Twin TIFs and a streetcar kicker: How taxpayers will finance the Downtown Kroger store

WCPO analysis pegs public support at $30.7 million
Posted at 8:50 AM, Jun 19, 2017

CINCINNATI - Developers of a Kroger-anchored residential tower are seeking $30.7 million in taxpayer support for the project, including the diversion of about $95,000 a year in property taxes that would otherwise flow to the streetcar, a WCPO analysis shows.

Details of the financing plan were not finalized when the Kroger Co. and the Cincinnati Center City Development Corp., or 3CDC, announced the $90.5 million project at Court and Walnut streets June 6. City officials and 3CDC are still tinkering with contract terms. But WCPO pieced together the plan in several interviews over the last two weeks.

It’s a complicated deal that makes the Kroger store itself the first Downtown development to be exempted from a two-year-old policy requiring tax-break recipients to share 15 percent of their proceeds with the Cincinnati Bell Connector. It also includes some profit-sharing language that enables the city to recover some of its investment if the project exceeds expectations.

“No one wants a windfall,” said Adam Gelter, vice president of development for 3CDC. “If the residential sells, the city will share in the proceeds. If the garage performs to a certain level, the city will share in the excess.”

Cincinnati’s City Council could vote on the plan as early as June 28. 3CDC hopes to break ground by August to enable a grand opening of the two-story Kroger by Spring, 2019.

Subsidies will flow to three real estate parcels in the Kroger project: The grocery store in blue, garage in yellow and residential tower in green

The major public contributions in the financing plan are tax credits, a state loan, a city grant and a tax-increment financing agreement -- also known as a TIF -- that allows property taxes to cover debt service and other expenses for the 550-car garage and eight-story apartment tower above the store.

Here are the subsidies:

  • State and federal New Markets Tax Credits of $2.5 million for the $21.5 million Kroger store
  • An $8.5 million city grant, covering $6.5 million in construction costs for an eight-story garage and $2 million for the 139 apartments on floors 11 to 18
  • A  $4 million state loan for garage construction, paid off by parking revenues
  • Tax-increment financing proceeds worth $7 million for the Kroger store
  • Tax-increment financing proceeds worth $8.7 million for the residential tower

What's a TIF?

Tax-increment financing is a widely used tool for development projects. It allows building owners to make “service payments” instead of taxes. Often, those payments are pledged to pay off debt for public improvements like garages, new streets or sidewalks.

The Court and Walnut project would have two TIF agreements under the financing plan 3CDC requested. The city estimates the twin TIFs will generate $1.6 million in annual payments in lieu of taxes. Both TIFs would send 25 percent of all payments to Cincinnati Public Schools as part of a longstanding city policy to make the district whole when tax breaks are awarded. The grocery TIF would deliver the remaining 75 percent, or $473,0000, back to the project, where 3CDC said the money will be used to cover free parking for Kroger customers.

The apartment building is likely to be worth more than the store, but its developers will receive only 60 percent of TIF proceeds – roughly $581,000.

That’s because, in addition to paying schools, residential developers will sign a voluntary tax incentive contribution agreement, or VTICA, to fund streetcar operations. The name says it’s voluntary, but the city has required such deals for TIFs and abatements since early 2015, said Greg Huth, deputy director of the city’s economic development department.

The Downtown Kroger store, however, will benefit from another city policy for grocery stores. It waives “certain taxes and permit fees” for “fresh food markets” willing to operate in Cincinnati neighborhoods “lacking this important amenity.”

Beyond that, the city argues the Kroger store will benefit the streetcar.

“The grocery store will support the streetcar directly and indirectly through ridership,” Huth said. “The anticipated benefits to the streetcar offset the direct benefit the VTICA would have provided under a different financing structure.”

Kroger's front door at Court and Walnut. Rendering by GBBN

Pros and cons

Because it's paid over 30 years, the city and 3CDC both argue the value of TIF payments are actually worth less than the $31.6 million total of all payments. So, WCPO's analysis uses the city's present-value estimate for those payments. It shows what $1.05 million per year is worth today, assuming a discount rate of 5.72 percent for 30 years. If you don't adjust for future inflation, the value of the total financing package is $46.6 million.

Cincinnati Vice Mayor David Mann said the streetcar arrangement gives him “a little bit of heartburn,” but doesn’t see it as a reason to oppose the overall financing plan.

“As a matter of practice, we abate virtually everything for some period of time. I think the time is approaching when we need to take a look at that,” Mann said. But in the meantime, “you’ve got to trust that our economic development people have protected our interest, at the same time achieving an important goal.”

Cincinnati Mayor John Cranley said the grocery store will accelerate the development of new housing, restaurant and retail options in the urban core. Cranley said most of the city’s subsidies are tied to a garage that will be open to the public and benefit surrounding residents and businesses.

“If you didn’t do the TIF, the project wouldn’t happen,” Cranley added.

A subsidy is needed “to justify the capital requirements and the risk ... of the project," Apartment developer Rick Kimbler said. "There’s a limit to how much risk developers are willing and able to take.”

Kimbler’s NorthPointe Group is one of three companies partnering on the residential tower at Court and Walnut. Kimbler said the project is more costly than others he’s developed because of design techniques that eliminated support columns in the grocery-store space. While Downtown apartment rents are rising, they’re not high enough to support the actual cost of building Downtown.

Kimbler said his partners – Rookwood Properties and North American Properties – “thought long and hard” before committing between $6 million and $8 million to the project.

“You can go to the suburbs and make a lot more money for the same investment of capital,” he said.