TIF-ed off in Edina!

Feeding the buzzard

Further update (4/11/15): On Thursday, April 9th, the Edina Sun Current carried a long op-ed written by Edina’s city manager, Scott Neal; it was featured prominently as though it was the paper’s lead editorial. The op-ed was posted to the Sun Current’s web page today, the 11th. You can read it here. The hed for the piece is “With patience, Pentagon Park can fuel its own success.”

Neal’s op-ed does not refer to this story, but there can be little doubt that it was written in part because of it. The op-ed was a defense of the use of a twenty-six year TIF district at Pentagon Park that is criticized here. One of the points he makes is that we should look at the city’s experience with the Centennial Lakes TIF (a mix-use commercial development along France Avenue in Edina) as a success story because of the use there of tax increment financing.

If Pentagon Park is going to fuel its own success, you would think it would do it without $50 million in public money all along the way.

The argument that a TIF created the success at Centennial Lakes is also a case of the logical fallacy in “post hoc ergo propter hoc.” The fact that Centennial Lakes was successful after a TIF was declared does not prove that the TIF was the cause of the success, certainly not merely because Mr. Neal says so.

Update (3/30/15): It is apparently being said that this story says that Edina’s Economic Development Manager persuaded the city assessor to reduce the assessments at Pentagon Park. It doesn’t say that, and as I wrote earlier, Scott Neal was emphatic that no one asserted, or attempted to assert, influence on the assessor.

The story did say that the ECM conferred with the developer in meetings where the subject was discussed, and that the ECM manager served as liaison with the assessor. Nothing more.

I don’t know how the decision to reduce the assessments was arrived at.

It cannot be inferred, and I don’t, that city officials were influenced improperly.

This is a story about the use – and perhaps misuse – of TIF (tax increment financing) in Edina. But it is also a story about poorly understood consequences of TIF use on the other residents of a community, and other taxing jurisdictions, such as a school board. The story has application to not only Edina, but to other communities where LeftMN readers live. That’s why I hope those of you who don’t live in Edina will read it, too.

This story is based on public record information. I sent a copy of it to the City of Edina for comment before publication; I met with City Manager Scott Neal in his office on March, 25^th. I include some of his remarks in this story. With that preamble, let’s begin.

There is a commercial park in southeast Edina called Pentagon Park. Sitting at the junction of Highway 494 and Highway 100, the 43-acre expanse is divided into 16 parcels. Fifteen of these parcels are owned by Hillcrest Development and related entities, which acquired most of the parcels in 2012 for $7,865,000. The parcels contain multiple buildings, some of which were considered “substandard.”  Here are the first few graphs of a story in the Edina Sun Current when the Pentagon Park TIF district was established in February of 2014:

A new Tax-Increment Financing District was established that encompasses the Pentagon Park property.

The unanimous approval of the district by the Edina City Council on Tuesday, Feb. 18, doesn’t commit the city to any costs and instead lays out the maximum budget for the district. The next step for the district is to draw up a term sheet and then an agreement.

About 10 percent of the cost of the $500 million Pentagon Park project is expected to be covered by tax increment financing, according to consultant [for the city of Edina] Mark Ruff of Ehlers and Associates.

The TIF District would be a redevelopment district, and 10 of 18 existing buildings on the property have been deemed “substandard” by an architectural firm. The Pentagon Park TIF District isn’t similar to the Centennial Lakes TIF District because the Centennial Lakes TIF funds can be used for projects in the city outside of Centennial Lakes and Pentagon Park TIF funds can’t be transferred outside of the district, Ruff said.

A little further in, the article says this:

The financing would be “pay as you go,” meaning as Hillcrest Development pays taxes, the city reimburses some of the taxes, which are then used by the developer to pay its financing institutions, Ruff said, adding that it’s “pure developer financing.” No general obligation bonds are involved.

No comments were received from the Edina school district or Hennepin County, which are also affected by the TIF District. No one opposed the TIF District during the Feb. 18 public hearing.

It sounds like free money, doesn’t it? City of Edina economic development staff and its consultant prepared a TIF plan and presented it for approval on February 18, 2014. The TIF plan said, in part:

The estimated impact on other taxing jurisdictions assumes that the redevelopment contemplated by the TIF Plan would occur without the creation of the District. However, the HRA or City has determined that such development or redevelopment would not occur “but for” tax increment financing and that, therefore, the fiscal impact on other taxing jurisdictions is $0. The estimated fiscal impact of the District would be as follows if the “but for” test was not met: (p. 2-8)

Estimated amount of tax increment attributable to school district levies. It is estimated that the amount of tax increments over the life of the District that would be attributable to school district levies, assuming the school district’s share of the total local tax rate for all taxing jurisdictions remained the same, is $36,286,666; (p. 2-10)

But there was something else going on behind the scenes at the time the TIF plan was being prepared and submitted. Something that would make the assumptions above very misleading. Before we get to that, though, we need an understanding of what a TIF district is.

– o O o –

A TIF district is created to induce development or redevelopment that would not otherwise occur, but for the TIF designation. Here, in other words, a prime piece of real estate at an important intersection in the metro area would have lain fallow forever “but for” the city’s creation of the TIF. Well, maybe. But remember, Hillcrest had just bought Pentagon Park, and it bought it without the TIF district. And it obviously bought the properties with redevelopment in mind; one has to be skeptical of the application of the “but for” test here. In our conversation, Mr. Neal called the “but for” finding by the city council an “informed judgment call.”

When a TIF is created, the real estate taxes for the district are frozen, and the taxes payable for any incremental increase in the assessed value of the property after that (presumably because of development or redevelopment) are payable to the TIF authority (the HRA in Edina) for the duration of the TIF district (a maximum of 25 years, although it could be 26 years, since like the first pancake, sometimes the first one doesn’t count). Here, that includes not only the city’s share of the increase, but the school district’s, the county’s, and the watershed district’s share, too.

In the case of the school district, there are actually two levies: one calculated on the Net Tax Capacity (NTC), and the other is the Referendum Market Value (RMV) levy. The RMV levy is the “operating levy” and it amounts to 43% of taxes levied by the school district. The NTC levy accounts for the other 57%. The incremental NTC taxes levied are captured by the TIF, while the incremental RMV levy taxes are not. The assessment decreases described later do affect both the NTC and the RMV levies and the taxes raised by them.

Mr. Neal explained the difference in the TIF treatment of the NTC and RMV levies when I met with him.

The incremental taxes are rebated one way or another to the developer for the duration of the TIF, either directly for “eligible expenses” under the TIF/redevelopment plan, or by providing public infrastructure for which the developer would otherwise be assessed. Just as you, Mr. and Mrs. Homeowner, in Edina, anyway, are assessed for the new street in front of your house. So it’s a great deal for a developer.

But it’s not such a great deal for everybody else. In addition to the taxing jurisdictions mentioned, that includes other owners of similar real estate in the city in competition with the development, and the rest of the taxpayers, too, who have to pick up any increased load for city services provided for the development during the TIF: fire and police services, street and sidewalk maintenance, water and sewer maintenance, and safety inspections to name just some of them. But let’s get back to the specific case of Pentagon Park.

According to the TIF plan, and assuming the same degree development, it was estimated that $36,286,666 of tax money that would have gone to the school district would go to the HRA, and on to the developer because of the TIF. The city would say that it’s fair because the development wouldn’t occur “but for” the TIF. As I wrote earlier, I think that is a questionable assumption. Maybe not “the” development, but some development certainly would occur. The buyer Hillcrest didn’t buy Pentagon Park in 2012 to sit on it.

At the same time the city’s staff was preparing the TIF plan showing zero tax consequence to the school district, members of the city staff, Bill Neuendorf, the Economic Development Manager, Cary Teague, the City Planner, and James Nelson, a consultant for the developer group, Scott Takenhoff, of Hillcrest Development (the new major owner of Pentagon Park), and Mark Rauenhorst, a developer who apparently has some interest in the property, too, were meeting in 2013 and early 2014 to, among other things, discuss the reduction of the assessed valuation of the Pentagon Park properties. They were, in fact, reduced from $53,659,400 to $16,299,500, a nearly 70% decrease. According to written agendas available, this group met at least eight times, and tax abatement was an agenda item on seven of these occasions. Takenhoff prepared the written agendas.

Economic Development Manager Neuendorf acted as the liaison for Takenhoff with the city assessor to press Takenhoff’s demands for making the decreases in assessed valuation. There were many email communications between Takenhoff and Neudendorf on this subject; you can read a couple of them here. Hillcrest also had several others acting as its agents in communication with the assessor.

In addition, the members of the council and Mr. Neal met with the developer in groups small enough not to trigger open meeting requirements.

Not only were the values reduced “going forward,” but the city stipulated to a settlement of outstanding property tax petitions by the Pentagon Park ownership to much lower values. Those cases were settled on January 27, 2014, just a couple of weeks before the TIF plan was adopted and the taxes certified at the new low level.

It certainly seems from the linked emails that the TIF and the tax abatement were intertwined.

Mr. Neal objected strenuously to this characterization in our meeting, stating emphatically and unequivocally that the TIF and the assessment/abatement issues were separate. He also said that no city employee and no elected official influenced or attempted to influence assessment decisions by the city’s assessor. He said that the assessment reductions would have occurred with or without the TIF.

No representative of any other jurisdiction with taxing authority over Pentagon Park was part of these discussions. No one else had any knowledge of them, and certainly not the school district, which actually collects more in real estate taxes than the city does.

Perhaps the Council didn’t even know about them. In a recording of a recent joint Council/School Board working session, Council Member Ann Swenson can be heard to say, “We didn’t reduce the assessments.” If she meant “we” the city, she is obviously wrong. If she meant “we” the Council, she is technically correct, but by adopting the TIF, it froze the school district’s taxes at a low level for potentially 26 years.

In the same recording, Economic Development Manager Neuendorf claims to have only the vaguest understanding of the assessment and tax abatement issue. You can read a transcript of the last few minutes of the working session here.

– o O o –

The assessed valuation of property and taxes payable when a TIF district is declared matter, a lot. By waiting to put the declaration of the TIF district on the Council agenda until just after the assessed valuations and taxes went way down, the incremental TIF revenues to the HRA and the developer went way up for the 25-6 year duration of the TIF.

As a consequence of the city’s stipulated settlement of the tax petitions, the owners of Pentagon Park received a property tax refund of $4,987,371.90 (for taxes payable in 2010, 2011, 2012, and 2013) on the 12 parcels that were the subject of the protests. The school board recently received a bill for about $1,200,000 for its share of the abatement, for both NTC and RMV levies. This is already far worse than the zero impact predicted by the TIF plan.

But on top of that, the greatly diminished NTC school taxes will remain frozen and result in substantially less tax revenue to the school district for a generation, wholly apart from any gains not shared in because of the TIF. Millions less. The assessment on which NTC taxes to the school district will actually be paid cannot even rise with general market improvement from the current certified level.

Economic Development Director Neuendorf (who is paid by the city’s TIF authority, the HRA, by the way) says that the values at Pentagon Park “plummeted in the Great Recession,” which actually happened, of course, a few years earlier. I doubt, however, even then, that any other commercial owner (or any property owner in Edina) saw a diminution in property assessment of 70%. This was like Macy’s after Christmas.

The assessed valuation for taxes payable in 2010 was $53,659,400. The stipulated assessed values in the settlement were $25,000,000 for taxes payable in 2011, $19,400,000 for taxes payable in 2012, $18,200,000 for taxes payable in 2013, and $16,300,000 for taxes payable in 2014. (Taxes payable in a given year are based on assessments made the prior year.) You can see that the assessments decreased in the later years, even as the time from the Great Recession increased, and real estate values in general were rebounding.

Hillcrest did demolish one of the building in Pentagon Park after it bought the properties, but since the value of many of the buildings was written down to virtually zero, it is hard to tell how much that accounts, if any, for in these assessment decreases, especially the later ones. Seven of the buildings have an assessed valuation (apart from the land) of $1,000; three of them have been improved and are being actively leased.

Mr. Neuendorf observed that Pentagon Park was in foreclosure, and apparently the city assessor took that into considerable account.

The sale of Pentagon Park was a fire sale, though. This is true of any sale out of foreclosure.  The sale prices do not reflect the real value of properties being sold by financial institutions that are in the lending business, not the real estate business, and which are just interested in recovering the amount of their bad loans. As a regulatory matter, the bad loan on the books is worse than the potential upside in holding foreclosed property, especially if money has to be invested to hold the property or improve it to achieve any gain. Banks are “motivated sellers” as they say in the biz. They won’t throw more money after a bad loan.

– o O o –

The Pentagon Park TIF district is the inverse of a gift that keeps on giving. It’s the buzzard that keeps on eating. Economic Development Director Neuendorf likes TIFs because, “we can use private money for public infrastructure.” But that is manifestly untrue. TIF-captured taxes are still taxes, diverted to a TIF authority (like the HRA in Edina) and disbursed to provide benefits for a private entity. TIFs are the opposite of what Neuendorf says.

Using the TIF plan’s own figures, the school district will lose out on some $36 million of tax revenue during the life of the TIF district: dollars that other taxpayers are going to have to pick up. The same is true for money that would have gone directly into the city’s coffers, rather than the HRA; other taxpayers will have to shoulder this load. The county will lose its share, too. But because of the substantial assessment markdown, the loss to the school district will undoubtedly be greater than the $36 million prognosticated.

Compare that $36 million with the $50 million that consultant Ruff is quoted as coming from the TIF in the Sun Current article quoted at the beginning of this story. If those figures are accurate, and they both come from city sources, most of the TIF financing is coming from school district levies.

Moreover, many of you know that the Edina School District will have a levy referendum in May to raise some $125 million dollars for repair and capital improvements to school facilities, to permit, among other things, the hot water to reach the third floor restrooms at Southview Middle School. Guess where the additional NTC mill levy on Pentagon Park will go? It’ll go to feed the buzzard, of course. And that loss will be on top of the losses described in the prior paragraph.

Taxes that residents voted for specifically in a levy referendum intended for the school district won’t go there.

A baby born today in Edina will go through the Edina public schools, go to college, and earn a master’s degree before the buzzard quits feeding. How do you like them apples?

Edina has five TIF districts, including Pentagon Park. It is contemplating a sixth for the development of the former Grandview public works site. The consequences for the school district are potentially even greater for a TIF at Grandview, on a percentage basis, anyway, for reasons that will be discussed in a future story here. There probably isn’t anything that can be done about Pentagon Park, but we can certainly use it as a cautionary tale for Grandview.

– o O o –

Here’s a coda for those of you who aren’t Edina residents and have stuck with this story. The one-two punch of reducing assessed valuation followed by the declaration of a TIF district is hardly limited to the circumstances here in Edina last year. TIFs are a disaster for public school districts. I’ll have more on that later.

Correction: 2010 should have been included in the years of property tax refunds referred to.