Tax Increment Financing For "Quasi-public" Hospitality Projects
November 13, 2000
Matthew E. "Matt" Norton- Chicago
The Debate Over Tax Increment Financing
The merits of tax-increment financing have been debated throughout our country. Simply put, tax-increment financing occurs when the government allows the increased property tax, sales tax or other tax revenue that is generated by a new development (i.e., the tax increment) to be used to pay for certain development costs associated with the development, such as costs for land or infrastructure. Depending on the particular transaction and jurisdiction, the tax increment may be used to pay for bonds or other debt issued to pay for such costs or to reimburse the property owner or developer for development costs it has incurred. Proponents of such financing argue that it is a vital incentive for the redevelopment of blighted property or projects that are too risky to be developed without an incentive. Critics contend that tax-increment financing is a windfall for property owners and is too often used for developments that would occur, even without the incentive.
Quasi-public Hospitality Projects
Despite this general debate, tax-increment financing may prove less controversial for hospitality projects that include substantial “quasi-public” elements that benefit both public and private interests. Local governments undertake many projects that greatly benefit the public, lend prestige to their communities, and spur substantial economic growth. These include recreation centers, open spaces and gardens, entertainment facilities, and convention and conference centers. However, many of these projects are either too risky or not sufficiently profitable to be undertaken by the private sector. When a hospitality project undertaken by the private sector will consist of or include one of these quasi-public uses, the risks and benefits of the project might well justify tax-increment financing or other public incentives.
A Case In Point
Holland & Knight recently used this strategy to obtain increased tax-increment financing for a client developing a conference center in suburban Chicago. The client’s property had severe drainage problems and a long history of unfulfilled plans. In 1986, the vacant property in question was designated a tax increment financing (TIF) district. However, the owner’s right to receive the tax-increment was conditioned upon the property’s development as an auto mall. That development never came to fruition and the property remained undeveloped. In 1997, the documents governing the TIF district were amended, but this time tax-increment payments were conditioned upon the property’s development as a full-service hotel. Again, the property owner’s plan fell through. In 1999, the village was still determined to put a full-service hotel on the property, but the local market had virtually disappeared and the owner had no solid prospects. To make matters worse, the TIF district was scheduled to expire in 2009. Therefore, the owner, who had not received a penny of tax increment during the first 13 years of the TIF district’s life, now had only 10 years to recoup millions of dollars in land and infrastructure costs it had incurred in anticipation of receiving the tax increment.
In an effort to satisfy all competing interests, the owner proposed to build a conference center for business and social functions on a portion of the property, leaving sufficient room for a future full-service hotel. The village officials were interested in a state-of-the-art conference center that would attract a full-service hotel to the property and also attract business to the village; they did not want a facility that would be limited to use for wedding receptions and other social functions. In recognition of the village’s desire, the owner proposed to develop the center with state-of-the-art Internet, telecommunications and videoconferencing technology. As such, the conference center would be used as much to attract business to the village as it would to turn a profit for its owner. However, the upgrades necessary to make the center a true conference center for business drastically increased its cost.
The owner’s feasibility study concluded that the conference center, in fact, would be a tremendous boost to the local hotel market, generating hundreds of thousands of dollars in new hotel room revenue each year. The study showed that seven other hotels would be located within one mile of the conference center. Most of these hotels reported that they consistently turned away potential guests seeking to hold conferences or banquets because they lacked meeting space for such purposes. The feasibility study also concluded that the conference center would (1) be unique, because no state-of-the-art conference or banquet center existed in the northwest suburbs of Chicago; (2) attract business from local corporations within the village and surrounding communities; and (3) increase the likelihood of attracting a full-service hotel to the property.
However, the owner’s bank saw the conference center, particularly its use as a means for attracting business to the village, as a substantial risk. The bank concluded that the proposed use was akin to a public or quasi-public use and conditioned its financing commitment on the owner obtaining public incentives.
In the end, by emphasizing the quasi-public nature of the conference center, the economic benefit that it would generate, the prestige that it would lend to the community, and the substantial risk of the project, the owner convinced the village to approve the conference center and the use of property tax and sales tax increments to pay back a portion of the developer’s redevelopment costs. The owner was able to explain to the village and the other taxing bodies who stood to lose the increment (e.g., the school district and the county) that, without the incentive, the property would remain vacant and continue to make insignificant tax contributions. On the other hand, with the incentive, the conference center would boost other property taxes in the area and, in 2009, when the TIF district expired, would add a significant new member to the tax rolls.
While this is only one recent experience, it provides important insight and guidance concerning the TIF methodology as a potentially powerful and important tool for hotel owners and developers.
As hotel deals become more difficult to assemble and finance, owners and developers will need creative solutions to have the project advance. TIF concepts should be in the tool box if and when the need arises.
Mr. Norton is a Partner in the Chicago office. Mr. Norton can be reached at 312- 578-6564 and at mnorton@hklaw.com.