Ohio’s Vacant (Dinosaur) Buildings are not Extinct-Incentives Available to Create Jurassic Building Parks

When I think of old, vacant industrial buildings, I see opportunities vs. eyesores. Brick and block is a far better insulator than thin-skinned metal siding, and certainly adds character to the exterior appearance as well. Often, floors are 6’’ level concrete, spans (between columns) are 40’ to 60’, clear ceiling height is at a premium and  amenities like cranes, high pressure gas lines and an abundance of power are common. While there are often challenges to retro-fit a vacant industrial or commercial facility, there are many incentives in Ohio, as well. Three programs, particularly worth mentioning are:

1.  Ohio Vacant Facilities Fund: The Ohio Vacant Facilities Fund was enacted as part of HB

18 (signed by Governor Kasich on May 4, 2012) to provide grant funds for businesses that create jobs in underutilized commercial and industrial sites.  The $2 million Fund basically offers a $500 grant for each new job created in a building that has been at least 75% vacant for a year or more.  The funds can be used for acquisition, renovation, or equipment for the building. Employers must hire at least 50 employees or bring at least half of their current Ohio work force to the facility. The Jobs must be full-time and meet or exceed minimum wage. 

With 10 projects underway and more than 300 new jobs created, this incentive is already making a big impact across Ohio. The funding process is on an open cycle and the money is authorized through August of 2015.

To learn more about the Ohio Vacant Facilities Fund click here.

2. JobsOhio Revitalization Program Loan and Grant Fund: Created to replace the popular Clean Ohio Revitalization Fund and Clean Ohio Assistance Fund, The JobsOhio Revitalization Program is designed to support the acceleration of redeveloping brownfields, vacant and underutilized sites in Ohio. Priority is to be placed on projects that support near term job creation

opportunities for Ohioans.

An eligible site is “an abandoned or under-utilized contiguous property where redevelopment for the immediate and primary purpose of job creation and retention are challenged by significant redevelopment constraints”.

An eligible applicant is “a business, non-profit or local government where an end user has signed an agreement such as a letter of intent, option, lease or holds title for the project site and has a

specific business plan, financing plan and schedule for redevelopment and job creation to occur.”

Possible loans and grants under the JobsOhio Revitalization Program include:

a) Grant of up to $200,000 for Phase II environmental assessments;

b) Grant of up to $500,000 re: asbestos and lead paint. The funds can be used for asbestos abatement, demolition, site preparation, and disposal of waste; and

c) Loan for up to 75% of environmental clean-up/remediation costs (max. $5 Million) with the possibility of up to $1 million cleanup grant coupled with the loan.

If you have a project and would like to discuss funding opportunities through the program, you can contact the JobsOhio Network Partner for your area.

3. Ohio Historic Preservation Tax Credit Program: The Ohio Historic Preservation Tax Credit Program provides a twenty-five percent (25%) tax credit for the rehabilitation expenses of owners and lessees of historically significant buildings. A building is eligible if it is individually listed on the National Register of Historic Places; contributes to a National Register Historic District, National Park Service Certified Historic District, or Certified Local Government historic district; or is listed as a local landmark by a Certified Local Government. The program is competitive and receives applications bi-annually in March and September.

Over the first ten funding rounds, tax credits have been approved for 174 projects to rehabilitate 246 historic buildings in 40 different communities. The program is projected to leverage more $2.2 billion in private redevelopment funding and federal tax credits directly through the rehabilitation projects. For more information log on to: https://development.ohio.gov/cs/cs_ohptc.htm

While you still may not be able to get a silk purse from a sow’s ear, it may certainly be worth your while to revitalize your business and one of Ohio’s “Jurassic” buildings at the same time.

Controversial Plan to Use Eminent Domain to Seize Underwater Mortgages Advances in California

The following article was written by Laura Englehart, Law Clerk at Kohrman Jackson & Krantz and a law student at CSU's Cleveland-Marshall College of Law

* * *

In an attempt to keep residents in their homes and prevent foreclosures, municipal leaders in Richmond, California are advancing a plan that allows the city to use its eminent domain powers to seize and refinance underwater mortgages.  While Richmond is still far from actually executing it, the controversial plan could have far-reaching effects if it continues to move forward.  Because Ohio is similarly struggling with an abundance of underwater mortgages, Ohio’s local lawmakers, lawyers, realtors, and other interested parties should take note of how the debate and implementation proceed.

The power of eminent domain allows a government to take private property for public use, but Richmond would be the first to use this power to seize underwater mortgages.  A mortgage is underwater when a homeowner owes more on the home than it is worth.  According to Zillow, 45% of homes in Richmond were underwater in the second quarter of 2013.  

In July, the City of Richmond sent letters to mortgage servicers and trustees offering to buy 624 underwater mortgages at considerable discounts and has indicated that it can otherwise use eminent domain to forcibly take the mortgages.  Upon seizing these kinds of mortgages, the city intends to compensate the banks at fair market value and would then refinance the mortgages to make them more-affordable for homeowners.

 

Housing and community advocates who support using eminent domain in this way believe it is a mechanism that can help stop the housing crisis that is devastating local communities by lowering principal balances and enabling more homeowners to stay in their homes.  Those in opposition argue that it will create a chilling effect by making banks unwilling to enter into future mortgage agreements in Richmond. The Federal Housing Finance Agency has already stated that Fannie Mae and Freddie Mac should stop doing business in places that approve the use of eminent domain to seize and refinance underwater mortgages, effectively eliminating mortgage financing.

 

Investors holding the mortgages in Richmond sued the city through their Mortgage-bond trustees Wells Fargo, Deutsche Bank, and The Bank of New York Mellon and sought an injunction to halt the plan.  Last week, however, U.S. District Court Judge Charles Breyer dismissed the case on grounds that the lawsuit was premature, as Richmond City Council has not yet voted to approve the use of eminent domain. Regardless of the ruling, whether this is a legitimate use of eminent domain remains undecided, and further lawsuits are expected as Richmond continues to move forward. 

 

Lawyers and stakeholders in Ohio should stay abreast of this ongoing controversy because Ohio is also struggling with the magnitude of the housing crisis and has a similarly high percentage of underwater mortgages. According to Zillow, in Ohio 35% homes in Lucas County (Toledo); 32% of homes in Montgomery County (Dayton), 30% of homes in Franklin County (Columbus) and Cuyahoga County (Cleveland), and 28% of homes in Hamilton County (Cincinnati) are underwater.  Other jurisdictions across the nation are already exploring whether eminent domain can or should be used as a new tool to seize and refinance underwater mortgages to stop such homes from going into foreclosure. The eventual outcome in Richmond will have widespread influence.

Recent Ohio Construction Law… Changes

Any assistance to help increase public construction activity (or make it easier) would certainly be welcome these days, so thank you to the Ohio Legislature, for the following new amendments (except, perhaps for "Amendment No. 4" below):

1) Ohio HB 509- Effective September 28, 2012

The competitive bidding thresholds for cities, villages, specified boards, and sanitary districts are increased to $50,000;

2) Ohio HB 487 (repealing Ohio RC Sections 2909.32-.33)-Effective September 10, 2012

“Declarations of Material Assistance” are no longer required to be submitted by persons bidding on public projects;

3) Ohio Am. Sub. HB 135- Effective September 28, 2012

Prevailing wage thresholds for new “vertical construction projects”(vs. bridge, road work) were increased from $125,000.00 to $200,000.00 beginning 9/28/2012, and will increase to $250,000.00 beginning 9/28/2013. Vertical reconstruction thresholds were also increased;

 

4) Ohio Sub. SB 224- Effective September 28, 2012

While not limited to public construction contracts, Ohio Sub. SB 224 generally shortens the “statute of limitations” (or the law establishing the period within which one is able to bring legal action) upon a written agreement or contract from 15 years to 8 years after the cause of action accrued. Current exceptions to Ohio’s statute of limitations for written contracts (ORC 2305.06) dealing with unclaimed funds, and contracts for the sale of goods (pursuant to UCC 2-725) remain in effect. Obviously, political subdivisions won’t be too happy about this one, but public construction project bidders should be pleased.

The (Real Estate Finance) Year in Review and Forecast for 2012

A Perspective from Mike Cantwell, a Principal of Johnson Capital
(re-printed with permission from Mr. Cantwell)

Banks continued their lethargic return to the market with more loans moving off the balance sheets than being added. The Mortgage Bankers Association estimates that there is $2.4 trillion of commercial debt outstanding as of Q3 in the United States. Banks hold 33% of that total, so they are by far the most significant source of capital for commercial real estate. Banks will have lost over $100 billion in their commercial loan portfolios through this year.

CMBS lenders started the year with great optimism and retooling for a return to higher volumes. After a slowdown in the spring and early summer due to legacy loans, this sector was brought to its knees in July. S & P literally stopped CMBS lending in its tracks by the untimely and questionable withdrawal of its rating on the day before a securitization was to settle. CMBS spreads ballooned out to levels that were 100 to 150 basis points wide of Life Company and bank lending. As of December, we are finally seeing spreads come in and some meager volume reemerge. CMBS looks like it will finish with approximately $32 billion of closed transactions, which is up from 2010, but well below the pace that was anticipated at the beginning of 2011.
Life Insurance lenders enjoyed a record year in terms of production. With a total volume for 2011 approaching $75 billion, they were the mainstay of our business. This record level of production was achieved while maintaining low LTV levels and cherry picking only the most stable of assets used for collateral. Part of this record volume can be traced to the lack of competition from banks and CMBS as well as borrower willingness to de-lever.

Agencies: Freddie Mac and Fannie Mae remain solid and are producing loans at near record volume levels. Their multifamily delinquency rates remain at less than .5% and this sector of their business is solid and profitable.

New Construction:Multifamily continues as a good news story with demand projected to continue increasing for years to come and supply lagging behind demand. Rents and values are up and we expect to see a large increase in the number of multifamily permits as well as investment sales activity. Lenders consider apartments to be the preferred asset class. With new starts projected at 188,000 units across the country, opportunity exists for construction lending with our FHA, 221 d4 program as well as the life companies who are now providing low leverage, construction/permanent financing. Other than build-to-suit projects, expect to see little or no new construction of office buildings, warehouses or retail facilities.

Refinancing:Interest rates remain at all-time low levels and we can expect to see relatively flat interest rates for 2012. Only $101 billion of commercial loans mature in 2012, so the real onslaught of refinancing is projected to occur in 2015-2017. Look for banks to continue to move loans off of their books which should be another good source of refinancing opportunities. Also, we expect CMBS to re-emerge as a factor. Freddie Mac, FHA and Fannie Mae continue to offer very attractive rates and terms that most life companies and banks cannot match.

Investment Sales:Commercial investment property sales are surprisingly slow and have not reacted as expected to the low interest rate/cap rate environment. CRE sales are up over 2010 but the total is something close to 30% of the peak years’ activity (’05-’07). However, the trend is up and we expect 2012 to produce a continued increase in sales volume. A great deal of this activity will be a function of the political environment toward the end of the year and the health of the European Union economies.

2012 promises to be just as volatile and unpredictable. However there is good news on the horizon. Interest rates will remain near record low levels. And the top 30 life insurance companies report a collective increase of 20% in their 2012 lending programs. Founded in 1987,

Johnson Capital is one of the country’s top real estate capital advisory firms with eighteen locations nationwide. Mike Cantwell, who has built his 29-year career in mortgage banking and commercial real estate in Denver, is in charge of new business production in Johnson Capital’s Denver office. He is also responsible for the mortgage loan servicing department. To learn more, email: mikecantwell@johnsoncapital.com.

PILOTs = Special Assessments (according to the Twelfth Dist. Ct. of Appeals of Ohio)

Generally speaking, courts will typically uphold language in a commercial lease, unless it is contrary to statutory law or public policy. Consequently, commercial landlords and tenants have a lot of leeway in allocating the risk and responsibility of issues inherent in commercial leases. Because of this deference to lease language in a commercial lease, landlords and tenants are strongly advised to “say what you mean, precisely, or a judge will decide what you meant”.

Failure of the lease to clearly define if repairs include replacements, for example, or what improvements stay with the landlord and what goes with the tenant upon expiration of the lease (i.e., the “fixture” vs. “trade fixture” issue) often results in disputes that could easily have been avoided with clear, specific lease language (See “Getting a Fix on Fixtures”, Ohio Real Estate Blog, by Stephen Richman, June 30, 2008). Allocating responsibility for real estate taxes and assessments should be added to the growing list of lease provisions that must be drafted carefully, and precisely to avoid unintended, and often, costly results.

Most commercial landlords intend for their tenants to pay for their pro-rata share of taxes and assessments, especially in a long term, triple net (NNN) lease. Sometimes, however (depending on the relative bargaining strength of the parties and the length and type of lease), tenants are successful in negotiating for special assessments to be paid by the landlord vs. the tenant. In those cases, the distinction between general real estate taxes and special assessments is usually understood, but must be clearly spelled out in the lease. The distinctions among taxes, assessments, PILOT’s, and TIF’s, however, are much more difficult to understand, as illustrated (and resolved) in the relatively recent Twelfth District Court of Appeals case: Chu Bros. Tulsa Partnership, P.L.L. v. Sherwin-Williams Co., 187 Ohio App. 3d 261, 2010-Ohio-858; which basically held that PILOTs = Special Assessments.

In order to help understand the Twelfth District’s resolution of this issue, and the nature of taxes vs. assessments, it is helpful to understand the following terms involved:

“Taxes vs. Assessments”. "In a general sense, a tax is an assessment, and an assessment is a tax; but there is a well-recognized distinction between them; an assessment being confined to local impositions upon property for the payment of the cost of public improvements in its
immediate vicinity, and levied with reference to special benefits to the property assessed."
Lima v. Lima Cemetery Assn. (1884), 42 Ohio St. 128.

A tax is a burden levied on citizens for the general operation of the government. By contrast, an assessment is a narrower burden levied on specific property owners to cover the cost of benefits bestowed on the property by public improvements. State ex rel. Emrick v. Wasson (1990), 62 Ohio App.3d 498, 506.

Because of the general nature of taxes, and the special/more specific nature of assessments, it is less confusing to refer to assessments as “special assessments”, and real estate taxes, as “general real estate taxes”. Using the phrase “general real estate taxes and special assessments” or “real estate taxes and assessments, both general and special” clearly covers both. However, the phrase “general real estate taxes and assessments”, for example, could be construed as not inclusive of “special assessments”.

“TIF” stands for “Tax Increment Financing,” a special tool that cities can use to generate “new” revenue for economic development in a specific geographic area. This “new” revenue– also called “increments” – arises if new development takes place in the designated TIF district, or if the value of existing properties rises, resulting in higher tax bills.

PILOT stands for Payment-In-Lieu-Of-Tax. The idea behind TIF’s and PILOTs is that property values, and therefore tax collections, will rise after the TIF plan improvements in a TIF district have been completed. TIF allows the increase in property taxes to then be used to reimburse the developer for certified project costs. The difference between the taxes on the property before and after it becomes part of a TIF plan is called the PILOT. If there were existing tax on the property, the portion of property tax that existed before the TIF plan is called the “base”. Any tax amount larger than the base is then the PILOT. The PILOT and any base tax add up to the same amount of tax that would have been charged if the property had not been in a TIF plan. The PILOT is NOT an additional “TIF tax”; it is a portion of the regular tax that can be redirected to the project.

The facts of the “Chu” case are simple enough. Sherwin Williams (the tenant) was given a bill from Chu (the landlord) for approximately $18,000.00 for the PILOTs, which it refused to pay (claiming it was a special assessment, and not tenant’s responsibility under the lease). Chu sued for breach, claiming the PILOTs were analogous to general taxes and thus the tenant’s responsibility under the lease. Both parties agreed that the terms of the lease clearly defined their respective real estate tax and assessment obligations. The lease in this case provided that Sherwin-Williams was responsible for all "general real estate taxes and assessments," while Chu Brothers was to pay for "special assessments”. Both parties clearly disagreed, however, as to whether PILOT’s were general taxes or special assessments.

The trial court sided with, and entered judgment in favor of the landlord, concluding that the PILOTs are not specific, statutory special assessments under R.C. 727.01 and, since PILOTs are not R.C. 727.01 special assessments, Sherwin-Williams was responsible for, and obligated to pay the PILOTs under the terms of the lease. The trial court also implied (but did not specifically hold) that PILOTs are a form of general taxes, as they represent the increased portion of taxes that result from improvements made to a property (but they are then redirected to pay for
specific infrastructure improvements).

The Twelfth District Court of Appeals in Chu reversed the trial court’s decision and held that the PILOTs assessed against the property under its governing TIF agreement shared all of the same characteristics as special assessments as defined by the Ohio Supreme Court, and therefore, they were a type of special assessment, even though not specifically mentioned in R.C. 727.01. The Twelfth District Court in Chu acknowledged that PILOTs are levied and valued similar to real estate taxes (and viewed by some as redirected taxes) however, it recognized that the Ohio Supreme Court has clearly held that PILOTs are not taxes. (See Dayton v. Cloud (1972), 30 Ohio St.2d 295,302).

The Court of Appeals in Chu reinforced its holding by: 1) examining Ohio's TIF legislation (R.C. 5709.40), stating same “clearly demonstrates that PILOTs are special assessments”; and 2) citing Ohio Supreme Court decisions noting that public improvements constructed pursuant to a municipal TIF program "benefit specified parcels of property."

In other words, according to the Twelfth District Court of Appeals: “like assessments levied under R.C. 727.01 et seq., PILOTs collected pursuant to a TIF agreement are another form of statutory special assessment. Although equal to the real property taxes that would have been payable if the property had not received a TIF exemption, PILOT funds are used to pay for the infrastructure improvements that directly benefit the property owner…” Id at Par. 18.

The moral of this story? Say what you mean, precisely, in a commercial lease, or a judge will decide what you meant. If you intend for a party in a commercial lease to pay for general real estate taxes and assessments, special assessments and “PILOT’s”, say so. Some leases describe these terms in a paragraph vs. a phrase, just to be sure all bases are covered. Of course, every property, landlord, and tenant are unique, and a legal professional to create a unique lease geared to reduce unintended costs and liability is always advised.

New Incentive to Invest in Ohio- Ohio New Markets Tax Credit Program

On August 20, 2010, Governor Ted Strickland announced the creation of the Ohio New Markets Tax Credit program.

The program will help attract new business in Ohio by providing state tax credits to those who provide investment in low-income communities.

According to Ohio House Speaker Budish (credited with the idea): “The credit offers an incentive for investment in new and growing companies that will not only generate jobs but also add to the vitality of the community, fostering an environment for ever greater business growth. The New Markets Tax Credit is just part of the extensive job creation initiative in the Ohio House that includes the Investment Technology Tax Credit, adding $100 million to the Venture Capital Authority and expanding the Third Frontier Program.”

Many investors/developers have taken advantage of the Federal New Markets Tax Credit program and now they will be able to even better afford projects in Ohio by combining the Federal credit with the Ohio credit.

According to Ohio Department of Development Director Lisa Patt-McDaniel: “Tax credits are often a critical component in creating job and economic growth opportunities in Ohio’s communities. By providing these tax credits for investors, businesses are able to increase their efficiency, benefiting the company and the entire community.”

The program is administered by the Department’s Urban Development Division.

$10 million in tax credits is available in the first round of funding. The Ohio New Markets Tax Credits program will provide a thirty-nine percent (39%) tax credit over seven years for qualified investments in low-income community businesses. Applications for the Ohio New Market Tax Credit are due on September 20, 2010.

For more information on the Ohio New Markets Tax Credits program, go to: http://www.urban.development.ohio.gov/

TIF 101 for School Boards

The article below was written by Scott Wick, summer associate with KJK:


Tax Incremental Financing (TIF) is an increasingly popular economic development tool used by local governments. However, TIFs have tremendous impact on school districts, so it is essential that school boards know their rights and options when facing a proposed TIF.

I. What is TIF?

Tax Incremental Financing (TIF) is a tool for economic development used to stimulate private investment and development in targeted areas. Through a TIF, communities capture the increase in tax revenue generated by the private development. The community then uses the excess tax revenue to pay back the private investors who paid for the public improvements required to make the new private development a success. For additional information about TIFs in general, see “Tax Increment Financing (TIF), An Overview” under the Public Finance topic heading (click here).

II. What impact do TIFs have on public school systems?

The exemptions resulting from TIFs limit the amount of funds available to school districts. Fortunately, school boards have the right in certain circumstances to participate in the evaluation and adoption of a TIF program. Under Ohio law, a local government must notify the affected school board and, in some cases, obtain the board’s approval prior to enacting legislation authorizing a TIF. Therefore, it is essential that school boards are aware, not only of the requirements and procedures for adopting a TIF, but also of the rights and options school boards have when evaluating whether to consent to a proposed TIF.

III. What obligations do local governments have to school systems?

A local government must provide notice of the proposed TIF to the affected school board, unless the board has previously waived the right to receive notice. Notice must include a copy of the TIF instrument and must be delivered no later than 14 days prior to the proposed adoption date. Local governments are required to consider any comments provided by a school board and to meet, upon request, with the board to discuss the proposed TIF.

IV. What can a local government do without school board consent?

A local government can, without a school board’s consent, authorize a TIF that exempts from real property taxes the value of the improvements not in excess of 75% for a term not to exceed 10 years.

V. When can a local government act only with school board consent?

A school district must approve any exemptions above 75%, to a maximum of 100%, and any extension beyond 10 years, up to a maximum of 30 years. In such case, the local government must provide notice no later than 45 days before the proposed date for TIF authorization. A school board will lose the right of consent if the board does not reply by 14 days prior to the proposed adoption date.

VI. What are the options when a proposed TIF requires school board consent?

A school board has three options in response to a proposed TIF that requires consent. The board can (1) approve the proposed TIF; (2) reject the proposed TIF, in whole or in part; or (3) negotiate an agreement, which will provide for compensation to the school district equal to a certain percentage of the amount of taxes exempted. These payments in lieu of taxes are commonly referred to as PILOTs. The school board opens negotiations by proposing a percentage. If the board either initially rejects the TIF or the parties fail to reach an agreement, the local government cannot authorize the TIF for more than 75% up to 10 years.

VII. What else should a school board be thinking about?

Beyond the obvious fact that school boards must be aware of the notice requirements and procedures for TIF approval, school boards should also keep in mind these additional factors:

• The theoretical argument in support of TIFs is that school districts will ultimately receive additional funding that would not be available without the development; but this argument only holds true when the development would occur only with TIF approval, and increasingly TIFs are being used in development that would occur even without the TIF.
• PILOTs allow schools to immediately recover at least some of the lost funds; but schools are required to declare PILOTs as compensation, which will count toward the total funding that the school receives from the state.
• School funding generally shifts from the local level to reliance on the state, and school districts under TIFs often report inadequate returns from the state.
• TIFs should spur new development, but the reality is that TIFs are often used to make improvements that merely impact the quality of life of current residents.
• TIFs apply to both commercial and residential development, and with residential development the school system may face a dramatic increase in the number of students.
• School districts and local governments are often not defined by the same geographic boundaries, which mean that schools often lose money to TIFs even though school district residents have no voice in the local government proposing the TIF.
• School boards can negotiate the scope or targets of proposed TIFs.
• Some school districts have negotiated agreements where the TIF program includes financing from the local government for the construction of school facilities.

The procedures and choices for dealing with a proposed TIF are complex, but with assistance from the right legal professionals, school boards can make informed decisions that protect the best interest of the school district, the students and the entire community.

Tax Increment Financing (TIF), An Overview

Special thanks to Matthew Galan, a summer associate at Kohrman Jackson & Krantz, for his assistance in the preparation of this article.

I. What is TIF?

TIF stands for Tax Incremental Financing. TIF is a tool for economic development that communities use in an attempt to stimulate private investment and development in targeted areas. The community, through a TIF, captures the increase in tax revenue generated by the private development itself. The community then uses those very same excess tax revenues to pay back the private investors that footed the initial bill for the public improvements and infrastructure required to make the new private development a success.

TIF requires significant communication and coordination among a variety of players and levels of government, as well as analysis and planning. This is one of the more administratively complex programs available to local legislative authorities, so prudent use of experienced legal counsel is recommended for the creation of a successful TIF.

II. When is TIF used?

A TIF is used to address site and infrastructure development obstacles for a project. Obstacles can include site assembly and preparation, environmental contamination, public infrastructure, blighted conditions that impair development, investment needs for commercial districts or large areas, targeted investment of tax revenue needs, lack of private commitments, and TIF district expansion constraints.

Effective use of a TIF targets districts in need of public investment to address infrastructure issues, blight and generation of new development. Use of a TIF is appropriate when comprehensive economic and redevelopment plans are integrated and can only be completed “but for” the TIF (i.e. without the TIF, there would be no project). Lastly, TIF’s are best used when clear objectives and thresholds for projects are established through broad community representation on a TIF advisory board.

III. Why would a community want TIF?

The use of a TIF can aid a community’s fight against blight by incurring the costs of development or by reimbursing a developer for redevelopment costs that normally fall upon the developer alone. Depressed areas are redeveloped, the community and local economy is improved, and property taxes remain unchanged.

Property taxes remain the same under TIF because TIF is not a method of taxation. Rather, TIF is a creation of new debt through the issuance of bonds. For example, the community sells bonds to raise money for an urban renewal project, which are the incurred costs. As the renewed area becomes more valuable, it generates more property tax revenue for the community compared to the area in its blighted state. The increased difference in tax revenue from renewal is used to pay the debt service on the bonds.

Essentially, the community is selling debt as bonds to investors. These investors are paid a return on their investment through the property tax revenue of a refurbished parcel of land. The community does not have to raise property taxes because the refurbished parcel generates the increased tax revenue through its more valuable redeveloped status. The developer profits from the undertaking because it does not have to foot a portion of the cost of refurbishment. The community gains urban renewal from a private developer without footing the bill or assuming financial risk. Lastly, the bond holders, through increased tax revenue, collect a fixed return on their investment.

IV. What are the advantages of using TIF?

· Can be a powerful tool to help finance projects.
· Does not divert funds from an existing budget so political support can be more easily acquired.
· TIF use can overcome site problems or costs.
· Correct use can generate new investment, employment, and tax revenues.

V. What are the disadvantages of using TIF?

· Tax revenue for other government uses and services is diverted (investors have to be paid back).
· Obstacles to development may not be overcome, but rather subsidized (i.e. without the TIF, would the project happen anyway?).
· TIF is a complex, costly, and time consuming tool for financing public infrastructure.
· There is incentive for higher density development to cover financing costs (most bang for your tax buck).

VI. Examples of TIF

A. Good Example

There is a vacant building on a piece of land in your city. The location has some strong commercial potential if public improvements are made to entice business development. For whatever reason, such as inadequate infrastructure, private development is unlikely in this location.

To foster development, the local government and school board agree to participate in a project to redevelop the area. Certain parcels of land are formally designated as a TIF district. Improvements under the newly created tax increment district are planned to include infrastructure. At the time the TIF district was created the property is assessed at a base value of $1 million. The taxes on the base assessment continue to go to the local government, county, school board, and other public entities that receive income from property taxes in that district. Upon improvements to and development of the land in the TIF district, the parcels now have an assessed of $11 million.

The tax increment of the project is the newly assessed value of $11 million minus the original assess value of $1 million. The additional revenue of $10 million is not taxed for the general fund. Instead, the money is separately taxed and deposited into a special fund in an amount equal to the new property tax liability. This additional money is devoted to repayment of the bond investors, and upon termination of the project, to the three original participants (city, county, school board). Because the value of the parcel increased to a substantial degree, the TIF not only increased the value of the parcel, but also generated enough money to repay investors.

B. Bad Example

Your city has an area where mixed development consisting of both residential and commercial uses could succeed. There already are some small businesses present, but the addition of a large centrally located department store is believed to be crucial in rebuilding the retail power of the area.

The area, as currently assessed, is valued at $30 million. In preparation of the private developer’s vision, the redevelopment authority plans on purchasing land, relocating businesses, and constructing plazas. The assessment of the newly completed property is estimated at $50 million. The redevelopment authority sells $15 million in bonds to get the project started through initial public improvements.

The project is completed without a multiplier effect while subsidizing competition for other department stores. The forecast for the project is overstated, and the newly assessed value is only $35 million, a $5 million increase. With such a limited increase, the city cannot repay the debt of $15 million. The city must now increase taxes to retire the debt. All the city accomplished was a job shift and some increased economic activity.

VII. What can a community do to make TIF a reality?

The TIF process is complex. Communities must first determine how best to administer a TIF and exercise its powers to encourage targeted development or redevelopment. To designate a TIF area, the community must conclude that the proposed area qualifies under the applicable state statute. In Ohio, the Ohio Revised Code Sections are 5709.40-43 for municipalities, 5709.73-74 for townships, and 5709.77-79 for counties.

After legislation is enacted authorizing the use of TIF, necessary steps must be taken (contract, constitute boards, incur long-term debt) to effectuate the development or redevelopment. The use of experienced legal professionals to navigate these complexities is not only helpful, but practical.

If the TIF project is successful, the increased assessed value of the TIF area will produce incremental tax revenue. The community can use this money to pay off its incurred debt by contributing to the development or redevelopment. After the statutory period of time expires, or when the debt is retired, the TIF district will terminate and the community (and other recipients of property taxes in that area) will receive both the base tax revenue and the incremental tax revenue from the former TIF district.

City Agrees to Provide Funding to Developers to Assist in Economic Development Project

Council for the City of Wickliffe, Ohio recently adopted legislation to assist private developers with the costs associated with the redevelopment of approximately 10 acres of blighted property located within the City. Under Ordinance No. 2008-57, Council of the City authorized the Mayor to enter into a contract with LTV Group, Inc., an Ohio corporation, and Milestone Building Company, an Ohio corporation, to provide economic development assistance to partially finance costs associated with the redevelopment of certain parcels of blighted property located on Euclid Avenue within the City.

The proposed economic development project includes the demolition of four buildings to provide space for the construction of 76 condo units and retail stores. The projected cost of the project is $1,300,000. The redevelopment project will result in job creation and employment opportunities in the City.

Under Ordinance No. 2008-57, the City will contribute $300,000 to the proposed project in the form of an 18-month loan to the development companies bearing interest at a rate of 1.5%. If, however, the development companies meet certain prescribed conditions within the 18-month term of the loan, then they will not be required to repay the loan. Ordinance No. 2008-57 provides that portions of the loan will be forgiven upon the satisfaction of each of the following conditions:

• 33% of the loan will be forgiven upon demolition of all blighted structures.
• 33% of the loan will be forgiven upon the commercial site preparation.
• 34% of the loan will be forgiven upon the residential site preparation.

City Council determined that the provision of funding to assist in the redevelopment project to be in the public interest and a proper public purpose under Article VIII, Section 13 of the Ohio Constitution, which provides generally that the making of loans and the lending of aid by a political subdivision for the purpose of creating or preserving jobs and employment opportunities and improving the economic welfare of the people is in the public interest and a proper public purpose. City Council has determined the project to be in the public interest by furthering commerce and industry, by removing blighted structures and by generating property and income tax revenues for the City.

Joint Economic Development Districts (JEDDs)

Special thanks to Matthew Galen, a summer associate with Kohrman Jackson and Krantz for his preparation of this overview on JEDDs.


I. What is a JEDD?

A “JEDD” is short for Joint Economic Development Districts. Sections 715-69-715.90 of the Ohio Revised Code govern JEDDs. In short, a JEDD is a type of contract between the legislative authorities of communities that border or touch each other to develop a specific parcel or parcels of land for a more productive use. Communities that individually lack land development capabilities create and enter into JEDDs with a goal of economic development, job preservation, and/or employment opportunities for their citizens. The combined efforts and shared resources between the communities for the parcel(s) in question aids efficient development. The foundation for a JEDD is cooperation between local communities so that each may economically benefit.

Private developers submit proposals to a JEDD board, comprised of representatives of all participating parties in accordance with O.R.C. § 715.78(A). The best proposal is selected and a contract is formed. Typically, once the land at issue has been developed, the partnering communities share roughly 80 percent of the income tax revenue earned by businesses operating on the JEDD land. The remaining 20 percent of the income tax revenue goes to the independent JEDD board. The JEDD board is responsible for maintaining the JEDD fund that maintains the land. This means there are no additional taxes for the partnering communities.

II. When is a JEDD used?

A JEDD is used when communities desire to work together for shared tax revenue. Communities who desire increased income tax revenue from an industrial opportunity, yet are unable to support the business or industry behind the increase in tax revenue alone, can contract with a neighboring community to share resources. This is done when a town cannot, or will not annex the necessary land. Because both communities are involved and share their resources, economic issues afflicting both communities are alleviated. JEDDs CANNOT be used for residentially zoned areas.

III. Why would a community want a JEDD?

Communities like to use JEDDs because they collect increased tax revenue without having to raise their own taxes or outlaying initial funding for property improvements. Participating communities enjoy increased tax revenue that facilitates a direct benefit for community infrastructure investments. Additionally, JEDD creation can alleviate any annexation pressures between neighboring communities since both equally benefit.

Since an independent and impartial board manages the JEDD, communities need not have to worry about future jurisdictional boundary issues or responsibilities of the other party. The JEDD contract, enforced by the JEDD board, governs all terms and conditions between the communities. The board does not have more power than the creating communities for which it serves, nor can it cause the creating communities to lose any powers.

IV. What are the advantages of creating a JEDD?

For Townships:

· Townships cannot collect income tax, yet the JEDD provides the township an ability to increase revenues through income and property taxes on previously vacant land.
· JEDDs prevent city or village annexation for a minimum of 3 years, creating a period of cooperation between the township and city or village.
· JEDDs provide a new source of funding for resident services at no additional cost to them.

For Cities or Villages:

· Income tax revenues increase.
· Infrastructure utilities typically increase, thereby increasing tax revenue.
· Economic issues between townships and cities or villages are solved in a cooperative manner.

V. What are the disadvantages of creating a JEDD?

· Negotiating and drafting the JEDD contract is a legally complex and potentially time-consuming process.
· Gaining a majority petition for a JEDD from the property and business owners within the JEDD can be difficult.
· A JEDD contract requires approval from the municipality and unanimous adoption from the township – if not unanimous, then the township voters must approve the contract through election in the township.

VI. Example of a JEDD

Consider for example that a company has contacted your community to relocate its business because of your community’s advanced infrastructure development. Your community is interested, but does not have any available industrially zoned land to make the deal happen. A community that borders yours has some available industrial land that could support the industrial prospect’s needs, but unlike yours, lacks the requisite infrastructure. What can your community do? Your commuity can create a JEDD with your neighbor. This allows the company to relocate its business onto your neighbor’s land while your community extends its infrastructure in support. Both your community and your neighbor now can collect and share equally in the increased income tax revenue brought in by the economic activity the new industry has brought in, such as increases in jobs, consumer spending, or community investment.

VII. What can a community do to make a JEDD a reality?

Townships, cities, and villages who desire economic development and increased local cooperation between sister communities can solicit assistance from legal professionals who are experienced in the intricacies and complexities of JEDD creation. Sections 715.69-715.90 of the Ohio Revised Code outlines the statutory language that governs JEDDs and their creation. These statutes are fairly complex, but with step by step assistance from the right legal professionals, communities can reap the substantial economic benefits JEDDs offer.