City policy is very much like a Nirvana song. To understand the words requires an enormous amount of concentration and patience, and even after you recognize them, you are special if you can actually figure out what they mean. There probably aren't more living people who understand Madison government lingo than those who can tell you what ol' Kurt was really yelling about back when Jason Joyce was chief at the Badger Herald.
The Edgewater debate is a prime example. In the simplest terms possible I will try to explain what the "TIF" controversy is all about.
TIF stands for Tax Incremental Financing. Step 1: The city loans a developer a sum of money. Like a subsidy.
Why not just call it a subsidy? Because the city sees it more as an investment than a gift. By investing money in a development, the property value is expected to increase, and with increased property values come increased revenue from property taxes. If you look at the Edgewater numbers, the property value implications are obvious. The developers are pouring nearly $100 million dollars into a property that is only worth several million right now.
TIF projects take place within TIF districts, or TIDs. They are designated by the city.
So that's the basic idea. The principle of lending money to a private developer isn't really the source of the controversy, however. There are certain specifics in the Edgewater's case that are making the project hard to sell to some alders. The project is asking for a number of exceptions to the normal TIF rules. Without these exceptions, the developers say the project is not financially viable.
Exception 1: The Self-Supporting Rule. This rule states that only increased property tax revenue from the specific property (the hotel) can be used to pay back the loan. However, the simple fact is that the hotel cannot generate enough revenue by itself to pay back $16 million any time soon. So how do they resolve that issue?
First, there is already tax increment being generated from other TIF projects in the area, most prominently the renovation of University Square. Increment generated by that ($1.5 million/yr) will go towards paying back the $16 million Edgewater loan. In addition, the renovation of the hotel will also increase property values throughout the district, and therefore cause more property tax revenue. Hence, the increased taxes that everybody, from condo owners to State St businesses, pay, will be used to pay back the loan. Under this model, the city estimates the $16 million will be paid back by 2019.
Exception 2: The 50% Rule. The city is not allowed to give a loan that equals more than 50 percent of the tax increment the project is expected to generate. The Edgewater project proposes shredding that rule, burning it, and then burying the ashes. $16,000 million represents 240 percent of the tax increment the project a lone will generate ($3.3 million).
In addition, the project proposes an exception to the Personal Guaranty. Usually that requires that somebody take responsibility for the project and guarantee total repayment of the loan if the project defaults or strays from the requirements (public access) set by the city. In the Edgewater's case, Bob Dunn, the project president, guarantees $1 million.
Concerns. People are worried that we're prioritizing private development over crucial public services, such as the library. Why aren't we taking chances on that, wonder some, such as Rep. Terese Berceau. In addition, some people, like Brenda Konkel, wonder if using the tax increment from the TID to fund the Edgewater loan will come at the expense of other developments in the district, such as street and lighting improvements. Ald. Mike Verveer also raised this point last night.