Monday, May 16, 2016

Don't It Make Your Brownfield Green?

The site of the old GM plant is known as a brownfield mostly because it is the site of the old GM plant. Now in a land nearby but a time long ago developers would have lined up to redevelop this site with their only contact with local government being around zoning -- consider upcoming development projects at Perimeter Center. And why did they do this? To make money and in particular to make profits. Fast forward and now any development larger than Al's Park is going to require that government Politicians pony up some public money -- think: Atlantic Station, Cobb's Brave's Stadium, Atlanta's Falcon's Stadium or the more disappointing Beltline project.

There are some tools, both raised in discussions around the GM plant available for Politicians to tap OPM on behalf of developers : Development Authorities, Tax Allocation Districts and Tax Abatement. Since there has been so much confusion around these tools let's take a closer look, shall we?

Development Authorities

Nothing is simple in Georgia, at least nothing involving politicians and power, and Development Authorities are no exception. The Atlanta Law Firm of Seyfarth Shaw have a very informative report De-Constructing Development Authorities : Learn Their Rules From How They Function focussing specifically on the types and behaviors of these quasi-governmental organizations here in Georgia. A key thing to keep in mind whilst perusing that document is that the Georgia Department of Community Affairs show the Downtown Development Authority of the City of Doraville as a single jurisdictional statutory Development Authority. Directors of these corporations are appointed by local politicians and you can rightly assume that Directors are not selected by an arms-length procedure but are a priori known to the politician. While these are unpaid positions Directors wield power and it is very common for power to be converted to money. It's magic, but it always seems to happen. It is thru the Development Authority that major Developers tap into public money for their profit.

Tax Allocation Districts

First and foremost TADs are interesting because no other place on the planet calls this technique a TAD, instead others use the more descriptive "Tax Increment Financing" or TIF. TIF is more descriptive because TAD or TIF, financing, AKA debt, is involved. Digging deeper let's move away from some of the confusing talk and look to an authoritative source: TAD Allocation Districts: How They Work from the Andrew Young School of Policy Studies. 

A depiction of how TAD/TIF's work with regards to underlying asset (property) values is this diagram from the above document.

The key takeaway is that for the period of the TAD/TIF taxing agencies (e.g., City, County and Schools) forgo all the potential tax in the yellow triangle in hopes of getting a pot of gold after a few decades.

There are lots of assumptions embodied in the diagram. Straight line asset appreciation. Really? Again, the "F" in TIF is "Financing" and these projects tend to be front-loaded in expense and asset value. It is more likely to follow an inverse exponential curve with the public foregoing significantly more than this simplistic depiction.

Has there ever been a development in it's golden years doesn't need to be torn down and redeveloped? What is life expectancy of the proposed development, how does that compare to the TAD period, what happens in the latter years of TAD and years thereafter? IRS depreciation schedule allows depreciation of commercial property over 39 years and residential property over 27.5 years. Depending on the length of the TAD the pot of gold may be skinnier than shown above.

Tax Abatements

Technically a Development Authority has no abatement powers which is why "abatement" almost always appears in quotes, but thru a very complex set of business arrangements they can reach a situation whereby the Developer gets a tax break, is awarded a grant and effectively leases the development over a period of years after which the title is transferred to the Developer. You'll find all the skinny in Understanding Property Tax "Abatement" courtesy of the Carl Vinson Institue and Seyfarth Shaw. 

This scheme relies on removing the property from the tax rolls by transferring title to the quasi-governmental Development Authority concurrent with a lease/purchase agreement with the developer and the issuance of a bond. 

The net net on this tool is that it is not as lucrative as a TAD and the property lease itself may be taxable, so "abatement" is negatively impacted. No one looking to profit from this endeavour favour this approach.

Current Kerfuffle

There is a developer who wants to get richer making money off the old GM Plant site and there are lots of Politicians who want to help make that happen. The Politicians' tool of choice is a TAD as it maximizes the amount of money Politicians get to funnel thru their Development Agencies to the Developers. Remember, money equals power and control of money is indistinguishable from having money. That is not to say that the artist's renderings of the redeveloped property are not beautiful. They are. They just do not surface any of the assumptions or risks. 

If you look at what is at risk in the context of a TAD you'll simply need look at your property tax bill. You'll note that your payments to the City, the County and the School System increase in that order with Schools dwarfing the others. If you look at this from that perspective you see a similar graph. 

If you take the position, as the Superintendent of DeKalb County Schools seems to, that the cost of service will increase over the period of the TAD possibly exacerbated by the addition of residents and students due to the TAD then you might not see this as a good idea. TAD proponents, many of whom benefit from the Power of OPM the TAD offers, point out that if the TAD fails a Tax Abatement will be used in which case the School's tax on that property will drop to zero for the abatement period. And, the pot of gold at the end of the journey will be smaller with abatement than with TAD. 

Perhaps. Perhaps not. 

While the Schools tax bill is quite high for the payer relative to City/County the question is what is the impact on the City given that this current revenue stream is a larger percentage of their overall revenue? 

A little perspective. 

A number of over $900,000 has been bandied about as the School's annual take from this property. Sounds like a lot of money. It IS a lot of money. But in the context of the 2016 proposed DCSD budget this amount represents less than one fourth of one percent of the revenue from local sources and less than one eighth of one percent of total revenue. Or look at it this way: it is the budgeted amount for the Superintendent. Or consider that if the budgeted amount for the School Board were reduced by a little over fifteen percent it would cover the lost revenue. Not much when compared to the tax base of the entire county, but what about GM plant city tax when compared to total for the li'l burgh of Doraville? Loss of that revenue might make a bigger dent and it may be that Developers and their Minions are playing a game of chicken with the Superintendent. Or will we see a noseless spited face?

What Can It All Mean?

The property in question is indeed a brownfield. But is is also fronting a major interstate with easy access to another, is surrounded by arterials, is adjacent to a MARTA rail station and located on the north side of the economic powerhouse of the southeast. It is hardly what one would call "blighted." It will be developed and the only question is when and who gets to put their fingers in what pie and pull out how many plums. And it can be done without decades-long tax-sucking schemes.

And were not all of today's blighted brownfields once a shining example of what could and should be? The pride of the community? It is probably true there will be higher asset values after completion of the TAD or abatement but to assume that values continue to rise without bound is absurd. At least in the absence of another infusion of public cash--after all isn't that really what this is all about?

Considering that DCSD is at their millage rate limit perhaps Superintendent Green feels that TAD related service costs will rise beyond what property value growth across the county can cover. Given we're talking decades, at least two generations of school children, it is probably beyond human capability to accurately project that far into the future and in that context it is reasonable that those who will bear the costs of bad predictions to exercise more caution than those who do not. The Lewis/Pope/Reed fiasco should have taught us to beware of school leaders who are readily attracted to expensive shiny objects. 

It is clear that the proposed development of the GM site will add to DCSD service cost but what is not clear is by how much and at what periods during the development. No known detailed model of projected service cost has been vetted. The revenue side is clear. With a TAD DCSD get the revenue they're getting now--in the absence of a detailed model of "property appreciation in adjacent areas" that is what is known. With tax abatement current revenue goes away.

Think of it this way: a child born at the beginning of this development may well have earned an advanced college degree and be launching their career before DCSD can tap into TAD's pot of gold. Carrying an increased service cost over 25-30 cohorts of students with many unknowns about if or how any of these costs are to be covered may explain Superintendent Green's position.