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Developer property tax breaks in hot Atlanta neighborhoods raising questions

Midtown sunset. Credit: Ritu Verma

By Maggie Lee

On Tuesday afternoon, members of a Fulton County board sat around a table in a Downtown conference room, listening to representatives for three Atlanta developments come ask for what amounts to a discount on property taxes.

One was a request for property tax savings worth $3.5 million in over 10 years for a company that wants to build a boutique hotel, with restaurants and a ballroom, on the BeltLine on what’s now trees and a parking lot in Old Fourth Ward.

“This was a great opportunity to help plant a seed, hopefully that would spur other development in the area,” Al Nash, the executive director of the Development Authority of Fulton County told the board. He said DAFC staff ran a model of the economic impact of the hotel, and property taxes it would pay versus what the parking lot is worth in property taxes to schools, the city and county. The developer is having to make a number of improvements to benefit the community, Nash said. He recommended approval.

There was a short discussion. Senior Vice President Charles Pinkham of Portman Holdings took a few board questions about hotel demand in the area, the target customer for the hotel, and why he said an abatement is necessary.

Pinkham said that without this cash flow, this incentive, the project will not be financeable. It’ll be expensive to build, he said.

“We’re having to take frankly quite a bit of risk to put a product here that’s going to draw demand out of other districts, out of Downtown we would hope, that we can bring more people to this market,” Pinkham said.

“It will be a very unique product, and we have to build it accordingly, and so because of that, we have to produce a yield that supports that cost,” he said.

And with one dissenting vote, the board members present gave the preliminary OK for a boutique hotel to pay a cut-rate property tax bill.

Even though it’s in a part of town hot enough that a developer thinks it can support a boutique hotel.

DAFC has also granted similar deals that amount to a property tax break for the renovation of part of Phipps Plaza late last year, and this year, to build a Buckhead luxury apartment building.

The argument is that Atlanta wins through jobs and eventual taxes when there’s a new development, even when that comes in the form of letting building owners pay a reduced property tax bill in a hot intown neighborhood.

Yet a counter-idea is that Atlanta and Fulton County are underwriting developments that are going to happen anyway; and even that local government is sometimes underwriting the wrong kind of development in the wrong part of town.

Property tax discounts worth $163 million over 10 years within the city of Atlanta have been given either preliminary or final approval this year so far by the board of the Development Authority of Fulton County board plus the city of Atlanta’s economic development authority, Invest Atlanta. (Their jurisdictions overlap in the city of Atlanta. That figure does not count DAFC incentives in Fulton cities outside of Atlanta.)

Property tax abatements

preliminary or final approval in Atlanta January-July 2019
Click on a dot for more details

The project list does include things like housing developments in places like Lakewood Heights that will be all affordable, or one in Chosewood Park that’s mixed-income.

But it’s the discounts for gleaming towers in Buckhead, Midtown and Old Fourth Ward that are raising questions.

The Math Now

Governments everywhere use tax breaks, grants or other incentives to certain businesses on the argument that it’s a good thing to have a building, a robust business, or an employer in one’s jurisdiction.

People will get jobs building new buildings, people will work in buildings once they’re done. The property owner will eventually pay full property taxes that will fund the city, the county and schools.

If a developer takes a walk, the community has lost those things, goes the argument.

Or as Nash put it in an email, “As New York learned when they lost Amazon, 75% of something is still better than 100% of nothing.”

Nash declined an interview about how DAFC evaluates this type of incentive that has the effect of a lower property tax bill, but he did answer written questions.

What Nash listed first, and what’s prominent in DAFC and IA documents — is how much in taxes a certain parcel will be worth both before and after development. Afterward, it’s always more. Except for extraordinary cases, it needs to be at least five times more for DAFC.

Take another deal approved Tuesday: a hotel that’s planned for what’s now a parking lot across Ponce from the Fox Theater. Now that parking lot is worth about $38,000 in property taxes annually to Fulton County, the city of Atlanta and Atlanta Public Schools.

After construction, DAFC expects the taxes to be worth roughly $892,000 to the city, county and schools, even when the property tax discount is fully in place. The tax revenue will only go up from there.

“DAFC pays close attention to extraordinary costs of proposed projects, including, but not limited to, system improvements, community give-backs, the historical and current state of the property, and site challenges,” Nash wrote. “We notice that often times the projected incentive amount is actually less than some of these extraordinary costs that many of the DAFC projects face. The DAFC also considers job creation, neighborhood and community support, and recruiting tenants on a national and global level.”

Midtown sunset. Credit: Ritu Verma

Fulton County Commissioner Liz Hausmann emphasized the same tax base math — Fulton got about $13 million more in 2018 than it would have because of DAFC deals, she said. (A report with details is due out next month.)

“I feel like the projects that we bring forward have a benefit in bringing jobs and additional tax revenue long-term to Fulton County, which offsets property taxes for the residential property owners,” Hausmann said.

She doesn’t agree with people who say some deals might go forward without an incentive. She watches DAFC closely — if she’s not at a meeting herself, generally someone from her staff is. She said she thinks it’s getting tighter and tighter to get financing.

“I hear all these guys that come in and say that without this help — a lot of these sites require a lot of mitigation, site work. Some of them are on brownfields. It’s expensive. They put in amenities [like sidewalks and public space] that they wouldn’t be able to afford for the community sometimes without the incentives,” she said.

And one thing you hear often is that Fulton is in a tight space, given that some neighboring jurisdictions, like Cobb, offer even deeper property tax breaks.

Invest Atlanta did not make anyone available for an interview about evaluating this type of incentive that amounts to a property tax discount. But they did send some written comments, emphasizing the technical mechanics of how the deals work.

On IA and DAFC handouts, there’s a figure: “estimated tax savings” over 10 years — and the sum of those is where the $163 million figure comes from (it doesn’t take inflation into account.) The transaction can be called several things, including a “bond for title,” “sale-leaseback” or a “lease-purchase bond.” IA and DAFC aren’t liable to pay property taxes, so they take the title to a development, and lease it back to the company that asked for the deal. Then the company pays property taxes on its leasehold interest in the property, which starts at 50 percent and grows in steps over 10 years.

“What Invest Atlanta’s board can do is recommend a tax incentive for a business, which serves as an operating subsidy over a 10-year period, for new capital investment projects that align with city’s economic and community development priorities such as job creation and new affordable housing. The proposed tax incentive is then presented to the local tax assessor’s office for approval,” reads IA’s statement.

So the tax base is bigger after a development than before it. And people work in a place where they didn’t work before.

Questions about Those Calculations

But just as there were New Yorkers who opposed $3 billion in public subsidies for a wealthy company like Amazon, there are Atlantans who don’t see a win in some business incentives here.

Lee Morris is a Fulton County commissioner who represents much of east and north Atlanta. He’s also just been selected as Fulton’s delegate to Invest Atlanta’s board.

“The questions I’ve raised with developers who have received these bonds-for-title deals on occasion is: Would you do this project without the abatements?” Morris said.

“And I’ve had some of them say, ‘Yes I would’ve,’” Morris said. “Although many of them … have said, ‘But I would have had to maybe change the quality of the granite [counter]tops in the apartments … or I might not have been able to do the facade on the parking deck that the neighborhood next door wanted.’”

This is called the “but-for” test, asking whether a site would really go undeveloped or underdeveloped “but for” the property tax discount. Is that Midtown parking lot really going to stay a parking lot forever “but for” a tax discount? Is a company really going to locate in Charlotte instead of Atlanta “but for” the subsidy?

No “but-for” test is required by state law; it’s more of a thought experiment.

DAFC board member Tom Tidwell is making that thought experiment. In a letter to elected officials and board colleagues last week, Tidwell wrote that he thinks the board ought to think long and hard about providing any incentives to hotel or residential developments.

“Both housing and hotels are location-specific projects so the developer cannot claim they will go to Charlotte, Dallas or Douglasville if we don’t give them an incentive. In addition, housing and hotels are built in response to demand for the rooms, they don’t create demand. In other words, we cannot build as many hotels as we want, only what the market needs,” he wrote.

He’s also not interested in the site challenges that developers often mention, like a sloped lot, or other physical things that make site access difficult.

“These types of challenges are known before the developer buys the site and therefore should be baked into the purchase price. If they are not, then all we are doing is providing a windfall to the landowner who sold his lot above FMV [fair market value] because the developer knew/expected to get a tax incentive,” he wrote.

Tidwell did vote against the O4W hotel deal. Reached for comment, he said that while he may not always agree with his colleagues, he stands by the group’s decisions.

Morris said he suspects that his Buckhead constituents would probably prefer developers being given disincentives to build in their neighborhoods, due to traffic that’s already bad and sewer infrastructure that’s inadequate.

“My constituents would vote overwhelmingly to say ‘Stop,’ especially when they get their tax assessment notices,” Morris said.

That is, those folks would like to know their commercial neighbors are paying as full a property tax bill as they are.

Morris said he hears from folks who say that site challenges make a site too expensive to build without an abatement, and that construction costs like labor and materials are climbing.

“Of course, I’ve also noted that developers as a class tend to be some of the most wealthy people in the region. So are we really making them wealthier with the use of public tax dollars?” Morris said.

But Nash, in his email, pushed back against the idea of a but-for test.

Nash wrote that the “but-for” test is often cited by opponents of economic development who may inappropriately try to rely on hindsight to state that projects shouldn’t happen, when in reality they are just hypothesizing and speculating that a project would be developed without an incentive.

Such opponents “often times lack the factual knowledge about the projects, as well as the sophistication on what goes into economic development.”

“Even if certain projects might have moved forward anyway (which is almost impossible to know on the front-end, and usually impossible to determine even after the fact), the developers will undoubtedly have to make cuts that lower the value of the project, reduce the benefit to the tax base, and give less to the community,” Nash wrote.

But schools, the county and the city have calculated the value of the discounts for the year that ended in June, 2018. For the city of Atlanta, it’s $4.5 million foregone. Fulton County’s figure is about $9 million. Atlanta Public Schools’ figure is about $13.5 million.

How to Do it Differently

Kasia Tarczynska is a research analyst at Good Jobs First, a policy resource center, that, among other work, tracks all kinds of government subsidies to companies nationwide.

“They’re happening because that’s the way economic development is designed in the United States, it’s based on offering incentives or subsidies. We don’t call those programs ‘incentives,’” Tarczynska said. “We call them ‘subsidies.’”

She said businesses have lots of reasons why they locate in a given place: proximity to customers, infrastructure and transportation patterns; subsidies are not the most important item, she said.

But Tarczynska said there is an argument for some subsidies in some situations.

“Say if there is a neighborhood that doesn’t have a grocery store, because grocery stores don’t want to invest in the neighborhood, there is a reason for local or state government to offer some incentives to change that behavior, change private sector behavior and encourage that investment,” Tarczynska said. “Or if we need affordable housing or investment in small and local businesses, investment in Main streets, investing in workforce development. Those types of incentives make sense.”

But that’s not how economic development agencies are generally judged.

“Traditionally it has just been about jobs, and the delivered amount of economic development,” said Todd Greene, who is the Atlanta University Center Consortium’s executive director and also an Invest Atlanta board member.

The headline numbers on any economic development agency’s reports are often the count of jobs created or retained by the agency’s deals and the “capital investment,” or amount to build and equip developments.

If you measure like that, of course a parking lot sprouting a hotel scores high.

But the philosophy of economic development is also changing to something more inclusive, more innovative, Greene said.

There’s more thinking about how to make sure economic development is tied to local workforce development, for example. Agencies are starting to think of whether a target company would, say, provide certain kinds of jobs. Sure, maybe it’s good to attract new people to a city, but maybe it’s even better to attract a company that can benefit the people who are already there.

Or look at it this way: The BeltLine is a jobs center now, mainly for folks who work in retail or offices. But for decades, its railside buildings employed blue-collar workers. Those who worked at the Sears that is now Ponce City Market might have gotten legendarily good benefits and middle-class wages even without high school, much less college, degrees.

Where’s the path to the middle class for less-educated Atlantans? Maybe economic development agencies could try to woo clean manufacturers, for example.

Or another innovative idea is that it’s worth focusing on parts of town that are rather quiet — in order to trigger a “halo effect” of surrounding unsubsidized development, as has happened around Alphraretta’s Avalon, or Atlanta’s Atlantic Station.

While the state of Georgia certainly gives grants and tax breaks, one of its economic development incentives is worker training: under certain circumstances, Georgia’s technical colleges will train a new company’s workers for free.

Back in Fulton and Atlanta, there are some shifts in policy just this this year — Invest Atlanta itself this month adopted a formal equity statement. DAFC  just adopted some minority participation guidelines.

[Read more about moves in Atlanta City Council to exert more control over Invest Atlanta.]

For years there’s been on-and-off talk of cutting DAFC out of Atlanta and ending the overlap between the two agencies.

It rankles some folks that developers can apply to two different agencies in Atlanta. At least one did that in 2018, the “The Metropolitan,” a warehouse-turned-art-office-event space on Murphy Avenue in West End. IA meeting minutes show no discussion of the development. DAFC received the application on May 16, 2018; and according to meeting minutes, within a week the board had granted preliminary approval for the incentive.

Invest Atlanta’s own leader, Eloisa Klementich, asked DAFC via a June letter to Nash to lay off of lease-purchase bonds (and tax-exempt mortgage revenue bonds) inside the city limits.

One of her reasons was perspective: “Having many other tools to incentivize economic development, Invest Atlanta has a unique insight into the appropriate means to promote trade, commerce, industry, and employment opportunities for the public good and the general welfare in the city,” she wrote.

Invest Atlanta has this year been focused on deals to help set up mixed-income housing — “affordable housing” is very much the theme at Atlanta City Hall.

Klementich also mentioned that IA’s board has delegates from Atlanta Public Schools and from the Fulton County Commission so those voices can be heard in lease-purchase debates.

DAFC has no seats set aside for those other taxing entities.

Nash replied with a letter that rejected Klementich’s request and said it was entirely unclear to him “how Invest Atlanta is in a better position or ‘has a unique insight’ to handle many of the things we handle here at the DAFC.” He suggested she suggest ways that the two might work together.

Any change to DAFC’s jurisdiction would have to come in a change to state law.

But local elected officials can influence the policy decisions taken by both DAFC and IA.

It’s the Fulton County Commission, Atlanta City Council and Atlanta’s mayor who make most of the board appointments.

Renderings of some of the buildings given preliminary or final tax abatements in Atlanta this year.

Documents:

Invest Atlanta meeting minutes and agendas

DAFC meeting minutes and agendas

CSV of map data

Governments disclose the impact of incentives given to businesses under an accounting rule called “GASB 77.” This figure is published in a city, county, state or school district’s Comprehensive Annual Financial Report. To find this figure, search on the internet for your jurisdiction plus “CAFR.” That will be a large document. Inside that document, search for the word “abatement.”

APS CAFR

COA CAFR

Fulton County CAFR

 

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Maggie Lee

Maggie Lee is a freelance reporter who's been covering Georgia and metro Atlanta government and politics since 2008.

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2 Comments

  1. OWEN B. Grown July 30, 2019 2:53 pm

    I look forward to the 2019 report about the Beltline TAD. I hope tax abatement practices don’t contribute to the under performance of the Beltline TAD, specifically on the Eastside Trail. On the other hand, tax abatement in lower income areas in need of investment (such as Federal Opportunity Zones) should be encouraged.Report

    Reply
  2. Christopher Johnston July 31, 2019 7:08 pm

    InvestAtlanta was reconstituted from ADA by Mayor Reed as a mechanism to swap quid pro quos with favored people, and nothing has changed under Mayor Bottoms.Report

    Reply

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