You must certainly be aware of Nashville’s unique and bustling music scene. You are also likely familiar with its plethora of higher education options. You may even have knowledge of its strong employment growth and diverse economy of health care and financial service institutions. However, you may notknow that the “Music City” is our country’s newest $100 billion city.
The Nation’s Newest $100 Billion City
Officially reported in late 2014 by the U.S. Department of Commerce’s Bureau of Economic Analysis, Nashville’s 2013 gross domestic product equaled $100.8 billion, making it the 34th largest metropolitan area in the United States. It is likely that Nashville’s growth would not have been possible without a unique and powerful financing tool – tax increment financing.
What is Tax Increment Financing (“TIF”)?
Generally, TIF is a financing method used by local governments to entice redevelopment, infrastructure and other community-improvement projects; typically, these projects focus on reviving blighted areas or providing benefit to the public as a whole.
A TIF project is expected to generate increased property tax revenue for the area in the future. TIF uses the future tax revenues on increased assessments of real property to pay for the debt issued to finance the development project. The increased taxes are channeled into a separate fund which is used to offset the redevelopment costs.
Nashville’s Use of TIF
Nashville’s Metropolitan Development and Housing Agency (MDHA), the state-chartered organization that administers the redevelopment of Nashville and surrounding Davidson County, maintains ten redevelopment districts. The TIF capacity in these districts ranges from as small as $330,000 to as robust as $230,000,000. The MDHA uses TIF in two ways: first, to finance specific development parcels, and second, to expend excess incremental revenues to support public purposes that are not for the benefit of a specific parcel.
It is important to note that many of Nashville’s TIF projects, especially those residential in nature, may not have been possible without the groundwork with respect to Nashville’s zoning code. Prior to 2010, when the city finally reworked the code, there existed significant barriers to developers wishing to build residential property in the downtown area. It was the city’s willingness to open the door to private downtown development that put Nashville on its way to becoming one the Nation’s most sought-after cities and earning the title of “The South’s Red-Hot Town” (as dubbed by Pulitzer Prize-winning author Jon Meacham in TIME magazine).
The MDHA is typically conservative in its use of TIF in three specific ways:
- It only uses the incremental tax revenues from properties that are passed through MDHA ownership;
- It targets specific parcels and developments for the use of TIF funding; and
- It keeps private developers accountable by requiring developer financing or a developer guarantee for each project.
While conservative in its approach, the MDHA has found and been willing to distribute significant excess TIF funds (i.e. funds not pledged to the repayment of any TIF loan) to non-related one-time projects. The $5 million for the construction of Church Street in its Capitol Mall Redevelopment area is one example. Others include the installation of additional infrastructure in the Rolling Mill Hill area of the Rutledge Hill Redevelopment District, and construction of West Riverfront Park and the Nashville Sounds baseball park.
However, some of Nashville’s TIF projects are far from conservative: the Omni Hotel ($62 million), the Westin Hotel ($16 million), and the 45-story, 505-unit apartment building (aptly named “505”) from Tony Giarratana, a prominent and successful developer in the Nashville area, and one of the driving forces behind the city’s skyline ($12.5 million). Additional examples include the AT&T/BellSouth Tower ($13.5 million), the Icon ($7 million), and at least seven other developments since 2000 with over $5 million in TIF.
What can Indianapolis learn from Nashville?
The success of Nashville’s TIF scheme seems to be rooted in the well-defined priorities the MDHA sets for itself. For example, the MDHA established the following priorities for 2014-2015:
- Create affordable multi-family housing and preserve historically significant structures for all districts;
- Create parking, retail, or cultural facilities, along with a substantial public good, with each project in its downtown core;
- Provide neighborhood-serving commercial uses for its neighborhood districts; and
- Deliver appropriately scaled development that will spur additional investment for its commercial districts.
Indianapolis can use the following five strategies to improve its use of TIF in the future:
- Priorities: Create a list of both short and long term priorities for each TIF district.
- Plan: Use Plan 2020 to pinpoint where there are opportunities for TIF. Find the problem areas and those ripe for redevelopment. Consider neighborhoods that need more than a one-time project. Develop a set of design principles that can be utilized across all TIF districts to create a more unified city development strategy.
- Necessity: Ask whether TIF aid is actually necessary for the project. Avoid permitting TIF funding if the developer is merely using TIF as a profit margin. If the developer is willing to proceed without TIF, and can be profitable doing so, Indianapolis should be able to benefit from the increased property tax revenue from the beginning of the project.
- “But for” causation: Consider whether providing TIF for the development of a certain parcel is necessary for the growth or resurgence of that area. Is there really a “but for” link?
- Public benefit: Does the proposed TIF-funded project have the strong support of the adjacent property owners? Does the project provide positive effects to the city’s environment beyond the immediate area? Are there clear signs of blight or high potential for new investment over and above the one-time TIF project?
Indianapolis has a proven track record of successfully using TIF to encourage development, but could consider using Nashville for some further inspiration.