Subsidized Redevelopment in Colorado
There is little argument that the Twin Peaks Mall in Longmont, Colo., has seen better days. "This mall isn't dying, it's already dead" reads one Yelp review. Another laments the vacant storefronts that line the mall's hallways, calling the corridors "sad and depressing at every turn." Does this mean the city has the right to seize property at the site and put taxpayers on the hook for redevelopment? Because that's exactly what happened.
In 2012, the Longmont City Council and the Longmont Urban Renewal Authority (LURA) declared the site of the Twin Peaks Mall a "blighted area." This designation was news to no one, but it was important in that it granted LURA the ability to take over any of the properties in the designated zone by force, through the use of eminent domain, for redevelopment purposes. LURA plans to subsidize the redevelopment through "tax-increment financing" -- that is, selling bonds and then (hopefully) paying for them with the extra tax revenue gained through redevelopment.
Blight or no blight, these practices should be stopped, especially since private-sector based redevelopment alternatives already exist and have been proven to work.
While Twin Peaks' owners welcome redevelopment plans, for the last several months one of the mall's largest retailers, Dillard's, refused to come to an agreement on the sale price of its property to LURA -- stalling redevelopment efforts and setting the stage for a court battle. Dillard's, which owns its property outright, argued that the blighted nature of the mall could be cured with Dillard’s still in place, and that at the very least LURA should not be allowed to take possession of the property until a jury sets the value.
Last month, a Boulder County District Court judge sided with LURA and the mall's owner, NewMark Merrill, ruling that Dillard's must hand over its title. The ruling quite literally paves the way for an $80 million renovation of the property through the use of tax-increment financing (TIF).
Supporters of Longmont's use of TIF argue that it is essentially a risk-free investment. While it's true that defaults on TIF bonds are uncommon, that's mostly because cities have many ways of capturing taxpayer funds to pay for TIF if the redeveloped properties don't generate the anticipated tax revenues. For instance, when municipalities levy tax increases for things like schools, roads, and libraries, taxes are increased both inside and outside the TIF district, but the increased revenues inside the TIF district go to paying for the TIF bonds, not to the schools, roads, or libraries. Similarly, inflation affects all properties, but the increased revenue it generates from the TIF district goes to the bonds.
And even with these advantages, defaults do happen. In 1991, the nearby Englewood, Colo., Urban Renewal Authority defaulted on $27 million worth of bonds issued to support a retail development that failed and was eventually bulldozed. A recent Reason Foundation Policy Brief also highlights the case of Marlton Square in Los Angeles. The square, once a vibrant shopping plaza in South LA, evolved into a desolate wasteland of vacant storefronts and dilapidated buildings even after more than $31 million in public funds were used for redevelopment.
Another complication regarding TIF is that it can decrease a city's general-fund revenue. In Longmont, there's an overall sales-tax rate of 3.275 percent -- a 1.275 percent tax earmarked for streets, open space, and public safety, with the remainder left for the general fund and the public-improvement fund. When redevelopment generates extra sales-tax revenue, more than one-third of it will still be earmarked for streets, open space, and public safety -- but the extra money will also be used to pay off the TIF bonds, so money that would otherwise go toward the general fund will have to go toward paying the TIF debt. The problem is exacerbated if the newly developed properties don't create new business for Longmont but instead redirect customers away from businesses not inside the city's TIF district. If this happens, in the same amount of money will be coming in, but some of it will be redirected to the TIF fund.
In Colorado, bonds issued for funding TIF projects cannot exceed 25 years in length. In 2010, the mall accounted for $1.15 million in tax revenue, and Longmont has already pledged $27.5 million to improvements. After interest payments and tax revenue already earmarked for other purposes are accounted for, it is clear that the added revenues will need to be substantial in order to reimburse taxpayers for the subsidies. Twin Peaks owners project 50 percent more in annual sales after the redevelopment than the mall's previous high, but it's hard to project what the economic climate in the area will be next year, let alone 20 years from now.
Subsidies for blighted areas also create a perverse incentive for owners. Rather than improving properties themselves, oftentimes investors buying properties will simply wait for government subsidies -- precisely what happened at Twin Peaks Mall. NewMark Merrill purchased the property in 2012, for a fraction of the price the previous owners paid, and hasn't attempted any sort of private redevelopment.
There is no need for government to act as the middleman between private investors and private businesses. If there are investors willing to buy TIF bonds -- and if those TIF bonds aren't mere subsidies, but actually are a good deal for the government -- then it should be possible for private developers to go out and get that money on their own. Private redevelopment has been shown to work in places like Oakland, Calif., where, instead of purchasing properties and flipping them for a quick profit, investors have upgraded entire neighborhoods by simply improving landscaping and fixing the roads in front of their properties. The result has been not just an increase in their property values, but also an increase in surrounding property values and the gravitation of higher-income individuals to the area, reducing crime and encouraging other owners to better maintain their property.
The same can and should be done in Colorado.
Victor Nava (victor.nava@reason.org) is a policy analyst at the Reason Foundation.
