Balancing Act
Oct 1, 2007 12:00 PM, By Elaine Misonzhnik
That's why cities badly in need of new sources of revenue will often give the developer a bit of a financial boost, ranging from tax incremental financing to low-interest loans to payment in lieu of taxes. The latter mechanism allows the developer to postpone the payment of property taxes on a new project if the firm builds a necessary community resource, such as a school or a library, free of charge. In many cases, the added cost of an extra building will be less than the combined amount of property taxes the developer would pay over a 20- to 30-year period.
However, for most developers, the city's financial contribution is not going to make or break a deal, Kaplan says. All that matters is to bridge the gap between what the project will cost and the targeted returns.
Meanwhile, cities that have plenty of income but are experiencing a gap in their retail infrastructure can lure developers in without forking over any cash or giving big tax breaks. The government of Corona, Calif., for example, wanted a lifestyle center to keep its affluent residents shopping within city limits. When Corona, which never suffered from a lack of interest from developers, partnered with Bakersfield, Calif.-based real estate firm Castle & Cooke for the Crossings at Corona, a 1.2-million-square-foot open-air retail and entertainment center, its only contribution to the project was expediting the entitlement process.
“From the time they approached us to the time they were breaking ground, the project took less than 18 months, and that was the worst-case scenario because they didn't have appropriate zoning,” says Darrell Talbert, deputy director of the Corona Community Development Department. In another part of California, the same project would take up to four years, Talbert estimates. The Crossings at Corona opened in the spring of 2005.
The Corona example illustrates an important point. Contrary to popular belief, the main advantage that public/private partnerships offer developers is not public funding, it's speeding along the process and helping developers gain access to desirable urban markets that might not otherwise be open for them, says Norment. The willingness to engage in public/private partnerships can increase the number of projects a firm can undertake by up to 20 percent, he estimates.
The problem, he says, is that in their desire to see underutilized space revitalized, both cities and developers often rush, either not doing enough preliminary studies to determine what kind of use would be best for a given site or embarking on projects that have no chance of succeeding. For example, William H. Hudnut III, chair of public policy with the Urban Land Institute and former mayor of Indianapolis, recalls a project along the East 38 Street corridor that he undertook in the 1980s. The project, called the Meadows, was supposed to revitalize the area's retail infrastructure with high-end shops. Instead, it ended up driving existing mom-and-pop stores out of business. To this day, Hudnut is not sure whether the city got the mix of retailers wrong or whether the area simply did not need additional retail.
To improve a project's chances of success, Norment recommends that cities take their time to research potential uses prior to initiating the request for qualifications process and that they do so with the help of independent development consultants.
Meanwhile, when it comes to deciding whether to make a financial contribution, Hudnut, who went on to complete a successful public/private project with Simon Property Group in the form of Circle Centre, an 800,000-square-foot urban shopping center in Indianapolis, recommends using what he calls a “but for” test. “You have to ask yourself: but for the tax abatement/tax deferment/bond financing would the project be possible? If the answer is no, then it's legitimate and justifiable to have the public sector participate,” he says.
The Circle Centre, which took 17 years to complete, required millions of dollars in tax increment financing, urban development action grants and federal loans, as well as the creation of a special downtown district and the use of eminent domain. When the project was completed, however, in 1995, it served as the centerpiece of the revitalization of downtown Indianapolis. Dozens of new bars and restaurants sprang up around the Centre.
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