The developer of the former Portland Co. property on the eastern waterfront is asking the city for a complex tax reimbursement agreement to fund some construction and maintenance costs of the mixed-use development that was approved last month.
Portland Foreside Development Co. said that elements of the project warrant a partnership with the city, and has asked the city for tax breaks that are projected to amount to $127.7 million over a 20-year period. It has also asked for much of that to be provided upfront by the city through the sale of bonds.
When fully built, the development will consist of several buildings containing office, residential, retail, restaurant and event space that Portland Foreside envisions becoming a vibrant new district in the city. It says it will subdivide the property among multiple owners and is asking for help in funding the construction and maintenance of common infrastructure such as access roads, utilities, and sidewalks between the new lots.
Several councilors expressed reservations in an Economic Development Committee meeting Feb. 18 where the unusual request was presented by Economic Development Director Greg Mitchell.
Portland Foreside has proposed a complex taxation structure involving a new tax increment financing district, a new business investment district, and city-issued bonds on anticipated TIF revenues. Each of the elements in the scheme is not unusual, what is unique is the way they are put together.
“While the overall proposal combines a few separate concepts, this is one interwoven plan and the success of the whole proposal requires all the individual parts,” Portland Foreside officials wrote in a letter accompanying the proposal.
In addition to common infrastructure, the proposal states that money from TIF bonds would be used for such things as a rebuilt bike/pedestrian section of Portland Trails in the state-owned rail corridor that bisects the site and restoration of a seawall on the waterfront. It also suggested partnering with the city on burying utility lines on Fore Street and building a new public pier and water-taxi port.
Councilor Belinda Ray, who is not a committee member but was present at the meeting, said she was troubled by the request, in part because some of the proposed tax reimbursements would fund improvements to a public easement through the property that was granted as a tradeoff for allowing demolition of a historic building.
“Now we’re being asked for funding for that maintenance,” she said.
In addition, she noted the city sold a triangular parcel of land to the developer to build a road. “Now we’re being asked for funding to do that. That doesn’t sit well. I understand the benefit of starting a new TIF for the city, but not revenue sharing,” Ray said.
Councilor Tae Chong, a member of the committee, asked why the developers would need help from the city amounting to a “drop in the bucket” of its total economic impact.
Costa pointed out that the city requires the applicants for such tax breaks to show financial necessity. If that analysis fails, the agreement can’t be approved, he said.
Portland Foreside says in its letter that development beyond the first new building, a 130,000-square-foot office building that will house financial services company Sun Life as well as retail and restaurant space, cannot move forward without significant improvements to the infrastructure on the site. The required infrastructure, it states, is “of a magnitude that, without the TIF bonds to assist with the costs, the additional planned phases of the development aren’t financially viable.”
Rather than the requested capital being given directly to the developer, the proposal calls for the formation of a nonprofit to manage the new business investment district, and receive bond funds and tax reimbursements.
Costa asked if the city has ever reimbursed taxes to a legal entity different from the one that paid the original taxes, and Mitchell said that it had not.
Thibodeau expressed concern about the effect such a scheme might have on the city’s credit rating.
“There’s a lot of what-ifs,” he said. “Even though the city is not on the hook for these bonds, I want to know the impact on our rating, what the lien implications would be for nonpayment of (business investment district) funds, and nonpayment by the (business investment district) of the bonds.”
City Councilor Justin Costa, chairman of the committee, emphasized that the city has not taken a position on the proposal but put it on the agenda to make it public and so that the Economic Development Director could break it down into its component parts.
“It’s complex, it’s different from what we’ve seen, but from staff review, it looks like it could work, fundamentally,” Mitchell said. “But the devil’s in the details.”
Transit-oriented TIF
The proposed TIF would remove Portland Foreside Development Co.’s 10-acre project site and other lots from an existing waterfront TIF district and assign them to a new transit-oriented TIF district totaling 70 acres. The other lots to be included are parts of the Maine Department of Transportation’s rail corridor, Portland Landing, Ocean Gateway and the Maine State Pier.
Mitchell said starting the new TIF now would lock in the assessed value of the sites, many with planned developments, at low values so any increases in value over the next 30 years would be shielded from state and county taxes. Costa emphasized that TIF districts also shield these increasing values from formulations that affect state revenue sharing and school funding.
For the city, the tax on the assessed value at the time when the TIF is established would go to the general fund every year. Taxes on any value above that base assessment would go into a separate fund, which the city would be able to use on transit-related infrastructure improvements on public property within the district.
For 20 of the 30 years of the proposed TIF, the developer is seeking to divert 65 percent of the revenues generated by taxes on its increased value through a credit enhancement agreement. For the other 10 years, the city would retain 100 percent of those tax revenues.
According to a spreadsheet included in its application, Portland Foreside projects that the increased value of the site at full build-out would reach $437 million. (Elsewhere in the application it refers to $444 million in increased value.)
Assuming a flat tax rate of $23.31 per $1,000 of valuation, it projects that annual TIF revenue will reach $10 million by the seventh year, while total property taxes including those going to the General Fund would reach $12 million annually. It projects that over the course of the 30-year duration of the district, the total TIF revenue generated by the site would be $281 million, with $128 of that going back to the property and $153 million retained by the city.
Normally, all TIF revenues are retained by the city and used on infrastructure improvements on public property within the district. In the Waterfront TIF district, from which the new TIF would be carved, only one other property has a credit enhancement agreement, Mitchell said, and it expires in two years. The existing Waterfront TIF district expires in 12 years.
Besides setting the base assessment at low or lowest points for the sites in the proposed new district and sheltering them at that level for 30 years, another benefit of converting these sites to a transit-oriented TIF is that the city could use the funds for anything transit-oriented, such as new bus stops and transit hubs in an area that may need it because of planned office and pier developments. Also, the state places a limit on the land municipalities can shield in TIFs, but transit-oriented TIFs do not count toward that limit.
The waterfront TIF district also allows for infrastructure improvements in the district, and its revenues may be used for public piers and dredging as well as transportation-related improvements such as new signals, crosswalks, and parking improvements on Commercial Street. If the new transit-oriented TIF is not established, the site would remain in the waterfront TIF district and the taxes on values above the base assessment would go to a fund for improvements in the waterfront district, not to the General Fund.
Councilor Pious Ali noted the city requires developers with credit enhancement agreements to ensure jobs created on the site pay living wages and asked how this would be ensured. The application projects more than 3,100 jobs would be created. Committee member Councilor Spencer Thibodeau said credit enhancement agreements also require that performance standards be met.
New business district
What makes the proposal more complex and unusual is that the developer would also like to create a new Business Investment District, like the Portland Downtown District, on its property within the TIF, to be run by a nonprofit, and that this entity would manage all the funding for the property: the TIF bonds, the TIF revenues, and the added tax assessments for the district.
The proposal calls for the city to create the Portland Market District, where it could levy additional taxes on the subdivided properties to fund the costs of maintenance and special services in common areas, projected to be $1.5 million per year.
The Portland Foreside project area, 10.4 waterfront acres bordered by Fore Street to the north, is greater in size than the Old Port, and the developer said it will be subdivided among multiple owners as the buildings are constructed.
“Geographically, this is very large and worthy of a district in and of itself,” Casey Prentice, managing partner of Portland Foreside Development Co., said at the Feb. 18 meeting. “The concept right now is that while we do have a single ownership, we’re setting up a structure in place that will facilitate what organically is bound to happen over the lifetime of this project, which is that many different owners will probably come to the table.”
The new nonprofit would have representatives of the city and the developer on its board. It would submit a proposed budget for the district to the City Council each year. The city would levy additional taxes on properties within the district to cover the approved budget.
Maintenance provided by the district would include such things as stormwater system repair, landscaping, graffiti removal, maintenance of access roads and plaza lighting, snow removal, the publication of site directories, and public safety enforcement. The district would also provide special services including job-creation efforts, digital infrastructure, advertising Portland Market District businesses and organizing promotional events.
“We’re functionally filling the role of the municipality in many ways, so all those private areas, they’re our responsibility: for potholes, snow plowing, salt, sand, trash,” Prentice said. “All that’s typically covered by the municipality will be borne by the landowners within this district.”
In addition to managing the business district budget, the nonprofit would also receive and manage the reimbursed TIF revenues according to the proposed credit enhancement agreement.
“Every year we get (funds) from the enhancement agreement reimbursed back from the developer, and the funds would bypass us and go directly to the business improvement district,” Prentice said.
Municipal bonds
Adding another layer of complexity to the proposal, the developers are also requesting that the city sell bonds on anticipated TIF funds and lend the proceeds to the developers for the upfront capital they need.
Prentice said the primary form of debt service repayment would be the funds from the credit enhancement agreement. The debts on these bonds would not be the obligation of the city, nor would the city need to back the bonds. Back-up security for the bonds would come from an additional tax on the properties in the Portland Market District, which would be collected only if the TIF reimbursement is less than that year’s debt service.
About the full proposal, Chong said he would like the developers to present the information in a way that shows clearly how all parties would benefit.
“I want to be able to see if this is a benefit to the city or not and be able to follow the money,” he said.
Costa said that if the committee decides to take up the proposal, it should think carefully about the financing structure and whether it would set a precedent for future proposals.
The committee took no action on the proposal at the meeting, nor did it schedule further discussion.
Connecticut experience ‘worked out great’
While the tax structure proposed by Portland Foreside Development Co. would be unique in Portland, a similar arrangement is already in place for the $3.5 billion, 100-plus-acre Harbor Point development in Stamford, Connecticut.
Before the purchase of the property in 2008 by developer Building & Land Technology, the area was mostly vacant industrial land in Stamford’s South End, much of it contaminated brownfield sites.
Now, at about 70 percent complete, the transit-oriented development contains marinas, restaurants, offices, retailers, 3,000 residences, and more than 20 acres of park land. Free shuttles and trolleys connect Harbor Point to the city’s waterfront, train station and downtown.
The project had extraordinary costs, because of its brownfield remediation, the preservation of historic property, and the alleviation of wetland issues. It was made possible by several funding sources, including tax increment financing bonds and a new business district.
“To do a project this big requires utilizing every form of capital you can think of,” BLT Chief Operating Officer Ted Ferrarone told the publication Commercial Property Executive in January 2019.
He also told the Stamford Advocate “the Harbor Point TIF has been very successful for the city and transformative for the South End, and is a great model of a public-private partnership.”
In 2010, Stamford created a new business improvement district within the property and issued $145 million in special obligation bonds to finance infrastructure work, including roads, stormwater, sanitary sewer, sidewalks, landscaping, streetlights, traffic signals, wetlands fill, environmental capping, parks, land acquisition and more.
Stamford Economic Development Director Tom Madden told Commercial Property Executive that the infrastructure work and brownfield remediation were important to the city because it opened the waterfront to the public and set the stage for development and new businesses.
The new district is run by a nonprofit, with the developer and city represented on its board. The nonprofit holds the bonds and owns the infrastructure, and the debt service is paid out of TIF revenues. Once the bonds are paid off, ownership will transfer to the city.
“The amount of property tax we’re getting off the development is huge,” Madden said Tuesday. Those TIF revenues have more than paid for the bond obligation, and the city retains all the TIF revenues over that amount.
According to the last two years of financial reports, the Harbor Point TIF revenue has been greater than the bond obligations, so no special assessments had to be levied in the district to cover the difference.
The city also used its triple-A credit rating to back the bonds, so if the development was unsuccessful the bond obligations would fall to the city. But Madden said there was no concern that this would happen: the city is booming and currently has $6.5 billion in developments.
Further, he said, the Harbor Point plans aligned with plans the city had laid out for the area in its 2002 Master Plan.
Madden said Stamford is using the same TIF model for other developments. “We think our TIFs worked out great here,” he said.
While most residents at a 2018 community meeting agreed that Harbor Point has been good for the city, according to reporting by the Stamford Advocate, some expressed concern that it encroaches on a nearby historic district.
There were also complaints that high residential rental costs were leading to tenant turnover, even though the city required that 10 percent of the development’s residential units be affordable.
“There’s our historic community, and then there’s the BLT community. And it’s like night and day – high-rise to low-rise,” South End homeowner Sheila Barney told the Advocate. “But it’s still a nice community.”
— Jordan Bailey