Tax Abatement: Too Little Too Soon?
 By Mark Forsythe The Kansas City Post How can you tell when your economic development policies are adequate? How much tax abatement is too much? How little is too little? Too little is easy to figure out. The development doesn't happen. The Planned Industrial Expansion Authority (PIEA) is one of those little known pseudo-governmental bodies that recommends tax abatements on a project by project basis. The maximum amount of "relief" they can recommend is 100% property tax abatement for 10 years and then 50% abatement for another 15 years. Usually this abatement is on the improved value, or increment as it is known. Consider you have a building appraised by the county at $100,000. You would continue to pay the property taxes on that $100,000 value regardless of what improvements you make. The development could end up being worth millions of dollars but the tax bill will still be assessed at the original $100,000 rate. Recently some big news was made as the PIEA actually denied a developer the standard maximum abatement. Developer Andrew Haden was given abated taxes on improvements at 2109 Broadway for 10 years. He had applied for the standard full 25 years but was denied on the basis that the Crossroads Arts District is now a desirable place to develop so it doesn't need as much incentive. Haden told the PIEA's board its decision "would put him at a disadvantage compared with other Crossroads condos that carry 25-year abatements." Really? Then why bother? Better to cut your losses now rather than pursue a poor project. So to my original question, do we know if we've given too little? I guess we haven't. "Haden will proceed with an $8.1 million conversion of the 95-year-old building he bought in 2005. Haden expects to deliver 34 units priced at $200,000 to $500,000 in early 2008." I don't know Mr. Haden, but if he's a shrewd businessman he's going to put a couple of bucks in his pocket at the end of the day. Had he really "needed" that extra 15 years at 50%, he would have had to have walked away from the deal. Nobody is going to start a project that loses money. But the development is going forward and we as a community know we saved ourselves 15 years of tax revenue. Of course this raises an even more pressing question. How many developments are out there right now receiving tax breaks they really don't need? |
posted by Mark at 7:51 AM
Comments on "Tax Abatement: Too Little Too Soon?"
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mainstream said ... (9:23 AM) :
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Bob Asher said ... (9:58 AM) :
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mainstream said ... (10:26 AM) :
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DaveKCMO said ... (11:38 AM) :
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Alan Birch said ... (12:02 PM) :
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Mark said ... (1:20 PM) :
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mainstream said ... (3:04 PM) :
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Mark said ... (3:27 PM) :
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Alan Birch said ... (4:30 PM) :
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Alan Birch said ... (4:37 PM) :
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Anonymous said ... (2:55 PM) :
post a commentThe answer is that many developers are being undertaxed.
This issue also begs another very interesting question: does the overabundance of tax abatements in fact put later developers at a disadvantage? I think the honest answer is yes, especially in a marginal/down/over-supply market. This relevant point should be considered when initially designing incentives for an area.
The Crossroads has been an extremely hot area for at least 5 years, and it may make sense to more adeptly assess the tipping-point, and err on ending tax incentives (or ramnping them down) much earlier than has been the case in the recent past.
"Of course this raises an even more pressing question. How many developments are out there right now receiving tax breaks they really don't need?"
Mark, the fiscal conservative in me says: All of them. If a development isn't financially feasible without taxpayer subsidy, then maybe the taxpayers should just wait for someone else to come along with a plan that works.
Believe me, I could develop some properties in the West Bottoms without any taxpayer subsidy if I was a little better connected. But that's because I know the right mix of people with the right ideas for uses who would end up down there.
Taxpayer subsidized developers are just picking the low-hanging fruit. It's easy to ask for subsidy for a poorly-thought-out development and offload the risk to the public. Do you think anyone developing condos in the Crossroads has any idea what they're doing besides moving money? Who are all of these people that are going to move into these units? Where is all of this population coming from?
I would suggest that maybe the Nate Accardos and the Brad Nicholsons should look past the dollars that they see walking around on first Fridays and understand that almost every person who has lived, worked, or owned businesses in the Crossroads longer than 5 years are all looking for somewhere else to move to.
Watch it: 10 years from now, depending on the real estate market, the Crossroads will either be a crime-infested wasteland or a SOMA-style (San Francisco) gentrified suburb. But you can guarantee that it will not be a place for art or artists. The folks who made the neighborhood what it is today will ALL be gone.
As to the PIEA, I read this article last night:
http://www.affordhousing.com/blocktales.htm
and I found it VERY interesting what happened 10-15 years ago and how similar things are today. Nothing ever changes, does it? Just the names of the folks doing it.
Bob - I think you have some very good points. One of them is gentrification, which is a very hard thing to balance. But it's been done - balancing gentrification - if we look to the right models in other cities.
Another point you raised was artists leaving the crossroads. I think there are two issues - gentrification is definitely one, but another is that you need talented artists who have sellable art (and there aren't really that many of those) and people to buy the art.
Artists do go out of business very frequently, not because of gentrification, but because people don't want to buy their stuff. And KC does have a limit on how much relatively expensive art they're willing to buy (I mean $250 per piece and up stuff, which allows artists, in the right volume, to make a living wage).
pay no mind to the fact that tax abatements on condos almost always go to the homeowners, and with the average occupancy of any home being ~7 years, who really cares what happens after 10? also, none of these developers are asking the school district what they think about the excessive abatements.
in the spirit of full disclosure, i live in a tax abated crossroads property that i purchased in 2003. i would have bought regardless of whether that extra 15 years was attached at the end. at that time, zin was the only restaurant... now it's a completely different story... and the incentive policy of the PIEA is now reflecting that.
Davekcmo, I'm sorry for your belief that you as a condo owner are getting any of the benefit of the TIF that developed your building.
I was at a party once and overheard one of the developers of the Wall Street condos (10th and Walnut?) jovially explain to his companion that the amount of TIF just helped him determine the selling price.
$20,000 worth of tax abatement from the TIF commission? Well, that would just allow him to raise the asking price another $20,000.
Don't even think for a second that the developer of your building was doing YOU a favor with his TIF. He was straight up lining his pockets.
"Tax Abatement" is a nice selling feature on the property listing, but good luck trying to quantify the monetary benefit.
The irony of it all is, if a developer sells a condo with $50,000 in property tax abatement for $500,000 when it was really worth $450,000, then not only does he get to pocket an extra $50,000, but your assessment will be based on the artifically inflated $500,000. The sucker that buys that unit from you 10, 15, or 25 years down the road is going to get screwed when the property taxes actually do kick in.
By that time, your poorly-built condo will have fallen apart, the property taxes will be too high, the city will be bankrupt, the schools atrocious, the sidewalks crumbling, and the developer of your condo will be drinking pina coladas on the beach.
Way to go, downtown landed gentry!
On the money Alan. I try and explain it like this. You're in the market for a condo. You find two, side by side. Absolutely identical in every way. They're even priced the same. The only difference is that one of the two has 10 years of tax abatement. Which one do you buy? If you answer "it doesn't make a difference" then you belong on the TIF Commission or the PIEA. The developers will love you!
If I'm buying a tax-abated condo, I would not pay anything significantly above the market price for that condo.
The tax abatement would serve as an additional incentive, because the immediately surrounding area is either blighted, underdeveloped, and/or is lacking in essential amenities like a grocery store.
My expectation would be that those things would come in time, but there is risk involved, and the tax abatement helps me rationalize/mitigate/justify the risk.
Is my thinking flawed?
mainstream,
Your thinking is not flawed. You're just coming at it from a different angle. Real estate prices (notice I said prices and not values) are highly subjective. You as a buyer look at things like the surrounding neighborhood, amenities, etc. You might look at a property and determine the price is too high for what you're getting. The next guy after you might walk in, think "cool view" and take it.
I think what Alan Birch is trying to say is that PIEA tax abatements aren't really passed along to the resident. The developer takes that money up front when he sets the selling price. All else being equal a tax free condo is worth more than a fully taxed one, wouldn't you agree?
This is why I have been an advocate of opening the books on all incentivized projects and capping the developer's profit. At the point we the public issue incentives, we become a cash partner so why shouldn't we have access to the books? Put that policy in place and I would venture a guess the number of abatement requests would drop significantly.
These guys are comping to nationwide standards of ROI (Return On Investment). From what I've read in EDC materials that equates to about an 18% return on your money when you invest in real estate development. If a municipality bent over backwards and gave you millions of dollars in incentives to guarantee you 18% return and their only requirement was for you to open your books, wouldn't you take it? I know I would! 18%!!! Like I said in this editorial, the developer complained but he's still moving forward. What does that tell you?
18%! Sweet Jesus! How do I get in?!
You know, another sad irony of tax-abated development, is that all of the 50-something empty-nesters that are buying all of these luxury condos will all either be dead or in a "home" when the abatement programs end and the market crashes due to skyrocketing property taxes. We won't even get the satisfaction of reading editorials from them whining about their taxes going up.
And if you think that tax abatement programs are being used to improve "blighted" areas, the maybe you can find out for us somewhere (anywhere) that can define blight in clear and unsubjective way.
I also suggest reading into Ollie Gate's involvement in the blight study of the neighborhood around his new Brush Creek BBQ restaurant if you want a good story about "blight".
Give me a camera and I can prove ANY neighborhood in Kansas City is blighted. You just take the right photos.
Oh, tax incentives, line the pockets of a few and screw the little people. I do know Mr. Andrew Haden and he's lost a lot of money over the years, but he won't on this project and so will his business partners who seem to have been left out of local news.