June 28, 2014

The Good, the Bad and the Ugly of Betting on Retail Development

By Jay Mejia

As they consider using Tax-increment Funding (TIF) for a proposed retail development, Lee’s Summit city leaders need look no further than surrounding communities to see how others fared using TIFs.

The City of Lee’s Summit is currently reviewing and negotiating a requested $18.5 million TIF put forward to develop the $72.8 million Summit Place shopping center project.

In the meantime, three nearby cities, Olathe, KS and Independence and Kansas City on the Missouri side of the metropolitan region have seen their share of the good, the bad and the ugly when it comes to TIFs.

For these three cities, the good has come in their ability to leverage new development assets to spur further economic growth. The bad came when the Great Recession hit local economies hard starting in 2007 and delayed expected tax revenue income, which is continuing to drag out. The ugly arrived when these cities had to dip into reserves to service debts for bonds they issued to fund various projects.

Eager to bring in high-profile retailers such as Bass Pro Shops, Olathe officials aggressively backed a plan to create a big retail development called “Olathe Gateway” at 119th St. and Renner Road. Olathe officials created a TIF district in 2003-2004 to help develop the 650,000-square-foot, $268 million retail center predicated on future income revenue.

The city issued $13,030,000 in bonds in December of 2006. When the economy tanked, reserve funds started to dry up and years of lower-than expected revenue drove the project into default in 2011.

Olathe was not on the hook, however, as it never guaranteed the bonds.

“The City of Olathe did not back the TIF bonds with its full faith and credit,” said Tim Danneberg, Olathe city spokesman. “We do not put tax dollars at risk. The risk is born by those who buy the bonds, mainly large institutional investors.”

Had the city started the project three or four years earlier, things would have been much different, Danneberg said.

“The world changed when the recession hit and we are still feeling the effects of the setback,” he said. “The development will be a success as the market comes back, it’s just developing at a slower pace than we expected.”

While Olathe Gateway is working its way back to pay off the bonds, Olathe officials continue to use TIFs to push new retail development, including a Walmart Supercenter now located at 395 N K 7 Highway where a former cement plant was removed and a giant gulch filled in.

“We did the ‘But-For” test,” Danneberg said. “Without the TIF, the land likely would not have developed in a productive way, and the cement plant would still be on a high traffic corner in our community.”

The Independence, MO TIF experience turned ugly in February 2011 when the $170 million Falls at Crackerneck Creek project failed to meet sales tax revenue. The City Council authorized a $3.5 million allocation to cover the shortfall in the bond payment drawing from the city’s general fund, resources that could have been directed to the city’s police and fire departments.

“The bonds were not guaranteed by the City of Independence through taxing authority as with General Obligation bonds,” City of Independence City Manager Robert Heacock told the Lee’s Summit Tribune. “They were subject to appropriation. However, the Council believed it to be absolutely necessary to appropriate funds to bridge any shortfalls to ensure the City’s strong financial credit rating.”

The TIF project was approved in 2004 and, like the Olathe Gateway project, the Falls at Crackerneck Creek plan was to lure a Bass Pro Shop as the anchor for development. The 180,000 square-foot Bass Pro Outdoor World opened in 2008 and was to be complemented by additional 50 retail tenants or restaurants and a hotel.

City officials, like those in Olathe, were excited about their planned development. They exercised due diligence through “methodical evaluation of this project including using outside consultants on the feasibility and financial going concern of the project,” Heacock said.

The State of Missouri also partnered in the project and committed future State revenues, he added.

“The project was presented to the Independence TIF Commission and received their approval to proceed,” Heacock said. “At that time, the economy was growing at a steady pace and all indicators showed this steady growth would continue through at least the end of the decade.”

Instead, the Financial Crisis of 2007-2008 gripped economies around the world. Stock markets crashed, many large financial institutions nearly collapsed, and massive bail-outs ensued. The U.S. housing bubble burst, resulting in evictions, foreclosures and severe, prolonged unemployment.

For retailers like Bass Pro, not many people were buying their Tracker aluminum fishing boats, freshwater trolling motors, spinning rods, fly tying hooks or anything else for that matter.

As revenues plunged across the board for nearly all retailers, so did sales tax revenue for municipalities like Independence, roiling debt service for TIFs.

The city is still paying a portion of the debt for the Falls at Crackerneck TIF. But Independence has since refinanced so that payments are much less than before. This year the city expects to pay about $400,000 and the TIF is expected to be paid in 2029.

“The TIF project does not take away from the existing tax base and will continue to flow to the tax jurisdictions,” Heacock said.

“The economy will recover,” said Independence City Finance Director Brian Watson. “It might take a decade and I don’t know if it will ever be like the early 2000s.”

In the meantime, Watson and Heacock both pointed out that TIFs in Independence have had success. A highway TIF on US 40 Highway and Independence Road paid off ten years ahead of schedule. The Centerpoint Medical Center TIF has added to the city’s economic growth while providing health care that benefits residents.

Finally, the Independence City Council in June passed an ordinance to a sales tax reimbursement for a 58,000-square foot “Main Event” entertainment center for the Falls at Crackerneck Creek. It is expected to raise nearly $8.9 million in tax increment financing revenues over the next 20 years to repay the bonds for the Falls at Crackerneck development.

Kansas City, MO officials used a combination of a TIF, super-TIF, state money and a 1% transportation development district sales tax to redevelop blighted neighborhoods in the downtown area to create the Power and Light District. The city backed $295 million in bonds for the half-million-square feet, nine block-neighborhood of restaurants, bars, shops and entertainment venues linked to the Convention Center and the Sprint Arena.

The city had been paying more than $10 million a year to support debt service using general funds. Like Independence, Kansas City refinanced portions of the debt and this year will be paying a lower amount and achieve savings of about $6 million. The debt is expected to be paid off in the year 2040.

“We refinanced the TIF bonds so we could fully fund our pension program,” said Chris Hernandez, Communications Director for the City of Kansas City. “Several credit agencies said that has put us in better standing.”

“Power and Light gets lots of attention and lots of crowds during concerts and sports events,” Hernandez said. “It has been instrumental in leveraging other projects like H&R Block building their headquarters downtown, the creation of the Sprint Center and the renovation of the President Hotel, that but, for TIF, would not have taken place. Yes, we still pay a lot, but the result has been the renaissance of downtown Kansas City.”

In the meantime, although they have not always been well advertised, at least according to some observers, the Lee’s Summit TIF Commission meetings are open to the public.

The TIF Commission will meet next at 6 p.m. on July 1 in the City Council Chambers at City Hall, 220 SE Green St.

The commission will consider an amendment to the I-470 Business and Technology TIF plan.