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Thread: TIF and falling property values

  1. #1
    Cyburbian btrage's avatar
    May 2005
    Metro Detroit

    TIF and falling property values

    My fair community is interested in establishing a Downtown Development Authority for an old, struggling commercial area. My question is whether or not this is a good time to establish an authority because of what is happening with property values.

    It could be good because the market may have hit bottom and there's no where to go but up.

    On the other hand, if the TIFA is established and the market continues to decline, we could have wasted our time because it will take however many years for there to be any measurable property taxes to capture.

    I'm thinking that it may be better to wait until we have a better understanding of where the bottom may be for property values.

    Any thoughts??
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  2. #2
    Cyburbian wahday's avatar
    May 2005
    New Town
    Man, the mud is slinging in New Mexico around TIFs right now. We have two of the largest TIDDs (Tax Increment Development Districts) in the country, both of which are on greenfields But that is another story.

    I have a few comments on this. First, you should consider what the timeline is for the TIF to sunset. Here, it can be as long as 25 years (after which taxes from the TIDD would be distributed through the city, or state - see below - and not earmarked for the area). I think this will have a big impact on what you as the municipality can reasonably expect as a return. If its 5 years, for example, I would be pretty nervous...

    Secondly, consider how the process works in your neck of the woods. Here, the taxes that are diverted are a combination of property taxes AND gross receipts tax (sales tax). The latter are state taxes and therein lies much of the controversy here. To divert money that would potentially benefit people around the state to fund infrastructure improvement (or in our current cases, building it in the first place) in a very specific area has caused some groups to call foul and there could be legal ramifications down the road.

    Lastly, I don't know if you belong to our dear professional organization the APA, but there was an article in the latest Planning mag that talked about Mesa del Sol, one of the current recipients of TIF monies here. At the end of the article they mention how they were downgrading their building intentions to make fewer homes this year and emphasize more affordable homes. A week after I received my copy, the local news announced that MDS would be building NO homes in 2009 and that they fired 9 employees (half their staff). Now, their timeline is 25 years before the TIF monies revert to the regular schedule, so there is still time to make up the lost revenues from slumping sales. But, I offer it as a cautionary tale. If your timeline is shorter, yes, I might be worried that the City (or whatever municipality) will end up eating that money.

    Hope that's helpful.
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  3. #3
    Cyburbian jmello's avatar
    Mar 2005
    Clayobyrne, CB
    The whole idea of a TIF is that the public investments will grow the tax base. If that is not in the cards, then a TIF makes no sense...regardless of the economic situation.

  4. #4
    There may be a problem selling bonds in this current climate.

  5. #5
    Nov 2005
    In the Peach State
    Government bonds tend to be doing better than company bonds right now because of the more secure revenue source. I think we will see bonding agencies start to really inspect more thouroughly each company/jurisdiction as they gather the data to rate the organization.

    As far as TIFs are concerned, it is difficult for a jurisdiction to lose taxpayer money on it. The improvements that will be done on the property (especially in a brownfield redevelopment), regardless if the new product sells or not, will be of a higher value from a taxation perspective due to the structural improvements. Now if the thing sits vacant for an extended period of time (as I am seeing here in the Atlanta area) then we could have a problem, although I have not seen it yet. Hopefully, the development community has deep pockets to weather the storm. If the developer folds, then the bank sells it to someone else who will continue the project.

  6. #6
    Cyburbian Cardinal's avatar
    Aug 2001
    The Cheese State
    The thing about downtown TIFs is that they often lose money initially. The TIF is usually used to acquire and redevelop property that has been on the tax rolls. As a result, the valuation drops in the first years of the TIF and then begins to rise as new development occurs. Of course, there are also the problematic ones where a community acquires property and develops a park instead of promoting redevelopment directly. These tend to be the ones that fail completely.

    It is certainly possible to question whether the base will readjust to a lower level as a result of the market. This is happening in many places, causing communities to struggle to maintain cash flow without tapping general funds, and causing states to consider emergency legislation that will extend the life of TIFs. Personally, I do not believe the market has hit bottom, especially in commercial real estate. I don't see signs of a recovery. Spending is still slumping. There are many more retailers (chains and independents) that will be going under. This will result in a rise in vacancies and will put strain on landlords who do not have a replacement cash flow. Commercial delinquencies and "fire sales" are just beginning. As a result, I would not hesitate to guess a further drop in values of twenty percent.

    On the other hand, those conditions may make it an ideal time to establish a downtown TIF. Downtowns may not have experienced the same rise in property value as common in suburban residential and commercial markets - a brief market analysis should substantiate this (and a more detailed one should be conducted to tell you what the future redevelopment opportunity may be). Furthermore, the best time for a city to acquire property is when the market is declining, when vacancies are rising, and when there are few competing buyers in the market. Some of this property might even be acquired through foreclosure. Willing sellers also mean there will be less controversy over the city "taking" land.

    Over the short term I would recommend that the city consider making usable buildings available as free or low-cost space for business retention and business start-up purposes. Acquire the building and reduce the rent of struggling retail tenants. Acquire the building and make office space available for free to qaulified business start-ups. Actions like these could keep the downtown fully leased while the strip malls sit empty, and could be a source for creating the businesses to occupy future redeveloped space.
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