TIF districts generate less property tax revenue than expected

When city officials decided to create a $5 million tax-increment financing (TIF) district for Bart Blatstein’s Avenue North project near Temple University, in 2005, they had a few figures in mind.

The property at 1600 N. Broad St., then valued at $800,000, would increase in value by $7 million after improvements, which included the construction of a movie theater and retail space. It would create 178 construction jobs, 225 permanent full-time jobs, and generate $21.7 million in tax revenue over the 20-year life of the TIF.

Today, the property is valued at $5.6 million, and it has produced around $1.6 million in property tax revenue since 2008, the last year for which data is published. That’s about $230,000 more than expected over that period.

But in outperforming the projected property tax revenue figure—year-by-year projections are a required component of TIF proposals—Avenue North is nearly alone. Only one other TIF, for the PNC Bank headquarters on Tinicum Boulevard in Southwest Philadelphia, is meeting or exceeding property tax revenue expectations.

The rest lag behind.

PlanPhilly compared actual property tax revenues against projected property tax revenues in 12 of the city’s 13 TIF districts. (The Aker shipyard was left out because property tax records could not be located.)

Property tax revenues in ten of the TIF districts are lower than the projections; in a few cases, they are significantly lower. In total, the 12 TIF districts have produced about $20 million less in property taxes than projected, over the last six years alone.

Sam Rhoads, an executive vice president at Philadelphia Industrial Development Corporation, which manages the Philadelphia Authority for Industrial Development, isn’t worried by that figure.

“I think everyone got what they bargained for,” Rhoads said. “People both in the public sector and the private sector aren’t naive. These things got approved with a lot of public process and comment; everyone realizes that projections are projections. We got these various projects built that wouldn’t have otherwise been built.”

Perhaps it’s not surprising that year-by-year projections of property tax revenues don’t align with the actual tax bills. Economic development is not a science. But the projections are part of the package used to sell these subsidies to the bodies that must approve them—City Council and the School District.

To be clear, it’s not that the city is losing money it gave to developers for these projects, only that it’s not gaining as much in property taxes as it had hoped. And records for other types of taxes that could conceivably make up the difference aren’t made public, and can’t be compared with the projections. But with Council set to vote in the coming weeks on whether to authorize a $33 million TIF for a proposed W Hotel at 15th and Chestnut, it raises questions of whether projects that benefit from TIFs are delivering the revenue growth that was expected.

Incremental revenue

Tax-increment financing was authorized in Pennsylvania in 1990 and first used in Philadelphia in 1995, to keep PNC from shipping 1,100 jobs outside of the city. It’s a bit more complicated than other forms of public subsidy and, proponents say, much less risky to the city’s budget.

It works like so:

• The city—in the form of the Philadelphia Authority for Industrial Development—identifies a parcel for redevelopment, in cooperation with the developer, and settles on a dollar amount, which represents the amount of would-be tax revenue that can be diverted to project costs over the ensuing twenty years.

• City Council and the School District approve the TIF, or not.

• The developer then secures a loan from a private source for the amount of the TIF.

• The improvements to the property increase its value, and the project starts producing more revenue, in the form of property, wage, sales, use & occupancy and other taxes.

• The city continues to collect all of the taxes produced from the property, but only keeps the amount the property was paying prior to the creation of the TIF, called the base value.

• It then forwards the difference to PAID, which passes the money along to the lender.

Councilman Wilson Goode, Jr., has compared TIF subsidies to allowing a developer to keep his taxes so he can pay his mortgage. Goode meant it as a criticism, but the analogy is essentially correct.

TIFs are intended to spur development of blighted areas, the formal definition of which includes any economically or socially undesirable use. In Philadelphia, they have been used mostly on a project-by-project basis, like the $33 million W Hotel TIF package, which was approved by a City Council committee last week.

If they work as intended, the city gets new development, rising property values, and more revenue after the TIF period ends. In exchange, proponents say, the city gives away nothing: it keeps collecting the base value, and after the TIF ends, it stands to collect much more. If they don’t generate the expected revenue growth, it’s the developer and not the city who is responsible for paying off the balance of the private loan when the TIF period ends.

Sam Rhoads emphasized the lack of risk for the city.

“The city’s not guaranteeing the funds; the developer is,” Rhoads said. “One of the first conversations we have with the developer is, I say to them, ‘I’m just guesstimating these taxes.’ … Whether my projections end up being accurate or not, they’re the ones who are on the hook.”

Still, Councilman Wilson Goode, Jr., a TIF skeptic who plans to vote against the W Hotel subsidy, said that developers and PIDC should be held accountable for the projections they make about revenue growth.

“It’s my general sense that the economic development bureaucracy, for years, came [to Council] and told us just to vote for projects, because they create jobs,” Goode said. “And they threw numbers at us, not expecting us to examine them.”

Goode acknowledged that the city needs to be involved in economic development, but said that it should get guarantees that projections for tax increases are met.

“We know subsidies are needed,” he said. “But there’s a smarter way to do it and part of that involves clawbacks, so when people put things on paper and present them to Council, we have to find ways to hold them to it.”

Fixing assessments

One potential reason that property tax projections for TIF districts have been overstated is that the city’s property assessment system has been dysfunctional for the past several decades. Mayor Nutter’s Actual Value Initiative (AVI), which goes into effect next year, is intended to fix that. The Office of Property Assessment recalculated the market value of every property in the city, and the assessment for many of the TIF districts has risen substantially for 2014.

But the actual property tax bills have shrunk.

According to PAID projections, the total 2014 property tax revenue for the 12 TIFs included in this analysis was estimated at $13.9 million. Next year, based on each TIF property’s assessed value and the settled tax rate of 1.34%, the districts will bring in only $5.6 million in property tax revenue, or $8.3 million less than projected.

Lee Huang, director of the local economists’ group Econsult Corporation, said that even with the shortfall in 2014, AVI will end up being a boon for the city, and will help it to reap the intended rewards of the TIF districts.

He said that without regular reassessments, the city misses out on the “positive feedback mechanism” created by TIFs and other development subsidies, in that new development not only generates new tax revenue, but also increases the revenue that can be collected from surrounding properties that rise in value because of the new development.

“Now that we’ve unbroken the assessment system, it has created a system in which TIFs actually work, by giving the city the proper incentives to invest in things that improve areas and cause property values to go up,” Huang said.

Councilman Bill Green, who supports the W Hotel subsidy, thinks the city should use tax-increment financing more often, even if the initial tax projections are overly optimistic, as long as the developer and not the city is on the hook for any shortfall.

“We’re disappointed it doesn’t bring in as much additional revenue as we’d hoped, but still we’re far better off with any increase in tax revenue,” Green said.

‘Tool of last resort’

There is no shortage of options for developers who feel they need subsidies in order to build in Philadelphia. The easiest, a by-right subsidy, is the 10-year property tax abatement on all new construction and improvements. There are also tax-abating “opportunity zones,” “empowerment zones,” the state Redevelopment Assistance Capital Program, federal Community Development Block Grants, and so on.

Tax-increment financing is designed to plug the financing gap for projects that simply can’t be built without it.

“Generally speaking,” said Sam Rhoads, “a TIF would be the tool of last resort.”

TIFs were used in the 1990s to turn the nearly-empty PSFS building into an upscale Loews Hotel, and to convert the former City Hall Annex into the Courtyard Marriott, and, most recently, to finance a retail shopping center at 52nd and Jefferson streets. They’ve also been used twice to finance parking garages in Center City.

PIDC believes none of these projects could have been built without the subsidy. For the purposes of calculating the tax benefits of the W Hotel project, they also assume that the property at 15th and Chestnut, in the heart of Center City, would sit undeveloped for the next twenty years.

Councilman Goode said that since the mayor’s economic development team is staffed with city planners, the city shouldn’t have needed to wait for the developer to propose a luxury hotel that needs tax-increment financing.

“There should have been a plan for a site like [15th and Chestnut], if they were seriously concerned about it being vacant for that amount of years,” Goode said. “So we should already know what should go there, and that type of work should be done in advance.”

Councilman Green said the hardest part about TIF financing, for the developer, is proving that the project “won’t pencil” without the extra subsidy. He said that the crucial evidence is the difference between the cost of a project and the expected financial return, and he acknowledged that the city has to partially rely on the developer to say what those figures will be.

“With respect to real estate,” he added, “the good news is you generally know what people should be able to get for the space.”

Connected developers benefit

If it’s not surprising that revenue projections aren’t completely accurate, it should be no more surprising that the developers who benefit from tax-increment financing districts tend to be well-connected.

Brook Lenfest, the W Hotel developer, is the son of the philanthropic Lenfest family, and his father H.F. “Gerry” Lenfest is part-owner of the Inquirer, Daily News, and Philly.com. Brook Lenfest has given around $30,000 to local political campaigns since 2007, including to Mayor Nutter’s, according to city records.

The two parking garage TIFs, at 1501 Spruce and on the 1200 block of Filbert Street, were developed by Parkway Corporation, which is led by Joseph Zuritsky and his son Robert. Together, the Zuritskys have given more than $200,000 to local political campaigns since 2007.

Two other TIF projects were developed by Liberty Property Trust, which is directed by Bill Hankowsky, also a part-owner of the Inquirer company. Hankowsky was the director of PIDC when the two Liberty TIFs were created, and he joined Liberty after leaving.

Lee Huang, of Econsult, pointed out that TIF projects tend to be very big, and very big projects in turn tend to be undertaken by big-name developers. The important thing, he said, is that the process for creating the subsidies is public.

“Do you have some analytical process and some public response process to make sure these subsidies are not handed out in a smoky-room, handshake-transaction sort of way?” he said.

The W Hotel is the first proposed TIF district during Mayor Michael Nutter’s administration. The bill was approved unanimously by Council’s finance committee last week, after a series of behind-the-scenes negotiations, though at least one Council member—Wilson Goode—is opposed to it. The bill could come up for a vote before the full Council in early December. If approved, the TIF will begin January 1st, 2014.