Tax Increment Financing for Transit Projects (2020)

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TCRP LRD 55 35 conveyed to private ownership to effectuate the redevelopment. authorized In City of Hollywood Cmty. Redevelopment Agency v. 1843, LLC,171 the Appellant community redevelopment agency brought a petition in eminent domain against appellee property owners. The agency sought to take the subject property as part of the agency’s community redevelopment plan. The trial court determined that the agency had demonstrated a valid public purpose, the redevelopment of a blighted area. However, it went on to rule that, based upon the totality of the testimony and the evidence presented, as weighed and considered by the court, the agency did not prove by competent, substantial evidence that the condemnation of owners’ property was reasonably neces- sary for the alleged public purpose. The trial court denied the requested order of taking and dismissed the petition in eminent domain. IV. CHALLENGES FOR USING TIFS TO SUPPORT TRANSIT This review of the literature, state legislation, and case law highlights dimensions in which the legal framework for TIF presents specific demands and potential challenges for TIFs in general. More specifically, it draws attention to the particular challenges (and opportunities) that may exist for TIF applica- tions that might be organized around transit investments, par- ticularly operating investments. This section discusses these challenges. A. Restrictions on Expenditures Every state authorizes certain eligible costs that TIFs can pay for. All states authorize the payment of capital expenditures related to property assembly, land purchase or lease, property purchase, property, site and building prep, including demoli- tion, refurbishment, reconstruction or rehabilitation. They also allow organizational costs for the TIF board or entity, profes- sional services including legal, finance, planning and other fees, imputed administrative costs, and relocation costs. In general, specific references to transportation or transit as eligible expen- ditures are more limited. Some states authorize costs that could potentially be utilized for transit provision. Connecticut for example, under Conn. Gen. Stat. Section 32-285 (c) authorizes “an analysis of neces- sary infrastructure development to support the project”.172 Florida under Fla. Stat. Section 163.400 offers latitude to other agencies to be involved in the redevelopment relegated activities “ (1) For the purpose of aiding in the planning, under- taking, or carrying out of community redevelopment and related activities authorized by this part, any public body may, upon such terms, with or without consideration, as it may deter- mine, including dedicating property or an interest or easement, 171 980 So. 2d 1138; 2008 Fla. App. LEXIS 4357; 33 Fla. L. Weekly D 860. 172 Conn. Gen. Stat. Ann. § 32-285 ©, Nexus 2019. cates that TIF funds are to be spent on the construction and installation of improvements, rather than continuing mainte- nance. The sole provision in the statute specifically authorizing the use of TIF funds for maintenance is Ind. Code Ann. Section 36-7-1-18(7), which allows TIF funds to be used for the mainte- nance of buildings on property acquired before redevelopment is complete. Also, Ind. Code Ann. Section 36-7-14-39 states that the allocation fund may not be used for operating expenses of the redevelopment commission. 4. Eminent Domain In Cornerstone Group XXII v. Wheat Ridge Urban Renewal Auth.,166 reviewed on other grounds,167 the Colorado Court of Appeals found that there was “No clear indication in section of an urban renewal authority’s powers to place the decision to condemn in the hands of a private party.” The Urban Renewal Law mentions many conventional matters that urban renewal authorities could effectuate only though contracts with private parties. No provision, however, suggests that urban renewal authori ties may, through contract, delegate to private parties the prerogative of taking property by eminent domain. Purpose of this section is to restrict eminent domain when used to acquire private property for transfer to another private party. Grants of power to exercise the sovereign right of eminent domain, in derogation of the common private rights of individuals, are gen- erally strictly construed. The court held that Because district court lacked authority to order the specific perfor- mance of a contractual obligation to exercise the core governmental power of eminent domain and urban renewal authority could not be estopped from abandoning its condemnation petitions, judgment of the court of appeals is reversed. However, because authority’s agree- ment to acquire specific properties by condemnation, if necessary, does not render the contract void under reserved powers doctrine, case is remanded and district court directed to consider respondent’s remaining claims, including breach of contract.168 In Tax Increment Financing Com. v. J.E. Dunn Constr. Co.,169 an appellant property owner appealed a Missouri circuit court judgment that had upheld the constitutionality of the Missouri Real Property Tax Increment Allocation Redevelopment Act (Act),170 and authorized the appellant property (that was located in a redevelopment project area) to be condemned by the local tax increment financing commission. The Supreme Court of Missouri held that the Act, empowers a municipality to create a Tax Increment Financing Commission, whose actions are sub- ject to final approval by the municipality. The commission was authorized to acquire property by eminent domain to further a redevelopment plan, and acquired property could then be used to enhance the tax base of the redevelopment area and could be 166 151 P.3d 601 (Colo. App. 2006). 167 176 P.3d 737 (Colo. 2007). 168 Wheat Ridge Urban Renewal Auth. v. Cornerstone Group XXII, 176 P.3d 737 (Colo. 2007). 169 781 S.W.2d 70; 1989 Mo. LEXIS 119. 170 Mo. Rev. Stat. §§ 99.800 to 99.865 (1986).

36 TCRP LRD 55 Rhode Island under R.I. Gen. Laws Section 45-33.2-5 authorizes “Property acquisition and site prep, plans, reloca- tion costs, construction, organization and service costs. (13) To grant or loan any project revenues, bond proceeds to an … gov- ernmental or quasi-governmental entity in order to finance the cost of any portion of a project authorized under this chapter, including, cost of acquiring land , constructing rehabilitating, equipping … transit-oriented development, within project area or within a tax increment district in accordance with a district master plan, or to loan bond or note proceeds in order to refi- nance any loans”.182 California (which repealed and replaced its TIF laws in 2014), Illinois, Maine, Michigan (which repealed and replaced its TIF laws in January 2019) and Texas have by far the most instructive elements authorizing transit and transit-oriented devel opment provision. California within its Enhanced Infrastructure Districts cre- ated the Second Neighborhood Infill Finance and Transit Im- provements Act at Cal Gov Code Sections 53398.75.7 (b) (E) re- quires that at least 10% of the total funds received by the district pursuant to this section be used for investments in the capital costs of parks, urban forestry, or permanent greening improve- ments along boulevards, streets, or other public areas within a district, or active transportation capital projects that qualify under the Active Transportation Program (Chapter 8 (commenc- ing with Section 2380) of Division 3 of the Streets and Highways Code), including pedestrian or bicycle facilities or supportive infra structure, including connectivity to transit stations. Under subsection 53398.75.7 (c ) remaining funds can also be used for: (2) Transit capital projects, including transit stations and pro- grams supporting transit ridership, including waterborne tran- sit, and at (3) Transit-oriented development projects, including affordable housing and infrastructure at or near transit stations or connecting those developments to transit stations.183 Illinois at 65 ILCS 5/11-74.4.3 § (q-1) For redevelopment project areas created pursuant to § (p-1), redevelopment project costs are limited to those costs in paragraph (q) that are related to the existing or proposed Regional Transportation Authority Suburban Transit Access Route (STAR Line) station. (q-2) For a redevelopment project area located within a transit facility im- provement area established pursuant to §11-74.4-3.3, redevelop- ment project costs mean costs described in §(q) that are related to the construction, reconstruction, rehabilitation, remodeling, or repair of any existing or proposed transit facility.”184 Maine at 30 A.M.R.S. §5225 1 (A) (1) (a) (i) capital costs - including TOD costs for transit vehicles such as buses, fer- ries, vans, rail conveyances and related equipment; bus shelters and other transit-related structures; benches, signs and other transit-related infrastructure; nonresidential commercial por- tions of TOD projects. Financing costs, real property assembly costs, professional services, administrative, relocation, organi- 182 R.I. Gen. Laws §45-33.2-5, Nexus 2019. 183 Deering’s Cal. Code §53398.75.7 (b) (E) and 53398.75.7 (c), Nexus 2019. 184 Ill. Comp. Stat. Ann. 5/11-74.4.3 §(q-1), Nexus 2019. lending, granting or contributing funds, incurring the entire expense of a public improvement and enter into agreements.173 Georgia under O.C.G.A. Section 36-44-3 (5) allows “capi- tal costs, financing, planning, professional services, relocation costs, organizational, real property assembly, construction, re- construction, repair, demolition, alteration, or expansion of structures, equipment, and facilities for mass transit.”174 Iowa, under Iowa Code Section 403.6 defines eligible costs to include “streets, roads, … or other facilities for or in connection with urban renewal project”.175 Kentucky under KRS Section 154.30-070 authorizes “… ac- quisition, installation, construction, reconstruction, planning and design and includes… sidewalks, promenades, pedways, roads, street lighting, parking, transportation facilities, public landings, portions of parking structures that serve as platforms; and under Section 154.30-010 (3) curbs, sidewalks, pedways, roads, parking, and transportation facilities”176. Louisiana under L.R.S. Section 8002 (1) notes that in its policy to promote sound growth and development can use tax increment to provide for growth or attracting or retaining in- dustries through finance of the cost of, “access to such facilities through transportation and mass transportation”.177 Montana under 7-15-4288 (4) MCA eligible costs authorizes the acquisition, construction and public improvements for “rail lines, and rail spurs” authorized under other part of the title.178 Nebraska under Section18-2103 (28) authorizes the con- struction of bus stop shelters, lighting, benches or other similar furniture, along with trash receptacles, shelters.179 Nevada, similarly authorizes rail projects under Section 278C.105 which denotes a “Rail project” means any railroad, railroad tracks, rail spurs and any structures or facilities neces- sary for freight rail service provided by a regional transporta- tion commission pursuant to NRS 277A.283, including, without limitation, equipment, terminals, stations, platforms and other facilities necessary, useful or desirable for such a project and all property, easements, rights-of-way and other rights or interests incidental to the project”.180 New Jersey under N.J. Stat. Section 52:27D-461authorizes demolition, clearance, removal, relocation, repair and recon- struction of “mass transit facility, service or other structure, infrastructure or improvement necessary to effectuate district plan.181 173 Fla. Stat. Ann. § 163.400, Nexus 2019. 174 I and at Section 36.44.3 (7) (B) (vi); Deteriorating or inadequate parking, roadways, bridges, pedestrian access, or public transportation or transit facilities incapable of handling the volume of traffic into or through the area, at present or after redevelopment, Ga. Code Ann. § 36-44-3 (5), Nexus 2019. 175 Iowa Ann. Stat. § 403.6, Nexus 2019. 176 Ky. Rev. Stat. § 154.30-010 (3), Nexus 2019. 177 La. Rev. Stat. § 8002 (1), Nexus 2019. 178 Mont. Code Ann. § 7-15-4288 (4), Nexus 2019. 179 Neb. Rev. Stat. §18-2103 (28), Nexus 2019. 180 Nev. Rev. Stat. Ann. § 278C.105, Nexus 2019. 181 N.J. Ann. Stat. § 52:27D-461, Nexus 2019.

TCRP LRD 55 37 portion of future revenue may add insult to injury, and spur opposition.188 For example, 46 states and the District of Columbia restrict local property tax revenue generation in some way, and such laws frequently limit local governments’ ability to provide ser- vices, especially when the state does not match the foregone revenue. Recent state-level laws to restrict property tax growth, such as the Texas Property Tax Reform and Transparency Act of 2019 which requires a referendum if taxing authorities wish to raise tax revenues more than 3.5% over the previous year, prom- ise to further hamstring municipal budgets189 and may therefore intensify intergovernmental competition for limited funds. The issue is common to TIFs throughout the United States, and transit TIFs have proven to be no exception. The Atlanta BeltLine, a public corporation developing abandoned railroad tracks into a 22-mile rail and multi-use path corridor ring- ing Atlanta and adding green space and affordable housing, is funded in part by a Tax Allocation District (TAD), Georgia’s version of TIF. Atlanta Public Schools, which by Georgia law must consent to participate in a TAD,190 negotiated upfront and ongoing payments from the city in exchange for the foregone tax revenue, as well as several concessions such as free transit rides for students and construction of recreational and athletic facilities at school sites.191 192 When the TAD failed to meet rev- enue projections due to the 2008 recession, however, Atlanta Public Schools threatened legal action over the city’s failure to provide the expected benefits, and successfully negotiated for back payments plus interest in addition to in-kind land transfers from the city to the school district.193 Addressing revenue-sharing agreements can increase pub- lic trust in transit-related TIFs. Chicago, which is famous for its number of overlapping tax districts potentially affected by a TIF—as many as 15 at once194—may offer an instructive exam- ple. Chicago’s Red and Purple Modernization TIF, established to upgrade existing transit lines, specifically exempts the school district from having to forgo revenue, so that it continues to 188 Iris J. Lav & Michael Leachman, State Limits on Property Taxes Hamstring Local Services and Should be Relaxed or Repealed (2018), https://www.cbpp.org/research/state-budget-and-tax/state- limits-on- property-taxes-hamstring-local-services-and-should-be. 189 Riane Roldan & Shannon Najmabadi, Gov. Greg Abbot signs bill designed to limit property tax growth, Texas Tribune, April 19, 2019, https://www.texastribune.org/2019/06/12/abbott-signs-property-tax- bill-sb2/. 190 Weber and Goddeeris, supra note 6 at 50. 191 Chrissy Mancini Nichols, Value Capture Case Studies: Atlanta BeltLine., Metropolitan Planning Council (2012), https://www. metroplanning.org/news/6357/Value-Capture-Case-Studies-Atlanta- BeltLine. 192 How the Atlanta BeltLine is Funded, Atlanta BeltLine (2019), https://beltline.org/about/the-atlanta-beltline-project/funding/ (last vis- ited Sep 30, 2019). 193 Max Blau, What happens now that the Atlanta BeltLine dispute is over?, Atlanta Magazine, January 29, 2016, https://www. atlantamagazine.com/news-culture-articles/what-happens-now-that- the-beltline-dispute-is-over/ (last visited Sep 30, 2019). 194 Weber and Goddeeris, supra note 6. zation costs and for TOD, ongoing costs of adding to an exist- ing transit system or creating a new transit service and limited strictly to transit operator salaries, transit vehicle fuel and transit vehicle parts replacements.185 Michigan under MCLS Part 4 Local Development Finance Authorities Chapter 125 at §125.4301 (which can be created by the state) notes that “(u) Public facility means… “transit- oriented development, transit-oriented facility, and other similar facilities and necessary easements of these facilities de- signed and dedicated to use by the public generally or used by a public agency”; (bb) “Transit-oriented development” means infrastructure improvements that are located within 1/2 mile of a transit station or transit-oriented facility that promotes tran- sit ridership or passenger rail use as determined by the board and approved by the municipality in which it is located. (cc) “ Transit-oriented facility” means a facility that houses a transit station in a manner that promotes transit ridership or passenger rail use. At § 125.4307 The Board May “(c) Plan and propose the construction, renovation, repair, remodeling, rehabilitation, res- toration, preservation, or reconstruction of a public facility, an existing building, or a multiple family dwelling unit which may be necessary or appropriate to the execution of a plan which, in the opinion of the board, aids in the revitalization and growth of the development area. (d) Plan, propose, and implement an improvement to a public facility within the development area to comply with the barrier free design requirements of the state construction code promulgated under the Stille-DeRossett- Hale single state construction code act, 1972 PA 230, MCL 125.1501 to 125.1531.”186 Texas authorizes under Texas Tax Code Section 311.01005 costs associated with transportation and transit (1) BRT incl. fixed guideway, high occupancy vehicle lane, bus way, or bus lane; transit center or station maintenance facility; and other real property associated with BRT operation. (2) Rail transpor- tation passenger rail facility, including: tracks; rail line; depot; maintenance facility; real property associated with passenger rail operation.187 However, it should be noted that there are no TIF statutes that authorize a transit agency to create a TIF. The majority of statutes authorize cities and counties to create the TIF, with seven states authorizing either the state or another political sub- division to create a TIF. B. Revenue Sharing As discussed in the preceding legal review, Tax Increment Financ ing has often been criticized for diverting property tax revenue toward one taxing authority at the expense of others. When local tax jurisdictions find their capacity to generate future revenue restricted to begin with, some fear that TIFs can exacerbate the problem. TIFs that would capture some 185 30 Me. Rev. Stat. Ann. §5225 1 (A) (1) (a) (i), Nexus 2019. 186 Michigan Compiled Laws Services Chapter 125 Part 4 Local Development Finance Authorities §125.4301, Nexus 2019. 187 Texas Statutes and Codes Annotated, Title 3 Local Taxation, §311.01005, Nexus 2019.

38 TCRP LRD 55 to pledge a portion of tax increments derived from the educa- tional ad valorem property taxes levied and collected within the BeltLine TAD. Woodham asserted that the proposed use of school taxes to fund the BeltLine Plan violates Art. VIII, Sec. VI, Par. I (a) and (b) of the 1983 Georgia Constitution because it contemplates the expenditure of school taxes for non-educational purposes. Under Art. VIII, Sec. VI, Par. I (b), the expenditure of school tax funds is limited, as follows: School tax funds shall be ex- pended only for the support and maintenance of public schools, public vocational-technical schools, public education, and ac- tivities necessary or incidental thereto, including school lunch purposes. The Supreme Court noted that that [w]here a constitutional provision expressly provides that funds de- rived from taxes levied and collected may be [97] used only for par- ticular purposes, such [4] funds cannot be utilized for or diverted to any other purpose Wright v. Absalom.197 The Supreme Court further stated that It is without dispute that the use of school tax revenue to fund the BeltLine TAD is not an explicit expenditure for educational purposes under Par. I (b); however, the question remains whether such fund- ing is “necessary or incidental” to public schools or public education under that subsection. Although we have held that this provision ‘vests broad powers in school districts to do those things properly determined to be necessary or incidental to public education,’ [cit.], this power must and does have its limits.198 199 The Supreme Court in applying its principles set out in of DeKalb County School Dist., held that school tax funds levied and collected by the school system could not constitutionally be applied to benefit the BeltLine project because the Supreme Court of Georgia held that the proposed use of school tax funds under the BeltLine project violates Art. VIII, Sec. VI, Par. I of the Georgia Constitution. In its dicta The Supreme Court stated that If the use of school revenue to improve a county road which provided access to a school was held to be an impermissible expenditure, it follows that school taxes cannot be used to fund the BeltLine Plan which provides a benefit to all citizens, and which has little, if any, nexus to the actual operation of public schools in the city of Atlanta. Although appellees assert that the BeltLine TAD will likely produce future revenue for the school system, such potential benefit will not suffice where the constitutional authorization for such expenditure is lacking. 197 224 Ga. 6, 8 (159 SE2d 413) (1968). 198 DeKalb County School Dist. v. DeKalb County, 263 Ga. 879, 880 (1) (440 SE2d 185) (1994). 199 The Supreme Court noted that “In DeKalb County School Dist., we determined that the expenditure] of school tax funds for improve- ments to a county public road adjacent to a DeKalb County school “would stray too far from the [school] District’s principal task of edu- cating young people in favor of providing a benefit to all citizens that the County generally has the duty to provide.” Id. at 881 (1). As a result, we held that the expenditure of school taxes for the road improvements was not necessary or incidental to public education and thus violated the Educational Purpose Clause. draw incremental taxes from within the district, and further- more sets aside 20% of the TIF’s revenue for parks and other tax recipients.195 Providing indirect benefits to other taxing authori- ties, such as how the Atlanta BeltLine TAD allowed free transit rides for students, may also help to strike political deals. 1. Case Law from the Atlanta Beltline The Atlanta BeltLine Case, which surrounded jurisdictional and taxation authority, sheds light on the intricacies of under- taking TIF for transit. This case also has relevance for transit in that the allocated taxes—in this instance school tax funds levied and collected by the school system—could not constitutionally be applied to benefit the Atlanta BeltLine project. In Woodham v. City of Atlanta, Supreme Court of Georgia,196 the State of Georgia filed a bond validation proceeding against, a school system, a city, and a county (appellees) to finance a project: the Atlanta BeltLine Redevelopment Plan. The Atlanta Independent School System, the City of Atlanta, and Fulton County. John F Woodham who resided in Atlanta and Fulton County intervened under OCGA § 36-82-77 (a) and filed ob- jections. The trial court validated the bonds and overruled Woodham’s objections, including his claim that the BeltLine Plan proposal violates Art. VIII, Sec. VI, Par. I of the 1983 Georgia Constitution, known as the Educational Purpose Clause. Woodham appealed. The Supreme Court of Georgia held that certain proposed funding for the BeltLine Plan violates the Educational Purpose Clause but further concluded that the trial court correctly dismissed the declaratory judgment action. The Supreme Court of Georgia court noted in its overview The bonds were intended to finance a redevelopment plan along 22 miles of historical rail segments. The school system agreed to par- ticipate in the plan by pledging a portion of tax increments to it. The court held that the use of school taxes to fund the plan violated Ga. Const. art. VIII, § VI, para. I(b) because it was not “necessary or incidental” to public schools or public education. The use of school revenue to improve a county road that provided access to a school had been held to be impermissible. It followed that school taxes could not be used to fund the present plan, which provided a benefit to all citizens and which had little if any nexus to the actual operation of public schools. The potential benefit of producing future revenue for the school system did not suffice where the constitutional authoriza- tion for such expenditure was lacking. The city of Atlanta adopted the BeltLine Redevelopment Plan (BeltLine Plan) by ordinance. This was a 25-year project which “proposes to combine greenspace, trails, transit, and new devel- opment along 22 miles of historic rail segments that encircle the urban core” of Atlanta. The ordinance created the BeltLine Redevelopment Area and Tax Allocation District Number Six— BeltLine (TAD). The TAD, authorized the pledge of ad valorem tax allocation derived from that TAD for the payment of or as security for the payment of the tax allocation bonds. The Atlanta Independent School System, through a resolution, agreed to participate in the BeltLine Plan. The school system consented 195 The good TIF, Chicago Tribune, 2016, http://digitaledition. chicagotribune.com/tribune/article_popover.aspx?guid=11a8fed7- 5f8b-42b0-9c33-ef45d66230e8. 196 283 Ga. 95; 657 S.E.2d 528.

TCRP LRD 55 39 C.  Concerns About Transit-Induced Gentrification  and TIFs A growing area of interest in transportation research exam- ines the linkage between transit investments, specifically capital investments in new rail systems and stations, and gentrification and displacement in transit-oriented and -adjacent neighbor- hoods. Rising property values, upon which TIF fundamentally depends, can lower affordability. Though this paper does not presume to define the link between transit investment and resi- dential displacement, it is worth acknowledging the active de- bate regarding the relationship and the wisdom of formulating policies that raise property values. Comparisons of light rail expansions in different urban areas find that levels of gentrification resulting from transit depend on factors such as station area walkability200 and local affordability policies;201 literature syntheses argue for more precise defini- tions of “gentrification” and “displacement,” since conflating the two confuses the policy implications of existing research.202 Ad- dressing TIF’s role in accelerating gentrification and displace- ment, Lefcoe and Swenson argue that TIF is fundamentally unsuitable for helping promote affordable housing, notwith- standing California’s attempt to mandate that 20% of all housing funded by a TIF be subject to affordability covenants, because TIF has no inherent equity component to oversee site selection and/or moderate capital inflows.203 200 Matthew E. Kahn, Gentrification Trends in New Transit-Oriented Communities: Evidence from 14 Cities That Expanded and Built Rail Transit Systems, 35 Real Estate Econ. 155–182 (2007). 201 Dwayne Marshall Baker & Bumsoo Lee, How does light rail tran- sit (LRT) impact gentrification? Evidence from fourteen US urbanized areas, 39 J. Plan. Educ. Res. 35–49 (2019). 202 Miriam Zuk et al., Gentrification, Displacement, and the Role of Public Investment, 33 J. Plan. Lit. 31–44 (2018). 203 George Lefcoe & Charles W. Swenson, Redevelopment in Califor- nia: The Demise of TIF-Funded Redevelopment in California and Its Aftermath, 67 Nat’l Tax J. 719 (2014).