TIF helps city shape up blighted area

Merriam, Kan., is moving toward completion of a major commercial redevelopment of a sizable, formerly residential area. The key to the project’s success was the city’s use of tax increment financing (TIF) in a way that reduced future risks while preserving the city’s options.

TIF is a redevelopment financing tool that is normally used to fund the costs of public infrastructure related to redevelopment and, in some cases, limited expenditures for private site preparation.

Merriam is an established residential community with approximately 12,000 residents located in the western Kansas City metropolitan area. The city’s 60-acre redevelopment area consisted primarily of older, single-family housing that was experiencing increased levels of absentee ownership, reduced private investment and heightening demand on public services.

The city’s objectives were to eliminate the increasingly blighted conditions and to enhance its operating position by diversifying revenues, the latter a result of the ability of Kansas municipalities to participate in locally generated sales tax collections.

TIF is increasingly being considered by Kansas jurisdictions as a viable redevelopment option. The state’s TIF law, although broadened somewhat in the most recent legislative session, is targeted mainly at helping local governments deal with blighted conditions.

If the major part of a certain area is blighted, a city may choose to establish a TIF district. The municipality may then collect the increase in property taxes generated by new development — “the increment” — to directly fund associated redevelopment costs or to pay debt service on bonds issued to finance such costs.

Eligible TIF redevelopment costs specified by the state law include land acquisition, demolition, relocation, public improvements and related administration.

Making the project technically feasible for the developer and funding a $2 million upgrade of related roadways were the city’s greatest challenges. The cost of acquiring and demolishing approximately 100 privately owned structures, including 160 apartment units, was a major obstacle.

TIF was chosen as the cornerstone in the city’s efforts to meet these challenges. TIF revenues were used to reimburse the developer for acquisition costs, as well as to fund Merriam’s related acquisition and demolition costs. Also, TIF, combined with the project’s new sales tax revenues, financed the roadway improvements.

The city reduced its risks by structuring the transaction as a “reimbursement,” or “pay-as-you-go,” revenue note placed with the developer. According to the deal, Merriam receives increment income from developer/tenant property tax payments.

The city in turn uses these payments to cover its administrative costs and debt service payments under the 18-year note. Thus, the developer’s only source of payment from the city is the project’s own property taxes.

Since the note will be fully retired after 18 years whether or not all payments have been made as scheduled, the city has, “in a sense, created an arrangement where the developer must perform or the bonds they own will not be repaid,” according to City Administrator Eric Wade.

The city recruited a national commercial developer with experience in building and operating regional commercial centers. The approximately $40 million, 500,000-square-foot Merriam Town Center is slated to open in the spring of 1997 and will be anchored by several retail stores, a multiscreen movie theater, restaurants, a public park and several interchange/roadway improvements. Thus, the city will have enhanced its economic vitality through the use of innovative financing.