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Solimar Research

Still Waiting for Redevelopment 2.0

Bill Fulton on
Dec 4, 2013

Two years ago, when Redevelopment 1.0 ended, it was widely viewed as the end of an era but maybe not the end of redevelopment. Maybe it would no longer be possible to use tax-increment financing to solve all urban development and infrastructure problems. But surely a new set of techniques would emerge, either as a result of state law (after all, Gov. Jerry Brown promised a replacement) or because local officials and developers would get creative. Redevelopment 2.0 might not be as powerful, but something good would come along.

We're still waiting.

Gov. Jerry Brown is so down on a new redevelopment regime that Senate leader Darrell Steinberg didn't even both to put legislation on his desk this year, even though the new legislation won't affect the state's general fund and even though he could have gotten it passed in the Legislature.

Meanwhile, most cities that had active redevelopment agencies are snarled in the redevelopment wind-down process. Interestingly, in most cases the hangup has not been the local oversight committee the committee of local taxing entities that must approve or deny the continuation remaining redevelopment projects but the state Department of Finance, which has the final word. And that has slowed down any local creativity about Redevelopment 2.0.

As the end of redevelopment was pending in 2011, it was thought that the oversight committees would be a tough hurdle to get past, as representatives from counties and school districts would rein in any city's ambitious effort to extend redevelopment in order to protect their own share of the tax increment. As it turns out, however, it's not the oversight committees that are tough it's the state Department of Finance's beancounters, which is charged with protecting the state general fund in the redevelopment wind-down and is doing so ferociously.

So cities have had to devote most of their effort to dealing with DOF. Under the law, cities and DOFT must agree on the Recognized Obligation Payment Schedule (or ROPS) every six months during the wind-down, meaning cities are almost in negotiations with DOF on ROPS-related items. And cities are now moving forward to DOF with their long-term property management plans, also required under the law, which will lay out the ultimate disposition (sale, development, transfer to the city) of each piece of property formerly owned by a redevelopment agency. 

And all that back-and-forth DOF means that cities haven't had time to figure out Redevelopment 2.0. They're still dealing with the detritus of Redevelopment 1.0, and understandably they can't see past that problem.

Meanwhile, urban redevelopment in California remains a major challenge and, not surprisingly, the fundamental problem is finding the money required to make urban projects and urban neighborhoods work.

Developing individual projects and whole neighborhoods requires two basic things: First, money to cover the significant cost of infrastructure and community amenities required to support new development; and, second, a market strong enough to make individual development projects pencil out. In post-Prop. 13 California at this point, the entire working life of most planners and developers in California the trend has been toward loading the infrastructure onto private developers, because it was hard to get the infrastructure money out of the tax flow. That means a bias toward upscale projects, because only in upscale situations is the market strong enough to cover all infrastructure and amenity costs and still make projects pencil.

And that's one of the reasons redevelopment was so popular. In an era where regular tax flows didn't cover the infrastructure and amenity cost and tax increases weren't popular, it was a way to cut the Gordian knot and make projects work in places that couldn't support extremely high-end development. Over the past decade, some urban neighborhoods have become so hot that private development projects pencil on their own. But that's still not true in lower-income neighborhoods; and in an urban, infill setting it's almost impossible for any private development project to cover the cost of infrastructure and amenities.

So that's the problem California cities are left with: How to write down the cost of development in lower-income neighborhoods; and how to cover the cost of infrastructure and amenities in every urban neighborhood experiencing incremental infill development. Whatever Redevelopment 2.0 winds up being, that's what it has to do. 

There's a big toolbox out there that cities are gradually discovering; and there are lots of ideas out there other than tax increment that could be added to the toolbox if state law can be revised. 

Generally speaking, there are four categories all these tools fall into:

1. Value Capture. This is essentially what tax-increment is capturing the increase  in property values by appropriating a portion of the increased property tax flows. But there are other ways to capture value, such as assessment and Mello-Roos districts and the potential for a revised infrastructure finance district law that doesn't require a two-thirds vote.  Most of these, however, require increasing taxes on property owners and developers, rather than diverting the increased tax flow.

2. Patient capital. Urban development is a slow and complicated process. So the idea of patient capital becomes far more important than it used to be. Patient capital can come in the form of underutilized land owned by public agencies or institutions; or in the form of investment funds from philanthropies or specialized institutions such as Enterprise or LISC. The catch here is that even patient capital investors want something an eventual return, affordable housing, and so on.

3. Tax credits. There are still some federal tax credits out there that pop, most importantly the Low Income Housing Tax Credit and the New Markets Tax Credit, which focuses on non-residential projects. But these are limited and must be allocated rigorously

4. Increased density. Whatever problems it creates for neighborhoods, increased density can solve a lot of the problems urban development faces. In a strong market, it can generate development projects that can be used for infrastructure and amenities. In a weak market, it can help attract more below-market money, principally for affordable housing. But, of course, it is often a huge political battle to obtain.

Yet even combining all these techniques, Redevelopment 2.0 is likely to be a lot harder than Redevelopment 1.0 was, for two reasons. First, a lot of the techniques above are best suited for a project rather than major district-level redevelopment and that makes it more difficult to put together the major infrastructure and amenity packages without big tax increases. And second, as the list above suggests, the transaction cost of even a project is likely to go up. Redevelopment deals were complicated, but big projects could often be done in one fell swoop with tax increment. Now, redevelopment deals will look like affordable housing deals, with the many layers of financing and complicated structure.

The bottom line is that there will be no magic bullet for Redevelopment 2.0. Yes, tax-increment may return in a limited form someday. Yes, all techniques above may be combined to do deals. But all of the above and probably tax increases too will have to be combined to turn around an ailing urban district.