Does streetcar offer model to reform city's tax incentives?

With the Cincinnati Bell Connector now serving riders, discussions are shifting toward identifying the sources of money that will help operate the streetcar.

One of those sources of money, city leaders say, is outperforming early estimates and could serve as a model for reforming other tax incentives.

Since Jan. 1, 2015, property owners and real estate developers in Over-the-Rhine and Downtown seeking tax abatements for redevelopment projects could direct a portion of their savings to the streetcar's operating fund. Voluntary Tax Incentive Contribution Agreements, or VTICAs, have been applied to 27 incentive deals, bringing in about $694,000 a year, according to independent consultant HR&A Advisors.

At its launch, the program expected to collect about $200,000 in its first year and eventually up to about $2 million a year by 2026. The idea is that with an increased appetite for real estate development in the two neighborhoods and rising property values, more money could be collected. Now, HR&A Advisors estimated $15.2 million could be captured over the life of the incentive deals, which typically expire after 15 years.

"These projects are not just providing benefits now, but also 30 years out," said Oscar Bedolla, the city's community and economic development director, in June.

The VTICA program was the result of difficult conversations among city, philanthropic and regional transit leaders over how to pay for streetcar operations. In September 2014, officials from the Carol Ann and Ralph V. Haile Jr./U.S. Bank Foundation recommended the city create a new taxing district where property owners in Over-the-Rhine and Downtown could cover more than two-thirds of operating and maintenance costs.

The city's central business district already has a special taxing district, which has to be renewed by voters every four years and funds the nonprofit group Downtown Cincinnati Inc. Some cities levy a special assessment tax on properties along their streetcar lines.

Eventually, that plan was scrapped. But the evolution of those discussions helped forge the creation of a voluntary, opt-in program. The move would quell critics concerned about the creation of a new tax and about harming the existing Downtown taxing district.

VTICA agreements are reached as part of Community Reinvestment Area property tax exemptions, which City Council has to approve. The exemption helps property owners reduce operating expenses of a real estate development project and lowers the initial development risk.

City Councilman Kevin Flynn said the VTICA program has been a huge success story that could serve as a development model for other Cincinnati neighborhoods. If current development trends continue, Flynn said it’s likely the fund could ultimately reduce the reliance on the $9 million backstop from the Haile Foundation and build a reserve for operations.

“Without this, we wouldn’t have money to do this without taxing citizens,” said Flynn, who ended up being the swing vote on council to create a veto-proof majority allowing the streetcar project to continue.

Flynn said the early idea for the VTICA program came from Mayor John Cranley. To Flynn's knowledge, there hadn’t been a model in Ohio for what Cincinnati leaders wanted to do and Cranley pushed project planners to "get creative."

“We inherited a project that until we took over, it was over budget and there was no operating plan other than asking the taxpayers to pick up the bill,” Cranley said. “I was motivated to find a way for developers who are benefiting from the streetcar to pay as much of the operating costs as possible.”

Cranley, who had been an ardent streetcar critic, said a significant amount of time was spent with lawyers to determine how it could legally implement the program. But the big goal for him – ensure those people who benefit most from the streetcar (the property owners) pay expenses that would otherwise be paid by Cincinnati residents.

Rhinegeist Brewery was the first company to step up to help fund streetcar operations and it remains one of the transit development's biggest supporters. There's a streetcar stop outside the 1910 Elm St. brewery and the company is also a streetcar advertiser.

The company pledged to contribute about $5,000 a year for 10 years to fund streetcar operations as part of obtaining a tax break to renovate its 1910 Elm St. brewery property. Rhinegeist spent more than $4 million to buy its property and after investing in equipment and upgrades, Bonder said the property  recently appraised for "substantially" more than what the company paid in November 2014.

"Our contribution toward the streetcar operating fund was an easy decision," said Bob Bonder, co-founder and president of Rhinegeist. "Rhinegeist has been successful because this thirsty city has rallied around great local beer and craft culture as a whole.

"The streetcar is not only going to help transport more beer fanatics to our brewery, it's going to play an integral part in helping our city to retain and attract talented people from within the region and beyond, which will create more jobs, investment dollars, and creative energy for years to come."

While it's relatively new, an independent consultant hailed VTICA as one of the incentive programs that have provided benefits for the city.

The city paid $160,000 to hire HR&A Advisors to complete a year-long study of its existing suite of economic development incentive programs and make recommendations on how to improve them. Three months ago, HR&A officials and Cranley's administration made a presentation to City Council revealing results of that study.

Among the findings: Incentives have spurred real estate investments around Cincinnati, but they haven’t done enough to foster job growth. In April 2015, The Enquirer published a report following an investigation of incentive policies that revealed inconsistent benchmarks in awarding incentives, a lack of transparency in decision making and little tracking on whether incentives provided an economic return to the city.

HR&A recommended expanding the use of instruments similar to VTICA in an effort to recapture property tax revenue to invest in infrastructure and other catalytic projects. Cranley said city officials are studying how to develop a program in Walnut Hills to fund public improvements around the neighborhood.

"In markets where the developer can bear the additional cost, VTICA offers an opportunity to derive additional public benefit," the report said.