TID#5

INTRODUCTION

The EDC has determined that a potential Railroad Corridor Redevelopment Area is located in the south quadrant of the City of Lake Mills. The planning area is bounded by the City’s boundary to the south, the east property line of Rotary Park to the west, property lines behind the businesses to the east of Main Street, and Columbus Street to the north.

The City Council budgeted funds in the 2013 Budget to complete TID Project Plan. In order to create a TIF district, the City must formulate a detailed project plan for the development of a specific geographic area called a tax incremental district (TID). Once the project plan and the boundaries of the TIF district are approved by the Council, local assessors and the Wisconsin Department of Revenue (DOR) determine a year-one ‘base value’ for all property within the TID. As the city and/or developer make improvements in the district (e.g., upgrading roads, adding sewer service, providing incentives to developers, rehabilitating old buildings, remedying brownfields), the TID’s property value increases. Taxes on all property value growth above the base value—on what is known as the ‘value increment’—are used to pay off the costs of the developer’s improvements.

The purpose of this memo is to assist the EDC with reviewing the Consultants proposed fees and making a recommendation to the Council regarding the consultant’s agreement.

BACKGROUND

A majority of the structures in the redevelopment area are residential or commercial, and there appears to be a predominance of buildings that are deteriorated, obsolete, and some that possess inadequate provision for ventilation, light, air, and sanitation. Many of the residential and commercial building façades show substantial deterioration, and a strong case can be made that the potential Railroad Corridor Redevelopment Area is in a condition consistent with Wisconsin State Statutory definitions of a blighted area.

Commercial uses within the planning area are generally concentrated along Main St. and Sandy Beach Road. Residential uses are concentrated along Columbus Street and along the west side of Main Street. Some of the residential uses are intermingled with commercial parcels.

There are two different public entities that own property in the redevelopment area. The WI DNR maintains ownership of the rail line right of way and railroad depot as the Glacial Drumlin Bike Trail. The Town of Lake Mills currently maintains their Town Hall on the west side of Main Street.

Located adjacent to the west side of the redevelopment area is Rotary Park.  Rotary Park is a public park in the City of Lake Mills. The park is 8 acres dedicated to active recreational use. Active recreational uses include two lighted softball diamonds, lighted basketball courts, a tennis court, a picnic shelter, play equipment, concession stand, and parking.

There are at least four sites listed with environmental issues. The DNR list these areas as having groundwater and soil contamination issues.

HISTORY

Back in the 1880’s, the Chicago and Northwestern Railroad found a flat route through the moraine and drumlins in southeastern and central Wisconsin and located a railroad line and depot just south of Lake Mills. In 1975 the Wisconsin Public Service Commission held a public hearing that authorized the closing of the local depot. The Depot is now used by the DNR.

The buildings and related businesses that developed in this area were generally related to the railroad. Northwestern Hotel was built in 1903, presumably as a railroad hotel. The building is now owned by J & J management and used to be a restaurant that catered to Sandy Beach vacationers. The restaurant building has been vacant since the fire and is under a raze order. There is the cattle barn which is now used as a warehouse, a feedmill and some storage buildings that were also constructed to take advantage of the railroad.

The gas station, fastfood building and car wash were a building which took advantage of car traffic to the beach that although still high, is no longer high enough to support those types of businesses. The conditions that originally supported these businesses have changed and the conditions these businesses need to survive have changed. The buildings have been generally converted to other uses. The uses and conditions of these structures make a strong case for a Railroad/Bike Trail Corridor Redevelopment Area.

ISSUES

In order to create a TID, the City and proposed project must meet three primary criteria in the State of Wisconsin:

1. The base value of the proposed TID plus the value increment of all other districts in the municipality cannot exceed 12 percent of the equalized value of taxable property in the municipality. This is the primary oversight provided by the Department of Revenue and serves to prevent the City from mortgaging too much of its future property tax growth in TIF districts.
2. At least 50 percent of the land in the proposed district must meet one of the following criteria: a.) blighted; b.) in need of rehabilitation or conservation work; c.) suitable and zoned for industrial development; or d.) suitable and zoned for mixed-use development. Additionally, the municipality must provide proof that the project will increase the value of all other property in the district.
3. The municipality must convene a joint review board consisting of members from each overlying tax district and one public representative. This joint review board evaluates the specifics of the TID project plan, including: whether the land within the TID is as characterized, the proposed boundaries of the TIF districts, the TID financing plan and expected expenditures and costs. Joint Review Boards have the power to approve or deny TIF districts based on the following criteria:
• Whether the development expected in the TID would not occur without the use of TIF (commonly referred to as the ‘but for’ test).
• Whether the economic benefits, as measured by increased employment, business and personal income and property value, are sufficient to compensate for the cost of improvements.
• Whether the benefits of the proposed plan outweigh the costs, in taxes on the value increment, to the overlying tax districts.

The Consultant is paid to determine the eligibility of the proposed area for designation as a Tax Increment Financing District (TIF), prepare a Redevelopment plan under applicable State of Wisconsin law as noted above and manage the approval process to a final determination.

The Potential Costs of TIF

Because TIF districts pay for improvements through future tax revenues, many people consider TIF ‘getting something for nothing’. This is simply not true. In fact, using TIF carries significant costs, beyond just the dollar value of improvements made in the district. These costs fall into five general categories:

1. Direct Costs: When most people discuss the cost of a TIF district, they are referring to direct costs. Direct costs are the costs of the physical improvements (including labor costs) within the district, the administrative costs of managing the district, the costs of any consultancies and/or developer incentives and the costs of financing all these expenditures.
2. Service Costs: Generally not included in TIF accounting, cities have the potential of taking on new service costs during the life of each TID. New development may increases demand for city, county, and school district services—demand not accompanied by increases in tax revenue to provide these services. For instance, new jobs can generate new subdivisions that will send more kids to school; require additional snow and trash removal; and need more road maintenance. Providing these services is costly and, over the full life of a TID, can add up to millions of dollars.
3. Fixed Tax Base Costs: Fixed tax bases result in the loss of tax revenue on private development that would have occurred without TIF. If the ‘but for’ test could be administered with 100 percent accuracy, the fixed tax base cost of a TID would be zero. Through the last two decades, the property included in TIF districts typically generated some form of privately-funded development over the TID’s life without any subsidy. If those properties had not been included in a TID, local taxing jurisdiction would have received taxes on these developments immediately instead of it being diverted to pay off TID project costs. Since 2008, most existing properties within TIDs have been devaluing and the City must focus on guaranteed increment.
4. Opportunity Costs: Using TIF also imposes opportunity costs on cities in two ways. First, by approving one project plan for TID development, cities eliminate the opportunity to develop that piece of land in a different manner. For example, if a project plan allocates TIF funds for the creation of an entertainment district, it eliminates the possibility of developing that land into an industrial corridor. Second, when one TID is created, it limits the municipality’s ability to use TIF elsewhere within the community, because state law limits the amount of property value which municipalities can include in TIF districts.
5.  Negative Externality Costs: Improper planning and land use is costly to a community. As a development tool, TIF can contribute to these costs when used unwisely. If TIF is used to subsidize development on the urban fringe it could contribute to sprawl, congesting commuter corridors and increasing pollution. If TIF lures businesses away from dense urban centers, it contributes to the spatial mismatch between jobs and employees, simultaneously creating labor shortages and unemployment. Likewise, if TIF is used to attract employers that do not pay living wages, the public bears the cost of wage supplements and social services for the working poor.

Potential Benefits of TIF

The City has to measure the benefits of a TIF project plan by estimating how much new property value will be created in the district. The use of TIF funds can also be used to leverage a wide range of benefits, beyond just property value growth. Understanding the full range of benefits that TIF use can create helps joint review boards better assess whether a project’s costs outweigh its benefits.

1. Increased Property Value: For TIF to work, it must create new property value within the district. The taxes on this new property value pay for the expenses incurred by the District and, once all costs are repaid, the public benefits by having new property value added to the tax rolls, which hopefully allows the City to maintain levels of services or reduce the tax rate.
2. Employment: In addition to adding property value, TIF is used with the anticipation of creating new jobs. Adding new jobs to the community creates new consumer income, which is then reinvested in local businesses. But not all job-creating projects are equally beneficial. Projects that create living-wage jobs accessible to unemployed or underemployed individuals generate larger net gains in consumer income and reductions in demand for various forms of public assistance than do projects that create low-wage jobs with no opportunities for advancement.
3. Catalyzing Further Development: TIF assisted developments can also benefit the community by acting as a catalyst for further projects. Projects which demonstrate the viability of a new market often spur future investment and eventually add property value well beyond that created in the first project. Also, providing TIF funding for small projects that can lead to much larger ones—for example, small business startup programs or business incubators—can leverage greater benefits for the community down the road.
4. Leveraging Other Monies: TIF can also be used to fill financing gaps in projects that can leverage other monies, such as matching federal/state grants or foundation dollars. Likewise, TIF can be used to match business expenditures for value added upgrades to their buildings and sites, leveraging greater consumer investment in city. Using TIF to leverage other funds increases the amount of benefits generated per TIF dollar spent.
5. Positive Externalities: Positive externalities are the beneficial side effects of TIF use. For example, developments constructed to modern building standards can reduce demand on overstressed power grids, fire services and wastewater treatment facilities. Likewise, TIF projects that have invested in complete streets can help reduce commuter traffic on congested roadways.

The most powerful economic development tool available to local governments in Wisconsin is tax incremental financing. Tax incremental financing allows the City to fund economic development projects by capturing the increased property tax revenue stemming from these projects and is the single largest economic development program in the State of Wisconsin.

RECOMMENDATION

The EDC’s review and determination to date indicates that the area has been in a long running state of deterioration. The area is in need of rehabilitation work and suitable for mixed-use redevelopment. Additionally, I believe that the consultant can provide a rational determination that the project will increase the value of all other property in the district.

I recommend the EDC ask the Council to approve the hiring of the consultant to complete the determination of the eligibility of the proposed area for designation as a Tax Increment Financing District (TIF), prepare a Redevelopment plan under applicable State of Wisconsin law as noted above and manage the approval process to a final determination.