Back in 2010, city council adopted a policy designed to steer development in directions it wanted; namely, toward the creation of more affordable housing that was energy-efficient and located near bus lines. To have the semblance of fairness, council created a point system. For every ten points a developer scored, he would be exempted from the increase in his project’s property taxes, from the pre-development base level, for a year. For every ten points scored, they would also get 10 percent cut off total permitting fees.
As it turned out, very few developers applied for LUIG’s. Only two projects had been approved, and neither of those had come to fruition. Consequently, on the same night that Pilos appeared to formally ask council to use their authorized powers to grant him some leeway; council also approved changes to the policy. Among them was a provision that developers would no longer assume responsibility for any legal challenges to the policy.
Even though Pilos was going to offer all his Energy Star certified apartments at “workforce” rates, with 5 percent of them qualifying as affordable housing; he only scored 35 points. Pilos would have gotten tax relief in an estimated amount of $510,000 with 35 points, but $725,000 with 50. According to the terms of the grant, regardless of what the economy does, Pilos would have to increase rents no more than 3 percent a year for the next ten years. The grant from the city would help him keep rents for his one-bedroom units below $1267/month, and his two-bedroom units below $1418/month. He would also use the funds to subsidize the rents of the small businesses that would be moving into the project.
Pilos explained, “Let me tell you the position it puts me or any other developer in. Basically, I’m the CEO of a tech startup that is going to the market and saying I am not going to allow our stock to go more than $10 a share. In order to attract capital in doing that, there’s got to be some tradeoff. We’ve run the math. It equaled 50 points in LUIG. I have to offset point-blank, period capping the value of the property for the next decade as well as capping the income stream, and the tradeoff that we came up with was 15 points higher than the city’s current program.”
Pilos continued, “And that’s where part of the problem with the current policy is. The math just doesn’t work. Certainly for us. Not only are we giving up rent that otherwise could be realized, and we’re capping it for the future, we’re also devaluing the property. Which means when you go to sell it six, seven, nine years from now, the new guy is inheriting the restrictions.” Mayor Esther Manheimer acknowledged that when council dreamed up the plan, they were sort of pulling numbers out of thin air.
The developer explained he was trying to create a quality development, and therefore was not recruiting national chains. The development boasted a neighborhood grocery store. Pilos did not know which restaurant would serve as an anchor, but he promised it, like the other tenants, would not compete with existing businesses. He described the development as a second-stage, somewhat like the second rung of a housing ladder, for local entrepreneurs.
When Pilos mentioned the novelty tattoo shop, Councilman Jan Davis made him back up. “It’s one thing when you go down there with your money and you put retail space out. It’s another thing when you go down there with partners with you. I don’t want this to be a nuisance to that neighborhood or to the people. I do have some problems if it’s less than a good neighbor,” said Davis.
Pilos assured that drugs and loud music would not be associated with his tenants. He said he had considered having a literal underground club on the premises, but he gave that up out of deference to the tenants. “I’ve got my future, my livelihood riding on those people living upstairs,” said Pilos. Of rowdy tenants, he assuaged, “I’ll shut them down a long time before you do, Jan.”
Only Gordon Smith and Gwen Wisler voted against increasing Pilos’ points from 35 to 50. Both expressed concerns with precedents to be set by deviating drastically from the point schedule.
Before the vote, Manheimer hit the audience with the standard strawman argument against using public funds for private investment. “To be clear, again, so that folks understand how this works, this incentive grant is only rebated back to the developer once this project is brought online, and we are only talking about the increase in tax revenue that the land then produces. So, it is essentially a rebate of the additional tax revenue that the project itself generates. People often get up here and say . . . no one should ever write a check to anybody for building something in a city or a county or in your state, but that makes it sound like today, right now, we’re taking the money out of the General Fund, and we’re writing a check and that’s not at all how this project works.”
Manheimer did not address actual complaints about government funding private interests with various forms of tax-increment financing. That is, why are taxes so high that existing contributors can pay the freight for free riders?