Edina city officials should say no to subsidizing luxury apartments

According to the Star Tribune,

Developers of a $251 million project with luxury apartments, retail and office space in Edina are seeking a $22 million tax subsidy to counter rising construction costs, a workers shortage and — according to unnamed “industry leaders” — the damage done to the Twin Cities’ image by the unrest that followed the murder of George Floyd.

“Some investors are hesitant to make long-term commitments in this environment,” according to a city staff report that recommended the tax subsidy for the project.

Mortenson Development of Golden Valley and Edina-based Orion Investments plan to redevelop a 5.7-acre commercial site at W. 70th Street and France Avenue now occupied by a US Bank branch and a vacant 1960s-era office building.

The development will feature a 24-story apartment complex with 267 high-end units, and an eight-story parking ramp with 540 stalls. None of the apartments will be priced as affordable. US Bank plans to replace its branch on the site.

The developers want the city to create a tax-increment financing (TIF) district, an incentive to defray costs that would return $22 million to Mortenson in new property taxes generated by the project over 15 years. Edina’s legal and financial advisers told city officials that the project would be unable to secure private funding to fill the $22 million gap.

In theory, Tax Increment Financing is supposed to pay for itself.

How this happens: New developments usually increase property values, hence raising the tax base of a city. In a TIF district, any gains in property values (and hence tax revenues due to new development) are earmarked for a development fund, which is then used to offset the cost of the subsidy given to the developers.

In practice, however, TIF does not always work out so well. In addition to shifting the burden of development from private investors to taxpayers, TIFs may also potentially capture some natural growth in property values and take credit for them, essentially diverting property tax revenues from other public services. In that case, taxpayers might have to pay more taxes to make up for diverted tax revenues.

Moreover, TIFs may underperform and simply fail to induce economic activity or raise property values.

In St. Louis for example, the $709 million that the city has spent on TIF and tax abatements the past 15 years has “not created jobs, revitalized neighborhoods, or increased long-term tax revenues.” Similar results have been found in other places like Kansas City.

But more importantly, like most tax incentives, TIF subsidies may go to projects that were going to be built anyway, which means that taxpayers will subsidize private businesses at no added benefit.

If private investors cannot shoulder the risk of project, why should taxpayers?

It certainly appears that in this case, the development may not be undertaken due to a lack of private investment, at least according to Edina’s legal and financial advisers. And while that may be considered a good reason to consider subsidies, it merely raises the question as to why taxpayers should be on the hook for a project that cannot raise its own capital.

If this project was profitable — after taking into account the risk associated with investing in it — private investors would be more willing to do it. That is, after all, how a free market system is supposed to work. The fact that investors are unwilling to shoulder the risk and cost means that there is a potential that the future profits generated by the project would not cover costs.

According to research, subsidies in most areas have failed to induce growth. And in some cases, TIF subsidies have had negative impacts. There is no good argument for the city of Edina to subsidize luxury apartments.