Risky business as Canadian cities turn to neighbourhood levies

Fixing rundown neighbourhoods can be an expensive proposition for a city. Increasingly, Canadian cities are turning to a relatively new type of financing that banks on a shiny new piece of city infrastructure to bring in developers to an area otherwise struggling to attract investment. Edmonton and Winnipeg are already doing it and it could be used to finance massive development in Calgary and Toronto.

The financing is a levy for a specific area of a city. It's referred to either as a community revitalization levy (CRL) or as tax incremental financing (TIF). If done right, the levies can pay off big time for cities and developers, however, they can also backfire if mishandled. In fact, some North American cities have stopped using them altogether after major financial headaches.

How they work

They are described as an innovative funding system that can help fix a city's blight. That's why Edmonton is using a CRL to help pay for its new arena. Calgary chose to use a CRL to clean up and develop its East Village neighbourhood. Toronto could use a levy to pay for a massive transit project. CRLs present several risks and challenges for local governments trying to find a new way to free up cash.

The levies are not a tax, but a method of borrowing money to develop an area, which will hopefully lead to higher property taxes in the future. For a portion of time, the majority of property taxes raised through the program will be reinvested there.

CRLs work by borrowing money to enhance an area through cleaning it up or constructing transit, recreation or other infrastructure. If cities improve an area, development usually follows suit. The city counts on future property taxes collected from the area to pay back the debt.

"If it's done correctly, I think it's a very good way to tap into the rise in property values their investments will bring about," says Richard Shearmur with McGill University's School of Urban Planning.

Problems arise when cities use CRLs to kickstart development which would have happened anyway if left to the private sector.

"For me, that's a crucial test," says Shearmur, reflecting on the CRLs that have backfired on some cities. "They were being turned into direct subsidies for the developers."

Calgary's East Village

Calgary boasts about being the first Canadian city to use this type of levy when it developed its Rivers District CRL plan in 2007. The Calgary Municipal Land Corporation, which leads the project, has committed approximately $357 million to East Village infrastructure and development. CMLC says it has attracted $2.4 billion of planned development that is expected to return $725 million of revenue to the CRL.

"I think overall it has gone well. They have gone from a very challenged and blighted situation to something really quite remarkable," says David Low, executive director of the Victoria Park BRZ, which overlaps some of the CRL district.

"I think it would have been very challenging for the private sector to go in. There were a lot of very large-scale remediation issues they had with the property. That piece of land was used as a dump at one point in Calgary's history," says Low, adding the site also needed sewer and utility upgrades.

This project used the CRL to fix blight, but other projects in the country are using the levy to pay for major infrastructure. There has already been talk at city hall about whether Calgary should setup a second CRL for its West Village area. That parcel of land is underdeveloped, contaminated, and a possible site of a new arena to replace the aging Saddledome.

Edmonton's arena

Edmonton is helping to pay for its new arena by creating a CRL district in the downtown and borrowing money to use for the arena, sewer upgrades and park development, among other upgrades totalling about $500 million. The city is betting on massive development in the area as part of its downtown revitalization. The debt will be repaid using the increased taxes collected.

Essentially, all of the new buildings surrounding the arena will pay off the city's loan to construct the complex. Edmonton estimates the CRL will "generate approximately $941 million in revenue in a medium-growth scenario."

"I am very much in favour of CRLs to get new growth in cities, especially areas that under performed," says Simon O'Byrne, who is involved in Edmonton's arena district as a vice-president of planning for consulting firm Stantec. "I think it's a great way to get certain areas to start seeing some economic activity."

O'Byrne describes the downtown Edmonton CRL as "phenomenally successful" with 25 construction cranes operating in the core with 6.6 million square feet of space currently under construction.

Alberta now has five CRLs including three in Edmonton, one in Calgary and one in Cochrane. CRL's are attractive in Alberta since the municipality collects all of the increased taxes, including the provincial government's education taxes. The levies only last for 20 years, after that all property taxes go back to the city and education taxes are collected by the provincial government.

"Alberta is really a leader with CRLs," says O'Byrne.

Winnipeg has used a levy to spur downtown growth including the re-development of its Metropolitan Theatre and expansion of the Convention Centre.

Toronto's SmartTrack

The next levy project in Canada could be a massive one in Toronto, where mayor John Tory wants to use tax increment financing to raise $2.7 billion for the SmartTrack surface rail line. It would span 53 kilometres and include 22 stops from near the airport in the northwest, down to Union Station along the Kitchener GO corridor, to Unionville northeast of the city.

"It's different, but basically no one else will develop transit except for the city," says Shearmur. "When you build big infrastructure like that, you are making real estate more accessible, you are raising its value."

Shearmur's big question with the Toronto plan is how the city will decide what size of levy zone to create.

"How do you determine which properties along the line are the ones that are going to be a part of the CRL?" he asks. "It's a delicate issue, there has to be a geographical limit."

Risks

These types of levies are used frequently in the United States under the title of tax-increment financing (TIF). Chicago is a big user, with 435 active TIFs in the city and surrounding area. Since 1986, all the TIFs have collected $5.9 billion in tax money.

Not all TIFs are successful. One of the most troublesome levies is in Atlanta. The local government used a type of TIF to transform an old railway corridor into a development with new parks, transit and housing. When the recession hit, development stalled and the TIF only generated half as much money as was expected. It's become a serious problem for those involved.

Experts also point to the New York 7 subway project as another TIF that can "fall significantly short of raising projected revenue."

O'Byrne says Canadian cities are more conservative with their projections to safeguard against some of the problems experienced with TIFs south of the border.

"The people that have done the TIFs have been way too optimistic about the numbers and what they expect in development in certain cases," he says.

Still, as the recent struggles of corporate Alberta suggests, carrying debt when the economy turns south is always a risk.

Keep it fair

One challenge is making sure everyone inside the CRL area is happy. The Rivers District CRL in Calgary is aimed at developing the East Village neighbourhood, but the levy zone is much wider and includes part of the downtown and the Victoria Park neighbourhood.

One reason the Calgary CRL is financially safe is because it collects tax money generated by the Bow tower, the tallest building west of Toronto at 58 storeys. It also collects tax money from new developments in nearby Victoria Park. That money is largely used to improve the East Village, a longtime deserted chunk of land in the city's core.

"That's a part of the challenge of these large catch districts, is usually they are geared around helping one very specific situation or project, but you are getting revenue from a much larger thing, so how do you balance that out?" says Low.

"Simple things like they would develop maps and they would have the East Village and the Stampede grounds and there would be nothing in between. We thought that was a little peculiar so I would go to them and say 'you know, there is this thing called Vic Park in between.' They would nod, smile and pat me on the head," says Low "Finally, when we articulated how we saw and perceived the situation, the relationship has progressed a lot."

Tax Trick?

The Canadian Taxpayers Federation has called CRLs a "tax in disguise" and taxation "sleight of hand." The group has argued CRLs don't create new tax revenue, but merely move it from other parts of the city. The federation has said "this shift causes a loss in revenue for the city that means property taxes across the city would have to go up to cover the shortfall for core services."

In 2011, California governor Jerry Brown ended the use of these types of levies for redevelopment. The levies were being used so aggressively that they diverted significant property tax revenues away from local governments.

"Does this way of financing development really genuinely lead to new tax income? In other words, would the development occur had the municipality not raised money in this way?" says Shearmur. "That's one of the big issues."