Tax Breaks for Luxury Towers Spur Redevelopment, and Backlash

Twenty years ago, it was unimaginable that a new residential high-rise would ever adorn the modest skyline of downtown Kansas City, Missouri. But in the last three years, two luxury apartment towers have opened, and a third is planned.

The buildings are part of a revitalization effort in the city’s core, but some officials are questioning whether tax abatements and other incentives given to the developer, Cordish Cos. of Baltimore, are appropriate for residential projects that cater to the affluent.

“You can take incentives too far, and it does create viable pushback from the community,” said Terry Ward, who represents a local school district on Kansas City’s Tax Increment Financing Commission.

The debate over incentives is not exclusive to Kansas City as new luxury apartment development picks up in connection with urban renewal around the nation. But the concessions given to developers typically reduce the tax revenue that would otherwise flow to schools, cities and counties.

In St. Louis, for example, an affiliate of Antheus Capital is receiving an $11 million abatement for the One Hundred, a $132 million, 36-story tower being built in the Central West End neighborhood. And a partnership that includes CA Ventures, a real estate developer in Chicago, was granted a $14 million abatement for a $100 million, 33-story high-rise downtown.

CA Ventures also obtained some $9 million in abatements for the development of three new towers in downtown Phoenix. Nearby, RED Development is receiving $18.3 million in incentives to help fund a mixed-use project with high-rise apartments in its CityScape development.

Incentives have fueled downtown redevelopment in many cities, and officials are using them to attract more residents to their districts. Phoenix wants to provide more apartments for some of the 168,000 downtown workers, said Christine Mackay, the city’s director of economic and community development. St. Louis has been trying to reverse the population loss that plagued the city in the second half of the last century, said Scott Ogilvie, a city alderman.

“There’s an ideological problem with granting incentives to luxury apartments,” he said. “But there’s going to be luxury housing somewhere, and we want high earners living here paying some taxes rather than in the suburbs paying no taxes.”

In Kansas City, Cordish’s projects, known as One Light and Two Light, are the first high-rise apartments to be built in or near downtown since the 1970s. They also are part of a revitalization effort that has added housing, a new arena, a streetcar system and other amenities to the urban core, and Cordish has played a big role in the renewal as developer of the Power & Light District entertainment quarter.

“It certainly wasn’t a given that downtown was going to come back,” said Nick Benjamin, a vice president of development for Cordish who oversees the company’s investments in Kansas City. “But we saw that the pieces were there in terms of the metro’s size, and its location, big local companies and civic spirit.”

One Light and Two Light are fetching top-of-the-market rents of around $2.25 per square foot, up from around $1.85 per square foot in 2015. To a large degree, the success of the first two towers fueled criticism of providing incentives for the third, the $130 million Three Light, which will begin construction in early 2019.

“People saw One Light and Two Light lease up and wondered why the city was subsidizing high-end apartments when schools are underfunded and sidewalks are crumbling,” Ward, the school district representative, said.

Despite the rebound in urban areas, developers maintain that rental rates in smaller markets still fail to justify new high-rises without incentives, especially with skyrocketing construction costs. The One Hundred tower in St. Louis should command rental rates of $2.50 to $3 per square foot when it opens in 2020, which are below rates for comparable housing in major markets, said Eli Ungar, founder of Antheus Capital, a real estate developer in Englewood, New Jersey.

“In the long run, we are investors in communities, and it would be shortsighted of us to try to extract a concession we don’t deserve,” Ungar said. “But is it better to have a surface parking lot, as there has been for years, or it is better to have a building that eventually is going to pay very significant taxes?”

Critics acknowledge that incentives have spurred development that may not have happened otherwise. But as urban cores grow, they argue, cities should taper the programs to realign tax burdens and priorities. A popular abatement program that has removed properties from the tax rolls in Phoenix has led to a tax burden of more than $1 for every $100 of assessed value for downtown business property, said Kevin McCarthy, president of the Arizona Tax Research Association, a public finance and tax policy watchdog group. That is about double the property tax rate in nearby Scottsdale, he added.

Ward, who wrote a dissertation on the effect of incentives in Missouri, said the Kansas City Public Schools district and area charter schools were missing out on $35 million a year.

From 2000 to 2014, St. Louis diverted $709 million in taxes to development incentives, according to a report by the PFM Group, a financial consultant in Philadelphia. But almost 75 percent were doled out in the city’s Central Corridor, which is hardly a bastion of blight, said Andrew Arkills, a member of Team TIF, a grass-roots group advocating transparent and racially equitable incentive policies in St. Louis.

“No one is under the illusion that all of those taxes would have been generated or that all of the construction would have occurred without incentives,” Arkills said. “On the flip side, no one has been asking how many incentives are actually necessary.”

The pressure is yielding results, to varying degrees. Arizona has tightened rules around its primary abatement tool, and the St. Louis Board of Aldermen has drawn up guidelines to cap incentives based on a project’s size and location. Officials in Kansas City are reducing incentives in about half of the projects it considers, said Greg Flisram, senior vice president for business and real estate development with the Economic Development Corp. of Kansas City. Where possible, the agency is also looking to link the creation of affordable housing with incentive awards.

At Cordish’s Three Light project, for example, Kansas City approved a tax abatement for 25 years, and it committed to fund a $17.5 million garage, in accordance with a long-standing agreement. In return, the developer is paying $16.4 million to the city, the school district and other taxing jurisdictions over the abatement period — some $5 million more than it is paying as part of the Two Light incentive agreement — and will take over some of the city’s downtown garage management duties. Cordish also will develop affordable units in an old office building that it plans to convert into apartments.

“There are a lot of people that think it’s time to take the foot off the gas downtown,” Flisram said. “But Kansas City still has a long way to go to achieve the density that supports transit, urban retail and major corporations, and there will be pressure to use incentives until we get there.”