How to test a TIF tax deal

An Evanston Now reader has asked, “Why on earth would Evanston give financial assistance” to the developers of the proposed new housing project on the old Bishop-Freeman factory site?

It’s a good question, and here’s an approach you can use to figure out an answer for yourself — for this or any other project.

How much help?
In this case, the developers say they plan to ask for help from the city to clean up environmental pollution at the old factory site created by former owners of the property. They say they’re still figuring out just how much the work will cost, but that it could total as much as $2 million.

What is the tax revenue now?
The development site includes four parcels now on the tax rolls. Those properties paid a total of $44,729.75 in first half taxes this year. So call it $89,500 for the full year.

For any project you can locate tax parcels on the city’s mapping website and use the property identification numbers displayed there to find the tax bill information on the county treasurer’s website.

What taxes will the new project yield?
The developers say the 137 units in the project will sell for between $170,000 and about $500,000. Let’s say the average price turns out to be $350,000. That would work out to a total selling price of $47.9 million for the development.

A consultant’s report to the city this year estimates that annual real estate taxas on new construction amount to about 1.8 percent of the market value. On a $47.9 million development that would be $863,100 — roughly ten times what the property generates in taxes now.

What happens if there’s no help?

In the past, developers have told the city’s Planning and Development Committee that they typically make a 10 to 12 percent profit on projects and that banks will not finance a development that anticipates less than an 8 percent profit.

Assume this development would show an 11 percent profit — $5.3 million — with the city help to fund the cleanup.

Without the help, the profit drops to 7 percent — a level a bank wouldn’t finance and a developer wouldn’t be interested in doing.

Or the developer could try to maintain his profit by raising the selling price of the average unit about 4 percent — from $350,000 to $365,000 and let the individual buyers pick up the cost of the cleanup.

Presumably the developer has already priced the units at what he thinks the market will bear. Will a 4 percent price increase for a project in a neighborhood that hasn’t seen new development in half a century, one that also has some well-known social problems, cause people to look elsewhere? Ah, there’s the rub!

So the question boils down to which odds you like better — have the city ante up perhaps $2 million to try to assure perhaps an extra $773,000 in new tax revenue each year, or take a gamble that the project will happen anyway without the city help and live with the consequences if it doesn’t.

And where would the money come from?

The money, in this case, would come from the West Evanston Tax Increment Financing district, formed in 2005. As authorized by the state, TIFs let the city hang onto all the additional tax revenue that new developments within a taxing district generate during the district’s 23-year life and use the money to encourage further new development in the area.

Without the TIF the city would only get about 20 percent of that revenue and the rest would go to the schools and other local taxing bodies.