Friday, January 18, 2008

Oread Inn, Eldridge Expansion, and TIF Loans

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.

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