In conversations online and around the city, I’m seeing some serious misunderstanding of the financing for the Navy Hill project. What is TIF? Why is the “TIF district” so big? Let’s make a few things clear. (I especially want to do this because I was a little confused about this last week.)
The better question, I think, is this: how will city pay back a $350M loan? (Or up to $560M w/ interest, according to the city’s financial advisors.)
Three key things to note about this loan:
First and most important, the city is taking out this huge loan ONLY TO BUILD A NEW ARENA. Private development $$ pays for the hotel, apartments, retail, VCU dorms/labs, and even the renovated Blues Armory (which is essentially the developers’ giveback to the city).
Second, the bus transfer station will be paid for through a separate pot of GRTC money, mostly made of state funding; the private developers just have to include a "hole" for it in one of their buildings.
Finally, no one is sure right now what VCU’s role is, or what commitments they’ve made to the project. (We need to find out.)
OK, so then how are we paying back the arena loan? The city will make payments for 30 years (or less, if we can) using the TIF mechanism and other city revenues.
As I’ve explained before, TIF (tax increment financing) is a way to fund a thing using future revenue from that thing. So in this case the city borrows money to build an arena, and then pays back the loan using future revenue from the arena.
There has been a lot of confusion (including on my part) about how this works and how it is even legal. But that’s partially because there are two ways to do a TIF:
“TIF by statute:” in this case, the state’s Public Finance Law sets up rules and a structure for how to do a TIF, presumably to help provide a model for local governments. The city and developers avoided this route because it places too many restrictions on the funds; you can only use real estate taxes, for example, and the city would be on the hook for paying back the loan if the bond fails.
"TIF by agreement” is much less formal. Basically, cities make an agreement with their Economic Development Agency to just hand over some money every year for development; so they can include whatever revenue sources they want. That’s what we’re doing here with Navy Hill. You could view this as "going around" the state law, but others would say that this just frees up local governments to do what’s best for them.
So what revenues are included to pay back the arena? Basically, there are THREE pots of money:
Meals, sales, lodging and admissions taxes from the arena and its immediately surrounding area. This would include the new hotel and any new restaurants. (I would argue this funding source is non-controversial – this is entirely new tax money that wouldn’t exist without the project.)
New parking revenue, both meters and parking lots, from the 80-ish block area that we've been calling the “TIF district” – basically, the entire downtown. The city would set the current base rate – so if we get $1M now, we will continue to get $1M each year to the general fund – and then any additional revenue (the “increment” in TIF) would go to the arena loan. FYI, the ordinance sets a max value of $2.5M that can be steered towards the loan each year, so this could be substantial.
The biggest pot of money: new property taxes from the TIF district. Again, the city would set a baseline, but using valuation instead of revenue. If those 80 blocks are valued at $500M now, the property tax on that value – say $10M – is the baseline. (I’m making these numbers up.) The general fund gets that $10M every year for schools and potholes, but any increase in property value in the entire area generates new taxes that goes to the arena. That’s true for the arena and new restaurants, but also if another property owner far from the arena renovates their building or opens a new store.
Key point: some of that "increment" or new tax revenue is obviously due to arena project – the new restaurants and apartments, obviously, but also better values for existing properties thanks to the new development. But some of that incremental revenue, plus much of the parking, would have been there without the arena. How much?
That’s hard to say, which is again why coming up with more clear projections will be a key task for the council commission. I’ll have more to say on this issue in the future, as it’s probably the central one for this project.
Next week: 4 ways that TIFs fail.