Developers seeking tax incentives from Louisville-Jefferson County Metro Government have been closely watching as Metro Council members grapple with how to best use a popular local tax incentive called a TIF, according to council president David Yates (D-25).
“In my recent discussions with new developers I know some of you all have met with, they have heard the rumblings, and they have questions about what our expectations are,” Yates said during the Metro Council meeting on Thursday.
Mary Ellen Wiederwohl, head of the city’s economic development arm Louisville Forward, also has been fielding inquiries from developers. Louisville Forward negotiates TIF agreements with developers.
“There has been some concern from a few developers about possible implementation of new requirements,” Wiederwohl told Insider Louisville.
TIFs, or tax increment financing, are used throughout the United States to promote development of properties in blighted areas and buildings that have long sat vacant. At its most basic, a TIF agreement is when a city allows a developer to pay a set property tax rate for a period of time — usually 15 to 20 years — even though the assessed value of the property increases.
A developer benefits because the savings in property taxes covers some of the cost of the development, and the city benefits because a formerly vacant property is now contributing to the economic vitality of the surrounding neighborhoods, as well as generating greater tax revenues in the future.
Some council members have questioned whether the projects that recently received TIFs pass muster. Do they provide enough benefit? Is the city subsidizing developments that would have occurred whether or not the developer received tax incentives? Should TIF agreements require apartment developers to include workforce or affordable housing units in their project?
The city doesn’t have any standards for “who is going to be granted a TIF and under what conditions, what we’re looking for,” Councilman Brent Ackerson (D-26) said at Thursday’s Metro Council meeting.
“In my opinion, a TIF — a government-assistance program, tax incentive, tax break — should be used to support projects that otherwise would not be supported on their own, that can deliver good to the community, and my opposition here is that we are talking about luxury apartments, luxury apartments in an area that is not blighted,” Ackerson said. “To throw government money at luxury apartments, I think, is a misuse of what a TIF is for, and I think this body should think twice about it.”
Ackerson was talking specifically about two proposed TIFs for a four-story, 195-unit apartment building at the former Mercy Academy site and a four-story mixed-use development with apartments and retail at the corner of Broadway and Baxter Avenue.
Louisville Metro Council Thursday night approved a total of $7.5 million in tax incentives for the Mercy and Phoenix Hill apartment projects. The votes for both TIFs were 22-3, with Ackerson, Councilwoman Mary Woolridge (D-3) and Councilman James Peden (R-23) voting against.
The city doesn’t have a specific list of standards because every project is different, Jeff Mosley, deputy director of Louisville Forward, told IL.
Instead, Louisville Forward staff asks questions such as “Do we think it is going to lead to other development? Is it going to be a catalyst?” he said.
Louisville Forward also looks at where a proposed project is located; whether the project provides a public benefit — for instance, the Phoenix Hill project will include a large public parking garage in an area with a serious parking problem; and whether a development would still move forward without local tax incentives, Wiederwohl said.
“It’s a question of math,” she said.
Properties in urban neighborhoods may require developers to clean up environmental hazards in the ground or preserve a building they didn’t realize was historic. Generally, they also have to pay more for the land and don’t benefit as much from economies of scale.
“These urban infill projects are already more expensive,” she added. “Once you add all those things up, and then you put another costly requirement up, then at some point the math no longer works.”
Before casting her vote, Councilwoman Woolridge noted that all of the TIFs awarded to developers in the past two years have been for projects on the eastern side of downtown and aren’t benefiting the most blighted portions of the city.
Since early 2015, Louisville has approved TIFs for the Omni Hotel downtown and for seven apartment complexes, only one of which — Heritage Green — is an affordable housing development. During former Mayor Jerry Abramson’s tenure, TIFs funded industrial redevelopment projects and attractions including GE Appliance Park, the Louisville Renaissance Zone Corp., the KFC Yum! Center and Churchill Downs.
“We talk about investment; we talk about Develop Louisville. Well, we need some folk to start looking below Ninth Street, but all the developers seemingly are east of Ninth Street,” Woolridge said. “My constituency really has a problem with everything being downtown so to speak. We’ve got property in west Louisville [that has been vacant for decades].”
Louisville Forward staff talks daily with developers about possible projects in west Louisville, Wiederwohl said, but TIFs only work if the property value rises enough to cover an enticing chunk of a developer’s project cost. The West End suffers from low property values and because of red lining, so even if a developer invested millions in a property, the land and building would likely be valued at less than what the developer put into it.
“We have these decades of issues, specifically in west Louisville, related to property valuation,” she said. “We would love nothing more than to be able to do one of these projects there.”
The city lobbied for federal funding to renovate Beecher Terrace and invested cash in the Cedar Street Development to help raise property values in the Russell neighborhood, Wiederwohl said.
“That is how you start to move the needle,” she said
Councilwoman Marianne Butler (D-15) stood up for using TIFs to incentivize developers who invest in costly urban infill projects.
“(A TIF) is just one tool in the toolbox that (Louisville Forward) has to use as they go about trying to get people to do stuff in the inner city and to infill, because when you infill on something like this, it’s much more expensive,” she said. “If you have to clean up an area, take a building down, etc., that adds a lot of cost to your project. Yet, a large blighted building in your neighborhood will take it down quite quickly.”
Butler noted that Nashville has used TIFs to fund “a bunch of developments” downtown. The Southern city, which has experienced a substantial construction boom, is often used as a point of comparison for Louisville.
Councilman Bill Hollander (D-9), who at one time didn’t support TIFs for either the Mercy or Phoenix Hill project, concurred that Louisville trails other U.S. cities when it comes to using TIFs to spur development.
“There are a lot of apartment buildings being built with TIFs. In fact, we are a little bit behind the curve on this,” he said.
Incorporating workforce housing
Ohio-based company Edwards Cos. will develop and manage both the Mercy and Phoenix Hill projects, which represent a roughly $80 million investment along East Broadway.
Edwards Cos. has a strong record when it comes to residential developments, said Councilman Tom Owen (D-8). The projects will bring stability, jobs and new tax revenue to a transition zone between downtown and adjacent urban neighborhoods, he added, making them deserving of TIF agreements.
“As a council we are in the process of moving toward, if there are public incentives, there needs to be an element of those projects that involve affordable housing,” Owen said. “This is the guinea pig. We have nudged that ball.”
Several council members originally did not support awarding TIFs to Edwards Cos. without a commitment to include workforce housing — apartments that people who earn 80 percent of the city’s average median income can afford.
After some pushing from members of Metro Council, Edwards Cos. agreed to make 19 studio apartments in its Mercy project workforce housing units. Five vacant shotguns saved as part of the Phoenix Hill development also will become workforce housing. Edwards Cos. is donating the shotguns to the nonprofit Preservation Louisville, which has committed to finding funding to renovate the houses and offer them at rates affordable to a family of four earning $53,600 a year or less.
Hollander, one of the council members lobbying for workforce housing, said he changed his vote because Edwards Cos. budged on the workforce housing.
“We can do better than what we’ve done here,” he said, “but I agree with Councilman Owen that it’s a process.”