IV. Jurisdiction Surveys

A. Washington, D.C.

1. Tax Increment Financing

The Tax Increment Financing Authorization Act of 1998 created a new tool for aiding economic development in Washington, D.C. See Determination of Special Merits, Nov. 19, 1999 (“Merits”), 5. The act sets a dollar limit for such bonds and a sunset provision. See id. “It is a resource that should be dispensed with care and one that should only be authorized for those projects that are designed to meet our most pressing economic development needs in the proposed project area.” Id. (emphasis in original). However, no official rules for what project would qualify for such financing were created until a determined group of developers forced the issue for their project. See “Capital Gains,” SCT, April 2000, 15.

The project that used the provisions of the act and some creative interpretation is the mixed-use $195 million Gallery Place Project, in the Chinatown/downtown area of Washington, D.C. See Merits, 2 and Capital Gains, 15. The developers claim that the project would not have happened without TIF. See Capital Gains, 15. The five-story project fills in the block next to MCI Center. See Arquitectonica (architects’ renderings of project). It proposed to develop 926,250 square feet into a high-end, destination retail/entertainment and residential area, including a multiplex cinema, restaurants, stores, a health club, residential units, a medical clinic, and a five-floor, underground parking garage. See Merits, 2 and 3. Two anchor tenants (the cinemas and a restaurant) signed long-term leases, provided that at least 50 percent of the retail spaces would always be operating. See Merits, 2.

To force their project along without having to wait for the legislative action, the project’s supporters created a consortium called the Gallery Place Associates. See Capital Gains, 15. Associates included many powerful developers who had developed, among them, millions of square feet of commercial office and retail space both in Washington, D.C., and New York City. See id. These developers hired Miami’s Aquitectonica, which designed Times Square’s E-Walk, to create an attraction that would meld Chinatown with the MCI Center. See id.

The Gallery Place Associates also applied to the Office of the Chief Financial Officer of Washington, D.C., for certification for a project that would require Tax Increment Financing Bonds. Tax Increment Financing (TIF) allows a percentage of the real estate taxes generated by a new development to be used to issue TIF bonds to pay back the costs of infrastructure and public improvements. See id. In fact the City contemplates using sales tax TIF for much of this project. (Highsmith Interview). This financing method can bring private investment to areas not normally attractive to them. See Capital Gains, 15. The City contemplates making up any shortfall in revenue generated from the TIF, to pay principle and interest on the bonds.

See Merits, 1. The Office of the Chief Financial Officer and the Office of the Deputy Mayor for Planning and Economic Development – which decided if the project had special merits – had to approve the applications. See Merits, 1. Criteria that must be met for certification include: financial feasibility, net tax revenues, conforming with D.C.’s “Comprehensive Plan,” a cost/benefit analysis, whether the TIF will compete with or supplant other financing options, and whether the project has “special merit.” See Merits, 3.

These merits include “economic, cultural, social, or financial factors,” none of which were defined, even though the Tax Increment Financing Authorization Act of 1998 mandates the creation of defining regulations. See Merits, 4. Although the act reads as though the writers expected such defining regulations to be developed in a public forum, such had not occurred. See id. In fact, the Offices of the Chief Financial Officer and the Deputy Mayor for Planning and Economic Development (OCFO and ODMPED, respectively) made a manual of guidelines for the submission and review of TIF applications after receiving the application for the Gallery Place Project, but no formal regulations, which are required by the act, have yet been issued for any part of other applications. See id.

The ODMPED made clear that before the existence of special merits could be decided, an economic development policy for the project area must exist. See Merits, 5. The policy must address the most pressing needs of the area, and any project requesting financing must help meet those needs. See id. Also, these projects must help address more universal goals, like an increased tax base and employment percentage. See id. Therefore, TIF, as an economic development resource, must be a catalyst for projects that meet an area’s specific needs as well as the district’s universal needs.

Because the project was a “significant first step in the direction of promoting and realizing our important development goals for the Downtown area,” the ODMPED decided to “rule on the issue of special merits with respect to the project even in the absence of regulations defining that term.” See Merits, 4. The office found that the project had special merit because, for one, it would help recreate the downtown area as a destination for tourists, residents, workers and convention attendees (a new convention center was being built a few blocks north of this project). See Merits, 5. The project includes the largest multiplex cinema in the area, blends in Chinatown’s influence, adds “market-rate” housing, answers downtown’s parking needs, is next to a significant Metro station, and enhances the MCI Center. See Merits, 5 and 6.

The Gallery Place Project could fulfill both of Washington, D.C.’s economic goals: revitalizing downtown as a destination area, and adding to the tax and employment rolls. See Merits, 6. Not only would the stores and theatres bring jobs, money and people to the area, but the residences also would add to the real estate tax rolls. See id. Both the MCI Center and the convention center were publicly funded, and the Gallery Place was seen as a way to supplement and enhance the attraction of those two structures, further aiding the downtown revival. See id. The project could also create a bridge between Chinatown and the Pennsylvania Avenue corridor, with its appeal to both segments of the city (China Walk, Chinese restaurant, only movie theatres in downtown area, etc.). See Merits, 6 and 7.

Once the ODMPED decided that the project had special merits, the office had to decide if the project could achieve these special merits with out TIF allocation. See Merits, 7. Again, the office had no regulations to follow. Instead, it checked if the developers of this project and of other projects in the area had tried, and if so with what success, to get any other types of funding. See id. The main deciding factors for the ODMPED were the amount of time that property had been unproductive and that there was no competing bids of comparable uses of that property. See id. Hence, the office decided that TIF allocation was required for this project, and that regulations defining special merits were necessary. See Merits, 8.

Another key individual to forcing the project through was the recently elected mayor of Washington, D.C., Anthony Williams. See Capital Gains, 15. Williams was elected about halfway through the process of getting the project approved and funded, and he helped convince the City Council to approve TIF in the district, which it did in December 1999. See id. Within days, groundbreaking occurred. See id. Once the Gallery Place Project was officially announced, the Mandarin Hotel complex in southwest D.C. also applied for, and had approved, its TIF within a couple months. See id. This hotel development will be financed both by TIF ($20 – 30 million) and taxable bonds. (Highsmith Interview).

A deal was struck to finance the downtown improvement. The city paid $64 million toward the project. See id. Of that, $18 million pays for 2.5 years of capitalized interest and a year of debt. See id. $46 million goes directly to the $195 million project. See id. The developers, in turn, agreed to pay prevailing wages (usually according to area unions) and to use $30.5 million from private investors as a down payment. See id.

Mayor Williams’ administration quickly created rules and regulations for the application for and acceptance of a TIF project, and published Tax Increment Financing: Developer’s Guide and Application Filing Instructions (Guide). Each application will be reviewed on a case-by-case basis, and those that qualify include improvements in public infrastructure, neighborhood retail projects, affordable housing and rehabilitation of historic structures. See Guide, 6. Each TIF project must provide private investors; include all available combinations of public and private funding in the forms of loans, incentives, bonds, credits, grants, etc.; and use other business development incentives for which the project and Washington, D.C., are eligible. See Guide, preface letter. Private funding need not exceed 20 percent of all project costs. See Guide, 2. The District can sell tax-exempt government revenue bonds to help finance development within “Priority Development Areas,” but the TIF proceeds per project cannot exceed 20 percent of the project’s total cost, the amount of private funding, or 50 percent “of the net present value of the project’s estimated total tax increments.” See Guide, 2 and 5.

The Guide also defined “special merit” directly. Some benefits to the district that qualify as special merit include the elimination of blight, district-authorized public improvements, increasing employment and the tax base, increasing property values, and fostering the economic development strategy of the district. See Guide, 7 and 8.

In yet another demonstration of the necessary government support for successful redevelopment, the city also has:

1. Written down the value of some of the land and sold it to the developer at a discount;
2. Helped with some necessary environmental clean-up of the site;
3. Provided employer tax credits; and
4. Provided the developer with internal government “expediters,” like Assistant Deputy Mayor Highsmith, together with a city tax expert.

2. District of Columbia Enterprise Zone

The Enterprise Zone of 1998 created tax incentives of more than $1.2 billion for the nation’s capital. See Business Financing and Investment Incentives in Our Nation’s Capital, Jan. 1, 1998 through Dec. 31, 2002 (“BFII”), i. These incentives include $3,000 a year in employer wage credit for each worker living in Washington, D.C., up to $8,500 over two years for Welfare-to-Work credit; $5,000 for purchasing a first home in the district; 0 percent capital gains tax on some investment earnings; a personal property expensing allowance; and up to $15 million in tax-exempt financing for qualified projects. See id. Projects that qualify for such tax benefits must: be a “qualified business,” have at least half their business’s income be from business within the D.C. Zone, have much of its business property within the zone. See BFII, 1, 8 and 12. The zone mainly contains census tracts with 20 percent or higher poverty rates, which is a third of the census tracts and about half of the district’s developable property. See id.

The Enterprise Zone Bonds can supplement other development tools, such as TIF. See BFII, 6. The tax-exempt financing (EZ Bonds) has an annual limit, but the district can reserve that which was not used in prior years. See BFII, 3. EZ Bonds do not require hiring from the zone, but do offer special credit for doing so. See BFII, 1 and 3. Some businesses cannot use these bonds, including residential rentals (vs. commercial rentals), country clubs, massage parlors, hot tubs, racetracks, and packaged liquor stores. See BFII, 3.

Some organizations – such as non-profits, health care facilities, and public and private schools – qualify for an unlimited amount of tax-exempt financing through 501 (c)(3) bonds. See BFII, 4. Facilities that can be financed through tax-exempt methods, without regard to their location in Washington, D.C., include waste disposal, transportation, utilities, recreation, parking, housing and urban redevelopment. See id.

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