The city has worked with individuals in the past using an economic development tool called Tax Increment Financing. This tool is a means of collecting taxes to use on a specified purpose. Tax Increment is used to generate a project that couldn’t be realized without its assistance.
There are a few different types of Tax Increment Districts. An Economic Development District lasts for approximately 10 years and is generally used with vacant property. A Redevelopment District can last up to 25 years. With a Redevelopment District the property needs to have buildings and be substandard or blighted in some way to qualify. There are other types of districts but these are the most common.
So how does this work? The mechanism of Tax Increment Financing starts with a parcel of property. What happens is a developer wishes to do a project but the costs of doing the project exceeds what it takes to make it work. With a redevelopment project, as an example, it is easy to look at the cost of removing a building and replacing it, creating a higher cost than starting with vacant property. To address these added costs the city assists the developer with tax increments that writes down the costs. They do this by certifying the taxable value of a property prior to development and then capture the difference between old tax and the tax created by the new development. This is the increment. That increment is then kept separate from other taxes and used to pay for costs associated with the assistance to the development.
The process of doing this is somewhat involved. The city needs to develop a plan to meet state requirements. This plan talks about what is going to be accomplished, sets the budget and determines the increment that will be received. The developer then signs a development agreement which states what he is going to do to accomplish the development. When the development is completed it generates larger taxes then previously paid on the parcel generating the increment. Within the development agreement is typically an assessment agreement or other assurance in value to protect the holders of the financing mechanism that increments will be paid.
Recently we saw a large decline in tax value for properties held by Whitebirch, Inc. The Marina II was one property which was improved as a result of Tax Increment. The agreement with them had a clause not to challenge the taxable value of their property, if they did they defaulted on the agreement. This was done and a notice was sent demanding the default be cured. In the event it isn’t cured the city will pursue remedies provided for in the agreement.
Tax Increment has its place and is a useful tool but in this environment of changing property values its use comes into question. In this instance the city had developed a “pay as you go” approach which means we pay only according to the amount of increment received. By doing this we limit the risk taken. In this instance we change the landscape in terms of what was meant to happen.
