New Approaches to TIF

(from Maine Townsman, January 2007)
By Douglas Rooks, Freelance Writer

By common consent, TIFs – or tax increment financing districts, as they are formally known – have become a primary economic development tool for towns and cities all over Maine.

That may in part be because there are so few other tools available. Municipalities may not levy local option taxes. And aside from constitutional amendments regarding tree growth, open space, farmland, and working waterfront – which are state-imposed tax breaks – there is no permitted variation of property tax rates for business development in municipalities.

So it is that TIFs have become central to proposals to bring major new commercial or industrial development to a community, to revive downtowns, and to support novel business ventures. All these purposes, and more, are represented in recent municipal TIFs approved by the state. Taken as a whole, TIFs provided a fairly reliable chart of what municipalities can offer as tax incentives to new development projects, and support with local tax dollars.

As Jim Nimon, who oversees TIF agreements for the Department of Economic and Community Development (DECD), puts it, “There aren’t many major commercial developments that take place in Maine now that don’t include TIFs in some form.”

It wasn’t always so. TIFs were pioneered, as with so many other municipal innovations, in California in the 1950s. They were first seen as a means to finance public infrastructure improvements necessary for major development proposals which otherwise would have strained municipal budgets before any resulting tax revenue came in. After their adoption in Maine in the 1980s – Rockland and Saco approved the first TIFs here in 1985 – they were used for this purpose. They were also used, from the earliest days, as a means to revive moribund and often problem-ridden downtown sites – the residue from Maine’s once thriving mill town past of the 19th and early 20th centuries.

In most states, TIFs are tool for regional development projects, but not here. TIFs can only be used by municipalities, which lends additional variety to their use, though in practice most TIFs are issued by larger communities that tend to attract larger and more complex development projects.

In 2006 alone, TIFs have been used for a planer mill in Moose River, for the Airport Industrial Park in Houlton, a U.S. Functional Foods commercial greenhouse in Madison, and Idexx Laboratories in Westbrook, a biological testing firm that is now a major regional employer. Those industrial uses are familiar, but TIFs were also registered last year for downtown redevelopment in Cumberland, Winthrop, Sanford and Augusta, while “problem” buildings such as the gigantic Saco Island complex received one of the largest TIFs ever created in Maine, a $35 million package. Downtown TIFs were approved in 2004-05 in Richmond, Waterville, Skowhegan, and Lincoln.

Since 1985, the state has approved 261 TIF districts, with many of them coming in the last decade, after the Legislature changed the statute to make them more attractive to municipalities. Initially, towns and cities usually had to float a bond to create a TIF package attractive to developers, a feature that saddled municipalities with significant risk if the new business failed. In some instances, properties built with local tax support remained vacant for several years before new tenants could be found, even though the municipality was paying interest on the bond.

In 1994, the Legislature found a way to remove most of the financial risk from the municipality. The use of “credit enhancement” TIFs become popular, and fueled an increasing number of TIF agreements. Under the new system, the municipality prospectively forgives the full or partial payment of property taxes on the new development for a designated period, which can be up to 30 years, though 20 years is more common. The concession helps the developer gain financing from a bank or other lender for a potentially risky venture.

Only 26 TIFs were created during the first nine years of the program, while 31 were added during the first two years credit enhancement TIFs were available. Since then the pace has been reasonably brisk — 102 TIFs from 1995-99, and another 87 from 2000-2004, the latter a relatively slack time for the state economy. In 2005, another 17 TIFs were created, while 2006 shaped up as a banner year for TIFs – 26 were registered through the end of September at DECD.

The state does not actually pass judgment on the wisdom or utility of a TIF. Instead, it simply ensures that the proper procedures were followed – a majority vote by the responsible body (usually the selectmen or council) following a public hearing with proper notice.

Opinions about the virtues of TIFs naturally vary. Some see them as unneeded tax concessions to development that “would have happened anyway.” Others deplore the possibility of one town poaching on a neighbor’s territory by offering a “great deal” to a desirable employer to woo them away. And still others wonder about the wisdom of another aspect of TIFs – they shelter the value of new investment from the state’s revenue sharing and school subsidy formulas, keeping state dollars flowing even when a municipality’s valuation has substantially increased.

Yet even municipal critics tend to vote for TIFs when their own community’s well being is at stake. One city official said that, “I’m not sure our neighbors should help support our business development, but if we’re going to grow, TIFs are one of the few means we have to attract new development.”

On the other side of the coin, officials in service center communities say they must provide for the needs of thousands of commuters and visitors daily, even though the service center gets no direct revenue from those visitors to balance its budget.

Some clear trends are evident over the 20-odd years TIFs have been available. Industrial projects are still prominent on the list, but there are many more downtown rehabilitation TIFs, including efforts to recapture some of the taxes paid by “big box” stores on the fringes of a community.

That technique is aptly demonstrated in Sanford, where tax revenue from a big box complex including a Lowe’s and a Wal-Mart Supercenter is being sequestered to promote downtown redevelopment.

Town Manager Mark Green said, “Big boxes are often seen as the scourge of downtown, so we decided that we should funnel some of the revenue directly to the downtown.” Although the big box development, about three miles away from downtown along Route 109 in South Sanford, is still receiving its final permits, Sanford already calculates the TIF will yield $200,000 a year for 30 years; the TIF’s design is the work of Les Stevens, director of economic affairs. The TIF will capture about 75 percent of the new tax revenue, while retaining 25 percent for the general fund.

At least half of the annual funding will go to downtown improvement projects, while another portion will help fund staffing and other economic development efforts. TIFs can also be seen as encouraging the hiring of municipal economic development staff; these offices frequently design and oversee TIFs and, as in the case of Sanford, derive some of their funding from the TIF.

Sanford, Mark Green said, is coming to the same point as many other Maine communities — seeing the passing of the mill era and the beginning of, well, something new. Many of Sanford’s enormous mill buildings are still occupied, but for relatively low-value enterprises such as warehouses and small-scale assembly plants. The just completed Blue Ribbon Plan for downtown, Green said, chronicles a town center “that in its day was just gorgeous,” complete with several public spaces financed by the Goodall family, which built many of the mills beginning just after the Civil War.

Sanford has at least two million square feet of space potentially available for redevelopment, and the new plan sets realistic goals, “to bring the downtown back, and provide the amenities that have given other places a new lease on life,” Green said.

Augusta has used a modest version of this TIF idea before, when the original Marketplace at Augusta across from the Civic Center was built in the early 1990s. Various downtown improvements, including new sidewalks, lighting and utilities, were financed from this TIF.

Roger Katz, just inaugurated as the capital’s mayor, thinks the city council should consider a similar TIF from revenues produced by Augusta Crossing, another major shopping plaza now under construction off Western Avenue. Downtown faces unique redevelopment challenges, including parking, accessibility, and building code issues, that make such municipal investment important, he said.

Katz is more enthusiastic, however, about a dramatic credit enhancement TIF recently voted unanimously by the city council to help redevelop the old Kennebec Arsenal, a state property deeded to the city in the hopes it would be reused. A North Carolina developer, also aided by a special state historic building tax credit, plans to locate housing and offices on a highly visible riverfront site that could include a marina or at least boat slips on the Kennebec, employing a TIF valued at $4.3 million. Even though the redevelopment is so expensive that the city is forgiving the lion’s share of tax revenue over 20 years, Katz argues that it’s still a good deal for the city: “The building has sat there empty for almost 30 years. If it goes back on the tax rolls, it will be a long-term asset rather than a liability.”

This logic also seemed compelling to the Saco City Council, which, with the strong urging of Mayor Mark Johnston, granted Saco Island LLC, a subsidiary of Harper’s Development of Augusta, a $35 million TIF. It’s part of a planned $100 million investment in nearly two million square feet of mill space. The Saco Island mills are truly primitive — some were never wired for electricity, and several now stand open to the elements, with minimal roofing and no windows.

Johnston sees the new plan as “the last chance we’ll ever have” to save the historic mills, dating to the early 19th century, and make them the center of the community again. In the process, the city could gain such amenities as a new train station to replace the platform stop for the Downeaster, improved parking and a link between Saco’s thriving downtown and the Biddeford business district just a stone’s throw from the Saco Island mills.

Ironically, Saco Island was also the focus of the very first TIF back in 1985, granted to developer Gavin Ruotolo, who redeveloped about 20 percent of the mills in the late 1980s before running out of money and filing for bankruptcy. “There’s the chance the development won’t work,” Johnston said. “But the risk is all on the developer, and if it doesn’t happen the city hasn’t really lost anything.”

Small downtowns can also employ TIFs to good advantage, according to Douglas Guy, assessor for Machias. He helped arrange a TIF for Machias Savings Bank, which was seeking to expand downtown but needed financial help to make the numbers work.

The bank planned to tear down one derelict building adjacent to its existing offices and renovate another while providing more parking. In all, the TIFed construction amounted to a $2.5 million investment. To make the numbers work – the bank financed the project itself – the bank is forgiven 100 percent of taxes the first year, with a declining portion until the full payment is restored after 15 years, even though it is technically a 20-year TIF.

The arrangement allows the bank to offset its interest charges in the early years of the deal, when it is financing the largest debt, and rationalize the additional expenses involved in doing downtown redevelopment, Guy said.

Selectmen favored the TIF, Guy said, because it provided a major boost to downtown by a business that is one of its mainstays. “They wanted to make sure expansion happened here, in the bank’s hometown, and not in Whitneyville or one of the other communities where it might be cheaper to build,” he said. The town also liked the physical enhancements to downtown promised by the Machias Savings Bank. Even though it was completed just last year, there has already been a flurry of new projects proposed and realized, including a new Rite Aid pharmacy and several small business expanding or moving in, he said.

Winthrop is another town that has employed TIFs as a means to revive its downtown. First, in 2001, was a post-Civil War building, once an elegant lodge hall, that had fallen on hard times and was nearly derelict. After taking it for taxes, the town sold the building to Harper’s Development, then based in Winthrop, for $1, provided additional space for parking, and saw the building fully redeveloped within two years. Now, across the street at the much larger Carleton Mill building, the town has approved another TIF for a developer, this one for just 20,000 square feet of redeveloped space in a complex at least 10 times that large.

“The developer had a tenant that was ready to go,” said Town Manager Cornell Knight. “The TIF made it work, since it’s so costly to reopen a building before it can be fully occupied.” MaineGeneral, which operates hospitals in Augusta and Waterville, now has 80 workers in the old mill, which amounts to a significant increase in the daily downtown population, Knight said.

Some TIFs have more unusual origins. A TIF was the last thing Mars Hill Town Manager Ray Mersereau had in mind when he received a request for an unusual tax payment schedule from Evergreen Wind Power, which is developing Maine’s first utility-grade wind farm on the hill which gives the town its name. Originally planned as a 50 megawatt project using 33 turbines, the complex is being built with 28 turbines producing 42 megawatts, Mersereau said. It began producing power in early January, and should be fully on-line by spring.

What the developer wanted, at the request of potential financiers, was a level tax payment throughout the expected commercial life of the project, 20 years. “For new and potentially risky ventures like this one, it helps to have predictable costs where that can be arranged,” Mersereau said.

When Mars Hill explored the idea, however, it quickly found that changing from a valuation-driven tax bill to something negotiated is not possible under Maine tax law and the state’s constitutional “just value” provisions. The only way, officials in Augusta advised, was to draw up a TIF.

“We had three or four TIFs already, and weren’t looking for more, but this was the only way the deal would work for the developer,” Mersereau said. He researched the value of wind turbines, including some built by the same developer in California and other western states, and found that a tax payment of $10,000 per megawatt was reasonable.

“We offered a level payment of $500,000 a year for 20 years, and they accepted,” he said. Initially, the market value of the wind farm was anticipated to yield a property tax payment between $900,000 and $1 million, but the tax bill would also have dropped over time as the property depreciated. “Having the consistent revenue, year after year, seemed like a good deal for the town, too, and the council decided to go along,” he said.

Mersereau regularly fields inquiries from town officials and others who have wind power proposals in their area, and he expects them to take a close look at how Mars Hill handled the tax issue.

He notes that the town is getting the full value it anticipated for 50 megawatts, even though the project, as built, will produce 42 megawatts. Recent financing documents indicate that the developers are investing $70 million in the project, up from an earlier estimate of $58 million. “Construction costs have gone up 20 percent,” Mersereau said. “Of course, electricity revenues are going up too.”

The rationales and uses for TIFs will undoubtedly continue to evolve as municipalities handle different requests from developers, and as they attempt to shape economic development within their boundaries. But the TIF program itself seems so well established that it is hard to see it being replaced or substantially altered any time in the near future.

Augusta Mayor Roger Katz sums it up by saying, “Any service center community would be missing out if it didn’t at least consider how to make TIFs work for its benefit.”