Watts: Why downtown growth, density -- and incentives -- matter for all of Durham

When it's election season, distributive politics -- those that focus on how the pie gets divided, versus how the pie get baked in the first place -- tend to bubble up to the top of the queue. And this cycle's no exception, with the topic of whether downtown has received "too much" and inner-city neighborhoods "not enough" of the City Council's attention in recent years.

Chuck Watts thinks that it's the wrong question, and makes an argument in this guest column for why he believes downtown development is a benefit for the entire community.

Watts is an attorney living in Durham and has long been active in the city's political and civic communities.  Among other things, he serves as Chair of the Parrish Street Advocacy Group and earlier this year was appointed by Governor Purdue to serve on the North Carolina Board of Transportation representing the seven county area, known as Division 5, which covers Durham, Granville, Franklin, Person, Vance, Wake and Warren Counties.

Durhamʼs downtown is seeing quite a metamorphosis. For years after Brightleaf Squareʼs opening, there was very little new construction or renovation even planned for downtown.

Then came the new ball park, the American Tobacco Factory, West Village, the Durham Performing Arts Center, the Venable Center, the Farmers Market, Golden Belt, the renovation of the old ball park, Rogers Alley, and, on the horizon, is the first phase of the Greenfire project in Durhamʼs Central Business District.

In each case, public-private partnerships have produced economic development that neither party would or, frankly, could produce alone.

In some instances projects have been publicly constructed facilities that are operated by private entities, like DPAC, the DAP, the DBAP, and the Farmers Market. In other instances, the City and County, have assisted private developers by providing incentives which close a projectʼs independently determined financial gap to make the project financially viable.

These partnerships on significant projects have proven truly catalytic. Even in the context of an historic economic collapse nationally and regionally anyone can see the green shoots of economic development sprouting in Durhamʼs downtown -- new restaurants opening, new privately financed renovations occurring, and new large commercial office leases being let.

In this political season, some in our community have taken issue with public support for these projects, suggesting, contrary to decades of experience, that without public support these projects would happen anyway, or questioning the motives of developers who make very long term financial, personal and legal commitments to our city, or suggesting that more economic development would be triggered if smaller projects were supported with these public incentives, or suggesting that public money going into these projects is being diverted from police and fire departments or from public schools, or suggesting that public money should be going to the “neighborhoods” instead of downtown.

These critiques tend to resonate in an environment of skepticism and misunderstanding regarding just what sort of incentives are being publicly provided and why it is actually a good deal for our community. I penned this comment in an effort to promote informed discussion during this political season. It's very important that we come to understand what these publicly supported projects do for our community and at what cost. Skepticism without information is simply a justification for inaction.

In the main, our public officials have chosen to use what could be described as a synthetic form of tax incentive financing to close financing gaps in private developments that have the potential to stimulate other development in their wake. However, with this approach no public money goes into the projects to get them completed.

Instead, these synthetic TIFs essentially provide what amounts to a tax reduction, actually a repayment of 80% of the increased taxes paid, for a period of time on the improved property once the new structure has been put into service. In other words, they incent the development by removing a tax burden that would otherwise kill the project.

The taxing authority wins because the project is completed, generates other private development, increases tax valuations and collections on even unimproved adjacent properties, increases employment which increases sales tax collections and decreases social services expenditures, and, once the incentives burn off, as they are about to over at American Tobacco, the tax base is significantly increased.

Of course, if the taxing authority had any reasonable belief that the development would happen as quickly and to the same scale without the incentive, then there would be no reason to provide such incentives. Certainly developers would love to avoid being encumbered by the public process, if it was not critical to the success of such a project.

Further, such financing is not a solution for every proposed project. It can only make viable projects that would be viable commercial projects but for the burden of taxation. If the project would not be viable even without taxation, then the TIF alone would be insufficient to make it a financeable project.

Using another approach, public entities have provided some aspects of the infrastructure necessary to make a project commercially viable. With the American Tobacco Campus, for example, in addition to a synthetic TIF, both the City and the County used public financing to build parking structures that were commercially necessary to make it attractive to potential tenants.

Clearly such projects would not have happened without these incentives.

With synthetic TIFs, arguably, the public money paid to developers is found money for the taxing authority created as a result of the developerʼs work -- the developerʼs improvements create viable commercial structures from dormant unproductive ones which otherwise generate little or no tax revenue. Again, if there was a reasonable basis for believing that the structure would be rehabilitated in the ordinary course, then pubic support would be both unnecessary and undesirable.

Similarly, with infrastructure support, various sorts of public financing can be used to construct the infrastructure necessary to make the project financially viable. Parking decks are fixed assets that produce revenue. They can be pledged to secure such debt so that the capacity for general obligation financing is not impinged. Thus, the capacity for bond financing of public necessities like police stations, fire stations or school buildings is not impacted by the provision of such incentives.

Our public officials need to be applauded for having the vision to get these projects completed because it takes years for this sort of foresight to gain public recognition, while elections happen on a more frequent cycle. Even when the benefits are apparent, incumbents may face challengers claiming, as you may hear in the current debate, that the public assistance should have been focused in other areas of the city.

However, taking a longer view, had the same mind set been in place in the 1980ʼs, for example, our downtown would display a completely different level of development today than it actually does. Job opportunities in downtown would be much more abundant, the tax base would be stronger, and residential property taxes in Durham could be lower than they are today because the burden of government would be spread across a larger economic base.

The challenge that I would level at our public officials today is why not do more of it and be more aggressive with it. Why has it taken so long to promote development in the central business district and along Parrish Street? Why were the incentives ultimately offered Greenfire so much lower and more constrained than those offered Capital Broadcasting or other developers whoʼve been focused outside the loop.

In my view, downtown is everybodyʼs neighborhood and benefits to downtown radiate out to the neighborhoods. That said, why not use these same sorts of incentives to promote targeted development in other areas of Durham.

Why not pursue catalytic projects along the Fayetteville Street corridor, around NCCU, and in other areas where underdevelopment has promoted other social and economic ills? Developers are ready willing and able and given the requirements of todayʼs debt market financing gaps are even more obvious.

These tools of economic development can, if prudently yet aggressively deployed, help to make this a more vibrant community. So I encourage the Council and the Commission not to yield to skepticism, “do-nothing-ism” or the politics of us versus them.

In Durham, we need more growth and more density in areas like downtown. The success of these public-private ventures should encourage us to do more of them and be more creative with with these tools.

Comments

[Stockard Channing]

AMEN!

[Freddie]

Very Insightful K!

I am one to believe that if you build within, growth occurs around you. Hence, if you pour money towards the downtown areas, downtown neighborhoods around it will grow with it as well as you'll have more and more people that want to be around these resources.

I agree that more money should be poured to even amount of areas but reality is, there isn't enough money to go around with blight and the conditions Durham used to be in for such a long time.

Naturally and historically, growth starts with the downtown core and once the downtown economy is healthy and thriving, this money made in these areas will help in recovering areas around it like the Fayatteville corridor, Angier Ave, NECD, or even Roxboro Rd.

[Phil]

"When it's election season, distributive politics -- those that focus on how the pie gets divided, versus how the pie get baked in the first place -- tend to bubble up to the top of the queue"

Well-mentioned, Kevin. Too often, the wrong questions get asked. Then it becomes virtually impossible to find the right answers, then do the right thing.

Related-ish: Back in the 90s, I was visiting some executives in the Philippines who had been hosting some Mexican government people who were interested in the Philippines' experience with land reform. The Mexicans observed with a start, "we want to learn how to cut up the pie -- but you people have cut up the pie PLATE."

[G Wolf]

Let me first say that I am all in favor of stimulating growth in the downtown area (ie, within the loop), as well as the other areas mentioned. However, I have to take issue with the following statement:

"However, with this approach no public money goes into the projects to get them completed. "

It's just not true. In fact, the author says so himself. A "tax reduction" means that less taxes are collected by the city/county/state government(s). That means less money flows into the government rolls. Granted, in this particular case, it is in the interest of collecting more future taxes, but in the short term it's still less taxes taken in for Year 1 (and likely Years 2, 3, and 4).

Basically, the government is making a bet, putting up some of their taxes in Year 1, and hoping for a bigger payoff down the road. Strictly speaking, that is public money going into the project.

Also, on another note, why no mention of the Lakewood area? Is that not a just as good, if not better, candidate for investment than the NCCU area?

[Chuckde424]

G. Wolf,

As you quote, what I said was that "no public money goes into the projects to get them completed." New taxed on the completed project would not even be assessable until a Certificate of Occupancy is issued. Of course, that would be the point at which the project is also completed. So as I said, under TIF finanicing, no public money goes in to get the project completed. Another way of making the point that I was trying to make is to say that if the project doesn't get completed, the developer gets not public benefit. Of course, the developer should not get any such benefit but the point is about cash at risk. The develope & his finanical parterns and not the government are financially at risk because no public money goes into the project until it is completed.

Second, my listing of communities where development could go was not meant to be exhaustive. Of course, in each case, you need private developers with ideas and financing to support projects that are close to being financially viable independent of government support.

Chuck

[Khalid]

It is also inaccurate that no public money has gone into our neighborhoods. There has been plenty of public money pumped into SWCD (i.e. Lakewood area) for many years. There has been money pumped into NECD including Eastway Village and the HOPE VI project. Historically, money has been pumped into Fayetteville St. and more money is in the pipeline for the area.

Now all these projects have been on a smaller scale because they have been mostly public projects with non-profit involvement. The private sector has been a limited partner up to this point (for better or worse). A more delicate balance has to be utilized in the neighborhoods because it is possible to uproot the good with the bad within these neighborhoods.

IMO public-private partnerships (i.e. synthetic TIFs, etc) should be reserved for larger scale catalytic projects. As of right now, those projects have been downtown (including the so-called loop). The developments around the Hayti Heritage Center will probably involve some sort of incentives. The key is the private sector recognizing an opportunity and taking on an immense amount of risk.

[Chuckde424]

Great points Khalid . . . I particularly appreicate your points about public money going where private money hasn't been willing to go, SWCD, NECD, HOPE VI and the like and your appreciation for the contributions and risks taken by private developers even in the pub-priv parntership setting.

I also agree that the three developments around the Hayti Heritage Center would seem to be likely targets for pub-priv partnerships where there is sufficent vision and capacity brought to the table by private developers.