As developer of one of the projects that brought about the new tax increment financing (TIF) law in Kentucky, Louisville's Craig Greenberg told the August meeting of the Lexington Forum that he was in many ways a guinea pig trying to establish the legislation. But as Lexington delves ever deeper into its first TIF project, CentrePointe, city officials are finding the waters first mapped by Greenberg difficult to navigate.
Greenberg's $490 million, 62-story Museum Plaza project to be placed along the Louisville riverfront, along with the $1 billion Ovation project being built by other developers in Northern Kentucky, enticed the Kentucky General Assembly to create a new TIF law similar to others in many states that captures a project's newly generated tax dollars to offset the cost of its development.
"In tough government budget times, for a city project to be able to bring 80 percent of state tax revenue back to the city in which it was generated and support development in its own city Ö is a wonderful economic development tool," Greenberg told the Forum.
But Greenberg and local officials are battling with current economic woes in the financing of their projects. Museum Plaza is on hold pending new financing, while Lexington is trying to figure out how to best capture and utilize future money generated as a part of the TIF district that will incorporate the Webb Company's 35-story, $205 million CentrePointe, which is slated to be paid for in cash from private investment.
TIF allows tax revenue generated above current levels to be returned to the district to pay for, or in most cases reimburse, public improvements made within the district, such as infrastructure work, public spaces and public buildings.
In Louisville, $150 million of Museum Plaza's total price tag will be spent on public improvements, rebuilding a floodwall along the Ohio River, a new park overlooking the river, new public connections to bring together Museum Plaza with the Muhammad Ali Center and other nearby areas, preserving historic facades along West Main Street to be incorporated in the building, expanding two streets and moving a 10-story electric transmission tower and underground utility connections. But Greenberg, like Lexington officials, has questions on how to fund those improvements.
Until recently, the best option would have been selling bonds to complete the public projects concurrently with the main project's construction, using the financial analysis of expected tax revenue to support the bonds. "Well, that bond market right now literally doesn't exist. You cannot sell that bond anywhere in America that we're aware of," Greenberg told the Forum.
Just two days earlier, members of Lexington's TIF Task Force wrestled with the same question trying to figure out the most effective way to finance $35 million to $70 million in projects in the downtown.
Financial analysis projects upwards of $190 million being generated in new tax dollars over 30 years from the TIF district incorporating CentrePointe, but Jim Parsons, the city's outside counsel on the matter, said it was unlikely the state's TIF Commission would approve a plan to spend the new tax revenue as it comes in. The city would have to identify now how it would need to spend money that comes in during every year including the 30th and final year of the district, which would be a hard sell, according to Parsons of Taft, Stettinius and Hollister's Covington office.
Selling bonds upfront, however, is also a dubious route, as Greenberg stated, because bonds based solely on financial analysis with no track record of generated revenue aren't being bought, and would be quite a cost, due to the risk involved. if they were. To issue bonds before revenue is being generated in the TIF district may cause the issuance of further bonds to pay the debt service on the original, he added.
The TIF task force examined their possibilities later in the day of the Forum meeting, with Morgan and Keegan financial analyst Bob Pennington saying he would feel most comfortable issuing rated bonds or credit enhanced bonds. To be rated, issuers must go to a rating agency such as Standards and Poor's or Moody's and demonstrate an ability to repay the bonds, which would probably have to wait for actual revenue to be generated from the project in this market. Credit enhanced bonds must show actual return on investment, which would mean waiting until taxes can be generated from at least the construction of the CentrePointe site, if not completion, before these types of bonds could be issued.
Getting the most out of the money made available from the TIF could mean delaying work on proposed city projects, such as a new parking garage, renovation of the Old Courthouse, a redesign of Phoenix Park and others. But for the meantime, the task force, along with legal and financial counsel Parsons and Pennington, will be taking a look at all options.
"It is very fluid; there's a number of possibilities and ways you could structure the transaction," Pennington told the task force. "We have looked at cash flows and revenue streams. There is certainly bonding capacity available."