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Jan 16 2013

Kellogg Real Estate Lab –Tax Increment Financing (“TIF”) in Evanston

Professor McGuire’s lab students present their research on the effectiveness of Tax Increment Financing districts and provide recommendations to the city of Evanston

By Sean O’Grady '14


Under the supervision of Professor Therese McGuire, a group of Kellogg students spent the fall quarter examining the effectiveness of Tax Increment Financing (TIF) as an economic development tool in the city of Evanston. The students – Seth Capron, Nick Fedorowicz, Eric Nyman, and Brandon Strong – presented their findings and recommendations before city leaders and residents at Evanston’s City Council Chambers on Tuesday, December 11th.

The comprehensive TIF report was commissioned by the City of Evanston and is especially timely because Evanston recently approved the Dempster-Dodge TIF district, and another TIF district at Chicago Ave. and Main St. has been proposed and is pending approval. Evanston’s first TIF district along Maple Avenue between Church and Emerson was created in 1985 and spurred significant and recognizable real estate development downtown. Evanston residents and Kellogg students alike continue to benefit from the success of this TIF district, which led to the development of the Century Theatres, Hilton Garden Inn, Optima Views and many adjacent restaurants and retail stores. Today, Evanston has seven active TIF districts.

The students opened their presentation by evaluating the effectiveness of TIF districts both in Evanston and in other locations throughout the country. The students conducted personal interviews with TIF experts and city officials, and examined academic and practitioner reports in order to identify best practices. The students presented eight major findings, as follows:

  1. TIF has the greatest impact when properly aligned with the city’s overall economic development plan. 
  2. TIF produces greater benefits when it is used to catalyze existing demand rather than create demand. 
  3. TIF is viewed more favorably by the community if a clear and objective approval process is in place. 
  4. TIF projects tend to require less public subsidy if the city effectively leverages competitive market forces to choose developers. This option is most practical when the municipality owns or controls the land. 
  5. The most successful use of TIF resources provides benefits to the broader community. 
  6. TIF districts should shift risk to the private sector and allow the city to protect its financial integrity. 
  7. TIF success is less debatable when clear metrics are in place to monitor performance. 
  8. TIF can be managed more effectively when overseen by an advisory board of community stakeholders.

Based on these findings, the students offered some general recommendations for the city of Evanston. First, they recommended that Evanston should approve TIF districts only after specifying how the TIF can help the city achieve its overall economic development goals. Therefore, Evanston should create a detailed economic development plan for each proposed TIF district. Second, Evanston should implement a more rigorous approval and oversight process for TIF districts. A more transparent approval and oversight process will hold developers accountable for TIF subsidies and leave fewer questions for all stakeholders. Third, Evanston should structure TIF deals to ensure that the city makes little or no upfront investment and the private sector bears most of the risk of development projects. The students suggested that this could be accomplished through performance covenants, where the city only reimburses the developer for costs after achieving mutually agreed upon performance hurdles. Finally, when a potential TIF development site is owned by the city, Evanston can maximize the chances of TIF success by encouraging a highly competitive bidding process for the given project.

The students also offered some specific recommendations for the newly created Dempster-Dodge TIF district and the proposed Chicago-Main TIF district.

Dempster-Dodge
While the Dempster-Dodge parcel certainly meets the definition of “blighted” by Illinois statute, the root cause of the decline of the Evanston Plaza shopping center has yet to be determined. While it is possible that the condition of the physical structure has led to the shopping center’s decline, it is also possible that the nature of demand for retail in the neighborhood has changed. Therefore, the students recommended that the city assess the current state of retail supply and demand in this submarket in order to determine the root cause of the center’s problems, making it easier to identify the most logical solution and best use for this site.

Chicago-Main
Echoing their overall recommendations for TIF policy, they suggested that the city should ensure that the goals of the proposed development at Chicago Avenue and Main Street are aligned with the city’s overall economic development goals. Furthermore, the city should look to shift as much risk as possible to the private sector. Finally, the city should also be sure to check the viability of potential developer projections. It will be especially important to ensure that the market demand for Class A office space is substantial enough to make the Chicago-Main project feasible without adversely affecting other office properties in Evanston.

About the Author

This article was written by Sean O’Grady '14.