Time’s up for TIF: Chicago bond program phases out tool favored by developers
Payments for $1.25B bond will come from phasing out many TIF districts
For over a decade, Chicago’s Congress Theater was stuck in a state of limbo that made most developers want to run.
A laundry list of code violations made the decaying structure cheaper to tear down than repair, while regulations on historic buildings made demolition of the 99-year-old theater an uphill battle.
Frontline Real Estate Partners’ Matthew Tarshis stuck around. A court appointed Tarshis receiver for the property in late 2020 after lenders hit a previous owner with a $24 million foreclosure lawsuit.
“There were a finite amount of groups capable of handling a project like this,” he said.
When Chicago-based Baum Revision, a firm that specializes in adaptive reuse projects, made an offer to buy the building, he knew he couldn’t let the deal fall through.
Baum, run in part by Scott Goldman, proposed an $88 million mixed-use redevelopment of the property that would include multifamily and retail space in addition to keeping the theater.
Tarshis and Baum needed to sort through affordable housing demands from the ward’s alderman, historic preservation regulations and a dispute between the concert venue operator and a local union.
They went back and forth on the terms of their deal. The negotiations wore on for three years.
“I was questioning whether the deal would ever get done,” he said.
If the negotiations fell apart, Tarshis could lose his best hope of offloading the troubled asset. And in the meantime, city officials were considering gutting the best funding mechanism available to the project, the city’s tax increment financing program.
It’s unclear how many other distressed buildings are stuck in the same kind of regulatory and financial limbo the Congress Theater faced. But under Mayor Brandon Johnson, they may have only a small window of opportunity left to get a similar infusion of city cash.
Tax increment financing, or TIF, consists of specialized funds dedicated to specific geographic areas. Versions of TIF exist in cities all over the U.S.; developers have found it critical for getting complicated projects to pencil out in Chicago.
The city now plans to scale back its use.
Baum, who sought to balance the project’s budget, asked for additional funding from the Fullerton/Milwaukee TIF district established for the Logan Square area, where the Congress Theater sits. This specific district was set to expire in a year, at which point its dollars would be swept back into the city’s general fund, so the timing was crucial.
In a matter of months, Tarshis and Baum’s delicate line of dominoes fell exactly the way they intended. Logan Square Alderman Daniel La Spata secured an extension of the expiration date, and the City Council approved additional TIF funds for the project. In January, they closed the sale.
“These old theater properties with that kind of architectural detail and history couldn’t possibly be rebuilt today,” Goldman said. “The cost to restore them is so significant that there has to be some kind of public-private investment.”
Not long after the Congress Theater contract was finalized, Mayor Johnson unveiled a sweeping $1.25 billion bond proposal that would fund core tenets of his campaign: building affordable housing, improving employment opportunities and supporting the city’s cultural assets.
There’s just one catch: The bond program’s payoff relies on the expiration of TIFs. In TIFs that are not extended, property tax revenue will re-enter the general fund and be used to make bond payments on this ambitious plan. Nearly 40 percent of the city’s 121 TIF districts are set to expire in the next three years; city finance officials said extensions will be considered on a case-by-base basis. The disbanding of those TIFs could prevent projects similar to the Congress Theater from securing the funding they need.
The City Council approved the bond program on April 19.
Savings account or a slush fund?
Chicago’s city planners and developers became prolific users of the TIF funding mechanism under former Mayor Richard Daley’s decades-long tenure.
Critics say that their unchecked use has done more harm than good for the city as a whole.
TIF districts, and their counterparts in other cities, were created to improve blighted areas or specific properties.
During the lifespan of a TIF, all or some portion of the new property tax revenue generated in the area stays locked into the district’s boundaries rather than getting siphoned off to the general fund or other taxing entities, like the local school district. The new property tax revenues fund portions of proposed developments agreed upon by the city.
Although the same basic qualities apply across TIF districts, they’re used differently city by city.
In Chicago, city planners often established TIF districts without specific projects lined up. They were seen as a way to entice developers to propose projects with the knowledge that new property tax revenues would be sequestered in the area and made available to boost their bottom line.
In some areas, that approach paid off.
“These old theater properties with that kind of architectural detail and history couldn’t possibly be rebuilt today. The cost to restore them is so significant that there has to be some kind of public-private investment.”
“It works really well on the perimeter of a well-developed area like the Loop,” said Rachel Weber, urban planning professor at University of Illinois Chicago. “TIF allowed the Loop to expand outward to the South Loop, Fulton Market and River West.”
But in other sections of town, TIF districts failed to draw developers’ interest. When there is no new development to serve as a catalyst, a given TIF district’s coffers do not grow much. Although TIFs are set up to expire after 23 years, they can receive an extension of up to 12 years from the state.
The Western Avenue (North) TIF district in Uptown and the South Chicago TIF district on the South Side are both set to expire this year after 23-year runs. Public-private investments in the Western Avenue TIF district totaled $135 million, city records show. Over the same period, the South Chicago TIF district generated just $1.5 million of investment.
Meanwhile, as TIF districts were established throughout the city, Chicago Public Schools and other taxing entities saw their contributions from the city dwindle.
“There is a built-in inequity in the design of TIF,” Weber said. “Places that are more likely to attract developers’ interest are places where TIF is going to do what it’s meant to do. But having a little bit of TIF assistance is not going to overcome disinvestment.”
Johnson is using such criticism of TIF districts as justification to recoup funds from the city’s districts when they expire.
He will need to strike a balance between reining in the number of TIF districts and using the funding mechanism in places where it can benefit his administration’s priorities.
A political tightrope
At its best, TIF performs magic tricks in the world of real estate, conjuring developments that would have been impossible to build otherwise.
That makes it a powerful bargaining chip between local officials and developers.
Downtown Alderman Brendan Reilly said it was clear that TIFs had been used excessively in his ward prior to his election. He only supports giving TIF to a development if it would not happen “but for” an infusion of such funds.
“Daley doled out a lot of TIF downtown,” he said. “I put the brakes on it because I didn’t think many of the projects could pass the ‘but for’ test. I’ve said no to all sorts of TIF requests.”
Goldman insists the Congress Theater is an example of the type of project that passes the test easily.
“If managed properly, the narrative that a TIF is a giveaway to developers is absolutely wrong,” Goldman said. “It’s a public-private partnership.”
That’s why even Johnson is keen on using them where he sees fit. In a February press gaggle, he floated the idea of using TIF funds to help the White Sox build a new South Loop stadium.
In April, he announced the continuation of a program started under his predecessor, Lori Lightfoot, aimed at using TIF to address post-pandemic office vacancies by funding office-to-residential conversions downtown.
This spring, his real estate transfer tax proposal, a signature of his campaign, failed at the ballot box in part due to legal maneuvering and advertising efforts led by local real estate trade groups.
That has left Johnson on a familiar political tightrope, navigating between keeping TIF districts as a development (and negotiating) tool and dissolving them to create an enticing new revenue stream for the city.
Real estate interests are also finding their line. Even though TIF is a boon for developers, the Illinois Realtors issued a statement of support for the bond program, on the condition that it keep property taxes from increasing.
“While this proposal contains the promise of a long-term funding source for necessary city services, we strongly believe that it will only be successful if there is accountability, transparency and a net zero impact on property taxes for residents,” the group wrote in a statement.
Their endorsement marked a key win in Johnson’s give-and-take relationship with the city’s real estate industry, in this case TIF districts for tax rates.
Developers, who will miss TIF the most, might ask for something different in return.