In the Flames proposed funding model for the CalgaryNEXT arena project, they included a public contribution in the amount of $240 million from a “CRL” or Community Revitalization Levy. Also called Tax Increment Financing (TIF), CRL’s are employed by municipalities as a way to finance redevelopment of blighted areas.
Contrary to what you might hear from the Flames and their boosters, CRL’s are not “found money” for a city. In infrastructure funding, as in anything, there’s no free lunch. In fact, CRL’s are complex long term gambles cities take that come with attendant risks and consequences.
How Does a CRL Work?
Here’s how The City of Calgary defines a CRL:
A levy imposed in respect of the incremental assessed value of property in a community revitalization levy area to raise revenue to be used toward the payment of infrastructure and other costs associated with the redevelopment of property in the community revitalization levy area.
Okay, that doesn’t help at all.
In English, what the above means is the city draws an imaginary border around a given area – usually one that is run down and in need of significant infrastructure investment. Then the municipality will borrow a big chunk of cash to execute the redevelopment. The levy will then be used to re-pay the loan via incremental (read: improved) property values yielded from the area as things get better.
An illustration: Imagine you own a bar. In your bar you have 12 pub tables and a dart board. The board is located at the far end of the bar with lousy lighting and a drafty window. Aside from a couple of old regulars, nobody plays darts and it’s too dark and cold to be inviting. All told, the far end of the building maybe generates $100 a week in revenue for you.
So you decide to invest in your bar by redeveloping the dart board area. You take out a bank loan for $12,000, fix the window, put in new light fixtures, remove the dart board and put in seating and a pool table. In order to make sure you pay back the bank loan, you decide to dedicate every dollar over the original $100/week in revenue the area provided to service the debt. Assuming, of course, people like to play pool more than darts.
So what’s not to like?
The Risks and Consequences of a CRL
The bar metaphor is overly simplistic. In reality, the risks associated with CRL’s are far more complex and far more reaching than our theoretical bar owner.
A community development cycle can take 20+ years from start to finish. The city has to forecast out several decades to be sure there will be enough demand to justify a spate of new living and office space. New developments also face all kinds of barriers ranging from the obvious (the need to improve or increase local infrastructure) to the unforeseeable (NIMBY complaints from existing business and residents).
So there’s real work and a lot guessing and prayers that has to be put in before a CRL can realistically be decided on.
Beyond the logistical issues of developing a community, there’s also the risk that the redevelopment will fail to adequately improve property values to cover the loan. CRL’s can only legally exist for 20 years in Alberta, so a municipality only has a limited window to pay back the debt. Although mega-developments like the West Village always seem like a slam dunk in the initial conceptual phases, in reality they can fail to live up to those lofty dreams for all sorts of reasons.
A good example in Calgary is Eau Claire Market. In the mid-90’s, Eau Claire was redesigned to be a premier destination in the city’s downtown (an “entertainment retail centre” or ERC). The new area was briefly popular but mostly failed to live up to the dreams of being a new font of urban vitality. And that’s despite a premium location along the river and near Prince’s Island Park.
As documented by Richard White, Eau Claire floundered for a variety of reasons: Chinook Centre was also re-designed around the same time and became the “mall of note” in Calgary and Stephen Avenue walkway was redeveloped into a destination for downtown diners. There’s probably a dozen others that aren’t altogether clear at this point.
Of course, even if the new community is designed perfectly and the city has enough demand capacity to justify the development, there’s an ongoing question of whether CRL’s are actually good for cities. Remember, over the life of the CRL, the incremental property tax from the area is used to pay back a loan and therefore doesn’t end up in city coffers. Depending on how the borders of the CRL are drawn, this can pose challenges for city administration in need of funds for essential things like roads, sewers and schools.
Finally, there is evidence that CRL’s definitely do improve the property values and development pace within a given area, but likely at the expense of other areas in the city. In studies recently cited by Jonathan Willis in this piece, it’s noted that:
Dye and Merriman studied TIF in Illinois and found that cities that adopted it “grow more slowly than those that do not” and that they only stimulate growth in a designated area “at the expense of the larger town.”
More extensively, from the study in question:
In summary, the empirical evidence suggests that TIF adoption has a real cost
for municipal growth rates. Municipalities that elect to adopt TIF stimulate the
growth of blighted areas at the expense of the larger town. We doubt that most
municipal decision-makers are aware of this tradeoff or that they would willingly
sacrifice significant municipal growth to create TIF districts.
The theorized reason for a lower growth rate in cities that employ TIF’s (or CRL’s) is, basically, inefficient redistribution of public and private funds. A CRL concentrates tax revenue, development and political will within a given area, potentially sucking resources and demand from other areas of the city. As a result, much of the literature argues that CRL’s are more a method of reallocating government funds rather than effectively raising new ones.
CalgaryNEXT Related Risks
All this is just generally applicable facts and considerations when it comes to CRL financing. The Flames’ proposed model comes with even more concerns than the average CRL scheme, however.
Remember that the Flames group wants a $240 million CRL to go towards the building of the “arena district” (though the information isn’t clear on the CalgaryNEXT website just where the organization thinks the CRL tax dollars will go. For now, we’ll assume it’s more or less earmarked for new arena/”event centre”).
That’s a huge amount of money going towards something that won’t generate property taxes (if owned by the city as proposed), meaning it won’t directly aid in repaying the CRL loan. Building a huge arena in a CRL designated area is like putting a giant money plug in the middle of the community.
In addition, that’s $240 million that won’t go towards vital infrastructure development and soil remediation – the sort of things that have to happen if a new mixed use community is to spring up in West Village.
The argument for so-called anchor developments like arenas is they drive demand in the area and foot traffic to local businesses. Remember, of course, that the economic effect of sports arenas in cities, like CRL’s, is mostly redistributive: it pushes existing money around, but it doesn’t tend to create new revenue. That’s why if you google “sports arenas economic impact” you get a lot of quotes like this one:
“If you ever had a consensus in economics, this would be it,” said Michael Leeds, a sports economist at Temple University. “There is no impact.”
To put the $240 million ask in perspective, consider that the total CRL investment for the East Village development has been about $357 million to date, total. That means the Flames want the city to commit 70% of the East Village budget to help build an arena complex alone (!) leaving aside everything that needs to be done to make the area livable.
The Flames group frames the CRL as an easy win, but the truth is far more complex. There are risks and consequences associated with a CRL – and the Flames proposal in particular – that you won’t find on the CalgaryNEXT website.
One final note in all this: if the city of Calgary wanted to use a CRL to redevelop the West Village, they don’t really need to have the Flames organization involved. In fact, with the arena district soaking up so much real estate and development dollars (without the attendant benefit of property tax generation) it’s fair to argue the city would be better off pursuing a West Village project absent the Flames’ involvement altogether.