12 May 2007

Reading between the lines, Part III - TIF

In the last installment we covered the impact of new retail development and the increase in sales taxes the ballpark village would provide. This time out we'll turn our attention to housing. It's the key to the whole deal, as it's assumed that housing proceeds will largely fund the ballpark. Housing is where A's consultants ERA are claiming the greatest amounts of benefits for Fremont. Are they blowing smoke here, or are their claims actually achievable?

The story starts with Prop 13, the landmark piece of legislation passed in 1978 that greatly limited assessments and property tax levies. Faced with severe budget crunches, cities started to look for other methods to preserve tax revenue. Arguably the most popular method was to create redevelopment districts. Originally the intent was to rehabilitate so-called "blighted" areas. A redevelopment program starts when a city identifies blight in an area. A redevelopment district is then created, which allows the city to freeze property assessments within. In following years, property taxes above the frozen level are captured by the city and used for redevelopment efforts. These funds are called tax increments. If the redevelopment agency sees a big ticket item that needs to be funded, it has the power to raise bonds, which are secured by tax increments. This instrument is called tax increment financing, or TIF.

In 25 years after Prop 13 cities took the concept to often absurd degrees. San Jose's redevelopment area in 2001 consisted of 8713 acres spread over 20 square miles, which is slightly larger than the entire Stanford University campus. Oakland's redevelopment arm is wrapped in a huge bureaucratic body called the Community and Economic Development Agency, or CEDA. To improve many truly blighted areas of Oakland, CEDA designated most of West and East Oakland as redevelopment areas.

In many cases, redevelopment efforts have rejuvenated economically depressed areas. However, it has also choked off property tax dollars that would normally go to education. As municipalities played round after round of "robbing Peter to pay Paul," state leaders started to reconsider the efficacy and value of redevelopment programs. Over the past several years, redevelopment agencies all over the state have scaled back both their programs and the size of their agencies.

Fremont's redevelopment agency has been less aggressive than San Jose's or Oakland's. It has been focused on three key areas:
  • Revitalizing commercial centers in three districts: Centerville, Irvington, Niles
  • Capturing tax increments to help finance highway interchange improvements for the Industrial district, in which Pacific Commons and the Ballpark Village site lies.
  • The creation and administration of affordable housing throughout the city.
I can't comment on the effectiveness of the first initiative above, but the second has shown results. All of the 880 interchanges serving the Industrial area are complete with the exception of the 880/Mission/Warren interchange, which is due for completion in 2008. The project doesn't fit within the definition of blight, which goes to show how loose the term is. It has worked out well for both businesses and residents, who prior to the revamp were forced to use cramped, old, poorly designed ramps that were in place decades before old Highway 17 was converted into Interstate 880. Even though the project was conceived without an eye towards a ballpark, this new infrastructure will serve fans extremely well.

Debt service on the highway infrastructure is expected to be retired in the next several years, yet the redevelopment district expires in 2023. That means that for the 3,000-acre Industrial district, there is a huge, dormant potential for tax increment revenue already in place - if someone were to take advantage by developing part of the area a certain way.

At least that's what consultant ERA claims. The implementation plan for the Industrial district does not call for housing within the area. They assume that the land would remain dormant for at least the next decade if the Ballpark Village were not developed. Cisco is looking to expand, but is more interested in the area around its corporate HQ in North San Jose than it is in Fremont. This is in keeping with a recent trend of Valley "mega-campuses" being sought by Google, Yahoo!, and Apple. There's no need for another power center shopping mall there. Virtually all of the big box stores that would normally fill a new power center are already spoken for in Pacific Commons or in the surrounding area. So that assumption is largely correct. I reproduced the table at the end of the report that shows how tax increments would increase as the Ballpark Village was built. Over the length of the project, the net tax increment would equal $58.6 million.

There is a flaw in the numbers above. ERA assumes that tax increments should be calculated based solely on the 1983 assessments, which have the 143-acre main parcel valued at $4 million ($28,000 per acre). Currently the parcels are assessed at $588,000 per acre, which means they're worth $85 million. The difference means that at a 1% taxation rate, tax increment would be $810,000 more than if ERA were basing their study on the current assessments. Over the construction period, that equates to $4.9 million in property taxes. Mind you, this is an interpretation of ERA's data, but it's something to mull over as we analyze the figures further. I point this out because using ERA's methodology inflates the true potential benefits.

Whether we're talking $58.6 million or $53.7 million (adjusted), it's a lot of money. The bulk of this would be generated by the 2,900 townhomes. The housing alone will bring in almost $20 million per year in tax increment. The numbers are realistic due to the high cost of real estate in the Bay Area. One thing to keep in mind is that this money has to be allotted for redevelopment projects or stay within the agency. It can't be used for city services or other general fund uses, nor can it be used to shore up the general fund.

Redevelopment has other smaller tasks for the Industrial district that go beyond the highway infrastructure:
  • A Learning Center on an approximately 4-10 acre parcel in the Project Area to provide advanced technology life-time learning facilities and resources that are accessible to businesses locating in the Project Area and to the broader Fremont community
  • A station and related facilities and services to provide commuter rail and bus service to the Project Area (where Auto Mall meets the Union Pacific tracks)
  • Widening of Fremont Boulevard from Cushing to Warren (already underway)
Notice how they use the words "Learning Center" as opposed to "school." There's no indicator what public/private body would build and run the Learning Center. The only definition is this:
The Agency will assist in the development of an advanced technology life-time learning center on an approximately 4-10 acre parcel in the Project Area that is accessible to businesses locating in and near the Project Area and to the broader Fremont community (the "Learning Center").
Now that sounds like an adult education center or technical college. It could be run either publicly or privately. Surrounding private property owners would not be required to provide anything towards the creation of the Learning Center. But since the implementation plan would change once the ballpark village was incorporated, it leaves room for a change to the Learning Center concept. It's quite possible that a public elementary school could be co-located with the Learning Center. It could be conceived in a way that maximizes land use and available space, while also consolidating costs. If it were a joint effort of City/Redevelopment, FUSD, and either Ohlone College or UC Extension, it could be a very fruitful effort. Cisco, via its foundation, could get a huge amount of positive PR by contributing technology and expertise. The A's would have to donate some of the land they're purchasing, but the city has 40 acres of its own nearby that it can swap because the A's covet the land for parking. The complicated part would be that redevelopment would have to authorize and issue bonds to cover this part of the project. But securing those bonds would be a slam dunk because $58 million is certainly enough to cover both the Learning Center and the transit hub. If not, tax increment projections beyond the year 2016 would total approximately $100 million through 2023 end date.

That said, the city doesn't have to do this at all. The municipal code only calls for new students from new developments to be fit into the existing school infrastructure. Adding nearly 700 students to schools that are divided from the village by a freeway and an aerial mile is not a good long-term solution. When Wolff talks about creative solutions for the city, I think this is one a possibility. I don't talk to him or his staff so I don't know if they've explored it, but it's a more than reasonable way to spend tax dollars.

Do you think this is a smart way to go? Does this sound like Wolff squeezing the city for a subsidy? As discussed previously, the two big pieces missing from the plan are a school and a transit hub. Redevelopment has mandated the transit hub be built, while there's an opening for a school if every party were to play ball (pun intended). To me it's downright fortuitous. As recently as a month ago I said that TIF potential was limited. After further review, it's much greater than I had initially thought
- at least if it's used for non-ballpark activities. The best part is that Fremont would only be doing what they already have planned, with a few changes to make accommodations for the ballpark village.

All of this possible through housing related tax increment. To paraphrase a former president, "It's the housing, stupid."

The ballpark's contribution to tax increment is uncertain, probably nil. Wolff said during his progress report that ownership of the stadium hasn't been determined. What the A's and MLB probably want is what ERA cites in its study:
The ballpark is assumed to have some form of underlying public ownership, and not be on the property tax rolls.
If the ballpark is publicly owned, the city would miss out on collecting property taxes as San Francisco does with AT&T Park, where the stadium is owned by the team on city-owned land. Depreciation rates are difficult to determine, but at 5% over 30 years, that translates to over $70 million in unrealized property taxes. Over the six-year build out period, that's nearly $24 million. In case you're wondering, property tax and insurance are two huge sources of overhead that actually make private ownership of a stadium unattractive. Sure, a team can partly write off those costs, but not all of them.

The next installment will cover city services, including fire and police. I'm putting off the economic benefits (multipliers) piece until next week.