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Taxing districts losing luster in tough economy

Also by Jacob Barker

The city of Columbia never expected to get its money back when it decided to help finance the Vandiver Drive interchange over U.S. Highway 63 in 2002.

The plan was simple. For the $8.9 million project, the city would finance a little more than $3 million on the condition that the CenterState Transportation Development District, set up around where Bass Pro Shops is now, would pay the city back.

But when the project came in at almost $1 million over estimates, developer Curtis MacDonald of Centerstate Properties was forced to borrow from banks on the condition that he be repaid the additional million before the city got a dime.

“We were agreeable to (MacDonald getting reimbursed first) because, really, we didn’t plan on getting any of our money back anyway,” City Manager Bill Watkins said. “What we’d done is put in what we thought was a fair share for a road project.”

Building the Vandiver interchange at U.S. 63 was a longtime goal for former City Manager Ray Beck. Although he didn’t like the idea of another governmental body financing the city’s infrastructure, it was more important to him that it get done, one way or the other, he said.

Worried he might be setting a precedent with CenterState, Beck made sure to put guidelines in place using the only leverage the city had – approving transportation projects that connected to city streets.

The city would be involved in their operation but not have a sitting board member. Sales tax would be capped at 0.5 percent, even though state law allows a tax as high as 1 percent. TDD revenue would not be used for development fees. Meetings would be publicly advertised. With these provisions in place, he thought, the districts would be a reasonable tool.

Since then, the city’s attitude toward TDDs, and vice versa, has changed considerably.

“Right now, we haven’t put any money in any TDDs,” Watkins said.

“After about the third (TDD), the development community inferred that the city really didn’t get a vote,” Watkins said. “So they pretty well did whatever they wanted to do unless they needed something from us. So we didn’t have to put any money in it, and they really don’t need us to be involved.”

This lack of city control has been a double-edged sword when it comes to funding road projects. The districts can pay for roadwork the city might have trouble persuading voters to finance. But once TDDs are established, the city has almost no control over what gets built or when.

And the districts diminish the city’s ability to raise sales taxes and fund the improvements it deems most necessary. But because they rely on the approval of a judge rather than the City Council, developers have used TDDs extensively in Columbia.

‘A cookie-cutter process’

Columbia’s 13th TDD was established late last year to pay for road work at the Rock Bridge Shopping Center so that Hy-Vee would agree to build a store at the old Walmart site. Unlike tax-increment financing or a community improvement district, a transportation development district needs no city approval.

Watkins said the city lobbied the legislature years ago for some degree of control over TDD formation to no avail.

Developers have used TDDs to finance roads to shopping centers that initially were the targets of public and City Council animosity.

“There are some cities where these mechanisms are not necessary because the community is so encouraging,” Columbia developer David Atkins said. “The community wants the jobs, the sales tax. … where the community welcomes development with open arms rather than putting up barriers, and our community doesn’t do that.”

Springfield, for example, had more than 150,000 residents in 2000. According to a 2008 Missouri State Auditor’s report, Greene County, which includes Springfield, had only two TDDs as of Dec. 31, 2006. Springfield officials are much more willing to approve community improvement districts or tax-increment financing, two financing tools that rely on city approval and oversight.

“They haven’t used TDDs as much because the city and the City Council (are) so much more pro-development down there,” Van Matre said. “You don’t have the same resistance as you do up here.”

When he was working for one of his clients to build a Sam’s Club in Springfield, Van Matre said, the city delegated a full-time staffer to help him through the approval process and offered to help set up a community improvement district.

“It wasn’t like I had to go lobby the council people or talk to 16 interest groups,” he said. “I just got it handed to me. Huge difference.”

In Columbia, Van Matre has hesitated to set up community improvement districts for his clients because he figured it would take too long to win approval. Indeed, a community improvement district on Range Line Street barely won approval from the City Council in December. Even council members who voted for it said they did so only because they thought it would be better than a TDD.

For developers, getting a TDD through the court “is a fairly cookie-cutter process,” Van Matre said.

A loss of luster

The loss of some big-box retailers such as Circuit City is making it difficult for TDDs to meet sales tax revenue projections. And the hole is much deeper than the revenue that those stores alone might have generated.

Successful commercial developments attract a variety of shops that complement each other and feed off one another’s traffic, said Don Lairmore, an early member of the Centerstate TDD. When a development loses a large retailer, the smaller shops also lose customers. This means not only less revenue for those shops but an exponential decrease in total sales tax for the TDDs.

Some districts, such as those encompassing a Walmart Supercenter, can weather the storm. (Walmart saw its sales rise in the fourth quarter of 2008.) But the outlook is grim in districts that rely on big-box retailers that sell items shoppers are trimming from their budgets.
When large infrastructure projects rely on a handful of stores rather than the whole city, the loss of one anchor store can imperil the entire project the districts were set up to fund.

But even for financing improvements around a single development, the economy’s decline is such that the transportation development districts are no longer as effective as they once were.

“In 2004, it was a fantastic tool,” said David Atkins, a local developer who set up a TDD for a development he’s planning at Providence and Blue Ridge Roads. “You had plenty of commercial users, you had a very healthy bond market. It was a very productive system; you could really deploy the system to create developments with very low risk to the community.”

Atkins is no longer sure he’ll be able to sell bonds guaranteed by sales tax revenue within his TDD. He said the plan now is to finance the road work through his development company and use the TDD to slowly reimburse himself and his partners.

Even so, Van Matre said that TDDs remain important tools and that they will become more attractive as the economy recovers.

“I can point you to – but I’m not going to – developments that have had the opportunity to use these techniques, haven’t done so, and they’re failing because their debt structure is now too great,” Van Matre said. “They’re just not going to survive.”

One of his clients, Stan Kroenke, who owns the Walmart developments, still has investment bankers willing to sell bonds to finance improvements around the shopping center at Broadway and U.S. 63. Still, investors now are more wary of any risk, especially risk tied to retail sales – and they’re demanding more for their money.

Developers who have set up TDDs with no stores built find themselves in a predicament even more grave. With national retailers slashing expansion plans and a sizable amount of unabsorbed commercial space vacant in town, new developments will face considerable challenges signing tenants and securing financing.

Forum Development Group paid more than $4 million for the new interchange at Gans Road and U.S. 63, more than half the project’s cost. It’s planning a large mixed-use development on the west side of the highway at the interchange and has a TDD on the site to recover the costs of the infrastructure improvements.

But plans for the development are on hold given the current economic conditions. Now Forum is forced to wait longer in order to recover its share of the public infrastructure through sales tax revenue on the property.

“That’s part of the difficulty that the public doesn’t understand,” Forum Vice President Jay Lindner said. “The contractor that built the bridge needs the money up front, and obviously that sales tax payback is a 25-year deal. So a developer like us needs to put the money up front at risk and then hope that there’s enough sales tax to pay it back.”

If developers lose their appetite for TDDs, the city might lose an important, albeit imperfect, instrument to fund large infrastructure projects.
“TDDs are here, and we’ve got to figure out how to live with them and how to get the most out of them,” Wade said. “But we’ve also got to figure out how to deal with their inadequacies and 
problems.”