the older neighborhoods that are suffering from disinvestment and decay.
In the retail sector, the city needs to protect and enhance its downtown, the retail district that attracts the coveted tourist dollars. The city needs to stop the unneeded expansion of retail space at the perimeter of the city and help to redirect retail spending to the downtown and the other shopping centers distributed around the city.
In the industrial and office sector, the city needs to carefully gauge the pace of growth of employment and limit the expansion of employment centers, whether office parks, industrial parks, or other form of employment center, to just that level that can be absorbed.
None of these steps means a complete moratorium on development. Moratoria have been tried and failed in other communities. Except in a few short-term situations, they do not work. However, city leaders need to realize that the stock of real estate is in trouble largely because the city has pursued a pace of growth that cannot be sustained.
In the housing sector, the city should stop the development of any new subdivisions until it is clear that more are needed. Evidence of this would be found in low vacancies among existing homes and small inventories of homes for sale.
In the retail sector, the city should avoid adding to the problem by approving any more retail proposals. However, from time to time, a neighborhood center may be needed because it will serve a newer subdivision that does not have a neighborhood center. Despite the retail market being overbuilt, some small quantity of new space may be needed to service the homes in this new subdivision. However, the city has approved several new retail developments that, if built, will be harmful to the city as a whole. Some of these developments cannot go further because they are unable to obtain the needed leases to leverage loans from banks. The development permission given to these projects runs for 18 months. As this permission expires, it is customary for the city to grant extensions without scrutiny of the impact of these unneeded projects upon the remainder of the city. This should be stopped. Until such time as the city can easily absorb new space without hurting existing shopping districts, the city should stop renewing the development approvals. When these retail developments come up for renewal, they should be shelved.
In the industrial and office sector, the city should avoid adding to the problem of surplus employment centers. While land needs to be available for the small number of new firms that may locate in Lawrence, there is already an ample stock of unused and underutilized buildings. The city should make every effort to make use of these structures before sprawling into new sites. In addition, the city should make every effort to use the existing employment center land before bringing more onto the market. Sprawling development, whether housing or manufacturing or office space, adds unnecessary and costly public improvements, and it stretches city services that are already stretched.
Monday, April 21, 2008
Lawrence has been on a spree of approving retail shopping centers that are not needed. The City Commission approved a second Wal-Mart. It approved another shopping center at 6th and Wakarusa, far beyond the square footage called for at that intersection. It approved two large shopping centers at 6th and the South Lawrence Trafficway.
This excessive approval of retail development proposals has been going on for some time, and it is harmful to the community. It hurts the downtown generally by siphoning spending away. It makes it impossible to complete various downtown redevelopment projects, such as Downtown 2000, which has left the taxpayers paying for an empty parking garage building. It hurts the capacity of other downtown projects to attract tenants, such as the Hobbs-Taylor building. It adds to the stock of vacant and deteriorating space found all over town.
Lawrence has developed retail space at a growth rate of 3.0 percent per year from 1995 through 2007. Yet, inflation adjusted retail spending--a good measure of demand for this space--has grown by only 0.9 percent per year during the same time period. Thus, Lawrence has allowed its supply of retail space to grow at over three times the pace of growth of demand for that space. This means that new space, if absorbed at all, simply takes demand away from existing space. The result is widespread vacancy, deterioration, and blight.
Overland Park is a nearby city confronting similar growth problems. It is interesting to note that Overland Park has kept the pace of growth of retail supply in line with the growth in demand for that supply. From 1990 through 2007, inflation adjusted retail spending in Overland Park grew by 2.1 percent per year. During the same years, Overland Park allowed its stock of retail space to grow by 1.7 percent per year.
Overland Park is practicing smart growth. It is keeping the growth in supply in balance with the growth in demand. As a result Overland Park’s retail market is in much better shape than is Lawrence’s retail market. Lawrence is not practicing smart growth, and it is paying the price.
What happens when developers control the pace of growth?
The Planning Commission tends to worsen these mistakes by granting the developers unlimited extensions of time in which to develop. When these developments initially go before the Planning Commission and the City Commission, they promise to initiate development within 18 months. Several have failed to move forward because they cannot find sufficient tenants. Rather than admit a mistake, they ask for--and receive--extensions of time to look for tenants. The Planning Commission should admit the mistakes of approving these unneeded developments and refuse the extensions.
Lawrence city government is controlled by the coalition of developers who contributed heavily to get pro-developer individuals elected to the City Commission. These elected pro-developer city commissioners have appointed pro-developer friends to the Planning Commission. This means that developers are getting all that they ask for, even when it runs contrary to the community’s plan which calls for balanced growth.
There is value in smart growth. It prevents loss of value to existing centers. It protects the existing downtown. It helps maintain a healthy level of investment in existing shopping centers. It promotes redevelopment plans.
Lawrence is losing value rapidly. Smart growth can help resolve that problem, but we need leadership that understands the harm that results from letting developers set the pace of growth. We need leadership that understands that smart growth will not happen by itself; we need to consciously plan for our future and work hard to achieve it.
On Friday, the Lawrence Journal World stated, “The [Public Incentives Review] committee on Thursday unanimously approved its annual report, finding that all eight companies receiving tax breaks are in compliance with the city’s economic development policies.”
This is not what the Public Incentives Review Committee (PIRC) did. The PIRC made no finding of compliance or lack of it. Rather, the PIRC swept the high level of non-compliance under the rug as it has for many years in the past.
The newspaper also said, “In total the companies had exceeded their job creation projections by 87 full-time jobs and 123 part-time jobs.” This is a case of looking at the glass as one-quarter full rather than three-quarters empty.
Here are the facts:
· In terms of making the promised investments, of the 11 currrent abatements, only 8 delivered, 2 fell well short, and 1 chose to lease the property.
· In terms of paying wages at or above the average found in the community, 4 of the 8 firms have substantial numbers of workers being paid from $3 to $6 per hour below the community average within each occupation group.
· In terms of producing the promised jobs, 4 firms fulfilled their promises, 1 firm fell 2 workers below the promised amont, and 3 fell well below the promised job production.
It is true that the total number of jobs at all firms given tax abatements is in excess of the total number of jobs promised. The firms that met the promised number of jobs produced more extra jobs than the shortfall experienced by the firms that failed to meet their promises. However, this statistic would have merit only if the jobs would not have been generated in the absence of the tax abatement. This is simply not the case.
The tax abatement is a needless giveaway. The firms would have produced the jobs without the tax abatement. Some of the firms have made public statements to this effect. All of the published research on tax abatements finds this to be true. Property taxes are too small a percentage of a firm’s total operating expenses to be crucial to the decision to build or expand. However, lower taxes are always helpful to enhance profits; thus, firms ask for the tax abatements even when they are not important to the decision to build or expand. The firms will even lie to the City saying that without the tax abatement the firm cannot build or expand.
What the report shows is that Lawrence has an ongoing problem with its tax abatement program. In a normal economic development program, non-compliance should be minimal. The PIRC should be discussing what to do with no more that one firm that is out of compliance. Instead, the PIRC is trying to cover up the fact that non-compliance is normal in Lawrence. Six of the eight firms are substantially out of compliance in at least one of the important areas or investment, wages, or jobs. This is not a new or temporary condition; it has been going on for years.
The City has been misled. It has been told by business advocacy organizations, such as the Chamber of Commerce, that tax abatements are needed to attract firms even though the experience both locally and nationally says the opposite. The City has been led into a position of offering abatements, almost automatically, to firms just for the asking. Yet, these firms fail to make the promised investments, fail to pay wages comparable to other firms in the community, and fail to produce the promised jobs. In many cases, the firms go out of business before the City can hope to realize any benefits. (Note that the PIRC report is deficient in that it only reports on existing abatements; it does not report of the firms that have been given abatements that went out of business such as Davol or E&E.)
An ongoing problem of non-compliance hurts the City. Not only does the City not get the jobs and wages and taxes promised, but it cannot negotiate effectively with future firms. Word is out; Lawrence is a pushover town. A firm can promise much, produce little, and still keep its tax break.
The City of Lawrence is confronting a severe budget problem. Revenues are not flowing into the City as expected. Planned expansion of the library has been scrapped. Social service agencies saw their budgets cut (although the Chamber of Commerce was given even more taxpayer money to further its failed economic development activities). Discussion has already been started on possible elimination of the bus system, the public transit needed by many people of low-income. We would all have been better served if we had not offered needless giveaways to firms in the form of tax abatements. Those lost tax revenues are sorely needed.
Saturday, April 12, 2008
Recent developments present an opportunity.
The City of Lawrence, Kansas does not conduct its economic development planning through city staff. Rather, the City hires the Chamber of Commerce to conduct these tasks.
In the wake of controversy and legal embarrassment, the Chamber of Commerce is about to replace its Executive Director.
This provides an opportunity for the City to rethink how it goes about conducting its economic development efforts.
Definition of economics development.
Economic development means helping a city achieve higher levels of employment as well as attracting higher levels of tax revenue from non-residential sources than would otherwise be the case. This usually involves:
Outreach: This means advertising the City to prospective businesses who might locate here.
Subsidy packages: This means generating analysis to determine whether or not the city should offer incentive packages to firms to locate here or to firms already here that may expand. These incentives may come in many forms. They may take the form of tax reduction through rebates or refunds. They may offer financial assistance through various forms of loans, which may come at below market interest rates. They may offer cost reduction through providing land, buildings, and infrastructure at reduced prices.
Planning: This means conducting research to identify weaknesses in the local economy and to identify the needs of the community in the future. This research should monitor which sectors of the economy suffer from the greatest levels of unemployment and underemployment. It should also project the needs of the community for future employment and use this research to guide future actions.
Current state of economic development in Lawrence.
For many years, the City has hired the Chamber of Commerce to conduct its economic development activities. The Chamber provides some outreach services. The Chamber has supported numerous applications for subsidy packages from the City to private firms without analyzing the need for the subsidy packages. The Chamber conducts little to no planning research.
The record of the Chamber of Commerce in the field of economic development is one of failure.
The Chamber has actively led the City into a large list of tax abatements. Of the 17 firms granted abatements:
· Only 6 produced the promised jobs and wages.
· The remaining 11 are either out of compliance, out of business, or not reporting.
This record of success is unimpressive. The abatements are:
· Successful only: 35% of the time;
· Non-compliant: 40% of the time; and
· Complete failure: 25% of the time.
(See Annual Reports of the Public Incentives Review Committee.)
The Chamber actively sponsored secret meetings to arrange for packages of taxpayer-funded subsidies to private firms. The parties at these meetings included the City Commission, the buyers of the property, and the sellers of the property. The only people excluded were the taxpayers. The Attorney General found these meetings to be in violation of the Kansas Open Meetings Act. (See “AG: City leaders broke law: Morrison proposes open meetings training for settlement” Lawrence Journal World December 1, 2007.)
The Chamber has led the City into failed projects. The Chamber recently held a celebration of its accomplishments in a building developed, at least partially, at taxpayers’ expense that has remained vacant for years. Many other failures such as Serologicals and Decyphera exist. (See Mark Fagan, “Business Park Marks 20 Years,” Lawrence Journal World April 1, 2008.)
Chamber staff actively resisted any and all efforts by the Public Incentives Review Committee to investigate the level of compliance by firms with the terms of their tax abatements. (See Minutes of the Public Incentives Review Committee.)
Lack of Planning:
The Chamber conducts virtually no planning in its economic development exercises. It has supported proposals for such grandiose projects as the development of 1,000 acres of industrial park space, yet it has failed to produce any planning analysis that would justify such a large facility. (Lawrence Journal World, Group recommends 1,000 acres to assist in creation of jobs, December 5, 2001.)
Lack of Analytical Skills:
The City has recently fielded requests from the developer of the Oread hotel for subsidy through the Tax Increment Financing and Transportation Development District programs. The City had to hire outside consultants to review the subsidy request because neither the City staff nor the Chamber staff possess the capabilities to perform this type of analysis.
What Lawrence needs.
Lawrence needs to bring economic development skills inside City Hall.
The Chamber of Commerce is a business advocacy organization. Economic development strategies need to be good for business, but, more importantly, they need to be good for the City and its taxpayers. Everything that is good for business is not necessarily good for the City and its taxpayers. The Chamber has shown itself to advocate for the interests of business at the expense of the interests of the City.
Lawrence needs intelligent, knowledgeable, highly skilled economic development leadership that is an advocate for the City and its taxpayers.
Lawrence needs economic development planners that can guide the City through detailed negotiations with firms to ensure that a subsidy package, if any, is in the City’s best long-run interests, not simply a giveaway to any business that asks.
Lawrence needs economic development planners that can accurately project the City’s future needs without exaggeration or bias.
Lawrence needs economic development planners that will be open and transparent in the development and analysis of subsidy packages and will understand the confines of the law prohibiting secret meetings.
Lawrence needs economic development planners who will enforce the terms of agreements between the City and private firms receiving taxpayer dollars.
It is time for Lawrence to learn the difference between economic development and business advocacy.
Redefine the role of the Chamber.
The Chamber has lost the respect of the taxpayers by leading the City Commission into failed projects, into illegal meetings, and into tax giveaways that do not produce as promised. The Chamber’s role in economic development should be redefined. The Chamber needs to be heard as economic development issues arise, but the Chamber should not be performing any of the analysis or planning duties.
Bring professional economic development planning expertise onto the City staff.
Bring the job of economic development inside City Hall. Increase the skill level of the planning staff to include:
· Analysis of the feasibility of real estate development projects so that the need for subsidy can be determined by someone who interests lie with the City and not with the businesses who will be subsidized,
· Analysis of market conditions so as to determine the true need for commercial and industrial space, protecting the City from engaging in unneeded industrial parks, retail centers, or office parks that will further expand the surpluses that already exist, and
· Analysis of existing programs to fairly assess their effectiveness so that they can be expanded when they succeed and redesigned or discontinued when they fail.
Tuesday, January 22, 2008
“Smart growth, or sustainable development, has been tested as a policy in at least two-dozen states since the 1970s, when the term first appeared. It's evolved over the decades, to be sure, but the chief goals remain: to plan better, rein in sprawl, redevelop in established urban areas, promote mixed-use growth near transit and in environments that are easy to walk around, and offer a range of housing types that are affordable to different incomes. “ - Lincoln Land Institute Smart Growth: Form and Consequences (2002).
The Smartcode does nothing to rein in sprawl, it works against the redevelopment of established areas, and it does not ensure that development proceeds at a sustainable pace. While it makes a nod to mixed-use and the ability to walk around, it does nothing to ensure that affordable housing is provided in new developments. As such, the Smartcode fails to deliver what it promises.
The Smartcode is a poorly designed development code that removes most public input from the development process and circumvents needed review of many development projects by both the Planning Commission and the City Commission.
The basics are as follows:
Certain districts would be designated as appropriate for development. Once designated and zoned, no further public input is permitted on any development proposal. Yet, we know from experience that citizens rarely become involved in the zoning process; they only become involved when a development proposal comes forward.
If a developer plans a development within these districts, and if a committee of planning staff members (called the Consolidated Review Committee or CRC) finds that the architectural design of the development meets the design guidelines of the Smartcode, then a building permit is issued.
There is no review by the Planning Commission, and there is no review by the City Commission. Because public input is only received through hearings before these two bodies, there is no public input on the process.
The Smartcode assumes that if land is zoned, that the developer can build at any time with only cursory staff review. If the market cannot absorb the new development without negative impact upon existing space, the Smartcode does not prevent this negative impact. In fact, it facilitates growth at an unsustainable pace.
If the CRC does not approve the development plan, the developer may appeal to the Planning Commission. There is no obligation for the CRC to inform the public of the development plan or seek out public input. If the public does learn of the development plan, it has no capacity to provide input. The public cannot appeal the decision of the CRC to either the Planning Commission or the City Commission.
The Smartcode calls for subsidies to certain types of developments that meet the architectural guidelines within the code. It is apparent that the Smartcode calls for subsidies to development that will take place without subsidy and fails to assist development in older neighborhoods that will not take place without subsidy. This is wasteful and counterproductive.
Good design does not resolve all planning problems
Smartcode is a needless giveaway to the developers. The Smartcode derives from a false belief that if development meets certain design guidelines, that all of the other planning and developments problems resulting from the proposal are resolved. It would be nice if beautiful architecture could overcome all the other problems, but it cannot. There is nothing in the Smartcode that prevents the development community from its continued overbuilding. If the district is zoned and if the development plan meets certain architectural guidelines, then the development can obtain its building permit even if the neighbors object and even if the development will have a negative impact upon other parts of the community (such as traffic congestion or adding to an already overbuilt supply of space).
The planning staff made a few modifications to the initial draft of the Smartcode by agreeing that the CRC will examine a developer provided market analysis and traffic impact study. The staff has not demonstrated either the skill or the willingness to respond appropriately to market studies in the past. There is nothing in the Smartcode mandating attention to these issues now. Further, there is little reason to believe that developer provided studies will tell the truth. In Lawrence, we have seen many false reports, making phony claims and exaggerated promises. For every piece of failed real estate, there is a market study saying the property would succeed. The planning staff have accepted and approved these studies in the past. They have made few, if any, efforts to correct these studies or to create their own studies. This record does not suggest that the public can trust the planning staff to do better in the future.
Building space faster than growth in demand for that space
The greatest threat to Lawrence is the excessive pace of growth in the supply of real estate. The community should expect, even demand, good design without offering subsidies or accelerated access to building permits. The community should be a part of the development process from the zoning decision all the way through to the final development plan approval.
The development industry confuses growth in supply with growth in demand. Economic growth is assessed by the growth in demand, which is the growth in people and their income. When we have more people and these people have more income, then their spending will demand more goods and services.
These goods and services may include more homes and support more retail stores. Note that building more homes and stores does not generate more people or income. Demand must precede supply and support supply. If supply is built beyond the available demand, then bad things happen. Older shopping centers empty out and become blighted. Older neighborhoods decline. Developers never pick up the cost of this blight; they simply look to the taxpayers to pay the very expensive costs of redevelopment. Even this expensive redevelopment fails unless there is sufficient demand for the revitalized space.
Sustainable growth means supply growing no faster than the growth in demand
It is crucial to the health of any community that the growth in supply be kept at a pace that matches the growth in demand. Unfortunately, the development and construction industries are prone to overbuilding. Cities, under pressure from developers, are prone to over-zoning. This is true throughout the nation, not just here in Lawrence. Preventing excessive growth in supply is easy and costless; it only takes well-managed growth controls by the community.
This is the purpose of the market analysis requirement integrated into the planning process. Lawrence has ignored this analysis because it has, for years, indicated that Lawrence is building more homes than it needs and more retail space than it needs and more office space than it needs. Developers and builders have brought political pressure on the planners to ignore the market signals indicating that the market is building at an unsustainable pace. Except at the extreme, developers make money even in overbuilt markets. Thus, the builders and developers have captured control of the political process to prevent the community from taking steps to slow the pace of growth.
What Lawrence needs is smart growth management tools not misnamed smart development codes that are giveaways to a development industry that has proven itself prone to overbuilding.
Lawrence should not adopt the Smartcode and should actively work toward bringing the pace of real estate development in line with the growth in demand for that development.
Friday, January 18, 2008
How should the City approach reqests for TIF and TDD financing?
The developers of the Oread Inn (the Fritzel family) bring a very interesting project to the community. It may be a project worth the community’s investment, but the devil is in the details. The community needs to be very careful with its scarce resources, including its future tax revenues. The community should subsidize commercial projects like these hotel proposals only:
- Where it is sure that the net result is beneficial to the community, and
- The financial commitment is not one dollar more than is minimally necessary for the project to move forward.
Here are the basics of the Oread Inn proposal:
The development will cost about $31 million. Of this total, about $6 million is for a parking garage and $5 million is for off-site improvements (road, pipes, walks, etc.) The developer will finance about $20 million, and the city will finance about $11 million (the parking garage and the off-site improvements) though Tax Increment Financing (TIF) bonds and Transportation Development District (TDD) bonds.
TIF bonds are bonds sold to investors through the normal bond market. However, these bonds are sold with the understanding that the revenue to repay the principal and interest on the bonds will come from pledging some or all of the incremental taxes generated by the project. Thus, the project will pay to the city, county, and school district the taxes that would have been collected from these properties had no new development taken place. The taxes collected above these original levels, called the tax increment, can be pledged to repay the TIF bond debt. Kansas law permits some or all of the city and county tax increments to be pledged to repay TIF bond debt. Kansas law prevents all of the school tax increment from being pledged to repay TIF bond debt; a portion of the new tax revenues must be given to the school district. To the extent that portions of these city, county, or school district taxes are pledged to repay TIF bonds, these future tax revenues are lost to local government. Until the debt is retired, government services will have to be paid by other taxpayers.
TDD bonds are very similar to TIF bonds. The difference is that the tax revenues pledged to repay the bonds come from a special sales tax that is added to the properties within the district. This TDD tax giveaway is of less concern to a community than the TIF giveaway because, if used appropriately, all of the tax revenue comes from non-residents (i.e.: tourists staying at the hotel). There is no capacity for the city to impose the tax without pledging it to repay TDD bonds; thus, there is no loss of future tax revenue to the city as there is with the TIF.
What the developer wants
The developer wants all legally available local taxes generated by this project pledged to repay the bonds. The developer has offered a letter of credit to fully cover the debt on the bonds in the event of default by the property. Thus, the city cannot suffer out-of-pocket losses on this project, but the city will not see any tax revenues from this project until the bonds are fully repaid. This could be as long as twenty years.
Some of the taxes that would come to the city from this project will go to paying for the hotel’s parking garage. As such, these funds will not be available to meet the city’s other needs. Also, some of the taxes that would come to the city from this project will go to paying for the hotel's road, sidewalk, and utility line improvements that would not otherwise be needed by the city.
The city's decision process
What this means is that the taxpayers are giving property taxes from this development back to the development itself. If the community believes that this project will be so beneficial that it merits this return of taxes, then it may be a subsidy deal worth undertaking. Unfortunately, the process is not designed to help us make this assessment.
What the developer is offering is:
Option 1: A 7-story hotel (7 stories above Oread Avenue with 3 stories of garage below) which would require 20 years to retire the TIF bonds.
Option 2: An 8 or more story hotel (with condominium units on the top stories) which could permit repayment of the TIF bonds in ten years bringing the property onto the tax roles much earlier.
The developer claims that the project is not feasible without the TIF bonds. This may or may not be true. The city can and should determine the accuracy of this claim by careful examination of the developer’s projected expenses and revenues. It is possible that that a smaller project would be feasible with no tax increment financing. It is possible that the project, as proposed, is feasible with TIF bonds paying only for portion of the public improvements and the parking garage.
It is unclear if anyone within city hall is examining these issues and guiding the negotiations toward an optimal design for this project from the perspective of the taxpayers.
The developer is doing a masterful job of boxing the city into a corner. The city should hold off on the deciding about the historic issues, the zoning issues, or the design issues for now. First it should decide what is the best option for the city and negotiate for that option. However, the developer is pushing ahead on these issues so that the city effectively will be given a “take it or leave it” choice. This is unfortunate and should be avoided.
The developer is also planning a similar expansion of the Eldridge Hotel downtown. It wants to expand the hotel to the west to Vermont Street with underground parking, conference facilities and additional rooms. It is very likely that a similar or even larger TIF and TDD request will be made for the Eldridge.
The process that the city is following is reminiscent of the process followed years ago to approve the financing of the parking garage on the 900 block of New Hampshire. The process ensured that the financing was legal, but the process did not ensure that it was beneficial to the city. As a result, the city is now paying for a parking garage for which it is struggling to find cars. Much of the concern over the Oread Inn financing is resolved with the letter of credit guarantee offered by the developer. However, much remains unresolved.
Being legal is not enough; the project should be beneficial to the city and avoid any unnecessary giveaway of much needed tax revenues.
The city has hired a consultant to address the feasibility issues. This feasibility study is to be completed by January 30th. The city has published a “calendar of events for TIF and TDD” for review and approval of the Oread Inn project. The calendar provides no time for negotiations between the city and the developer. Rather, the calendar is couched entirely in terms that assume approval of the developer defined proposal. The calendar’s language assumes the developer alone defines the proposal; there is no provision for negotiations and modifications by the city. Further, the calendar assumes approval of the developer’s proposal at each and every step along the way. There is no conditional language stating that approval at a later stage is conditioned upon approval at an earlier stage. There is no decision tree showing alternative paths that may be taken to a negotiated agreement if the city agrees to partner with the developer in the building and financing of this hotel.
What should happen next?
The city should take command of the approval process and enter into negotiations with the developer. The city should seek to maximize the tax revenues that can flow to the city from this hotel. Giving away all of the tax revenue means that the city’s economy gains a few jobs, but the city must provide police and fire protection to the hotel plus other services for which it will not be compensated. It also means that the city will lose this hotel as a source of much needed revenues to pay for the ever growing costs of running the city. To maximize these revenues, the city must negotiate with the developer on alternative development schemes that may reduce the need to tax increment financing.
These questions need to be answered:
1. Will more hotel rooms permit the bonds to be repaid earlier, bringing the property onto the tax roles earlier?
2. Can alternative design schemes be feasible without pledging all of the tax dollars to the project?
It is the role of the city Manager and the Director of Development to assure the taxpayers that these issues are being addressed. Both are relatively new to their positions. Being new, neither has developed a track record of prior success in such negotiations that can build public trust.
We cannot afford to sit back and depend upon the developer to propose a scheme that is optimal for the city. Provision of TIF and TDD bonds is a significant participation by the city. If the city is to become a partner in this development, city staff members need to take a lead role in the examination of alternative design schemes which may be better for the taxpayers.