More handouts for developers? Distillery District hotel shows need for a better policy.
Last year, a Lexington government task force warned the council to cut back on the expensive economic development incentives known as TIF projects (tax increment financing). This allowed developers to get back a portion of future profits to pay for expensive infrastructure at taxpayer expense. From The Summit mall to 21C Hotel to Red Mile, Lexington has paid out almost $10 million in tax rebates without any idea how many jobs the projects have created or what their benefits really are.
So now it appears that developers have turned to a second option, known as internal revenue bonds or IRB projects. In Lexington, in recent years, they’ve only been used to help non-profit organizations with big projects, like new dorms for Transylvania University. But last week, the city started the process to approve $39 million in IRB bonds for a ritzy boutique hotel in the Distillery District.
The developers want to reap the gains from the booming Distillery District to the west and the new expanded Central Bank Center and Rupp Arena to the east. The Distillery District’s restaurants, breweries and distillery are thriving without government help after their TIF was dissolved; the Central Bank Center got a $41 million TIF, less than half of what it requested.
The IRB proposal, according to reporter Beth Musgrave, “would allow the government to own the property and lease it back for 40 years. That means the hotel would not have to pay local and state property taxes for 40 years.”
Property taxes take less of a bite out of city finances than do occupational taxes, which are usually used in TIFs. The project is expected to create 100 mostly service industry jobs.
But the two government incentives do have some important things in common: Corporate socialism with little oversight, no job requirements, and another way to use public coffers to help private, for-profit companies with building projects.
“Why is it being done in one of the hottest development areas in Lexington, one that’s thrived despite not having a TIF?” asked Pam Thomas, an analyst with the Kentucky Center for Economic Policy and an expert on economic development incentives. Normally, if a government wanted to help a project, “you have a budget and you evaluate the projects against each other to see what the best one is. With incentives, that doesn’t apply. If they (council members) started thinking about it that way, they would pay more attention to the efficacy of the things they decide.”
The hotel developers hired uber-lawyer Bill Lear to represent them in the IRB negotiations, as anyone would, given that Lear helped create some of the TIF statutes.
“The idea is that the public sector in appropriate places is going to help make private projects work that otherwise wouldn’t work,” he said. “You can point to examples of organic growth, and examples of government assisted growth and the reality is they both can work, but it takes a lot longer for organic growth than it does for government assisted growth.”
The project is on hold because the developers are still working with independent taxing districts like the library, school district and LexTran to see how much they will pay those groups to offset the property tax losses, a process known as Payment in Lieu of Taxes. The last big story about PILOTs was in Louisville, where Churchill Downs got $153 million in bonds for improvements to its facilities. They turned over their buildings for 30 years to city government, forgoing all those property taxes. But as reporter Chris Otts figured out, the PVA never reassessed the property to include those improvements because they officially belonged to the city, so the Jefferson County schools were stiffed. Something to think about.
In the meantime, council members should be asking some large and small questions about this whole process. First of all, what is their policy now? IRBs were used for big developments in the 1980s, but were stopped at some point, possibly when the more lucrative TIFs were created. Is council opening the door to underwrite a slew of new projects? What oversight will the council have to make sure jobs are created that will help Lexington? When did we as a society decide that government should underwrite private development anyway?
Guess what else IRBs could be used for? Affordable housing projects in the “industrial” area, close to downtown. But city attorney David Barberie said the city’s economic development committee had never received such an application. That’s because these incentives are socialism for the rich, not the people who really need them. Sure, people can argue that Lexington needs another fancy hotel for rich tourists, but at some point, let’s see this kind of planning to help those who need the help a lot more.
Kentucky has a long history — well-documented by this newspaper — of giving away more tax benefits than it takes in to help lure and keep private business. At both the city and state level, it’s time to reassess.