When developers wanted to cut the cost of renovating the long-empty General American Building, they turned to the St. Louis real estate subsidy of choice: tax-increment financing.
When developers of the Cortex research district needed money for a park and a new MetroLink stop, they did the same. They used TIF.
And when Paul McKee kicks off his effort this spring to transform a large section of north St. Louis, reworking 2 square miles of streets and sewers, he also will be relying on TIF.
These big-name projects, which moved through St. Louis City Hall in 2013, thrust tax-increment financing back in the spotlight. Unlike the debate in the suburbs, where subsidies for new retail centers have sparked controversy for years, the concern in the city is more about the routine use of TIF and the impact that this build-now, pay-later subsidy is having on the tax base.
Today, there are 122 TIF-funded projects in the city of St. Louis that are either built or under development. TIF districts cover everything from an industrial park on the south riverfront to a truck stop on North Broadway. They line the central corridor, financing downtown loft rehabs and the vast Cortex research park, where sales tax revenue from the new Ikea will pay for streets and parks.
This heavy use is by design. Missouri lawmakers created TIF in 1993 to draw investment to distressed urban areas, offering developers a cut of their project’s future property, sales and income tax revenue to help pay for construction and public improvements around it.
In a city struggling with decades of population loss and weak real estate values, it’s no wonder TIF has become a popular tool, said Otis Williams, executive director of the St. Louis Development Corp.
“The city of St. Louis is the poster child for why TIF was created,” Williams said. “We’re a jurisdiction with a large low-income population and areas of significant blight. We’re focused on eliminating that blight and increasing people’s earning power.”
That means drawing investment, redevelopment and jobs.
If that means sacrificing some future tax revenue to make a project happen, so be it, Williams said. As he puts it, it’s better to get 50 percent of something than 100 percent of nothing, and he’s quick to note that TIF districts in the city have already generated $4.3 billion worth of development.
If all the projects in the city’s TIF pipeline pan out — including Paul McKee’s $8 billion NorthSide Regeneration vision — that figure could top $14 billion.
A GROWING TAB
But that’s not without cost.
That $4.3 billion in development came with $608 million worth of TIF subsidies, money the city and St. Louis Public Schools won’t see in taxes. Last year, $24.3 million in tax revenue was diverted into TIF funds, according to the city’s Budget Office. That’s up 50 percent — from $16.4 million — since 2009 and it’s likely to keep growing as existing TIF districts, which can last as long as 23 years, mature.
There’s a small but growing chorus of people who say that money might be spent in other ways, or at least not given out quite so freely in the future.
Several showed up at a public hearing in November where the Koman Group sought a $7 million TIF to renovate the Philip Johnson-designed General American Building, at 700 Market Street, to serve as a new headquarters for Laclede Group.
Those who showed up in opposition, mostly north St. Louis residents, wondered why a downtown office building merited subsidies while poor neighborhoods continue to struggle.
“We have no police protection. No businesses. Derelict houses. The whole nine yards,” said Ann Shirley Crenshaw, a north St. Louis resident. “We need that TIF money to go where it’s supposed to go, to our communities.”
Despite the criticisms, aldermen approved the General American Building TIF. But several said they’d like to see fewer TIF districts get created, especially in stronger parts of the city that have already seen lots of public investment.
“At some point, there has to be a place, especially downtown, where we say we’ve put enough tax abatement and TIF into this,” said Alderman Sharon Tyus.
But that’s a gamble that city development officials say St. Louis isn’t quite ready for yet.
Every TIF hinges on two words: “But for.” As in “but for the subsidy, this project wouldn’t happen.” It’s a requirement that any TIF project meet the “but for” test, and proposals typically come with lengthy analyses demonstrating how the economics of the development wouldn’t work without the public money.
In the General American request, for instance, developers said they couldn’t get enough in rent to finance the $46.6 million renovation, hence the $7 million TIF request.
“We have to bridge the gap between the market rate rent and what the redevelopment cost is,” said Josh Udelhof, chief investment officer at the Koman Group, at that November hearing. “This is a financing structure that allows us to deliver the building and cover our costs.”
To some degree, that’s a function of simple supply and demand. More than 17 percent of downtown office space sits empty, according to real estate brokerage Colliers, and rents have been flat for years. That makes it hard for building owners to finance improvements without public subsidy, said Bob Lewis, president of consulting firm Development Strategies.
“There’s a lot of space and not enough demand,” he said. “We’re just not generating an office market.”
But also, said Lewis, all those TIFs for all those years have set a precedent, and any building owner or developer by now has seen his neighbors get subsidies. So why not pursue them himself?
“It’s other people’s money,” Lewis said. “You might as well ask for it.”
And the city rarely says no.
‘A RUBBER STAMP’
The St. Louis TIF Commission, a nine-member citizen board that acts as the first round of public review, has recommended approval of all 40 TIFs it has seen since 2008. According to the commission’s meeting minutes, only one proposal — amendments to an existing TIF — even received any “no” votes in that time, passing 6-2.
Aldermen, too, typically give their blessing to TIF proposals with little change, though there are occasionally tweaks, such as lowering the General American Building TIF from $8.6 million to $7 million. Critics say there’s just too little scrutiny from the TIF Commission, and that even aldermen are loath to block subsidies in someone else’s ward, for fear of their own projects having trouble.
“There are fundamental flaws with the process,” said Arielle Klagsbrun of Missourians Organizing for Reform and Empowerment, which led protests against the General American building TIF. “The TIF Commission is a rubber stamp, and then you’ve got aldermanic courtesy,” she said, referring to the practice of aldermen deferring to the wishes of the alderman whose district includes a key project.
What negotiations do happen tend to be behind closed doors, where city officials hash out TIF deals with developers. Williams said each project gets a close review from SLDC and its consultants, and that some TIF requests are rebuffed or reduced, though he wouldn’t discuss specific examples. His staff won’t propose a TIF it doesn’t support, Williams said, hence the paucity of “no” votes from the TIF Commission and aldermen.
As for the “but for” clause, Jeff Rainford, chief of staff to St. Louis Mayor Francis Slay, acknowledges it’s hard to know what would happen if the city said no entirely, or where the line is for what needs subsidy.
“It’s as much an art as a science,” he said.
But both Rainford and Williams said the city is starting to pare back on tax breaks for development in its strongest neighborhoods — particularly the Central West End and Lafayette Square. Downtown, though, isn’t quite there yet, they said, and other parts of the city still have a ways to go before they can compete with suburban locations that often have lower land costs, and higher revenue potential.
“I don’t think the city of St. Louis, for the most part, is at the point where development will be done just on a market basis, without TIF,” Williams said. “We’re trying to get to the point where it is.”
Dennis Lower agrees. As the CEO of Cortex, Lower controls the city’s second-biggest TIF district — $158 million over 128 acres — and just negotiated the deal to bring Ikea to Forest Park Avenue. While the Cortex TIF will pay for a lot more than just Ikea, that Ikea would never have happened without a TIF; the retailer would just have found a chunk of undeveloped land in the suburbs instead of reviving an underused intersection in the city, and it likely would have gotten TIF there, too. The incentive lowered Ikea’s costs enough to make a city site competitive.
Lower said he hopes that his project — both the jobs it creates and the retail it brings — and all the others that are getting TIF today generate enough energy, and real estate value, that TIF won’t be needed next time around.