The History of Tax-Increment-Financing in the Queen City (Oh my!)

Tom Stapleton (Senior VP from Eagle Realty) and I exchanged a few emails recently and I happened to mention that I thought Great American Tower was the first use of TIF project bonds in Cincinnati and “there is no other way for citizens to critically examine this financing structure without citing specifics about Great American Tower.”

Tom responded, “What do you mean by the statement “this was the first use of TIF project bonds”?  Project-specific TIF financing has been around for a long time, so I don’t understand your comment.”

He was kind enough to follow up with a link to the Ohio Development Services website that lists all the active Tax Increment Financing Districts and Projects in the state.  Tax Increment Financing is a type of financing structure that uses tax payments (that would have been used for basic services like police and trash collection) to pay down debt associated with a specific building project instead.

Of course, Tom’s right.  He’s the pro.  TIFs have been used for quite some time, 32 currently active within city limits.  19 of those are Districts that benefit a wide variety of businesses.  The other 13 were established for specific projects, usually pretty big ones.

Our oldest TIF was for Fountain Square South parking garage in 1980.

In 1984, we used the TIF tool to build Hyatt/Saks.  Partners that owned the Hyatt filed for bankruptcy protection in 1994 and a foreclosure action was sought on the property in 2008. The hotel was sold in 2009 at sheriff’s auction after years of financial woes.  The TIF, however, remains outstanding and benefits the current owner of the property.

10 years later in 1994 we used another project TIF to finance the  square and parking garage at Fountain Square West.

A TIF was used again in 2001 for the Center of Cincinnati Milicron project in Oakley, a Neyer development.

In 2004 we established a project-based TIF for the first phase of Tom’s project: Queen City Square, now owned by the Port Authority with Western & Southern named in the Master Lease Agreement.  The second phase was established in 2008.  Total financing amounts to over $323 million.  Redirection of property tax payments to pay down the debt of both buildings and their garages will continue until all the bonds have been paid off, probably around 2038. (Cincinnati Public Schools still receive 25% of the payment and another part of the payment goes to finance other development.)

The Baldwin Building just purchased by Neyer was originally granted a TIF project in 2007.  They will most likely continue to benefit from the arrangement as they reconfigure the property into apartments.

Neyer was awarded a project TIF to develop the Keystone Park Project, a $100,000,000 office campus in Evanston in 2008.

The dunnhumby garage received the benefits of TIF financing in 2013.  3CDC holds the master lease on the $70,000,000 garage.  (The headquarters portion of the building will receive a 15-year Community Renewal Act abatement.)

5 new TIF projects have also been recorded as of 03/02/2015:  3D Color Project Development, Centennial TIF, Emery Pineapple Project Development Public Improvement,  P&G June Street access, and Rumpke Project, Public Improvement.  No details have been provided for any of these new Tax Increment Financing deals.

So – Tom –  thank-you for correcting me.  Tax Increment Financing has been used for projects in Cincinnati since 1980.  But it’s been a fairly rare occurrence, Queen City Square/Great American Tower was the largest private financing to date three times over, and we have used this 30-year arrangement for only a handful of companies.  I stand by my statement that your financing structure is one-of-a-kind – no other building is owned by the Port Authority with the developer holding a master lease – and it is important for citizens to study this particular example and understand it.

It’s especially important right now, as the use of this highly advantageous, 30-year tax subsidy is apparently gathering steam in the city of Cincinnati – all this while we project at least another five years of budget deficits.  Let’s hope our elected officials don’t get so greedy for growth that they forget what can go wrong and cripple the next generation of hard-working middle-class taxpayers who will have to cover the costs of their great expectations.

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12 thoughts on “The History of Tax-Increment-Financing in the Queen City (Oh my!)

  1. JCS

    There are multiple companies with the ”
    Neyer” name that are involved in real estate and development: Al. Neyer inc., Neyer Properties, Neyer management, etc. Some of the principals of those companies represent branches of the same family tree, but they are very much separate companies. Neyer Properties is the developer of Keystone in Evanston and owner of the Baldwin Building. Al. Neyer inc was involved in the center of Cincinnati project led by Vandercar.

    Reply
    1. executivedreamer Post author

      You should love my post tomorrow, JCS. It’s all about the multiple companies that use the Neyer names and others – but – according to the State of Ohio – are very much part of the same development enterprise. Please teach us about how these development partnerships work. We’ve got a lot of them going on on big projects, don’t we?

      Reply
  2. Thurman Wenzl

    We need more clarity on just what IS a TIF; ‘..type of financing structure..’ is confusing; and we need clarity on why it’s bad – ..takes property tax revenues away from city services, like education?

    Reply
    1. executivedreamer Post author

      Thanks for asking, Thurman. – Here’s my best attempt at a layman’s explanation of a Tax Increment Financing Project: A homeowner receives a bill for property taxes twice a year and writes a check to Dusty Rhodes. Dusty distributes that money to the city, the county, the public library, mental health services, indigent health care, parks – all the stuff we’ve voted on as a community that we want to support. When the owner of a property financed by Tax Increment Financing writes their check – they don’t write it to Dusty Rhodes. It goes directly to the city and the city uses that money to pay down the “mortgage” on the property. (25% of the payment does still go to the schools vs. the 65% of our property taxes that they normally get – not the full amount – but better than what they were getting before the development.) Middle-class homeowners who are paying their property taxes have to make-up the difference on basic services. In essence, taxpayers are paying for the building – and in the cases that bother me the most, they are paying for the building for private corporations. This is supposed to be an investment that will result in more jobs and income tax revenue. But as you can see with the Saks deal – these are risky propositions. When citizens pick up a corporation’s portion of basic services for over 30 years – wow, that’s a big bet on a future nobody – not the smartest politician – can possibly know. To date we have not benefited from these deals in terms of population growth or income tax revenue increases, not that I can see. (I’ve just put in a public records request for the past 30 years of income tax revenues in Cincinnati.)

      Reply
  3. Craig Hochscheid

    Excellent work Kathy, as always. Keep digging for answers, hod knows that our corporate lapdog local newspaper of record won’t ask these questions for fear of offending the powers that be at Neyer, Western-Southern, Eagle etc.

    Reply
  4. Steve Frank

    Tax increment financing, TIF for short has been used for years. The premise is that the project being financed would not make economic sense to produce unless it was subsidized by government. Government subsidies could come in various flavors. Money could be directly given from existing taxes to a developer to reduce his out of pocket expenses. That’s been going on a very long time. TIF has been around about 25 years. In a TIF, property, sales, and /or payroll taxes that the project would generate but do not presently exist and would never exist if the project never happens are used to reduce the cost of the project. Now it can be argued that the project would have gone forward without subsidies; but that is hardly an easy question to figure out because if Cincinnati didn’t offer deals like TIF, other jurisdictions do and projects will gravitate to those places that will subsidize. Hopefully the project financed with TIF generates enough additional business activity or jobs that more than make up the for gone taxes. Last point. In the immortal words of Muddy Waters;”You can’t lose what you ain’t never had”. If the projects are not built, it’s not like you would have received more taxes.

    Reply
  5. Matt Jacob

    Personally I tend to look at TIF funds and other subsidies like TI (tenant improvements) for city/public assets. The city is ultimately the landlord of the public land and they are renting it out to a tenant, the land owner, who makes rent payments that we call real estate taxes, and then further subleases it for profit and upkeep to companies etc.

    Now there are many different ways to structure TI in lease deals (and give out sudsidies) based on preferences and financial ability of each party involved, but in the end these funds are invested directly in the asset itself one way or the other.

    TI is valuable in lease deals for many reasons with ROI being only one of many. Another prominent one that comes to mind is to keep the asset competitive in the marketplace. Time erodes value and without adequate TI to keep an asset fresh it degrades from class-A to class-B naturally.

    Similarly it could be argued that without a public subsidy at QCS (TI for this particular public land) that Cincinnati wouldn’t have ANY class-A office buildings (when viewed on a global scale) and that the very quality of our city would risk slipping from a class-B city further toward class-C.

    (And don’t get me started about all the other ways the Cincinnati public needs to wake up and invest in itself to remain competitive. The streetcar and QCS are small drops in the bucket)

    That being said, Kathy, I enjoy and learn from this blog even if it’s ruffling a few feathers. I can’t say that I enjoy its slant towards demonizing subsidies, so hopefully you can also cover the positive side of them as well.

    Specifically I’d be curious if there’s a coming boon once these first TIF abatements from the 80s expire. Maybe there’s just a lag time of 30 years before the public sees the big benefits. I suspect they do and that other bigger cities that use them more often might even start to see a sort of snowball-effect/virtuous cycle as they then have even more TI money to reivest in further maintaining the quality of their public assets. The big fish didn’t get big taking small bits after all.

    Reply
    1. executivedreamer Post author

      I repeat the same comment I made to Peter above: I LOVE this conversation: smart, thinking people that know enough to poke at my logic and make me work harder.

      Maybe I’m confused on this Class A stuff. Without QCS we wouldn’t have any? What about the office towers on Third and Fifth, all of which were subsidized? Our vacancy rate is currently at a little over 19% versus a national average of 12% – and that’s an improvement. It was over 21%. But we’ve got QCS. It’s there. I have even come to like the tower on our skyline and I’m pleased with the re-imagining of so many of our old office buildings like the 580 (high-end apartments) and the Enquirer Building (now Hampton and Homewood Suites) and the Bartlett (now Renaissance Hotel).

      But that’s enough, don’t you think? Although it’s no skin off my nose if we build them by the dozens. Because I am 59 1/2 years old and with any luck I will be dead by the time this shit hits the fan. It’s your generation that is going to have to fix it. I don’t foresee any big problems for another 15 years – around 2030. By that time self-driving cars will be considered normal. We will have continued the trend to walkable neighborhoods. And the initial Great American 15-year lease will have run out on 70% of the square footage in the Tower. Do you want to work in an office tower, Matt? When Eric Avner (who does wear a bow tie – but let’s face it, he’s no spring chicken) is apologizing for the location of his office in a nondescript office building, you know tastes have changed. And you millenial people better start thinking now about a creative reuse of those big things. (Giant open floor plans look tough to me – but I’m no architect.)

      I have to start writing more about the incentive programs I like. Because if you say it seems like I’m demonizing incentives – then I must be. And I don’t really feel that way. I’ve just never seen a TIF project where I thought the numbers worked for the city. I happen to be a big fan of CRA 10 year residential abatement – although I think we could start to shift those down to 5-7 years in the city center at this point.

      Mostly I just want my city to negotiate harder for us. To me, it looks like developers have been given whatever they ask for – always a little bit more than the last time – and I want somebody on the other side pushing back. I want us as a community to have higher expectations for ourselves. Because part of believing in ourselves is believing that there is a value in this place where we live and we deserve actual measureable outcomes in terms of population growth, income tax revenue or property value increases. At some point, shouldn’t we get more coming in than we give away?

      I just hope I live to see it.

      Reply
      1. Matt Jacob

        Thank you for providing a forum to talk about this and starting the discussion.

        QCS is indeed the only A building worth looking at in Cincinnati for global investors with a taste for trophy assets, and even then barely worth it given Cincinnati’s lower-tier status. Head and heels above anything else in our market. It’s the best thing that could have happened for our city’s office market (not to mention image) because it has pulled up the top-tier of our market closer to that of other cities and forced all these other aging buildings (of which we have many) to reinvest or convert/get out of the office supply. Sure there’s pain from other owners as a result, but would we have all the great conversions happening now without it? Certainly not at the 580 building.

        I still haven’t seen much proof to support the idea that these can lead to a long-term problems. Hopefully what you dig up can inform us all on whether it’s just crying that the sky will fall or whether we need to really start digging bomb shelters for when it happens.

        I didn’t mean to be so critical on your blog’s tone, because it does go both ways. Just it seems in general that many are predisposed to hate on these subsidies because of lack of knowledge about how they work and their positive sides, which are less intuitive to many.

        I couldn’t agree more on the need to negotiate harder from the city’s side on the deals, but there is actually a point that the numbers don’t work for these projects to still happen. You’ll always run into the trade off between nothing happening and giving too much. But I’d rather see them push for the quality of the development to increase rather than just saving on the subsidy amount. If a developer isn’t willing to do a truly high-quality project, then why should the public subsidize crap? To me that’s the way that our subsidy money needs to be redirected rather than turning off the spigot in order to be penny wise, pound foolish.

      2. executivedreamer Post author

        Who are you Matt Jacob? Do you know my friend, Zachary Schunn? Are you in the real estate biz? You sound way too knowledgeable to be a regular guy off the street. You’ve given this stuff a lot of thought.

  6. Peter

    Kathy:
    Thanks for continuing to pursue this.

    You say “…Total financing amounts to over $323 million.” Does that mean that the TIF district is paying, through diverted property taxes, for the total building costs of $323M?

    I’m not that familiar with Ohio TIF. Originally, TIF was intended to be finance projects that–“but for the public participation”–would not be built. The tax increment funds were meant to pay for public improvements (e.g., sewer, water, street, public garages, streetcars, etc.), not private improvements, and that justified the use of the (diverted) property taxes. When the district is created, the taxes are frozen at the current level (i.e., city, county and schools get what they have been getting unless they negotiate increases. The tax increment (the increase), caused by the increase in property valuation that results from the new development, goes to pay off the debt on the public improvements. I don’t know if the new earnings tax is part of the deal or not.

    Somewhere in city hall, an analyst should be performing the cost-benefit analysis to determine that the city comes out ahead. But, based upon the recent Enquirer story, the city doesn’t seem to track the performance of many of their development deals.

    Reply
    1. executivedreamer Post author

      Ohh, Peter – this is the conversation I always dreamed about when I started this blog. Hard, complicated issues with really smart fellow-citizens. I knew there would be no easy answers – but I wanted to talk about pros and cons, see what other people thought.

      What you have described above is a Tax Increment Financing District – which (so far) I’m not complaining about. What bothers me are the Tax Increment Financing Projects. These are single buildings that are pulled outside a District and become a world unto themselves. And they benefit a single for-profit company. In essence we seem to be building buildings for corporations. “That money you would have been putting into the pot to help pay for running the city – you keep it. Build an asset that you can sell and benefit from. We just want you to be happy.”

      As far as I can tell there is no analyst at City Hall doing any of this work. Yesterday I put in a public records request for the past 30 years of income tax revenue as a way to measure if any of this development is having any impact. Somebody will probably have to pull that info year by year. I’m going to put it in an easy to read chart form. That’s pretty basic stuff these days. Maybe the city should get a Quick Books account.

      Reply

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