Urban Revitalization and Tax Increment Financing in Chicago

This article describes how the City of Chicago used tax increment financing to lure business and development, while revitalizing the local economy.

By Lori Healey and John F. McCormick

hroughout the late 1800s and early available in 1997 was down 56 percent • deleterious land use or layout; T 1900s, the Chicago Stockyards from its 1980 level, and what little fund- • lack of physical maintenance; provided jobs for thousands of residents ing is available usually is offered on a • lack of community planning; or and fueled the local economy, earning the short-term annual basis, which makes it • dilapidation or deterioration. city the nickname “Hog Butcher to the too unreliable to support multi-year Even though the TIF law was estab- World.” But as traditional meatpacking revitalization and development programs. lished in 1977 in Illinois, Chicago ap- and butchering industries declined rapidly In response to these cutbacks, many areas proached the program cautiously and did in the late 20th century, the South Side’s began using TIF. Another advantage of not create its first TIF district until 1984. Stockyards closed production in 1980, using TIF over federal economic develop- When Mayor Richard M. Daley took leaving vast parcels of vacant and blighted ment money is that it allows for more office in 1989, there were only 12 TIF land and buildings. At the time, few project flexibility and local control. districts in the city. Many of them were federal resources were available to rebuild TIF was first enacted in Illinois in 1977 not well monitored, and as a result, had the area’s infrastructure; the soil was after the drastic reduction of state and not been generating much in terms of unstable, many roads were privately federal economic development funds. For private investment. Mayor Daley’s admin- owned and unusable, and the land was an area to be eligible for TIF in Illinois, istration embraced TIF as a tool for divided into small lots. These factors the structures in it must have some of the reaching Chicago’s economic development made large-scale redevelopment for following problems: goals. From 1990 to 1997, the city modern industries impossible. • age; adopted 32 more TIF districts. By the end Through a series of industrial and • obsolescence; of 1999, there will be more than 75 TIFs commercial tax increment financing (TIF) • illegal use of individual structures that in Chicago. districts, the city has successfully brought are below minimum code standards; In terms of sheer scope and scale, this once-thriving industrial center back to • excessive vacancies; Chicago’s use of TIF to retain and attract life. TIFs provided the funding mechanism • overcrowding of facilities; industry is unprecedented in urban to clean up the stockyards and prepare • lack of ventilation, light, and/or sanitary America. Through TIF, Chicago has land for redevelopment. The Stockyards facilities; become one of the strongest industrial Industrial Park is now home to modern • inadequate utilities; markets in the country. industrial facilities for companies like • excessive land coverage; Culinary Foods, Inc., Luster Products, and OSI Industries, while a new retail center has brought stores and services to a once- TIF in Chicago underserved area. In this age of dwindled The City of Chicago works state and federal funding, the Chicago with local aldermen, commu- Stockyards have become a national model nity groups, businesses, and for urban economic development. developers to identify areas not living up to their poten- tial. The city then examines the land to determine if it is Tax Increment Financing eligible to become a TIF Tax increment financing is a technique district. If it qualifies, the city for financing a capital project from the creates a TIF redevelopment stream of revenue generated by the plan to revitalize the neighbor- project. It can be an important community hood and public hearings are development tool for attracting the devel- held to provide input. Once opment that will generate new taxes. The Stockyards arch welcomes visitors to the Stockyards TIF the redevelopment plan is Federal economic development money district (photo courtesy of City of Chicago). completed, the City Council

DECEMBER 1999 • GOVERNMENT FINANCE REVIEW 27 project-completion risk upon the devel- Exhibit 1 oper, his or her equity partners, and HOW TIF WORKS lenders. Here, developers enter into Equalized redevelopment agreements, complete the Assessed project, pay for eligible costs, and are then Valuation pledged incremental revenues occurring (EAV) over time as a result of their project. $ Real Estate Tax The developer, as holder of the securi- Increased EAV with Redevelopment revenue derived ties and source of the incremental revenue from Increased EAV stream, eliminates default risk. Costs of to pay eligible project costs issuance expenses are minimal, and generally the need for a debt service reserve and capitalized interest are elimi- nated. Higher interest rates (equal to the developer’s borrowing costs) are mitigated Project area’s total EAV area’s Project (Real estate tax revenue available derived from EAV to taxing districts serving area) by the municipality’s ability to call and refund these securities at any time in the 5101520 future. This is especially valuable when TIF 23-year TIF TIF the city wishes to issue a Tax Increment Adopted Dissolved Bond for the entire district at a lower interest rate, refunding one or more high interest developer notes. The city has been proactive in using TIF formally votes on the creation of the TIF competitive with other cities and states in to assist financing low- and moderate- district. attracting development. income housing revenue bonds. While When the City creates a TIF district, the In 1992, the city allocated approxi- Chicago’s TIF funding has mainly been amount of tax revenue the area currently mately $25 million from its larger, limited to the 30 percent interest rate generates is set as a baseline that will serve citywide general obligation bond issue for write-down provided by the state TIF as the amount local governmental taxing economic development funding. Funds statutes, new legislation raised the level of bodies will receive from that area for the from this allocation allowed the city to assistance to 70 percent of interest rate life of the TIF, which is 23 years. As attract and retain large industrial compa- costs, as well as 50 percent of construc- vacant and dilapidated properties are nies like Culinary Foods, Luster Products, tion costs, which could trigger even more developed, with TIF assistance, the value Eli’s Cheesecake, National Wine Service, financing in this area. and tax revenue from those properties and Farley Candy. After completion of increases. The “increment” above the these projects-–with their proven real baseline is then captured and used solely estate tax increment numbers-–TIF bonds for improvements and redevelopment were issued in the Stockyards, Reed- activities in the TIF district. After the TIF Dunning, and Sanitary and Ship Canal TIF expires, or when the city’s investments are districts. Proceeds from these bonds then repaid, all property tax revenues are again were used to repay the funds originally shared by all of the local taxing bodies. allocated from the 1992 general obligation bond. Two of Chicago’s “mature” TIFs-–the Near South and Central Loop TIFs-–were Financing deemed qualified for AAA-rated insurance The City of Chicago initially made a through AMBAC. The Lincoln-Belmont- policy decision not to issue general obliga- Ashland TIF was insured by ACA. The tion bonds to directly fund projects in its city will look to the municipal bond TIF districts. Other than four TIF Bonds insurance companies in the future, realiz- issued in 1987 for commercial shopping ing that the underwriters have higher centers that were supported by real estate requirements for the insurance (larger size, tax increment, city sales tax, and state greater diversification, proven numbers, sales tax (the State of Illinois discontinued and overall higher increment coverage), the sales tax TIF program after one year), rather than unenhanced TIF bonds. the city was limited to offering “pay-as- The use of other forms of up-front you-go” TIF funding on a yearly basis for funding, such as CD Float Loans and individual projects. developer notes, provide time for projects Because individual companies and to mature and become “bondable” (as developers often need up-front funding to they did in the North Side’s Lincoln- make their deal complete, other initiatives Belmont-Ashland and Irving Cicero TIFs). The “Neighborhoods Alive” sign designates a TIF needed to be taken to keep Chicago Developer Revenue Notes place the district (photo courtesy of City of Chicago).

28 DECEMBER 1999 • GOVERNMENT FINANCE REVIEW In the Near North Redevelopment $12,500 for two-flats, $15,000 for three- than they would have without the TIF- Project, the most recent TIF financing of flats, $17,500 for four-flats, and a maxi- funded development. Simply put, TIF does $55 million was issued on two series, had mum of $50,000 for buildings with five or not take a bigger piece of the taxation pie, two letter of credit providers, and utilized more units. rather, it creates a bigger pie. a swap to provide an optimum interest Two programs in the downtown While Chicago’s Loop/downtown TIFs rate. This TIF area covers Cabrini Green, “Loop” business district provide local have been criticized by some as unneces- once one of the poorest, most crime- businesses with financial assistance for sary, they have been incredibly productive infested public housing projects in the projects that contribute to the area’s for all of Chicago. Most of the downtown country. Tax increment to fund the TIF growth as an entertainment, retail, and success stories in recent years are due to area is provided by a large commercial financial district. TIF: the creation and retention of thou- shopping center and market-rate condo- The Central Loop Improvement Fund sands of jobs, providing the funds for the miniums, which were constructed in the uses TIF proceeds to help property owners reconstruction of the State Street retail area after the TIF was established. Project improve their buildings according to the district, and the needed funding efforts to funds will be used for parks, infrastruc- standards outlined in the city’s two down- save and restore several historic theaters ture, new schools, and a new housing town vision plans. The plans encourage from demolition. Such projects have been project, which will consist of a mixture of building owners to install pedestrian- integral to the revitalization of Chicago’s market-rate, low- and moderate-income friendly improvements (such as new signs, downtown and have played an essential housing, as well as replacement housing awnings, facades, doors, and windows) as role in the formation of a new Theater for the Cabrini residents currently in soon- well as environmental remediation and District. to-be-demolished high-rise buildings. upgrades to electrical and plumbing systems. The fund provides grants of up to $150,000 or 50 percent of eligible costs. The Central Loop Loan Program, a Results TIF Programs companion to CLIF, provides low-interest By the end of 1998, Chicago’s TIF In order to bring some of the benefits of loans of up to $50,000 to retail, commer- program had created more than 9,800 TIF to small businesses, homeowners, and cial, and service-oriented businesses that jobs and retained more than 24,000. New small-scale downtown projects, the city are undertaking projects that benefit the housing units totaled more than 3,000. has initiated three new lender-backed city and employ Chicago resi- micro-TIF investment fund programs. dents, but do not qualify for These unique initiatives target housing TIF funds. Eligible projects Exhibit 2 and business programs in some of include leasehold improvements CHICAGO CUMULATIVE TIF RESULTS 1984-1998 Chicago’s most needy areas, as well as and expenses involving inven- TIF Districts: 64 at end of 1998 small improvements to the central busi- tory, working capital, equip- (More than 75 by end of 1999) ness district. ment, and building rehabilita- The Small Business Improvement fund tion. Loans last up to five years PUBLIC/PRIVATE INVESTMENT Total public investment $ 526,925,838 (SBIF) reimburses businesses and building at 3 percent interest. Total private investment $ 2,821,990,004 owners for TIF-eligible investments that Total investment $ 3,348,915,842 preserve building stock, improve neighbor- Leverage ratio $5.36/$1 hood appearance or commercial value, EMPLOYMENT and enable businesses to stay in the Special Considerations New jobs created 9,875 neighborhood, remain competitive, or Tax increment financing can New jobs retained 24,108 expand. Businesses may be reimbursed for be a controversial subject. Total jobs 33,983 up to 50 percent of eligible costs with a Misinformation about TIF RESIDENTIAL DEVELOPMENT maximum assistance of $50,000 per districts can lead to a fear of New rental units 1,506 project. Businesses such as free standing higher taxes and the perception New owner-occupied units 1,415 fast food chains and branch banks are not that TIF will take money away New student housing beds 757 eligible. Priority is given to businesses from other entities, particularly New youth hostel beds 250 located at major intersections or major school districts. But in fact, Total housing units 2,921 commercial corridors, projects resulting in additional taxes created by (excl. student housing/hostel) the retention or creation of jobs, and redevelopment of blighted land COMMERCIAL DEVELOPMENT historically significant buildings. goes to relieve the tax burden New office space 4.73 million square feet A pilot program in two South Side of other properties in the city. Rehabilitated office space 1.08 million square feet neighborhoods provides homeowners with TIFs also work to create money New retail space 2.36 million square feet TIF assistance for home repairs and for school districts and other Rehabilitated retail space 198,400 square feet improvements such as new roofs, taxing entities by developing a New parking spaces 4,615 entryways, windows, porches, exterior solid tax base that will help Rehabilitated theater seats 10,920 New movie theaters 2 siding, and masonry work. Coordinated fund them for years to come. through the city’s new TIF Neighborhood Local taxing bodies will realize INDUSTRIAL DEVELOPMENT Investment Program (TIF-NIP), the pro- a budget windfall after a TIF New industrial space 3.98 million square feet gram provides a maximum grant amount district expires. They will Rehabilitated industrial space 1.03 million square feet Total industrial space 5.01 million square feet of $10,000 for single-family homes, receive much higher revenues

DECEMBER 1999 • GOVERNMENT FINANCE REVIEW 29 New and rehabilitated office space topped creating and following a policy that is 5.7 million square feet, and new and aggressive and innovative in its utilization rehabilitated retail space was more than of TIF as an economic development tool, 2.5 million square feet. The city also had but conservative in its financing guide- more than 1,300 TIF-encouraged new lines. hotel rooms, two 10-screen movie the- Many of Chicago’s neighborhoods are aters, a newly created Chicago Theater coming alive with new development and District with 11,000 seats in rehabilitated growth. Modern industrial facilities are downtown theaters, 4,600 spaces in new replacing abandoned factories, while new parking facilities, and a new 250-bed shopping centers are appearing in city youth hostel and college dormitory. neighborhoods that have not seen com- A statistic which may best illuminate mercial or retail development in more the success of Chicago’s TIF program is than a generation. In most cases, these the calculation of private return leveraged improvements would not be possible from public investment. For every one without TIF. Chicago’s TIF program has dollar of public funds spent on TIF become a key ingredient in rebuilding projects, the private sector has invested Chicago and awakening its neighbor- almost five and a half dollars. By the end hoods. of 1998, Chicago had invested a cumula- tive $526 million in TIF funds and ben- LORI HEALEY is First Deputy Commissioner for the City efited from $2.82 billion in private invest- of Chicago’s Department of Planning and Develop- ment. JOHN F. M CCORMICK is TIF Financial Manager in ment. the Chicago Department of Finance. The City of Chicago has put in place an overall TIF program that not only serves its taxpayers well, but provides a model that other cities have looked to follow. This program has been successful by

30 DECEMBER 1999 • GOVERNMENT FINANCE REVIEW