The Trouble With Lexington Club—TIF 101 (Part 1)

In the next month or two, the St. Charles City Council will have a public hearing on the matter of the application for a new Tax Increment Financing (TIF) district to assist the construction of the proposed Lexington Club development. While one way of looking at this application is to cheer it on as a sensible way to encourage development of a blighted site in downtown St. Charles, another way of looking at it is to question if this is the best use of taxpayer’s money (we will all be paying for this development, if approved) in this economy. To be able to answer “yes” to that last question will require that there is some significant value to the community to be found in the project as it currently exists; value that is seemingly in short supply.

For those readers who do not have a good working knowledge of what Tax Increment Financing (TIF) districts are, or how they work, please take a minute to first investigate here before reading any further. 

I believe that the following four elements hold promise for success in a TIF project: (1) the property in question has an intractable problem, with no apparent hope of redevelopment “but for” the TIF, regardless of the economic climate; (2) the use of public money is involved, so actual, quantifiable public benefit, that would not otherwise be accomplished, must be done by the TIF district; (3) the project should ideally be the redevelopment/renovation of existing buildings, where critical infrastructure is already in place; (4) the project should ideally be a project that is all commercial development or includes commercial development alongside residential development.

Although TIF can be extremely beneficial to cities when applied to projects that are well-suited for the TIF model, the proposed Lexington Club development does not seem to be such a case. The proposed TIF district is to support the construction of the proposed 143 unit residential infill project, to be located on the site formerly occupied by Applied Composites (a nearly twenty eight acre site bounded very roughly by the train tracks on the north, State Street on the south, 12th Street on the west, and Fifth Street on the east). The site was once a light industrial/manufacturing facility from the early 20th century through closing of operations in 2005, at which point it went on the market. Its sold relatively quickly, according to Kane County records, in August of 2006, for $3.825 million.

TIF districts are designed to give local municipalities a tool kit to help them to kick-start development when everything else has failed. A property that has been in dire need of redevelopment for decades, yet has seen no possible suitors, regardless of the strength of the economy, is a great candidate for TIF assistance.  Given that the Applied Composites site found a willing buyer so quickly, it does not seem to indicate that its problems are intractable; it did not have to languish on the market for decades, waiting for a willing buyer.

In 2005, market forces dictated that Applied Composites could no longer continue as a going concern. In 2006, market forces further dictated that there was enough intrinsic value in the property that a for-profit developer willingly bought it for $3.825 million—despite apparent full knowledge of the fact that there were several million dollars in liabilities attached to the property. That does not indicate an intractable problem; that merely indicates healthy, normal market function.

The developer did not make public any intention of making a request for TIF assistance during preliminary plan presentations in 2007 and 2009; presumably the project was economically feasible at those points in time without TIF assistance. Although formal application for the TIF district has not yet been made officially known, it is known to be in the works because of the fact that the developer made a presentation (see here and here to District 303 on May 26, 2011, asking them to sign off on the proposed TIF district. The school district denied their initial application amount of $5.25 million, settling instead on the amount of $4.96 million.

The agreement with D303 stipulates that the TIF money is to be used for what the developer terms “extraordinary expenses” related to the development of the site. Those expenses are: demolition of the existing buildings on the site, leveling of the topography of the site, and remediation of the environmental contamination at the site.

To help to justify the use of public money to fund their private project, the developer has stressed their belief that the use of TIF funds to remediate the environmental contamination present on the property is a public benefit. Nobody will argue with the notion that public benefit is accomplished by cleaning up the property, as it protects public health and is thus, by definition, a public benefit.  However, one could argue that since state law demands that they clean up the property, simply because they own it, it seems to call into the question the notion that the act of environmental remediation is for the public benefit (How can one claim to be accomplishing something beneficial when all one is doing is simply what is required of them by the law? For example, should we then give monetary awards to people who pay their taxes?).

The developer should have known all this when they bought the property in 2006 (that they were legally responsible to clean up the property), so this all appears to erode the claim of environmental remediation as being a public benefit.  Conversations with legal counsel at the Illinois Environmental Protection Agency have confirmed that they would be more than happy to step in and force the developer to remediate the environmental contamination present at the property, simply because that is what the laws of the State demand. 

In a related matter, the Illinois Environmental Protection Agency (IEPA) also signaled that they would be happy to step in and force the developer to clean up the mountains of demolition debris they left behind when they demolished the Applied Composites building complex in 2008. Despite the fact that St. Charles’ own ordinance stipulates that demolition projects must be completed within 30 days, and that a completed demolition project entails the “demolition and removal” of the building, the City has thus far been seemingly unconcerned with requiring the developer to follow their own ordinance.

Given that the project was understood by the public to be financially viable when presented as preliminary proposals in both 2007 and 2009, the application for TIF assistance now makes it look like little more than a publicly-funded bailout for a private developer who made the mistake of buying a chunk of land very near the absolute peak of the real estate market. While the people pushing in favor of the TIF assistance certainly do not see it that way, that is a fairly common perception in the neighborhood where the proposed project is located.

Another place where the proposed Lexington Club TIF district seems to get it wrong is that it is not a redevelopment of existing buildings, but is instead a completely fresh start for a significant tract of land. Unless this proposed development is going to be built using private streets and maintained totally through homeowner’s association fees, one assumes that the City will be responsible for maintaining all the new streets, parkway trees, streetlights, signage, sidewalks, sewers, water lines, power lines, and all the other infrastructure that goes into creating a new neighborhood. Additionally, there will be new demands on the Fire Department, the Police, and the Utility Departments as well.  This will create new costs for the City, which may well show up in the form of increases in the tax levy the City requests to support its budget. To be fair, the City will receive some new revenue via small increases in sale tax receipts, as the new residents in the development will spend some of their money inside St. Charles. However, if that additional sales tax revenue will be enough to cover the additional costs brought on by maintaining the development is anybody’s guess.

If the City’s costs to maintain the new neighborhood outstrip the increase in sales tax receipts, the costs will have to be passed on to every other tax payer in town, because the tax increment money generated by the development will be flowing to the school district and the developer, not to the various taxing bodies.

The final place where the proposed TIF district seems to get it wrong is that the project is exclusively residential in nature. This means that the impact on the school district and other governmental services is going to be significant. Based only on the number of school-aged children that live on one block in the neighborhood, it does not seem to be unrealistic to assume that the 143 proposed new homes in the Lexington Club could generate as many as 150 school-aged children. This will, in turn, force D303 to request a larger tax levy to support the larger budget required to support the additional children. The 25 percent carve-out of the tax increment money for the school district most likely will not be enough money to cover the additional expense to educate those children, so the tax rate that is passed along to every other tax payer in town will have to increase to make up the difference.  

Bottom line: while the tax increment money flows to the developer to pay off their loans, the school district will probably be looking to all of us to make up the shortfall. The same could potentially hold true for the public library, the park district, and other taxing bodies, since unlike the City, they will not see any increases to their revenue from the development, only increases to their costs.

TIF is not an inherently evil thing. It has been used quite successfully, many times, across many decades, as a tool to spur development that would otherwise never happen, regardless of market conditions. Lexington Club simply does not seem to be one of those ideal uses of TIF as a development tool, as the property took only one year to find a new suitor; the use of TIF money seems to create little public benefit that would not happen but for the TIF; the development is not a redevelopment of extant urban fabric; and, the proposed development is exclusively residential. Everybody needs to go into this with their eyes wide open.  TIF money is not free manna from heaven; it is simply tax money that is redirected from its original purpose (paying for public services) to pay for another purpose (paying off debts accrued to build the development). Taxpayers who do not live in the TIF district may well have to foot higher tax bills than they would if the land was developed without a TIF in place. If there was significant public benefit to the proposal, we could all get on board and support it, same as we do from time to time for other bond issues put before us. However, the general sentiment is that that public benefit side of this proposal appears to be lacking. The developer gets the cash, while we seem to get very little in return. We can do better than this; we must do better than this.