Taxing districts losing luster in tough economy

BY CHAD DAY, JACOB BARKER
news@ColumbiaMissourian.com

COLUMBIA — The plan was simple when the city of Columbia entered an agreement to help finance the Vandiver Drive interchange over U.S. 63 in 2002.

For the $8.9 million project, the city would finance a little more than $3 million on the condition that the CenterState Transportation Development District, set up around the location of the Bass Pro Shops, would pay the city back.

But when the project came in almost a $1 million over estimates, developer Curtis MacDonald of CentersState Properties, was forced to borrow from banks on the condition that he be repaid the additional million before the city got a dime.

“We were agreeable to (MacDonald getting reimbursed first) because, really, we didn’t plan on getting any of our money back anyway,” City Manager Bill Watkins said. “What we’d done is put in what we thought was a fair share for a road project.”

Building the Vandiver interchange at U.S. 63 was a longtime goal for former City Manager Ray Beck. Although he didn’t like the idea of another governmental body financing the city’s infrastructure, it was more important to him that it get done, one way or the other, he said.

Worried he might be setting a precedent with Centerstate, Beck made sure to put guidelines in place using the only leverage the city had — approving transportation projects that connected to city streets.

The city would be involved in the districts' operation but not have a sitting board member. Sales tax would be capped at 0.5 percent, even though state law allows a tax as high as 1 percent. TDD revenue would not be used for development fees and meetings would be publicly advertised. With these provisions in place, Beck thought, the districts would be a reasonable tool.

Since then, the city’s attitude toward TDDs, and vice versa, has changed considerably.

“Right now, we haven’t put any money in any TDDs,” Watkins said.

“After about the third (TDD), the development community inferred that the city really didn’t get a vote,” Watkins said. “So they pretty well did whatever they wanted to do unless they needed something from us. So we didn’t have to put any money in it, and they really don’t need us to be involved.”

This lack of city control has been a double-edged sword when it comes to funding road projects. The districts can pay for roadwork the city might have trouble persuading voters to finance. But once TDDs are established, the city has almost no control over what gets built or when. And the districts diminish the city’s ability to raise sales taxes and fund the improvements it deems most necessary. But because they rely on the approval of a judge rather than the City Council, developers have used TDDs extensively in Columbia.

A tough sell

One of the initial worries, Watkins said, was that TDDs might encroach on the city’s ability to levy sales tax. Stores that generated more than half of the city’s sales tax income in 2008 are within TDDs and are charging an extra 0.5 percent sales tax.

“Ray’s concern, and I share it, was that at some point we may have to go to the voters and ask for an actual increase in sales tax,” Watkins said. “We did that back in 2005, and the voters did not approve it. And one of the reasons that maybe they didn’t approve it was they felt most of the retail sales areas had an additional half-cent, so they weren’t interested in paying more.”

Shoppers in much of Columbia pay 7.55 percent in sales tax, except on qualified food sales. But in TDDs, which include most of Columbia’s large shopping centers, they pay an additional 0.5 percent.

“The TDDs take away from the city’s ability to do citywide special sales tax initiatives because it’s already up to that 8.05,” Fourth Ward Councilman Jerry Wade said, noting that 8 cents has generally been accepted as the city’s sales-tax ceiling.

“If you don’t have the ability to do that, we have a real problem in terms of basic road infrastructure,” Wade said.

Even though the city can let TDDs finance road improvements it might agree with, the money for those improvements is also tied to other district projects that benefit the developer. Rather than making its own decisions about where the most pressing transportation needs are, the city often depends on new developments that set up TDDs to finance major road improvements. But those road projects might not be among the city’s top priorities.

“(TDDs) have removed a source of revenue from community investment, have used it to pay for private development costs and used taxpayers’ money for private gain with no return,” Wade said.

‘A cookie-cutter process’

TDDs have proliferated in Columbia. The 13th TDD was established late last year to pay for road work at the Rock Bridge Shopping Center so that Hy-Vee would agree to build a store at the old Walmart site. Unlike tax-increment financing or a community improvement district, a transportation development district needs no city approval.

Watkins said the city lobbied the legislature years ago for some degree of control over TDD formation, but to no avail.

“That would give us the leverage and the oversight on a public, transparent basis to look at exactly where the money was going, what the project was going to be used for and make sure it was a project that really was in the city’s best interest,” Watkins said. “We’ve had one or two that I strongly, strongly disagreed should have been done. I think that’s still the way to go, but that was soundly defeated at the legislature.”

In Columbia, developers have used TDDs to finance roads to shopping centers that initially were the targets of public and City Council animosity.

“There are some cities where these mechanisms are not necessary because the community is so encouraging,” Columbia developer David Atkins said. “The community wants the jobs, the sales tax. … where the community welcomes development with open arms rather than putting up barriers, and our community doesn’t do that.”

Springfield, for example, had more than 150,000 residents in 2000. According to a 2008 Missouri State Auditor’s report, Greene County, which includes Springfield, had only two TDDs as of Dec. 31, 2006. Springfield officials are much more willing to approve community improvement districts or tax-increment financing, two financing tools that rely on city approval and oversight.

“They haven’t used TDDs as much because the city and the City Council (are) so much more pro-development down there,” said Craig Van Matre, a Columbia attorney who represents developers and TDDs. “You don’t have the same resistance as you do up here.”

When he was working for one of his clients to build a Sam’s Club in Springfield, Van Matre said, the city delegated a full-time staffer to help him through the approval process and offered to help set up a community improvement district.

“It wasn’t like I had to go lobby the council people or talk to 16 interest groups,” he said. “I just got it handed to me. Huge difference.”

In Columbia, Van Matre has hesitated to set up community improvement districts for his clients because he figured it would take too long to win approval. Indeed, a community improvement district on Range Line Street barely won approval from the City Council in December. Even council members who voted for it said they did so only because they thought it would be better than a TDD.

For developers, getting a TDD through the court “is a fairly cookie-cutter process,” Van Matre said.

But the city has managed to reach agreement with developers to keep the sales tax levied within TDDs at a half-percent, Watkins said. Plus, the districts have financed road work that makes large developments viable.

For the city of Columbia, which depends heavily on sales tax revenue, large new developments can lure out-of-town shoppers.

Don Lairmore, an original board member of CenterState TDD, said large stores such as Bass Pro Shops not only draw more people to Columbia but also increase traffic for all retailers.

Also, unlike citywide sales taxes for specific road projects, TDDs ensure that the people who use the roads pay for them, Lairmore said.

That argument, however, carries less credibility as consumers cut back and towns around Columbia develop their own shopping centers.

“We’re at the point now, I would argue, that most retail developments simply become a shifting of what’s here,” Wade said.

A loss of luster

The loss of some big-box retailers such as Circuit City is making it difficult for TDDs to meet sales tax revenue projections. And the hole is much deeper than the revenue that those stores alone might have generated.

Successful commercial developments attract a variety of shops that complement each other and feed off one another’s traffic, Lairmore said. When a development loses a large retailer, the smaller shops also lose customers. This means not only less revenue for those shops but an exponential decrease in total sales tax for the TDDs.

Some districts, such as those encompassing a Walmart Supercenter, can weather the storm. (Walmart saw its sales rise in the fourth quarter of 2008.) But the outlook is grim in districts that rely on big-box retailers that sell items shoppers are trimming from their budgets.

For instance, the three TDDs set up on Stadium Boulevard — Columbia Mall, Shoppes at Stadium and Stadium Corridor — are in an area hit harder than others by declining sales, Watkins said.

The districts were established after the developers came to an agreement with the city to eventually merge and use combined revenue to finance $21 million worth of work on Stadium Boulevard and the roads that feed into it. But disagreements over which projects to complete first hung up the “master TDD” plan.

Raul Walters Properties, which set up the Stadium Corridor TDD and paid for engineering on the road projects, insisted that MoDOT first build a right turn lane into the development that includes Toys R Us. The city sided with MoDOT, agreeing it made no sense to complete Walters’ project before the others because it would have added more time and cost to the larger improvement, Watkins said.

Walters died in December.

Stadium Corridor attorney Craig Davis said negotiations are moving forward again. But the plan to improve Stadium Boulevard, which seemed reasonable when sales were better, no longer looks as feasible.

“Once Walters Properties and MoDOT get their issues worked out, the original financing plan — which is two years old — supposed a growth in sales tax that we no longer have,” Watkins said. “So we are quite concerned that the original financing plan won’t work.”

The proposed work on Stadium, which Watkins said is very important, essentially depended upon three independent developers coming to an agreement with MoDOT. While the city has been waiting for the parties to work out their issues, sales tax continues to pay the lawyers who represent the districts.

“It’s like so many things: there’s a good solution, there’s an OK solution, and then there’s no solution at all,” said Van Matre, who represents Stan Kroenke, owner of the Shoppes at Stadium development. “You get too many people involved in the mix, you get no solution at all because you can’t get them to agree.”

When large infrastructure projects rely on a handful of stores rather than the whole city, the loss of one anchor store can imperil the entire project the districts were set up to fund.

But even for financing improvements around a single development, the economy’s decline is such that the transportation development districts are no longer as effective as they once were.

“In 2004, it was a fantastic tool,” said Atkins, who set up a TDD for a development he’s planning at Providence and Blue Ridge Roads. “You had plenty of commercial users, you had a very healthy bond market. It was a very productive system; you could really deploy the system to create developments with very low risk to the community.”

Atkins is no longer sure he’ll be able to sell bonds guaranteed by sales tax revenue within his TDD. He said the plan now is to finance the road work through his development company and use the TDD to slowly reimburse himself and his partners.

“A lot of luster has been knocked off of (TDDs) in this environment, where the deals are a lot slower, and there really is no bond market to speak of right now,” he said. “In theory, we can recoup some of those dollars in the future through sales tax revenue, but it could take a decade.”

Even so, Van Matre said that TDDs remain important tools and that they will become more attractive as the economy recovers.

“I can point you to — but I’m not going to — developments that have had the opportunity to use these techniques, haven’t done so, and they’re failing because their debt structure is now too great,” Van Matre said. “They’re just not going to survive.”

One of his clients, Kroenke, who owns the Walmart developments, still has investment bankers willing to sell bonds to finance improvements around the supercenter at Broadway and U.S. 63. Still, investors now are more wary of any risk, especially risk tied to retail sales — and they’re demanding more for their money.

“If you have a good tax-exempt revenue bond, investors are demanding twice as much return (than on a Treasury bill),” Van Matre said at a TDD meeting March 13. “I don’t know how long this perverse imbalance will last, but it’s going on right now.”

Developers who have set up TDDs with no stores built are in a predicament even more grave. With national retailers slashing expansion plans and a sizable amount of unabsorbed commercial space vacant in town, new developments will face considerable challenges signing tenants and securing financing.

Forum Development Group paid more than $4 million for the new interchange at Gans Road and U.S. 63, more than half the project’s cost. It’s planning a large mixed-use development on the west side of the highway at the interchange and has a TDD on the site to recover the costs of the infrastructure improvements.

But plans for the development are on hold given the current economic conditions. Now Forum is forced to wait longer in order to recover its share of the public infrastructure through sales tax revenue on the property.

“That’s part of the difficulty that the public doesn’t understand,” Forum Vice President Jay Lindner said. “The contractor that built the bridge needs the money up front, and obviously that sales tax payback is a 25-year deal. So a developer like us needs to put the money up front at risk and then hope that there’s enough sales tax to pay it back.”

TDDs might have required the city to react to the needs of developers to build infrastructure that would have been lower on the priority list, but they’ve still financed projects that will be important as Columbia continues to grow.

“There have been some TDDs that probably would not be in our priorities but other ones that have done good work,” Watkins said. “On a case-by-case basis, a TDD can be a really good thing, or it can be something that’s not appropriate.”

It’s only since the economy began to weaken that Columbia has begun to consider other tax instruments such as community improvement districts and tax-increment financing. And as retail revenue falls and it becomes harder to attract investors and tenants to new developments, the justification for the cost of setting up a TDD is also likely to fall.

If developers lose their appetite for TDDs, the city might lose an important, albeit imperfect, instrument to fund large infrastructure projects.

“TDDs are here, and we’ve got to figure out how to live with them and how to get the most out of them,” councilman Wade said. “But we’ve also got to figure out how to deal with their inadequacies and problems.”

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