HomeMy WebLinkAboutV.D - TIF legislation HEDRA Memorandum To: HEDRA Commissioners From: Rusty Fifield, Economic Development Coordinator Date: October 4, 2019 Subject: Special Legislation for TIF Action Requested Approve evaluation of special legislation for obsolescence TIF district. Background This memo describes the concept for special legislation that would allow Hastings to be a case study for a new type of TIF district. There is a glaring need for new economic development tools. The primary elements of tax increment financing (TIF) powers are almost 30 years old. They are not well-suited to the contemporary development issues facing many Minnesota cities. Redevelopment is a perfect example. The TIF Act requires that buildings become blighted (structurally substandard) before TIF can be used. The goal of most cities is to act before blight occurs. A more widespread issue is obsolescence. Obsolete properties are a more complicated community development problem than blight. There are several forms of obsolescence:  The building deterioration and deferred maintenance of Physical Obsolescence can have negative impacts on an area without reaching the structurally substandard level of a Redevelopment District.  Functional Obsolescence takes many forms. Factors such as architectural design, layout, size, market, and local economy can make a building functionally obsolete. Big box stores and older strip malls are prime examples.  Buildings become Economically Obsolete when its use cannot generate sufficient revenues for operations to be financially feasible. Each of these circumstances leads to similar outcomes. Buildings sit vacant because one or more of these factors acts as a barrier to reuse. The longer the building is vacant, the more likely the structure begins to deteriorate, adding cost to reusing a building. These conditions can be a disincentive to investment in neighboring properties. These problems can perpetuate when buildings are acquired at a discounted price and operated as investment property. The buildings are often occupied by businesses looking for low rent and with limited concerns about the TIF Special Legislation October 4, 2019 Page 2 physical condition of the building. As long as the building has tenants, the property owner has little incentive (or capacity) to address deferred maintenance. There is a clear public purpose in removing the physical and economic barriers to revitalizing/reusing obsolete property. No current TIF district applies to these situations. Since general legislative change seems very unlikely, I am proposing that we consider special legislation for Hastings as a test case. I have discussed this idea with Gary Carlson at the League of Minnesota Cities and he believes it is worth exploring. My underlying rationale is simple. Obsolescence is based on the same basic principle as redevelopment. Property is occupied with buildings that require substantial renovation or clearance and private investment will not occur without the use of tax increment financing. The difference is that the buildings have not deteriorated to the point required to be structurally substandard. There are a variety of examples in Hastings that illustrate the need. The local Target closed in February 2018. It was built in 1999 with 126,000 finished square feet. Ryan Companies has been engaged (I do not know the nature of the engagement) to sell or reuse the property. Based on my discussions with Ryan, several factors have been an impediment to reuse of the building:  There are a limited number of uses that fit into this footprint.  Cross use agreements with adjacent properties exclude certain uses. For example, Cub Foods would object to Aldi occupying the building.  The local economy does not help to attract potential users. The economy also limits the financial feasibility of reuse involving structural change. Clearly, there are examples of the marketplace finding alternative uses for big-box stores. As this form of retail becomes less functional and the number of potential users declines, these buildings will pose greater reuse challenges. The site offers additional development opportunities. Some of the parking area could be converted to pad sites. Reuse of the existing structure would not warrant a TIF district. There would be limited value to capture and few eligible expenditures. Tax increment financing comes into play when the solution becomes the physical repurposing of the structure or demolition and start over. The scenarios are identical to basis for Redevelopment and Renovation & Renewal districts. The difference is that the building has not been allowed to become structurally substandard. Otherwise, the financial challenges facing these alternatives are the same. Another local example is Sterling Drug. Sterling closed its doors this year after more than 20 years of operation. The store was a combination pharmacy and old “five and dime”. The combination of competition from national chain pharmacies and the challenges for brick and mortar retail drained profitability from this location. Sterling occupies about 20% of the 139,000 sf Westview Mall. The Mall was built in 1976. Sterling by itself is not the basis of a TIF district. It does, however, pose a significant financial challenge for a form of commercial development already under stress. The 1970’s strip mall has TIF Special Legislation October 4, 2019 Page 3 become outdated. Market conditions often require rents that leave little margin to maintain or enhance the structure. The physica l structure and the economic conditions make it practically impossible to repurpose the site without a public/private partnership. It is clearly in the public’s best interest to have the capacity to act before the building becomes structurally substandard. Some aging suburban strip malls will not deteriorate to a level of structurally substandard. The decline of the property reaches an equilibrium where users seeking low rent space will sustain the facility. When the private sector wants to undertake redevelopment, cities have no option to use tax increment financing to facilitate this investment. There are also settings where a mix of smaller buildings and inconsistent land uses pose a barrier to redevelopment. The sites have the inherent challenge of land assembly. Even if a developer can assemble a site, cities can only participate if some of the buildings are structurally substandard. In these settings, the difference between obsolete and structurally substandard becomes clear. Subject to HEDRA approval, the propose to take the following steps: 1. Define parameters for TIF district. 2. Seek input from other stakeholders (as needed). 3. Meet with legislative staff to review concept and assess the viability of special legislation. 4. Report to HEDRA with recommendation and, if needed, budget for advocacy. 5. Seek City Council approval of special legislation, if necessary. Financial Impacts None. No expected expense unless seek special legislation. Attachments None