The weak development market is forcing municipalities to scale back the amount of money they give to support new projects.
Cudahy, for example, plans to use tax-incremental financing to dedicate $5.8 million to a proposed $11 million landfill cleanup and retail redevelopment.
Before development slumped and growth in property values slowed, the same TIF district could have raised $1.2 million more for the project.
“It’s going to mean less flexibility on the part of the community to provide for incentives,” said Michael Harrigan, chairman and chief financial officer of Brookfield-based Ehlers and Associates Inc., which is a financial consulting firm working with Cudahy.
Tax-incremental financing districts are municipalities’ main tool for raising money for private projects. The districts let municipalities borrow money for projects and pay off the debt with the increased property taxes generated by the new development.
But the amount of money the districts can raise is based on the value of the new development. New developments are not worth as much as they used to be.
So the 200,000 square feet of retail buildings Milwaukee-based Cobalt Partners LLC plans to build in Cudahy will not support as much city borrowing through the TIF district.
Under a proposed development deal with Cudahy, Cobalt Partners will pay for the remainder of the cleanup costs.
Municipalities’ should count on TIF districts generating less tax money, said Chuck Sulik, team leader in MSA Professional Services Inc.’s Baraboo office.
Consultants such as Ehlers and MSA predict future property values so municipalities know how much they can borrow through TIF districts.
“It’s not going to be at the levels that we’ve seen in the past,” Sulik said, “so you have to be more conservative in your deal-making than you have in the past.”
In the past, Sulik said, new buildings were given a value equal to their construction cost. But that is not true any more, forcing consultants to take a more careful approach, he said.
In 2009, for example, Merit Gear LLC built a $10 million manufacturing plant in a city of Antigo TIF district. But the state appraised the plant at only $3 million, said Dale Soumis, Antigo city administrator.
Antigo borrowed $2 million through its TIF in 2009 for site work to support the project and expected the $10 million project would pay for the debt, he said. But the lower value means the city’s annual budget of $7 million, rather than the TIF district, must pay a portion of the more than $100,000 annual debt payments.
“It kind of leaves you high and dry,” Soumis said.
Cudahy’s conservative approach is an attempt to avoid the same fate as Antigo, said Lara Fritts, Cudahy’s economic development director.
“We model conservatively so we don’t end up in a position where we have to look at ways where we have to fund a shortfall,” she said, “which, unfortunately, has happened in other communities.”
When figuring out how much debt a TIF district’s taxes can pay for, Ehlers used to predict property values would increase by at least 2.5 percent a year, Harrigan said. On the Cobalt project, the firm predicted property values will grow only 1.5 percent a year, he said.
But that does not eliminate TIF districts as a development tool, Harrigan said.
“There’s a mutual interest there,” he said, “and the parties are going to have to work together in this tough economy and roll up their sleeves a little bit.”