City poised to shift development support to projects that would generate jobs

Mike Ivey  —  10/22/2008 10:27 am

Depending on the spin, tax increment financing is either a) a great tool to rescue blighted urban areas, or b) a boondoggle giveaway to wealthy real estate moguls.

In practice, it falls somewhere in between.

Now, after two years of discussion, tweaks and rewrites, the city of Madison is poised to dramatically shift direction with its use of TIF.

New rules headed to the City Council for final approval later this fall would ban the use of TIF for luxury condos, campus apartments or any other "market rate" housing.

Had those guidelines been in place 10 or 15 years ago, they would have likely blocked city assistance for such projects as Monroe Commons, Capitol Point or Union Transfer -- high-rise condominiums all built with some level of city financial assistance.

"I don't think we're abandoning housing ... but we'll be much more selective," said city TIF coordinator Joe Gromacki.

Under the new policy, TIF monies will be aimed primarily at economic development and job creation, along with neighborhood revitalization and workforce housing. Advocates have long pushed to put city resources to work for those who most need the help.

"It's absolutely the right direction to be going," said Vicky Selkowe, who serves on the city Economic Development Commission that just reviewed a final draft of the new policy. "I think there's been a realization that a lot of other cities have done a better job using TIF in that way."

Established by the Wisconsin Legislature in 1975, tax increment financing allows municipalities to use projected new property tax revenue to fund new development. The city basically loans a developer money that is repaid with taxes generated by the new project.

But the city often must borrow money to make the loans, and incurs short-term borrowing and administrative costs. Also, other taxing entities such as the school district, county or MATC don't begin pocketing any of the new tax dollars until the TIF loan is paid off. And that can take years.

Still, the theory is that municipalities win out on this tax juggle because it's assumed the blighted area would not have been redeveloped without some public nudging.

"The city has done pretty well with TIF over the years. It hasn't lost one penny," said Madison attorney Tripp Widder, who chaired the city subcommittee writing the guidelines.

Widder's group has since come up with several new strategies, including targeting areas of high unemployment and helping employers committed to "living wage" jobs. Industries receiving special focus include manufacturing, medical, life sciences and information technology.

"A lot of the current policy was unwritten," said Widder. "We needed something that was clear to the applicants but also sets priorities about what the city wants to use TIF for."

In the past, deciding who got TIF and who didn't could often boil down to personalities, creating hard feelings all around.

One story recounted by local real estate insiders tells how developer Cliff Fisher "dropped the F-bomb" on then Mayor Sue Bauman during a meeting over TIF for Metropolitan Place Phase 1.

Fisher never did get any city backing for the condo project on the 300 block of West Washington but managed to land financing in New York and eventually sold all 174 units. Phase II of Metropolitan Place didn't enjoy the same success, however, with the project now in receivership.

Madison developer Joe Krupp has found using TIF to be a mixed bag. He was successful in securing $1 million in city backing for Bedford Court, the 54-unit condo project that helped jump-start revitalization of the Bassett neighborhood.

But Krupp had run-ins with the city over TIF backing for Kennedy Place, his mixed-used project on Atwood Avenue. Krupp requested TIF funding but balked at the city's insistence on an "equity kicker" -- basically, a cut of profits generated by the development.

Krupp said excluding TIF for market rate or student housing shouldn't pose much of a problem today, given the current market.

"The days of using TIF for condos is long gone unless it would involve unusual circumstances like redevelopment of a brownfield as an example," he said, referring to contaminated sites.

Krupp said focusing TIF on projects that create jobs and workforce housing is not a bad objective on its own.

"But I've always felt the city shouldn't write such a tight policy that ties their hands in looking at case-by-case opportunities," he said.

The new guidelines do include annual review of TIF policy, designed to provide needed flexibility for both the city and the development community.

"There's the ability to adjust to the changing marketplace," said Widder, who has helped developers like Randy Alexander and Todd McGrath to secure TIF funding. Widder said that Alexander's Depot and City Station projects along the West Washington rail corridor were great examples of TIF being used in the right way.

"It was just a mess over there, a junkyard, but Randy had a vision for it," said Widder.

Statewide, however, TIF has been used to fund major retailers building on open space and farmland. Wal-Mart and Target, among others, have grabbed public money in Wisconsin to build new stores and warehouses.

Those cases were recounted in a 2006 report from the Center on Wisconsin Strategy, a UW-Madison think tank.

The report was aimed at helping Wisconsin municipalities structure TIF projects that yield the greatest public benefit. It found that state municipalities funded $243.6 million of development through TIF in 2005 alone, making it the largest economic development tool available to most cities.

"But despite the massive amount of money funneled through TIF, local governments allocate this money in a largely unorganized fashion and often do not use this tool to their greatest advantage," the report noted.

To address some of those issues, Madison officials have included a "clawback" provision to let the city recoup any money if a TIF-backed project fails to deliver on its promises of jobs or other benefits.

"That only kicks in if a developer had used new jobs to move ahead of other projects," said Widder.

Of course, with the economy facing major headwinds and credit in tight supply, there could be more demand for city backing.

TIF coordinator Gromacki said he's already getting plenty of interest despite the current market environment.

"Even with the economy like it is, we're seeing lots of 'tire kicking' for office and commercial projects," said Gromacki.

And if developers come looking for city assistance in 2009, they'd best have a copy of the new TIF guidelines in hand.

Mike Ivey  —  10/22/2008 10:27 am