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What Cities Do To Promote Economic Development

February 14, 2007 by dave

Creative solutions to closing development funding shortfalls

Public financing techniques for economic development projects can take the form of direct and indirect measures to assist public-private ventures. Direct financial involvement in public-private ventures can take many forms. Indirect or non-monetary measures, while not financially involving local government in a real estate project, can nevertheless have an equal or greater impact on project financing than direct public financial participation.

The aim of direct financial involvement is not only to promote economic growth and development and to revitalize depressed areas, but also to participate in the returns of that investment beyond the normal tax revenues the project generates. To be acceptable to private investors, the public’s share of the return will in most cases be delivered after private investors have earned a return sufficient to attract their investment in the first place. The profit-sharing objective is likely to lead to a shift from outright grants to private developers to loans with the repayment schedule and interest rate depending on project performance. These provisions for participation are similar to those frequently used by conventional mortgage lenders.

Direct financial involvement includes the following examples:

use of public funds to cover non-revenue-producing elements of a private project, thus yielding higher private project investment returns (like lobbies, hallways, and other open spaces);
use of land lease rather than a land sale from a public entity to a private developer (especially where land costs are prohibitively high);
use of a public guarantee of repayment of private project loans (risk exposure can be covered with an insurance policy);
public lease of privately built and owned facilities in order to leverage additional private investment (like parking); and
pledge of project-related tax revenue to cover capital and operating costs of a project (like Tax Increment Financing or TIF).

Indirect financial involvement includes the following examples:

design changes to facilitate non-duplication of spaces within a project (shared parking, lobbies, pre-assembly areas, elevators, kitchens, and other common areas);
exchange of public land for public space (swap land value for free space);
granting certain easements, air rights, and zoning considerations as development inducements (eliminate title difficulties or provide zoning benefits);
development rights transfer (transferring development rights not only encourages development within a given location, but also relieves development pressures on other sites, notably where historic structures are located); and
site reorganization (land and/or building exchanges or swaps can be used to reorganize land ownerships, thus reducing site assembly costs).

In closing, a plethora of innovative and creative measures can be taken to solve development-finding shortfalls. The most important consideration is a willingness on the part of both the public and private sectors to try!

Ralph J. Basile, principal, Basile Baumann Prost & Associates, Inc., Annapolis, Md., has more than 30 years experience in structuring successful public-private developments nationwide. He holds degrees in economics, city planning, and law, and is a frequent guest speaker and author.

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