Financing Downtown Redevelopment

Stephanie Larkins Grey

By Stephanie Larkins • March 5, 2014

Photo Credit: --Mike-- via Compfight cc

While a city’s neighborhoods give it character, its downtown is what sets the city apart from others. Downtown is the hub, the economic engine, the well-known skyline that adorns postcards and draws tourists. Although the demand for investment is great throughout a city’s entire geography, downtown has the greatest ability to leverage private investment, often for the greatest return on taxpayer dollars. The City of Chicago, for example, invested $270 million in Millennium Park, which spurred $220 million in private investment and annual returns of more than $2 billion from tourism and new park-side development.

There are many approaches to creating a vibrant downtown (anchor institutions, main streets, competitive clusters) and many financial tools to fund the development (tax increment financing, tax credits, revolving loans). So what factors help determine which development model is most appropriate for a city? How should a city finance the proposed project(s)? What are some examples of best practices that cities can adapt?

To discuss these questions and others, the Harvard Kennedy School and Living Cities, Inc. convened the eleventh Project on Municipal Innovation – Advisory Group (PMI-AG). As part of this network, more than 30 leaders from America's largest and most creative cities discussed the adoption and replication of innovative ideas in urban governance. One session focused on finance tools for downtown revitalization and redevelopment, giving participating cities a forum to compare their different downtown development stories.

Above all, the three major takeaways from this session were:

Survey the natural landscape. Selecting the right type of development must consider a city’s current conditions, assets, and available resources. But sometimes development opportunities arise due to happenstance. For example, the continuous flooding of the Trinity River snaking through downtown Fort Worth required assistance from the U.S. Army Corps of Engineers. The Corps’ resulting plan included digging a bypass channel that will double the size of Fort Worth’s downtown by 2020. (To put that in perspective, the riverfront property will be four times the size of San Antonio’s River Walk.) The city is taking advantage of the new waterfront space with 90 projects developed through a master plan process.

Think outside the financial toolbox. Oklahoma City wanted to redevelop large swaths of its downtown through significant investments in cultural, transportation and recreational infrastructure. The city selected nine investment projects – a downtown arena, minor league ballpark, trolleys, convention center, and music hall, among other venues – and decided not to fund them through debt. Instead, the city created a Metropolitan Area Projects (MAPS) finance tool that proposed a term-limited, local option one-cent sales tax. The city discovered that slate of proposed projects was so diverse that it was easier than anticipated to build support. Since 1995, the city raised and invested $363 million in the projects, and they estimate it catalyzed $5 billion of private investment. We have begun to see other cities attempt to introduce a local option, like Louisville, even when it requires a change in the state constitution.

Develop a shared vision with partners. Indianapolis relies mostly on property taxes to fund local initiatives, as it cannot share sales tax revenue with the state. As a result, the city relies heavily on Tax Increment Financing for development and to attract philanthropic donations. In 1986, Indianapolis consolidated seven downtown TIF districts that has leveraged $87 million in public funds to secure $873 million of total investment. So when the city’s largest employers asked for help in attracting talent to Indianapolis, the city leveraged its TIF to create CityWay. Amidst the post-recession lending freeze, the city lent $86 million to a developer who pooled the funds with its own, with other corporate funds, and with $9 million in TIF funds. Together, they developed 14 acres of underutilized parking lots obstructing the city’s business development district. The resulting mixed-use district has luxury apartments, restaurants, retail, a world-class hotel and a state–of-the-art YMCA.

In addition to the best practices we heard about at the PMI-AG convening, we also left with a number of important questions for cities to consider when thinking about downtown redevelopment and revitalization. These include:

  • How to manage gentrification as new development increases property values;
  • Whether major or minor league stadiums are a blessing or a burden;
  • How to take calculated risks with public funds;
  • Whether to offer tax credits or fund office buildings to businesses that may soon depart for a better deal.

Read more about other session takeaways and challenges identified throughout the eleventh PMI Advisory Group convening by browsing our other entries here on Data-Smart City Solutions.