TIFs with a Diff
Tax Increment Financing has been used in Knoxville almost exclusively to assist private developers in getting financing for the rehabilitation of historic downtown buildings. Nearly all the conversions of these buildings into upscale condominiums have been supported by dedication of the increase in property taxes resulting from redevelopment to secure construction loans that developers have convinced the city they would otherwise be unable to obtain. Once the loans have been paid off, the incremental tax revenues go to the city, and only the developer (not the city) is on the hook for loan repayment.
All of that is about to undergo a transformation where the use of TIFs to finance South Knoxville waterfront development is concerned. TIFs loom large in the financing scheme envisioned by the city’s waterfront consulting team headed by Hargreaves Associates. But instead of going to assist private developers, the incremental property taxes resulting from their projects would be dedicated to paying for public sector improvements that support the waterfront development as a whole. Those include extensive roadwork, a new riverfront walkway, parks, an amphitheater, garages, and the list goes on.
The leader of the Hargreaves team, Gavin McMillan, is expected to make an estimate of the cost of the public sector improvements contemplated in its resplendent south waterfront vision plan at a City Council workshop Thursday April 27. In advance of that, an educated guess is that those costs could run well upwards of $50 million over the 20-year span encompassed by the vision plan (and that doesn’t include such wish-list features as a light rail system and a pedestrian bridge connecting the south waterfront to the UT campus).
The Hargreaves team’s financial guru, Richard Ward of Development Strategies in St. Louis, projects that if all the private development that’s envisioned actually occurs—and that’s a huge if—property values would be enhanced by $814 million and cumulative property tax revenues by $120 million. That revenue stream, by his more complex calculations, could support TIF borrowings of $50 million.
So it’s not totally beyond the realm to postulate that most of the public improvements could be financed by TIFs at little cost to the rest of the city’s taxpayers. (That requires the further assumption that most of the private development wouldn’t occur without the public improvements, and therefore taxpayers wouldn’t have gotten the benefit of the revenues dedicated to a TIF, which can last for up to 15 years.)
One rub in this analysis is that much of the private development can be expected to occur subsequent to the completion of infrastructure and amenities needed to support it. So the city might have to proceed with other sources of financing during the time gap. But any such debt could be retired and replaced with TIF–backed borrowing as soon as the incremental tax revenues become available.
Mayor Bill Haslam has repeatedly stressed that south waterfront development will be “market driven,” meaning that public improvements will be made only as private development commitments warrant them. But that is easier said than done. Realignment of the James White Parkway’s interchange with Sevier Avenue is considered a prerequisite to making the waterfront area more accessible from the east, as is a new underpass beneath the Norfolk Southern tracks at the area’s western perimeter. Beyond that, creation of a riverwalk traversing the entire, three-mile expanse of waterfront has become a signature feature of the project, and erecting the segment that will jut over the water at the foot of the bluff below Baptist Hospital is on a fast track without any TIF revenue in prospect to support it.
The city has $6 million in federal highway funding (spread over six years) earmarked for the project. And Haslam is expected to include $1 million in additional city funding for the fiscal year ahead in the budget he presents today (April 27). The city’s chief operating officer Dave Hill terms this “placeholder money” that will most probably go for environmental studies, design work and possibly right-of-way acquisition. Actual construction isn’t expected to begin until the following fiscal year. Yet the city’s five-year capital improvement plan only includes $237,000 per year, which is the local match needed for the federal highway grant. City officials say it’s premature to project beyond that.
What could be a prototypical public-sector TIF has already been agreed upon with Camden Management Partners, which is developing a 120-unit condo complex on the former Knoxville Glove Co. waterfront property. Camden is committed to spending $2.8 million derived from a TIF for construction of a section of the riverwalk along its shoreline and for a sidewalk along Blount Avenue.
Whether such a piecemeal approach can be extended to other developments on a project-by-project basis is problematic, Hill says, “My personal preference is not to get into a bunch of site-specific TIFs, because you stand a risk of having less coordination and don’t get the full potential of investing in the entire development.” His preference is for creation of a TIF District in which tax increments from a variety of private developments could be pooled for public sector investment.
But the city’s finance director, Chris Kinney, cautions that the city might well have to guarantee repayment of borrowings, secured by tax increments derived from multiple properties. In that event, he says, bond-rating agencies would treat the borrowings just the same as any other city debt, thus impinging upon its capacity to issue bonds for other purposes. As matters stand, the city is working down its outstanding debt at the rate of about $10 million a year, which frees up debt service funds to support new borrowings in just about the same amount. But no other major borrowings are in prospect.
For his part, Ward says that many other cities have found ways to create TIF Districts whose borrowings are backed solely by tax increment revenues, thus avoiding the constraint on debt capacity. South waterfront development has generated a lot of enthusiasm and little opposition, in considerable part because of the exemplary way in which the vision process has been conducted. But as Hill says, “All of this is something that just looks pretty on paper right now. The hardest part of the work is still ahead of us.”
The entire city stands to benefit from an attractive waterfront with lots of public amenities, but the more of its cost that can be borne by resulting private development the better.