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Understanding the tax base consequences of local economic development programs

Real Estate Issues, Fall 1998 by Gsottschneider, Richard K

It is generally accepted by economic development professionals and municipal officials that new real estate development will not only enhance the economic base of the community, but that it will also expand the tax base. The purpose of this article is to show that this is not always the case, and that new developments, if not properly planned, can in aggregate have a negative impact on the tax base. A recent case study prepared for Concord, New Hampshire, is used to illustrate some of the main points discussed herein.

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Economic development traditionally focuses on such things as job generation, the provision of affordable housing, and the creation of retail centers. Tax base expansion focuses primarily on maintaining and enhancing real estate values within the municipality. In the author's professional experience, based upon working with cities and towns throughout the United States, municipalities tend to pursue economic development with almost a religious fervor, and often do not think strategically about the overall real estate impacts of their economic development initiatives. Yet, the existing tax base in almost every municipality throughout the United States is an important source of revenue for funding municipal and school expenditures.

For public sector officials it is important to recognize the potential for a conflict between these two distinct, yet overlapping areas of public policy, and to establish procedures to achieve the proper balance in this regard. For real estate investors it is important to recognize when public policy is not fully cognizant of the impact of its actions on the real estate market, because of the potential negative impact on property values. This article concludes with a series of recommendations for municipal officials to help them ensure that economic development projects in their community truly do enhance the local tax base.

THE CONFLICT: HOW DOES IT OCCUR?

The conflict between economic development and tax base expansion can occur in one or more of the following ways:

New Development Detracts From an Existing Component of the Tax Base

Many forms of new development can detract from the existing tax base. Some examples include a new shopping center which has a negative impact on business and vacancy rates downtown; a new prison which creates a negative impact on an adjacent residential neighborhood; and a large subsidized housing project which adversely impacts market rate rental housing values. Naturally, not all new development within a community will have a negative impact, but these are three examples of the types of projects which can. Municipal officials need to be cognizant of the potential for negative impacts, and if they still decide to proceed with the development, to establish procedures for mitigating these impacts.

Zoning Does Not Property Protect Existing Values

Zoning is the tool by which most municipalities establish and maintain certain land uses. Generally, zoning is relatively restrictive, except in certain cases where problems can occur. The two most frequent problems the author has encountered are in the typical office/industrial zone and at the edge of two incompatible zones. Within an office/industrial zone, property values can vary substantially. Suburban office buildings typically cost $90 to $110 per square foot, while light industrial and warehouse buildings cost around $30 per square foot. Also, parking, lighting, and landscaping requirements vary substantially. Why communities mix these uses in the same zone is not clear, but it is akin to allowing a mobile home park in the middle of an exclusive single-family residential community. The addition of an industrial building into an area of established office buildings will have a negative impact on the value of the office buildings.

The second type of conflict can occur when an industrial park is developed adjacent to a residential neighborhood without an adequate buffer, or a shopping center generates increased traffic through an existing residential or commercial area.

An Inordinate Emphasis is Placed on New Development

Many municipalities seem to forget about their existing tax base and infrastructure. Older neighborhoods, shopping centers, and industrial areas are allowed to "exist," but public policy and funding is directed to new development or possibly downtown revitalization. Yet even if these new developments are extremely successful, they seldom contribute more than one or two percent to the tax base. Meanwhile, the existing tax base in the rest of the municipality declines.

The purpose of these three examples is to illustrate some ways in which a municipality can pursue new development at one location and inadvertently cause property values to decline at another location. The following case study for Concord, New Hampshire, which was prepared by the author, illustrates these points more fully.

CASE STUDY: CONCORD, NH

Concord, the capital city of New Hampshire, has an estimated population of 39,000. The city is located in the central part of the state and has excellent regional highway access. The Merrimack River runs through Concord, but because of highway locations, the city is largely cut off from access to the river. Although total land area in Concord exceeds 41,000 acres, only a small portion of it is developed.

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Understanding the tax base consequences of local economic development programs

Real Estate Issues, Fall 1998 by Gsottschneider, Richard K

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