Unanswered NID/TIF questions for hotel project at 15th and Chestnut

Neighborhood Improvement Districts (NID) typically assess an additional fee for income-producing properties in particular areas to pay for special services. Does it make sense to use the revenue stream from NID to back a single-property Tax Increment Finance district created to support the development of two luxury Center City hotels at 15th and Chestnut? Community Contributor and NID consultant Dan Hoffman argues the concept could work but requires much closer scrutiny.

The Brook Lenfest proposal to layer a Neighborhood Improvement District (NID) revenue stream on top of a one-property Tax Increment Finance (TIF) district to support the development of two hotels may be feasible, but it needs serious review.

First, some definitions: 

Neighborhood Improvement Districts (NIDs) are corporations created by local government at the request of property owners within a defined service area in order to undertake activities that these owners believe will improve property values and/or business profitability. In order to undertake these activities property owners agree to assess themselves a fee, (often passed on to tenant-occupants). In Pennsylvania a NID may be organized as either a municipal authority, in which case the municipality is ultimately responsible for naming the board members, or as a self-governing non-profit corporation in which the board is chosen according to the NID’s by-laws.

Tax Increment Finance (TIF) districts are also created by municipal ordinance. In this case properties within the TIF area have their property taxes “frozen” at a particular level in anticipation of future development, and with that development increased property taxes. For example, a vacant lot may be designated a TIF district, with such a lot paying relatively little in the way of property taxes.  Then a building is constructed and the taxable value of the property is greatly increased. However, the property owner continues to pay the lesser, “frozen” amount of property taxes. The additional property taxes that would otherwise be due, but for TIF designation, are returned to the owner or developer as a revenue stream. Historically, TIF revenues have been generally used to cover the cost of infrastructure improvements associated with the development of a project as this infrastructure is deemed to be of value both to the project and the municipality in general.

 

The Brook Lenfest proposal seems to have no negative consequences for consumers or taxpayers. The proposed NID revenue stream is money that the property owner could be charging the property manager or customers as part of basic rent. What the proposal does by segregating “rent” into two categories, rent and NID revenues, is to enable the developer to pledge the NID revenues as collateral. Lots of BIDs have done this for capital improvement projects. So to this extent, this proposal isn’t novel.

Still there are three significant issues with the proposed NID that require deeper consideration before City Council approves the proposed legislation:

  1. NIDs are independent corporations. As such NIDs are responsible for their own debts. However, I don’t see where state law authorizes NIDs to be responsible for the privately incurred debts of others. The proposed NID seems to have no direct interest in the project and no role in authorizing the incurrence of this debt. Moreover, as a nonprofit corporation (more likely than a municipal authority, which would require enhanced public scrutiny creating additional problems for the developer) state law requires some sort of charitable outcome. The present proposal doesn’t seem to do anything more than enhance the feasibility of a for-profit venture. Related to this issue, NID fees are usually a tax deductible cost of doing business. Here fees seem to be a source of income rather than a cost to the property owner.
    The City of Philadelphia should get an IRS ruling or other independent accounting opinion regarding all of this before making a City Council member, as a NID board member, complicit in a questionable tax scheme.
     
  2. State law never anticipated the possibility of a one-property NID there are a host of NID board organization and governance problems that should be considered before approving this proposal, not the least of which is the heightened fiduciary responsibility the city might assume if its representative is the only NID board member not working for the developer.
     
  3. State law never anticipated that a NID would exist simply to serve as a contingency fund, as seems to be proposed. A NID plan, which is part of a NID enabling ordinance, requires the NID to declare how (and how much) funds are to be used each year. Moreover, per state law, funds raised in a particular year must be spent in that year and not simply accrued. Neither of these concepts seems to be part of the current proposal.

In short, this proposal seems to be an accounting gimmick, and is not about creating a legitimate NID. Evidence needs to be presented that NID law can be used in this way. Whether this scheme is legal or not I am not sure, but clearly there are implications and issues that have not been fully considered. It may be that no one will have the legal standing to challenge this arrangement, but that ought not be the standard by which a city ordinance is adopted.

Real NIDs and TIFs should be paired, but Philadelphia hasn’t pursued this. Where property owners have created a NID  in order to accomplish collective goals that are also good for the city, the city should be creating TIF district overlays for these districts so that as property values (and property taxes) rise in these areas as a result of NID activities, the NID receives some benefit or reward for the expenses it has incurred in bettering the area. This would permit the district to do more, incentivize the establishing of NIDs, and reward them for being pro-active. For a city claiming to be concerned about its commercial corridors, the absence of this approach from the city’s commercial corridor revitalization tool-kit is disappointing and retrograde.  NIDs and TIFs should, and can, work together. But the way being proposed is not the model to be emulated.

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