FAYETTEVILLE — The 18-story Renaissance Tower hotel two developers planned downtown in 2004 never came to pass, but property taxes of about 1,300 downtown landowners are still paying for the demolition that cleared the way for its construction.
And if tax collections since 2005 are any indication, the payoff of the bonds that funded demolition of the former Mountain Inn may take longer than city leaders and economic experts predicted.
Developers predicated plans for the hotel project on using a public tax increment financing, or TIF, mechanism to purchase and demolish the old hotel and other properties at Mountain Street and College Avenue. The Fayetteville City Council in 2005 approved the plan, which created a nearly 350-acre redevelopment district downtown from which property tax revenue will be siphoned until the bonds are paid off.
Bond counselors, city officials and economic experts at the University of Arkansas, in 2005, expected the $3.7 million in bonds would be paid off no later than 2029.
At A Glance
What is Tax-Increment Financing?
Tax-increment financing captures increases in property taxes within a predefined district as a way to pay to remove blight, provide infrastructure and encourage development within the district's boundaries. Typically, bonds are issued to pay for infrastructure improvements. City officials determine a baseline of property values on land and structures within the district. Any tax dollars derived from future property value growth beyond the baseline goes toward repaying the bonds.
When the project is complete and the bonds are paid off, property tax proceeds return to local governments, schools and other taxing entities at their full, increased value.
Source: Staff Report
To date, bond payments have lagged behind those projections, a fact that will extend the payoff and cost city and county governments future tax dollars.
Documents obtained from Little Rock-based Crews and Associates, the underwriter for the bonds, showed projected tax receipts from within the district of $679,700 as of Feb. 1. But, according to Bobby Hill, chief deputy treasurer for Washington County, only $402,085 had been collected and paid toward the bonds as of Aug. 5.
“One thing this TIF district should show us is that it’s hard to predict even something as stable as property taxes,” said Kit Williams, Fayetteville’s city attorney. “There’s no free lunch, even though it was promoted that way by the supporters when they presented it to the City Council.”
The attraction of the funding mechanism was that it allowed the creation of a pool of money to remove blight — which most agreed the Mountain Inn was — without raising anyone’s taxes. Rather, the financing district counted on new developments and the future growth of existing properties’ value within the district. Higher property values translate to added tax revenue that would pay off the bonds.
The district’s creation set a property value baseline. In future years, any tax dollars derived from property value growth beyond that baseline are captured and used to repay the tax-increment financing district’s bonds.
A delayed payoff will allow the interest that must be paid on the debt to grow. Williams said the downside of tax-increment financing is that it can take years to generate the money needed to start making significant paydown of the debt, allowing interest to accrue on the $3.7 million principal.
Williams said even under the best projected conditions, the tax-increment financing was scheduled to require $4 of taxes for every $1 spent on the Mountain Inn demolition project.
Missed Projections
The revenue projections were formulated in 2005 using information from analysts at the University of Arkansas’ Center for Business and Economic Research.
Their analysis anticipated that property values in the district would grow at pre-2005 levels. The center predicted properties within the district would generate more than $95 million in assessed value by 2011 — as compared with $31.4 million in 2005.
Assessed value is calculated at 20 percent of a property’s market value, as determined by each county assessor.
Washington County Assessor Jeff Williams said Tuesday that assessments within Fayetteville’s tax increment financing district were actually $47.2 million as of Jan. 1 — an increase of more than $17 million compared to six years prior, but still a far cry from the tripling the UA had projected.
The Center for Business and Economic Research’s analysis assumed a number of projects — including the Lofts at Underwood Plaza, the Legacy Building north of Dickson Street and the unbuilt Renaissance Tower — would be generating property tax at levels far greater than they have.
“Everybody felt these projects, conservatively, were going to be successful,” said Bob Wright, senior managing director at Crews and Associates.
Wright called the City Council’s decision in 2005 — after months of debate — to set the tax increment financing district’s boundaries and approve the $3.7 million bond issue “a solid financial plan and projection.”
“It just hit the historical meltdown in the economy and real estate cycle,” Wright said.
He and William emphasized that a few big-ticket developments in the district during the next several years could speed up repayments on the bonds.
But overall, Williams said, “It was probably too rosy a scenario when presented.”
Tied-Up tax revenue
Property owners within the district are not paying higher taxes as a result of the tax-increment financing district. Paul Becker, city finance director, said their taxes are figured on whatever their property value is. The district, however, diverted revenue from those tax payments that would otherwise have gone into the city’s, county’s and Fayetteville School District’s coffers.
“It somewhat restricts the city, because we don’t get any growth from the time that the assessed value was calculated,” Becker said. “That particular incremental amount, of course, could have gone into the general fund.”
Becker added that, compared to the city’s more than $33 million general fund, property tax growth within the tax increment financing district is “not significant.”
He estimated that the city will miss out on about $22,000 this year.
Was It Worth It?
Dan Coody, who was mayor and an advocate of tax-increment financing as a way to promote downtown redevelopment, said the approach would be celebrated had economic conditions not killed projects like the Renaissance.
“We got some benefit out of it, but not nearly enough to make it worth creating the district if we had it to do over again,” Coody said.
A key benefit, he said, was the removal of the eyesore Mountain Inn from the downtown landscape.
“It removed blight,” Coody said. “It just exposed all the blight that was behind it.”
Robert Rhoads, the former Fayetteville alderman who proposed the tax-increment financing district, said the upside of creating the district was far greater than the downside even as it turned out that the hotel project fell apart. Even today, great potential exists for the site, he said.
“There’s a benefit to having that building gone and having a place that can be built upon when the economy turns around,” Rhoads said.
Williams said it will be better if that happens sooner rather than later.
“Every dollar you get now that goes into it saves you a lot of interest in the future,” Williams said.
Greg Harton contributed to this report.