I was approached this week by a lawyer who told me he is working with one of the bidders on MDHA’s Rolling Mill Hill property. He wanted to talk about how one aspect of my proposed TIF ordinance would work. You can read more about the proposed ordinance here.
The developer’s lawyer was asking whether the “debt service taxes” part of the ordinance would be an inappropriate “curtailment” of tax increment financing. I told him no – there is no “curtailment.” This is a slight adjustment that allows Metro to better meet its own debt obligations.
What is TIF again?
To see how slight the adjustment is, we need a brief recap of how TIF works.
A developer proposes a project. Typically, the developer will tell MDHA, “We have a great project, and we can almost make the financing work, but not quite…can you help us with some tax increment financing?” If TIF is provided, MDHA will borrow money from a bank, and the developer uses the money for the project. Once the project is built, it creates new, additional property tax revenue. The new, additional property tax is the “increment.” The developer (or owner) then pays the full property tax bill to Metro each year.
When the Metropolitan Trustee collects the property taxes, Metro gets an amount equal to the pre-development taxes, and MDHA gets the increment. MDHA then pays the bank loan. If there is a shortfall, and the increment is not enough to make the loan payments, it is typically the developer who will pay the shortfall; the bank that made the loan will usually demand a guaranty from the developer.
What is this new “debt service taxes” provision?
One of the knocks on Nashville’s use of TIF over the years is that, by paying all of the increment to support a small number of developments, Metro is cutting into the tax revenue that would otherwise be available to pay its own long term debt obligations. As a reference point, about 15% of what Metro collects in property taxes is used to pay Metro’s own debt. Up until now, when there has been a TIF loan, that 15% goes to pay the TIF loan instead of paying Metro’s own debt.
You can see how, if Nashville were directing a high enough amount of property taxes into paying TIF loans, it would impact the amount of revenue available to pay Metro’s own debt. We don’t have to debate whether the impact is large of small – it is undeniable that using property taxes to support TIF loans means there is less revenue available to pay Metro’s own debt.
The new “debt service taxes” provision would allow Metro to keep the portion of the increment that is ordinarily used to pay Metro’s debt. The language require that, “All TIF loans authorized by [MDHA] after the effective date of [the law] shall include provisions stating that the debt service taxes shall be retained by the metropolitan government…” At our current Metro debt service levels, this means that after the new ordinance is passed the first 15% of increment will be retained by Metro on new TIF loans.
Does this matter?
There are two perspectives to look at. From Metro’s perspective, I think that this new provision should reduce or eliminate the potential risk that paying for TIF loans could ever erode Metro’s ability to service its own debt. We’ll be setting aside the proper portion of the increment to pay Metro’s debt. This is fiscally responsible and, in the long run, will support a strong bond rating for Metro.
It is important to look at it from the developer’s perspective too. This will include a lot of numbers – I’m sorry about that. I’m going to use the project that lawyer called me about. In the call, he suggested it would be a $400 million project. I also know that the total amount of TIF that remains available in the Rolling Mill Hill redevelopment district is approximately $31 million. Let’s assume that MDHA were to decide to use the entire $31 million for this project. (I can’t imagine that they would ever use ALL available TIF dollars on one project…but let’s pretend.)
In order for the developer (who will have to guaranty the loan) to want that large a TIF loan, the developer would have to feel like the expected property tax increment after the project is built will be large enough to make payments on a $31 million loan. When the lawyer who called me suggested my ordinance is a “curtailment”, he was making the point that, because we’ll now set aside the first 15% of the increment to pay Metro’s own debt, there will be less money to pay that TIF loan. There’s no question that this is correct. But if there is 15% less increment to pay the TIF loan, logic tells us that the size of the loan the tax increment can support should also be 15% less.
That would mean that instead of the increment supporting our hypothetical $31 million loan, the increment might only support a loan that is 15% smaller, or $26.35 million. This decrease of $4.65 million would lower the overall size of the project from $400 million to $395.35 million. I think we can agree that a 1% decrease in the size of the project shouldn’t kill any deal worth doing.
Remember, I’ve used outlandish numbers and assumed MDHA would put all of its Rolling Mill Hill TIF dollars into one project. More realistically, this wouldn’t happen. My guess is that, by choosing to pay Metro’s own debt first, we are making the choice that a $400 million project might have to get done on $397 or $398 million.
For me, TIF loans are a critically important tool for redevelopment. The proposed ordinance accomplishes two important goals – we are still committed to using tax increment financing for redevelopment, while also making the choice to be sure to pay Metro’s own debt obligations first.
CORRECTION (03/10/2016): An earlier version of this post said that the Tax Assessor collects property taxes. That’s not right. The Tax Assessor assesses the amount of taxes, and then they are collected by the Metropolitan Trustee.