Cleveland City Council agreed on Wednesday, December 9th, to double the duration of a major tax incentive for the Flats East Bank project – a U-turn that occurred barely 24 hours after a council committee withheld the unusual proposal.
In a 14: 2 vote, the members decided to extend an existing tax increase financing agreement for the 23-hectare bank development by 30 years. The decision forms the basis for developer Scott Wolstein to refinance the project and make up for millions in debt payments to the city and other public and civic lenders.
The council’s approval followed a nearly two-hour discussion on the panel’s final election day in 2020. This was the last opportunity for the apartments to take advantage of a recent amendment to state law that allowed the creation of atypically long TIFs for major projects.
The tax hike funding reallocates some of the new property tax revenue created by development, with this money often being used to pay off debts for public infrastructure. In Ohio, the standard TIF is 30 years. However, the language included in the last two-year state budget bill allowed local governments to extend existing contracts for three decades.
This provision created a narrow window for projects like the apartments. This appears to be only the third development to benefit from an option that effectively goes under on December 31st. In late November, Columbus City Council approved TIF expansions for two mixed-use projects, home to the Easton Town Center and Polaris Fashion Place shopping malls.
The law only allows for such TIF renewals if the “service payments” – these reallocated tax revenues – from a project in 2019 exceeded $ 1.5 million.
However, as of January 1, a project will only qualify if these payments, with the exception of the last, were less than $ 1.5 million per year.
That formulation closes the door in 2021 for projects like the Flats, a more than $ 500 million development that opened in 2013 and includes an office tower, hotel, apartments, restaurants, parking lot, and public areas along the Cuyahoga River.
Legislation for the Flats Deal, which will reach the end of the TIF by 2040-2070, was introduced in Cleveland City Council in late August. However, members only discussed the matter at a public hearing this week.
During a Tuesday, December 8th, at a meeting of the Council’s Development, Planning and Sustainability Committee, nobody mentioned – or seemed to notice – that the clock was ticking.
This committee decided to propose the legislation in the hope of holding a special hearing with Wolstein in early 2021. However, that decision sparked a mad battle when the Council Presidents learned of the December 31st deadline.
Council President Kevin Kelley finally called for a vote on Wednesday.
“Everyone has a hand in this success,” he said during a phone interview, noting that the city has nearly $ 25 million in debt for the project, including a large loan from the US Department of Housing and urban development is guaranteed.
The greatly extended TIF will enable Wolstein to replace the bonds issued in the first two project phases in 2010 and 2014. New debts are borne at much lower interest rates over the longer term.
That refinancing, in turn, will help the developer make past due payments to a cascade of lenders: the city, Cuyahoga County, the state, and Cleveland Development Advisors, a branch of the Greater Cleveland Partnership. Eliminating this insolvency will also put Wolstein in a better position to move forward with new phases of the project, including more housing.
David Ebersole, the city’s director of economic development, told council members that the only alternative to a TIF extension is to take legal action against the developer. This approach would prevent additional development and jeopardize a high profile project that served as a testing ground for Cleveland’s ability to redesign its waterfront.
“I’ve worked on it for months, if not years, and I don’t think there is any other tool that can accomplish this,” Ebersole said as he retrofitted the debt for what he classified as a “high risk project” has very thin edges. “
Some council members were clearly dissatisfied with the proposal and felt frustrated by the last minute nature of the public process.
Councilor Charles Slife lamented an apparent breakdown in communications and called the 11th hour vote an “unnecessary fire drill”.
In an interview, City Councilor Tony Brancatelli described the 60-year-old TIF as “uncomfortable” but necessary.
“It makes the city whole,” he said.
“If we don’t,” he added, “the next stages will never happen.”
The Flats are a complicated project that tore itself out of the ground shortly after the great recession and has struggled with cash flow problems for years.
Together with the money from the TIF, the proceeds from the project’s main parking garage will be pledged to repay the debt. But this garage under the Ernst & Young Tower and the Aloft Hotel lags far behind the projections.
And when construction began in 2010, the development team didn’t anticipate a $ 15 million school levy that Cleveland voters approved in 2012. Wolstein, who said he was traveling this week and unable to comment, told Crain in August that the levy had a cost.The project has cost around $ 15 million so far. Cleveland voters renewed that levy, adding 5 mills in November.
As part of the existing Flat TIF, the Cleveland Metropolitan School District agreed to forego some new tax revenue over three decades. The developer has committed to pay the full cost of each new school fee. These terms will remain in effect until 2040.
During the 30-year extension period, the district will receive payments based on the full project value. The general assembly called for such so-called “Mega-TIF” agreements to keep the local schools harmless.
Ryan Sommers, a financial advisor to the Flats project, confirmed that the bond debt could be refinanced by March or April.
At that point, the developer will make up for more than $ 6 million in missed principal and interest payments to the city in 2017, Ebersole said.
Councilor Kerry McCormack, who represents the apartments and much of the downtown area, said his “yes” to the extension was reluctant.
“The Flats East Bank project is a really important and positive development for the community and appears to be doing well from a day-to-day operating perspective,” he wrote in a text message. “Nevertheless, the original financial situation seems to have been very weak over 10 years ago. For this reason, we have to deal with this legal provision in both cases with an undesirable decision. Let’s expand the TIF or are we facing a real one.” Is there a risk that the project will fail and the city will get into protracted legal disputes? “
He added, “I hope we have learned our lesson from past mistakes and never need to do it again.”