New community authorities are complex, somewhat arcane funding tools unfamiliar to most people in Northeast Ohio.
CLEVELAND, Ohio -- A nickel on a latte. Two dimes on a $10 parking tab. Just over a buck on a $90 steak at Ken Stewart's East Bank restaurant. And $3 more at the Aloft hotel.
That's the extra money visitors to the Flats East Bank project might have to shell out, if Cleveland City Council signs off on the creation of a funding scheme that would use surcharges on purchases in the 23-acre waterfront district to pay for amped-up security, maintenance and other services along the Cuyahoga River.
That funding mechanism - known as a new community authority - would be the first of its kind in Cuyahoga County. Such authorities, governed by public-private boards, have been used in central and southern Ohio for years to fill development-financing gaps and generate funds for public spaces, parking garages, community buildings and other purposes.
The Wolstein Group and Fairmount Properties, the developers behind the nearly $500 million Flats project, first considered a new community authority back in 2006 and 2007. Then the recession forced them to put construction on hold while they built a new, complicated web of financing. Now they're hoping to see money generated by such an authority - as people dine, stay and park in the Flats - used to maintain public spaces and provide services, not cover development costs.
That idea met with resistance at City Council last week, as some members questioned how the money would be spent. Others characterized the surcharges as a "regressive tax" that would place an outsized burden on low-income people. Councilman Joe Cimperman, who sponsored the legislation, scoffed at that notion.
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View full sizeThe Ernst & Young Tower and the Aloft hotel anchored the first phase of the Flats East Bank development. Apartments, restaurants and entertainment venues in the project's second phase will open in June, with a riverfront boardwalk to follow. The project, funded through a mix of private and public sources, represents an investment of nearly $500 million. "If the cost of the added services are such that it interferes with your ability to be productive or successful, then you have the ability to opt out," he said, pointing out that only people who spend money in the Flats will bear the additional costs. "If you can't afford $202 at the Aloft hotel but you can afford $200, there are other downtown hotels you can go to. ... It's actually the opposite of a regressive tax. It's an aggressive tax. You can opt in, or not."
Developer Scott Wolstein saw, and employed, variations on this funding mechanism in other states during his tenure as chief executive officer of DDR Corp., a major shopping-center owner based in Beachwood. He's never encountered government pushback before, though retailers have griped about the disadvantage of charging shoppers slightly more than their competitors at other properties.
Wolstein pointed out that the burden will fall on the Flats developers and their tenants to create a better experience for customers - one worth a 1.5 percent sales-tax surcharge, a 2 percent bed-tax surcharge at the Aloft and a 2 percent parking-tax surcharge across the property.
And, in turn, the money from those surcharges, estimated at $1 million a year, on average, could help maintain aspects of that experience, such as a riverfront boardwalk; green space; lighting; more costly and environmentally friendly road surfaces; and security around entertainment venues.
A seven-person board, with four appointees - including a city representative - picked by City Council and three members chosen by the developer, will control the money and decide how to spend it.
"It's a democracy and free enterprise, and you let the market decide," said Wolstein, the chief executive of Starwood Retail Partners, a company that owns and manages malls. "I think it's a very, very small price to pay to make sure what is today almost a $500 million investment - and what, ultimately, could be north of a $1 billion investment - will be protected."
Expansion makes arcane revenue source more attractive
New community authorities are complex, somewhat arcane tools unfamiliar to most people in Northeast Ohio.
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View full sizeIf Cleveland City Council and Mayor Frank Jackson sign off on creation of a new community authority to govern the 23-acre Flats project, customers at restaurants including Punch Bowl Social will see a 1.5 percent sales-tax surcharge on their bills. A seven-member board, comprised of four City Council appointees and three people picked by the developer, will decide how to spend money generated through use taxes in the neighborhood. In the most basic terms, such authorities let communities and developers create new revenue streams across a project site and then capture that money to pay for or care for the project. Some experts compare them to homeowners' associations, in which residents pay fees to maintain shared spaces; or even special improvement districts, such as the downtown Cleveland district where property owners pay fees for additional cleaning services, safety crews and marketing.
"No matter how you slice and dice it, it's a tool for generating revenues for improvements," said Scott Ziance, a partner at the Vorys, Sater, Seymour and Pease law firm in Columbus. "From my perspective, it's a valuable tool in the toolkit, but it should only be used by trained professionals. It's complicated. It's like my father-in-law's garage. I'm not going to touch half the tools in there, because I don't know what to do with them."
Many such authorities in Ohio rely on special assessments on real estate values - a property-tax surcharge, if you will - to pay debt-service on bonds for construction or ensure that anything from community buildings to sidewalks are maintained. In Columbus, a new community authority played a hand in the transformation of the vacant Lazarus department store into an eco-friendly office building. Elsewhere in the state, these public-private partnerships have generated money for new sewage treatment facilities, public high schools and road improvements.
The structure of the Flats district, though, would be a bit different.
A 2010 change to state law made new community authorities more flexible and attractive, by expanding the pool of potential funding sources to include use charges - sales taxes, bed taxes and parking taxes, for example, above what consumers already pay. The Wolstein Group and Fairmount are racing to take advantage of that provision, which will expire March 22 unless the Ohio General Assembly decides to renew it.
"We've been going through this process and started discussions with the city last summer, really," said Allyson O'Keefe, a Porter Wright Morris & Arthur attorney representing the developers. "We wouldn't have gotten this far without support from everyone we've spoken to with the city so far."
As Wolstein tests the waters, other developers watch
The Flats might be Cleveland's guinea pig, but other big projects - development of the downtown lakefront, for example, or the ambitious nuCLEus high-rise proposal in the Gateway District - could be candidates to explore new community authorities as a way to tackle some construction costs or pay for services the city won't, or can't, take on.
Tracey Nichols, the city's economic-development director, wouldn't identify other developers looking at establishing similar districts. But she's hearing chatter.
"Some groups are saying, where there are now vacant properties, that you could create a new community authority under the Ohio Revised Code," she said. "And then there would be a methodology by which they could add any of those taxes, or real-estate tax, to be able to come up with a financing stream that then they could monetize. ... It's been done in other places in the country."
Recent high-profile examples of new community authorities include Liberty Center, a sprawling, mixed-use development outside of Cincinnati. The 64-acre development, in Liberty Township, is generating money to pay interest on construction debt through a half-percent sales-tax surcharge and a special assessment paid by tenants. That means shoppers at stores there will pay an extra 50 cents for every $100 they spend.
City Council postponed a vote on the Flats proposal Feb. 2, when it appeared the legislation lacked the support it needed to pass. Council is expected to resume the discussion Monday.
"We hope it gets brought to a vote," said Adam Fishman, a Fairmount principal. "We hope it gets voted on favorably, and that the mayor signs it into law. ... We want this to be the finest waterfront district in the country. There are other models in the country that do things like this to allow neighborhoods the resources to be great. It's lost on us why this is not a fabulous idea."