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Tax abatements for commercial development

 
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Ellen
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PostPosted: Sun Jun 06, 2004 12:25 am    Post subject: Tax abatements for commercial development Reply with quote

City staff and Industrial Development Board are asking the City Council to approve a package of standard tax abatements as incentives to commercial (mostly retail) and "commercial housing" (apartment complex) developers. This proposal is on Council's agenda for this Monday evening, June 7.

Under the plan, for the next two years (a trial period) the IDB would be authorized to grant multi-year property tax reductions for certain projects involving a new investment of over $1 million.

I think it is a good idea to offer incentives for certain types of commercial development that address a particular civic need or where the developer must overcome significant obstacles that increase the incremental cost of the project (for example, if the project includes acquiring and renovating or demolishing long-vacant buildings that contain asbestos building materials). Also, because the City has previously given or offered incentives to Home Depot and for the redevelopment of the Oak Ridge Mall, there probably is an expectation that new commercial developments will receive financial incentives.

However, I have serious misgivings about this proposal, and I do not think Council should adopt it in its present form.


Last edited by Ellen on Sun Jun 06, 2004 9:50 pm; edited 1 time in total
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Ellen
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PostPosted: Sun Jun 06, 2004 5:54 pm    Post subject: Reply with quote

I have several specific concerns about this proposal. The City Council is being asked to approve a "model" with only the sketchiest of official criteria, and no provisions to ensure that incentives would be targeted to developments that address a particular community need.

According to the "model," eligible projects must involve more than $1 million in new investment. Eligible retail projects are those in which more than 33% of the complex is "new or expanded retail to Anderson County." Speculative office development is not eligible, but office projects are eligible if they involve new tenants from outside Anderson County or if they are in existing space that has been more than 50% empty for 18 months. Commercial housing has no specific limitations. The amount and duration of the tax abatement would increase with the dollar amount of the investment, from a minimum of 25% forgiveness of a property tax (applied only to the tax on the increased property value) for 5 years for a new office development costing $1 to $5 million, up to a maximum of 50% forgiveness of property tax for 20 years for a retail renovation worth more than $15 million.

There's nothing in this scheme to ensure that the new retail development, apartment complex, or office complex would not compete directly with existing merchants, apartments and offices in the community. When we give incentives to industry, we do so with the expectation that they are increasing the local economic pie. Most industry does that. However, commercial businesses compete in the local market -- normally they compete for pieces of the existing economic pie. If we give incentives to commercial development, we need to make sure that we are helping developments that will in some way increase our local economic pie -- for example, by capturing retail activity that otherwise would go to Knoxville or to mail order and the Internet. We should not be using tax incentives to new retail outlets that compete directly with existing retailers and force our existing local merchants to go out of business. And what message would these subsidies send to local businesses (such as the Rolling Hills Apartments) that have undertaken renovations and new developments without incentives?

Dollar criteria do not necessarily equate to value to the community. Why should we value a single $10 million investment (presumably by an out-of-town developer) more than ten $1 million investments (possibly by local businesspeople)?

The proposed abatement periods of 10, 15, and 20 years seem too long to apply on a blanket basis. My observations of commercial development indicate to me that the half-life of a commercial complex is typically less than 10 years. By the time these abatements expire, the investments they reward may no longer be worth very much.

Criteria such as 33% "new or expanded retail to Anderson County" do not buy us very much, and they could backfire. I can imagine local merchants refusing to enlarge their stores without a tax abatement.
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Ellen
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PostPosted: Mon Jun 07, 2004 11:08 pm    Post subject: Reply with quote

After much discussion, Council voted tonight to adopt this scheme, after tweaking some of the criteria. Overall, the incentives are calculated to "level the playing field" to make the initial property tax level similar to what a developer would pay in Knox County or Farragut.

A number of issues were raised about the proposal, including concerns like mine, questions about how effectively the City Industrial Development Board manages the properties it already owns (to get a tax abatement, the IDB would have to own the property), questions about how the eligibility criteria would be enforced over time, and concern by the developer of Centennial Village (the major new project to be built on Parcel A) that some of the last-minute changes would greatly reduce the incentive his company could receive for a planned retail-and-apartment complex.

Two Council members (Willie Golden and Leonard Abbatiello) voted to delay the vote two weeks in order to refine the program criteria before adopting them, but the majority of Council apparently felt it was important to adopt something ASAP, so as not to lose time on some prospective development proposals waiting in the wings. They pointed out that Council could modify or rescind its resolution at any time if they decided there was a problem with the scheme as adopted.

It seems that last Thursday's meeting of the City Council Economic Development subcommittee was most Council members' first full introduction to the proposal, although it had been discussed among City staff and the Chamber of Commerce for a couple of months. Under the circumstances, I think it would have been best to wait two weeks to make sure the proposal was "right" before adopting it. It's not fair to the citizens -- nor to our elected Council members -- when elected officials are pressured to make decisions on policy matters in a "now or never" atmosphere. I think it's far better to try to get things right the first time than to act fast and plan on doing it over later (and I think it is very unlikely that this scheme ever would be reconsidered, no matter how problematic it turns out to be).
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Ellen
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PostPosted: Thu Jul 01, 2004 7:54 pm    Post subject: More on tax abatements for commercial development Reply with quote

As we probably should have expected, today's newspapers report that prospective developers say the tax breaks aren't big enough.

In this morning's Knoxville News-Sentinel, Bob Fowler reported that the Centennial Village developers and Cowperwood Corporation both plan to build luxury apartment complexes, but say the Oak Ridge's proposed tax abatement is not big enough to be competitive with the situation facing builders in Knox County.

The arrangement approved by the City Council would give both builders 33% reductions for 10 years on their Oak Ridge and Anderson County property taxes on the value of improvements they build. Apparently, both developers want a 50% reduction for 15 years. The News-Sentinel article says
Quote:
Cowperwood executive Mark Harvey said the annual property tax cost per unit for [an apartment complex being built in west Knox County] is less than half the current estimated city and county tax costs for similar apartments proposed in Oak Ridge.

Richard Spining of Knoxville and John Chilton of Clinton are partners in the Centennial Village development, where they plan to build 240 to 270 apartments together with some retail. Meanwhile, Cowperwood is partnering with a Nashville firm on a $10-million plan to build a high-end apartment complex of 164 units on a 7.1-acre parcel next to the SAIC offices at Lafayette Drive and Emory Valley Road. They were going to announce their plan at a special meeting of the Oak Ridge Industrial Development Board this afternoon.
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Ellen
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PostPosted: Fri Jul 02, 2004 12:10 am    Post subject: Reply with quote

Questions of fairness are sure to arise whenever the City starts subsidizing commercial business. If the City helps these developments, why not also help the owners of Rolling Hills Apartments (formerly known as the Garden Apartments) with renovations? And why not assist the smaller developers who have been busy building more modest multifamily residences on infill lots on Robertsville Road, or the developers of the Teller Village apartment complex off Tuskegee Drive?

I do not intend to suggest that Oak Ridge should subsidize every developer in town, nor do I think that the City should deny assistance to all developers. Rather, I would like the citizens of Oak Ridge to know that we are assisting those projects that help us meet well-defined community goals.

Is there a pent-up demand for luxury apartments that would be satisfied by these projects?

Is there an expectation that the people who move into the proposed complexes will later become Oak Ridge homeowners?

Does the IDB expect that they will become regular customers of local retail stores?

Will the reduced property taxes paid by these complexes and the sales taxes paid by their residents compensate for the increased burden their children place on the Oak Ridge schools?

Is the Centennial Village apartment development expected to catalyze the success of the other developments planned on the same property?

Cowperwood has an impressive track record in Oak Ridge -- their developments are exemplary for the quality of site design and landscape maintenance. Smile Is this record of accomplishment sufficient reason to give Cowperwood a tax abatement to encourage residential development on land that is zoned and planned for commercial/office use? (Note that the other side of Emory Valley Road is zoned industrial -- I don't fancy the idea of juxtaposing residential and industrial uses.)

I'm all for property tax abatements if they help us accomplish important civic goals. I think that redeveloping the Oak Ridge Mall property is probably the single most important project/challenge facing the city right now, and if tax abatements help make that project happen, then we need tax abatements. However, I don't think that local taxpayers should be asked to support commercial subsidies without being given a clear explanation of why they are needed, and how they serve the community.
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Ellen
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PostPosted: Sat Jul 03, 2004 12:00 am    Post subject: Reply with quote

Today's Oak Ridger brought more news on the matter of tax abatements for commercial development.

It turns out that Cowperwood intends to sell the land at at Lafayette Drive and Emory Valley Road to another company that would develop apartments, which crushes my theory that the subsidy would be provided to encourage quality development by Cowperwood. Furthermore, it seems that the IDB does not see an infinite unmet demand for luxury apartments:
Quote:
IDB member David Wilson said he didn't think Oak Ridge could absorb 220 apartments on Parcel A near Centennial Golf Course and another 160 on Harvey's land. "The first one out of the ground is going to win," Wilson said...

Unfortunately, if the City offers generous tax abatements to everyone who shows up with a scheme to invest a certain amount of money, I fear that Oak Ridge (together with the lending institutions that put up the cash for these projects and could end up holding worthless paper if the projects fail) will end up holding some white elephant buildings left behind after a spree of over-building.
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Ellen
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PostPosted: Tue Jul 20, 2004 10:04 pm    Post subject: IDB wants to give tax abatements for "luxury apartments Reply with quote

Yesterday the IDB endorsed a 15-year 50-percent tax abatement for a 240-unit luxury apartment complex at Centennial Village and a 10-year 50-percent tax abatement for the proposed luxury apartment complex on Cowperwood property at the intersection of Lafayette Drive and Emory Valley Road. This was reported in both the Knoxville News Sentinel and the Oak Ridger. City Council must OK both proposals (presumably at the August 2 meeting) before the IDB can act. (Council approval is needed because these abatements exceed the limits to which Council gave blanket approval.)

I would reject both of these proposals.
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PostPosted: Mon Aug 02, 2004 7:14 pm    Post subject: Reply with quote

Tonight City Council considers the two proposals for tax abatements for luxury apartments.

The Council also will consider changing the deed restrictions governing the Cowperwood property at Emory Valley and Lafayette Roads (land that the City sold to Cowperwood for specified uses) to expand the allowable uses of the land.

The only uses allowed now under the deed are as a hotel/conference center or an 80,000-square-foot office building. The proposed deed amendment would add the following uses:
    Private physicians’ offices
    Professional occupations
    Multifamily dwellings (I stand corrected -- these are allowed under the site's "Office" zoning)
    Hotel, motel or tourist homes
    Barber or beauty shops
    Accessory uses, as defined in Section 6.02(b) of the zoning ordinance
    Mortuary establishments

This could be a long meeting. Oops

The Chamber of Commerce weighed in to support the tax abatements, but asked for a definition of "luxury apartments" (I agree that a definition would be nice!). Meanwhile, several Anderson County Commission members have expressed opposition to the city's issuing tax abatement without County concurrence -- I think they have an excellent point, and I hope that Council listens.

I see merit in revising the deed restrictions -- the city no longer has a need for additional office space (and is unlikely to need more offices for many years to come), so it does not make sense to insist on limiting the property's use in this way. However, the new list is odd Oops -- it's an attempt to identify permitted uses in the district that are unlikely to be nontaxable. (Yes, it is a bit inconsistent to do that, then turn around and grant a 50% tax abatement on the buildings Exclamation ) Maybe it would be better to stipulate that the land not be used for nontaxable purposes. Idea
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Ellen
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PostPosted: Tue Aug 03, 2004 10:41 am    Post subject: Reply with quote

Well it was a long meeting, but it was productive in getting many of the issues aired. Smile All seven Council members were thoroughly engaged and working hard to serve the taxpayers' interests. (However, they don't all agree regarding what's in the taxpayers' best interest. Confused )

Before I post more, I should note that I missed an important point in my review of the issues above. Embarassed I had forgotten (and the historical material in the agenda packet failed to remind me) all that had happened last year, when Cowperwood purchased the property (exercising an option negotiated in 1989, before the discovery of diesel fuel contamination on the property led to a long drawn-out remediation process). The company had asked to be released from some of the deed restrictions (this is documented in the packet), and the City had hoped for a higher selling price (this is not documented in the packet), but both parties went forward with the agreement negotiated in 1989. I should have remembered this -- matters related to this property were on EQAB's agenda nearly every month for a decade, Shocked so I have been very aware of happenings related to the property. Fortunately, Councilman Leonard Abbatiello remembered. Very Happy He pointed out that the price Cowperwood paid was based on a 14-year-old appraisal. He urged his fellow Council members to renegotiate the entire deed transaction if the buyer wants to be relieved from some of the conditions of sale. (Cowperwood's deed required them to build within 36 months of the sale. If they do not build, the City has the right to buy the land back at a lower price than Cowperwood paid.)

I think Leonard was right. I'm pleased that Council members Jane Miller and Willie Golden agreed with him when the relaxation of deed restrictions came up for a vote. Smile That's watching out for the taxpayers' interests. Thumbs Up
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Ellen
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PostPosted: Thu May 26, 2005 12:59 am    Post subject: Reply with quote

The proposal for luxury apartments at the intersection of Lafayette and Emory Valley was presented again at Council's May 16 work session.

The developer (Bristol Development Group) explained that they need a 50% tax abatement to help them convince lenders to provide financing. They said that the 33% abatement provided by the city's standard incentive package would not be enough.

There was discussion of bringing this up for action during the May 23rd City Council meeting. Apparently, however, there was not enough support among Council members...

I continue to be skeptical about the "demand" for luxury apartments in Oak Ridge.

Also, I note that the probable rents quoted at the meeting are higher than rents at existing Oak Ridge apartment complexes (which are not completely full) and are higher than what is being paid by young professionals who work at ORNL but live in "better" apartments in West Knoxville and Farragut...
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