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TIFS for malls stir debate in U.S. cities

By Jon Springer

By all accounts, tax-increment financing has become one of the most useful gadgets in a retail developer's toolbox. But whether that tool is a can opener or a sledgehammer depends on how -- and where -- one uses it.

While the financing tool known as TIF has helped build millions of dollars in retail projects, in the past few months it has also become a center of controversy, pitting developer against developer, city against city, and residents against local governments. Battles over the use of public subsidies for retail projects have broken out in Utah, Missouri, Connecticut and Ohio, among other places. In many cases, the developers arguing against TIFs in one city have benefited from them in another.

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Columbus, Ohio, residents let City Council members know they support two competing malls during a recent council meeting.

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Created in the 1950s in California by the husband-and-wife team of Don and Kim DeLaney, tax-increment financing is a tool in which a portion of the real estate taxes generated by a project is placed into a fund used to pay back infrastructure costs and public improvements that make the project happen. Properly used, TIFs spark private investment in areas where it would otherwise not occur -- a provision known as a "but for" clause in most TIF legislation.

Originally used to match federal urban-renewal funds in distressed areas, an estimated 35 states have passed some version of TIF law. Today, TIFs are being used to fund a variety of developments, including shopping centers, in areas both urban and suburban.

To be sure, TIFs have been a resounding success in most cases, developers and city officials say. Retail projects such as San Diego's groundbreaking Horton Plaza would have been impossible without them. But the successes haven't come without some significant snags. TIFs have raised questions as to the definition of "blight'' -- a prerequisite for TIFs in some states -- and the appropriateness of providing subsidies for one development that might harm another. And as with any program where public funds are involved, politics play a large and often divisive role.

"If you went back years ago, you had four developers on every corner, and this is an extension of it,'' said Martin J. Cleary, president and COO of The Richard E. Jacobs Group, Cleveland. "But while we as an industry used to do 100 malls a year, now we might do 10. The opportunities today are created not by corners but by subsidies.''

While all developers do not agree with Cleary's take on TIFs, few companies are as steeped in TIF controversy today as Jacobs Group. In Columbus, Ohio, Jacobs is attempting to block a TIF that would allow a new mall to go up -- and subsequently take some tenants of a nearby Jacobs project with it. In St. Louis, Jacobs has joined two other developers in attempting to stop a TIF from assisting the redevelopment of a competing mall, charging the center hasn't met the conditions of blight set forth in state law (The outcome of both battles was unsettled as SCT went to press).

At the same time, however, Jacobs has built successful retail projects in Cleveland and in Wausau, Wis., with the aid of TIFs. So what's appropriate and what isn't?

"It's a good question,'' Cleary said. "And it differs from case to case. I assume the courts and the voters will ultimately say what's appropriate.''

Jack Pettigrew, an urban planner and partner with the Chicago consulting firm of Turkla, Pettigrew, Allen and Payne, simply says that state law determines whether TIFs are appropriate or not, and it's up to cities to implement them fairly. "If there are challenges to the TIF, the courts are going to make findings based on merits,'' Pettigrew said. "The question should be, 'Did the municipality do what the state law said it could do?'''

In some cases, however, the law is open to interpretation. That is certainly the case in Des Peres, Mo., a suburb of St. Louis where the town's proposed TIF to redevelop Westfield America's West County Center has been challenged in court by a group led by mall owners in three surrounding communities. The plaintiffs say West County Center, a two-anchor mall that hopes to expand and renovate with the help of $29.8 million in TIF financing, does not meet Missouri's definition of blight. Noted Cleary, "It's in one of the best residential neighborhoods around.'' When it comes to blight, however, location isn't everything. "You could say this is a landmark case -- at least a noteworthy one -- because it will test the public perception of what blight is vis-à-vis what the legal reality is,'' said Richard Ward, president of St. Louis-based consulting group Development Strategies.

"The law provides a long, laborious, and not particularly articulate, definition of blight -- that's what gives rise to dispute,'' said Ward, who offered expert testimony on behalf of Westfield and Des Peres in June. "A layperson might look at West County Center and say, 'That's not blighted,' because they may think blighted means serious physical deterioration. But that's not the case because the law speaks to a whole bunch of criteria.''

West County Center, a two-anchor, 30-year-old mall, qualifies as blighted under state law because it meets several conditions, including some physical deterioration, and obsolete platting, or division of parcels, which would make expansion difficult, Ward contended.

"We have an aging, underutilized and obsolete mall,'' Ward said. "It's economically underutilized in the sense that the age of the two-anchor mall is gone. While that's literally not a fulfillment of the terms of blight, in actuality it is one of the primary reasons that the city needs to protect its asset and facilitate its conversion into a competitive mall.''

Missouri is one of a small handful of states in which TIFs may also capture a portion of sales tax, making it particularly attractive to retail projects and giving extra incentives for communities to offer them. "It's a rich tool,'' said Ward. "In an area like St. Louis, you have a lot of municipalities with a vested interest in capturing and holding retail dollars in their community."

A similar battle between cities -- and their respective regional malls -- recently has been a source of controversy in Utah County, Utah. In that case, Salt Lake City-based JP Realty developed its new Provo Towne Center mall with the help of TIF financing under the Utah Neighborhood Development Act, luring an anchor store from nearby University Mall in Orem. The city of Orem fought back by providing its own financing package to University Mall to help replace the missing anchor and renovate the mall.

JP Realty charged that the city of Orem's package for University Mall, owned by the Woodbury Corp. of Salt Lake City, violated state law. JP Realty President and COO Rex Frazier declined to comment further citing the ongoing litigation, but did say that TIF has been a boon to his company and the communities it builds in. "We've seen it rejuvenate every community in which we've used it,'' said Frazier. "But it's critical that you follow the rules to a T.''

Like environmental issues, use of public funds is a hot-button concern that attracts the attention of politicians, media and communities, and is therefore brought up often by businesses fending off competition. William H. McCabe Jr., ICSC chairman and senior executive vice president of New England Development, said such concerns are a large part of the opposition his company is facing in its proposed Galleria at Long Wharf mall in New Haven, Conn., a $485 million project that would receive $85 million in public subsidies (SCT, May 1999).

"Do people try to conjure up areas of opposition? Sure. They do it all the time,'' McCabe said. "It's certainly happened with us. I find it somewhat disingenuous because the developer who raised the issue [Westfield, which owns malls near the Long Wharf project] is the same one who's taking $29 million in public funds in St. Louis. It's one thing to do it in Connecticut but quite another in Missouri, I guess.''

The Long Wharf project was still in the process of gathering city approvals as SCT went to press. Los Angeles-based Westfield, which is funding a group opposing the mall called Save Our Downtowns Alliance, declined to comment on the issue.

Few issues have put retail TIFs under the microscope quite like the ongoing dispute between The Jacobs Group and Glimcher Realty Trust in Columbus, Ohio. In this instance, Jacobs' Northland Mall anchors were acquired by Glimcher to be moved to a crosstown mall it hopes to develop in a TIF district. Citing needed road improvements for its proposed Polaris Fashion Place, Glimcher has asked for $17 million in additional TIF financing. That, Jacobs charges, would amount to a publicly financed destruction of their center. The company petitioned to put the TIF to a public vote, a move the Columbus city council approved in late July.

The so-called "Mall Wars'' have been front-page news in local papers for months, and have become a major issue in Columbus' mayoral race.

Glimcher CEO Herbert Glimcher said by accepting TIF funds his firm is merely taking advantage of existing state law, as any developer in its place would. The additional TIF the company has asked for would be necessary whether or not the Polaris mall gets built -- but the mall will not be built at all without a TIF, he added.

As for Northland, Glimcher has offered to redevelop it into another retail use, such as a power center, should the anchor stores go. Jacobs has meanwhile pledged $70 million toward redeveloping Northland should the Polaris plan fall through.

One of the dangers about using TIFs is that the public often doesn't understand how monies are generated, said Glenn Reschke, executive vice president of development and acquisition of Prime Retail, Baltimore.

"Our strategy is to establish an educational process," Reschke said. We schedule meetings with local homeowners groups who might be concerned with the impact of the development. Usually, they're happy to know it's not their tax dollars that are being spent to support the development.''

Disputes over use of public finance could be reduced, Pettigrew said, with better state laws and better cooperation between communities. In Illinois, for example, legislation is being introduced that would prohibit TIF incentives for projects that would relocate a store or business from a neighboring community.

Even Cleary of the Jacobs Group cannot fault his rivals for taking advantage of TIFs where available. But he's quick to add that his firm is just as compelled to do what it can to save its projects. In a mature industry in which new developments rarely arrive without impacting another, he suspects battles will continue.

"Trying to justify everybody's position is the easiest thing to do,'' Cleary said. "We all have a position, and we all think we're right.''

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