Spokane Journal of Business

Learning to use a new tax tool

Creation of state’s first tax-increment financing district here proves thorny, though most like new law’s potential

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Those involved in creating the states first tax-increment financing districton West Plains land that will be home to a new technology parksay theres quite a learning curve to interpreting and using the new law, which made a long-sought economic-development tool available.

The lessons theyve learned, however, and the efforts theyre preparing to make in Olympia to get the new law tweaked, should help those who follow.

Last month, Spokane County commissioners authorized the issuance of up to $3.4 million in general obligation bonds to pay for roads, sewer lines, and other infrastructure improvements for the first phase of the Pacific Northwest Technology Park on the south side of U.S. 2, just east of the Boeing Co. plant. The authorization of the bonds marked the creation of Washingtons first tax-increment financing district, which will use property-tax increases from development to pay off the bonds. The Legislature authorized such districts just last year.

This concept was designed to allow developers to come in and have ready facilities constructed to attract new business, but it doesnt allow us to do it as we envisioned, says Lowell McKee, who along with prominent Spokane developer Dick Vandervert is a principal in Granite Investments LLC, which owns and is developing the tech park.

McKee says the new law is a useful tool, but is hampered by a process that hinders his ability to move quickly to attract new business tenants.

There are too many ifs, ands, and buts, says McKee, who says the law gives junior taxing districts, such as library districts, school districts, fire districts, and others, too much authority to influence the size of a bond issue. In this instance, by limiting the bond issue to a size that will cover only the initial infrastructure improvements, the junior taxing districts are forcing the development to proceed on a piece by piece basis, he says.

We have to develop at a slower pace because it reduces our ability to prepare the other facilities, says McKee.

The bond financing would make possible the development of $80 million worth of initial projects at the 152-acre technology park, says Roy Koegen, an attorney in the Spokane office of Seattle-based Perkins Coie LLP who serves as bond counsel to Spokane County. The park is envisioned eventually to include as much as $200 million to $300 million of development.

Tax-increment financing, billed as an economic development tool, allows bonds to be issued for infrastructure improvements in undeveloped or underdeveloped areas, which cities and counties can define by ordinance as special districts created for that purpose. For a time after the bonds are issued, says Koegen, the law allows for 75 percent of the property taxes generated by new development to be used to retire the bonds, which means the other taxing entities in the district get only 25 percent of new taxes from development. After the bonds are paid off, taxing districts receive the full amount of their share of new taxes.

McKee says the problem with the new law lies in the lack of influence the developer has in setting bond amounts.

The developer doesnt have a say. The county doesnt even really have a say, McKee says. The junior taxing districts have too much authority, and the result is that we cant do enough of the project at the planned tech park. We have to delay the additional amenities, the fountains and other features that we intended to construct ourselves in conjunction with the public improvementsthings like the national biotech convention center thats a major feature in our plan.

Spokane County Commissioner Phil Harris says such criticism of the junior taxing districts is misplaced.

While concerns expressed by junior taxing districts prompted the Legislature to give them a role in the formation of tax-increment financing districts, Harris says the junior districts are enthusiastic about the law, and those on the West Plains made no effort to limit the amount of bonds that could be issued for the tech park.

Once they saw that their income was greater on the improved property, none of the taxing districts sought to hold back anything, Harris says. The higher the bonds, the greater they benefit.

The developers and the countys bond attorney also have different views on how much development will be required to retire the bonds.

Todd Mielke, who lobbied on behalf of the Spokane Regional Chamber of Commerce for the state legislation and now represents Granite Investments in its dealings with the county, estimates that $58 million in new development would be sufficient to generate enough new tax revenue to retire the $3.4 million in bonds. Thus, he argues, bonds for a higher amount could have been issued.

Koegen, however, says $92 million in development would be needed to repay the bonds. He says hes being cautious, and contends that $27 of new investment is needed to retire each $1 in bonds, or $91.8 million. In contrast, Mielke contends the ratio should be $17 of investment per dollar of bonds, which would equal $58 million.

The question of how much new development is needed is significant, because county commissioners will rely on the value of the development when they decide how much of the authorized $3.4 million in bonds to issue for the first phase of infrastructure development. The money will be used to pay for a major extension of Flint Road, among other things.

A lesser amount could be issued should county officials conclude the assessed value of projects already under way in the first phase wont be sufficient to support the fully authorized issue. Mielke says, however, that since it is the developers obligation to service the bond issue, the county doesnt need assurance that the development under way would be sufficient to cover the bonds. All the county really needs to determine, he says, is that the developer is financially able to meet the bond obligation until the new tax revenues from the development become sufficient to do so.

Harris says Mielkes point is valid, although the county will probably tie the amount of the bond issue to the assessed value of the first phase of the tech park.

This project is unique because it had already been started, Harris says. Normally, you wont even be able to start a project before the district is approved. Because no development would have yet occurred in such a case, it wouldnt be possible to consider apparent increases in assessed value when setting the bond amount, he says.

The countys first tax-increment financing district covers an area of more than a square mile and straddles U.S. 2. To the south of the highway, the district includes a half-mile swath from Hayford Road east about a half-mile past Flint Road and which encompasses the Boeing plant, the new tech park, and other property. To the north of the highway, the district covers roughly a half-mile deep section between Hayford and Flint roads, including property on which Granite Investments has proposed a new shopping center.

Groundbreaking for a new Albertsons that will serve as an anchor tenant for that shopping center will occur within the next two months, says McKee, but although the shopping center is located within the tax increment financing district, it is not a consideration in the bond issue.

Groundbreaking on the tech park, at the southeast corner of U.S. 2 and Flint, occurred last year. The initial phase of work there is to include a $24 million, 60,000-square-foot biotechnology production facility for Biomedex Inc., of Spokane; a $10 million, 120-room Hilton Gardens hotel; a $12.5 million, 110,000-square-foot office building; a Bank of Whitman branch; a restaurant; a day-care center; and a fitness center, says McKee.

The tech park projects alone would approach the amount of investment needed to cover Mielkes estimate of $58 million in increased property value needed to cover the bond sale. More building there is expected, though no firm plans or schedules have been developed, McKee says. It now appears, however, that even Mielkes estimate of the amount of development needed to cover the bond issue is insufficient to cover the cost of constructing the infrastructure for phase one.

In moving to take advantage of the tax-increment financing quickly, developers relied on a $3.5 million preliminary estimate of the cost, Mielke says. The county and taxing districts relied on that estimate in setting the maximum $3.4 million bond amount.

Developers erred in relying on that preliminary cost estimate, and even the full $3.4 million will fall well short of paying for the phase one improvements.

It looks like the public infrastructure need for the first phase of the project is about $6.6 million, says Mielke. We didnt have our engineering estimates completed at the time the bond level was set, and we thought $3.5 million would cover the costs.

McKee says that even the $6.6 million estimate is outdated now, and a new estimate, based on actual construction costs, will be available soon.

Starting over?

Although Mielke says nearby Spokane International Airport will be responsible for about $1.3 million of whatever cost is finally set, the county would still have to issue more than $3.4 million in general obligation bonds to fund the developers most recently revised estimate of infrastructure costs for phase one. County commissioners knew that the cost estimate they received prior to approving the bond level was preliminary, says Mielke, who believes the commissioners have the power to increase that level through an addendum, rather than repeating the entire bond-authorization process.

Koegen, however, interprets the rules differently, saying a change in the dollar amount of the bond issue authorization would require that those tasks be done again.

Its another difference in interpreting the new law that will have to be worked out.

McKee doesnt welcome the possibility of repeating the entire process of resetting the bond amount, but wants the county to issue sufficient bonds to cover the full cost of infrastructure improvements for the first phase. Although he continues to express frustration that the bond amount would be insufficient to fund the infrastructure for the entire park, he says the development group is somewhat less inclined to assume liability for such a potentially large bond obligation now that the economy has faltered.

With the economy the way its been over that last six to eight months, I think now its probably best to (build the park) on a piece-by-piece basis, McKee says. The tax obligation follows the owner from Day One, so it may be best to do it in segments.

Despite their often-differing opinions, both Koegen and Mielke believe that the tax-increment financing law can be useful in spurring economic development. They even have similar views on one step that could be taken to improve it.

I think that the law could be changed to allow the issuance of revenue bonds, rather than general obligation bonds, says Koegen. Revenue bonds would limit the countys liability under the bond obligation because they could be retired only by the revenues generated within the tax-increment financing district, while general obligation bonds constitute a broader financial commitment that applies to all county tax revenues, he says.

Mielke and other lobbyists hope to persuade the Legislature to amend the law to add the use of revenue bonds as a second option available to tax-increment financing district.

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