Tax Increment Financing: Retail vs. Mixed Use Destination Developments
Tax increment financing (“TIF”) allows local governments to deem the area making up a new development a “Tax Increment District”. This TIF District is able to collect 50% of the new sales tax and 100% of the new property taxes generated within the District for approximately 20 years.
Retail TIF Developments: High Risk High Reward Developments Dominate St. Louis
Traditional strip center developments provide a relatively inexpensive way to quickly generate significant tax revenues for a local government. Lured by the potential for a quick windfall of tax revenue local governments in the St. Louis Region have dedicated the majority of TIF funding over the past 30 years to traditional strip retail projects.
Traditional retail centers provide municipalities with the potential to generate significant short-term tax revenue from relativeliy small capital commitments. However, this reward comes with significant risk of failure due to their reliance on a national anchor tenant to drive traffic to boutique retail and restarant spaces within the development. These retail developments have proven to add little value to the regional economy as a whole and have proven to have a signficantly lower success rate than the more diverse mixed-use TIF developments in areas such as Texas, Arizona, Colorado and Ohio. In the St. Louis Region alone, dozens of retail based TIFs have failed since 2000 from national retailer closures or rellocations that left behind abandoned developments unable to generate enough new taxes to pay for the debt associated with their projects.
Mixed Use Destination Developments: A Recipe for Long-Term Success
Apartment complexes, condominiums, senior living facilities, office parks and hotels provide a built in traffic flow and customer base that allows smaller retail and restarant spaces to flourish with or without a national anchor tenant. Diverse mixed-use developments often require substantial public funding to construct public parking garages and other signficant infrastructure improvements. However, the the diversity of tenants and built in customer base provided from mixed-use developments greatly decrease their risk and increase their chance of long-term succes.
University City’s University Place Development Raises Significant Reg Flags
After decades of failed TIF developments local governments in the St. Louis Region have finally started to create a framework for examining the true risks and rewards of proposed developments seeking public funds. The City of University City, MO (the “City”) is one of the cities that has created a set of standards required for approval of TIF funding. According to a recent request for proposal (“RFP”) from the City these requirements include “quality design and architecture…thoughtful and balance(d) mix of uses that create a regional destination and serve local needs; incorporate unique signage, art or other amenities that signify the area as entry to the City”(1). The University Place development proposal in its current form does not come close to meeting the requirements laid out by the City in their RFP due a number of fatal flaws.
The current proposal being considered by the City comes from the small local developer Novus Companies who were the only private developer to submit a response to the RFP. At first glance this proposal contains all of the attributes of a successful modern day mixed-use development over its 3-phases including a nationally recognized anchor tenant and grocery store, 176 unit luxury apartment complex, 90 unit senior living facility, 98 room boutique hotel and a number of restarant and boutique retail stores. If done correctly this $200 million+ development has the potential to transform University City’s economy for decades to come and could mark a change in the regions approach to publically funded development projects. However, as currently structured this development proposal requests over $70 million in TIF funding for a project that is nothing more than another big box focused strip center .
Phase 1 represents a traditional retail center development shown in the above map in red on the right side of Olive, Phase 2 includes a hotel, senior lilving facility and boutique retail and Phase 3 represents the luxury apartment development. This plan as proposed by Novus Companies has a number of glaring flaws that indicate bait and switch tactics by the Developer. It is not the three stage development plan in and of itself but the complete segmentation of the retail and residential portions of the project that are cause for concern. The density of the residential population surrounding a retail development is one of the largest factors contributing to its long term viability. Successful mixed use developments during the last decade have been defined by their ability to increase population density through a seemless integration of reatil and residential. Condominiums or luxury apartments placed on top of first floor retail provide a built in base of regular customers and create residential density in an area that is often surrounded by less populated suburban housing.
The University Place design plan seems to almost purposefully make the development unattractive for foot traffic with amost complete separation between the retail portion of the development and the residential portion which are blocked by a major thuroughfare and two large black top parking lots. This problem is compounded by the fact that the entrance of the luxury apartments, senior living facility and hotel as currently contemplated are facing a rear alley of a retail development.
The current map of the proposed development site is shown above. I-170 prevents acces from any neighboring residents to the left of the development and the public golf course directly to the right of the proposed site further reduces the residential density of the area. With this in mind it is no suprise that this area has not been able to support boutique retail or grocery developments in the past.
Despite this infromation, Novus Companies current proposal calls for the development of a hotel, grocery and significant boutique retail before the development of a 178 unit apartment complex. This flys in the face of logic and creates the potential for over 100,000 square feet in boutique retail space whose population can clearly not provide the demand necessary to support it.
The failure to contemplate any integration between retail and residential componants of the development, reliance on a non-disclosed anchor tenant to serve as “the “driver” of the development”(3) and sloppy development schedule which proposes a 178 unit luxury apartment complex face the back alley of a strip center development is completely unacceptable for a project of this size and scope.
The development experience of Novus Companies is similarly unimpressive and does not include a single project with both retail and residential companents or any mixed use developments with a project cost of over $200 million. University City staff and its elected officials have the duty to ensure a top notch development plan and financially capable and experienced developer. They also have a duty to demand mechanisms that minimize the ability of a developer to walk away from the project with large profits after completing only the retail portion of the development before they approve a $200 million development plan that calls for $70 million in public funding. As it currently stands Novus Companies University place proposal:
- Offers a backward looking development plan that does not create the walkable downtown center like environment needed to transform a region
- Has been proposed by a developer who lacks experience and has not provided any proof of having the financial wherewithall to complete a project of this size
- Requests significantly more public funding for most projects with
- No mechanisms in place to enforce that the development is completed as proposed
City officials and staff owe it to their residents and to the region as a whole not to approve any significant TIF funding until they have recieved a best in class proposal from a best in class developer. After researching the current proposal is clear that the current plan and developer do not come close to fitting the definition of best in class.