An Assessment of Tax Increment Financing

as a Tool for Economic Development

Seth CapronNick Federowicz

Eric NymanBrandon Strong

Add photo of Evanston?

December 2012

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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

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Agenda

1. TIF Districts in Evanston

2. Major Findings

3. Recommendations for General TIF Policy

4. Recommendations for Specific TIF Districts

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Agenda

1. TIF Districts in Evanston

2. Major Findings

3. Recommendations for General TIF Policy

4. Recommendations for Specific TIF Districts

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Summary of Evanston TIF Districts

TIF District

Howard and Ridge

West Evanston

Downtown II

Southwest

Howard and Hartrey

Washington National

Dempster-Dodge

Begin/End

2004/2027

2005/2028

1985/2008

1990/2013

1992/2015

1994/2017

2012/2035

Size (acres

)

35

Beginning EAV

$5,978,279

$37,477,570

$1,835,672

$1,007,606

$7,034,353

$25,727,379

$10,816,879

2011 EAV

$11,808,477

$45,084,553

$145,470,000

$8,223,329

$23,747,973

$103,106,568

N/A

Major Projects

Church St. Plaza, Hilton Garden Inn,

Maple Ave. Garage, Optima

Bond Proceeds

None

None

$23,144,579

$2,100,000

$9,069,445

$52,061,429

None

13

24

21

11

116

16

Sam’s Club, Ward Manufacturing

Retail Center: Target, Jewel, Best

Buy, Office Max

N/A

Park Evanston, Whole Foods,

Sherman Plaza & Garage

415 Howard St. apartment building

Church St. Townhomes,

Greenwood Lofts, LSL Industries

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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

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A brief history of the Southwest TIF district

After Image

Thriving retail

• City combined parcels to attract a large development • Sam’s Club opened for business in 1992

• Ward Manufacturing relocated from downtown Evanston in 1995

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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

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A brief history of the Downtown II and Washington National TIF districts

After Image

Maple Street rejuvenated

• Downtown II, the first TIF district in Evanston, evolved from the Research Park • Downtown II closed in 2008, releasing significant property tax revenues to taxing authorities

• Washington National resulted in two large developments: Park Evanston and Sherman Plaza

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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

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Agenda

1. TIF Districts in Evanston

2. Major Findings

3. Recommendations for General TIF Policy

4. Recommendations for Specific TIF Districts

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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

TIF Selection

Strategic Initiative

Alternative Tools

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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

Listen to

market

Market Indicators Ignore market

Peninsula Town Center, Hampton, VA

Houston Pavilions, Houston, TX

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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

Strategic Assessment

Financial Analysis

TIF certified by city official or department before presentation

to elected body

Proposed TIFs assigned to a city official or department

Structured Approval Process

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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 #3

Bid #2

Bid #1

Select Optimal

Project Bid

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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

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By having the private sector bear the risk of 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 Assessment

Backed only by

IncrementClawback No

Clawback

Pay-as-you-go

Pay Upfront

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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

Developer

City of Chicago

Coca-Cola

Subsidized Rent

Meet Jobs Goal or Pay Penalties

Tax Abatement

Example: Chicago Northwest Industrial Corridor TIF

Goal: Create 240 Jobs

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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

TIF Advisory Board

School District

Community

Organization

Local Busines

s

Local Residen

t

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Agenda

1. TIF Districts in Evanston

2. Major Findings

3. Recommendations for General TIF Policy

4. Recommendations for Specific TIF Districts

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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

Alignment with economic development goals increases the likelihood of success

• 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

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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

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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

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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

communityTaking advantage of competitive market forces improves the

chance of success

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Agenda

1. TIF Districts in Evanston

2. Major Findings

3. Recommendations for General TIF Policy

4. Recommendations for Specific TIF Districts

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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

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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

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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

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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

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Thank you!