How to fund Minneapolis streetcars? A complicated five-parcel Value Capture District

Courtesy of the Minnesota Historical Society
Minneapolis streetcar, circa 1923

On Tuesday morning, not one but two Minneapolis City Council committees met to approve the creation of a so-called Value Capture District, which would devote the area’s property taxes to financing a streetcar line on Nicollet Avenue.

Transportation & Public Works and the Ways and Means/Budget Committee took about an hour and a half to question the scheme, take testimony from the public and vote.

In the end, the endorsement was unanimous, except for an abstention from Meg Tuthill, who represents the 10th Ward. “I’m very conflicted,” she said. “There are too many unanswered questions.”

Chief among her worries was whether the Metropolitan Council would pay for the operation of a streetcar system; the value-capture scheme covers only planning and construction. She urged her colleagues to delay their approval until they get the answers to all their questions.

The problem is, waiting is not a terrific option, and here’s why. (Be patient; this takes some explaining.)

To finance the $220 million needed for the initial 4-mile streetcar line, the city lobbied the Legislature — and won from it — the right to create a special district where property tax revenues from new development would go to the streetcar project (and not to the maws of its own general fund, Hennepin County and/or the school board).

The Value Capture District is a lot like a TIF, or Tax Increment Financing district, which has been used extensively in our state and others to subsidize all kinds of private development, including stores, office buildings, manufacturing plants and so on.

Nicollet‐Central Transit Alternatives Project
City of MinneapolisThe Nicollet‐Central Transit Alternatives Project will
identify a preferred transit enhancement which could
serve as a first phase of a longer‐range vision for transit
service throughout the 9.2‐mile corridor.

With a TIF, a local government designates a targeted development site. The tax valuation of the site is then frozen at its pre-development value. Supposedly, new development will grow up around the new office or factory and boost property values; any amount over the initial frozen property value within the district goes to help repay the bonds the city floated to help finance the thing in the first place.

To illustrate: Let’s say, there’s an empty lot in Bow-wow City that Amalgamated Doghair would like to build on. Amalgamated claims that it needs help to build its factory (and if it doesn’t get it, it might just move its operations to Kurdistan), which would create 40 jobs. Bow-wow City is, of course, hot to have jobs, so it declares the empty lot and a couple of blocks on all sides a TIF district.

Let’s say, all the land in the district is worth $2 million on which the owners have been paying a 5 percent annual property tax or $100,000. Using its bonding power, the city borrows money for Amalgamated to put up its factory. If Bow-wow City is lucky, Tail-wag Treats and a couple of other factories buy up other land in the TIF district and build there, too. In three or four years, the TIF property is worth $10 million, which generates $500,000 a year in property taxes. The $400,000 increment taxes go to repay the bonds.

TIFs can be a bit risky. The city can’t lay its hands on that extra property tax dough until new development is up, running and reassessed. And sometimes the new factory or office does not attract all the extra economic growth that city leaders hoped for, leaving tax valuations little higher than they were previously and the city is on the hook for funds to repay the bonds. Oh, and maybe six years out, the factory moves to Kurdistan anyway, or Iowa.

The new Minneapolis Value Capture District, however, is a slightly different animal.  Instead of channeling handouts to corporations, money will be devoted to public transit, specifically streetcars, and only for one line, on Nicollet. And the district is odd.

Instead of one vast stretch, it’s made up of five discrete parcels where development is already under way:

• One parcel, at the intersection of Hennepin Avenue, for example, is the site of the new Whole Foods supermarket and a five-story apartment house above.

• The second — a 33-story, 330-unit luxury apartment building called Nic on Fifth and the 4Marq Tower nearby with 262 units is slated for — well, I guess the names of the projects should tell you where.

• The third parcel, on 14th and LaSalle, will be the site of Magellan Tower, a 36-story, 355-unit high-rise.

• At Spruce Place and 13th, another couple of hundred units are under construction.

• And finally, across the Mississippi where Totino’s Italian Kitchen once did business, a development of 130 market-rate apartments, commercial space (maybe Totino’s will rise again) and a 900-square-foot dog run are under discussion.

With the exception of the Totino’s property, all of these new buildings are pretty much sure things.

Minnesota Center for Environmental Advocacy

But to get the most out of them for streetcars, the City Council — and later Hennepin County — have to act fast. Why? If the local governments approve the measure before the end of this month, then the base value of the district would be frozen at its Jan. 1, 2013, level, what it was before development occurred. An increment in tax revenues would start to come in next January.

If there’s stalling until after July 1, however, then the base value of the property would be higher (since some development already would have occurred), and the amount of money the city would reap would be smaller. Worse, the dough wouldn’t start flowing until 2015.

According to the city, if all these developments are completed in the next three to four years, taxes captured by the “district” could total $5 million a year, presumably enough to repay bonds the city would sell to finance the streetcars.

The Value Capture District is an idea that’s been discussed in academic circles for a while as a way to generate money for public improvements without leaning on taxpayers. One study, done by H. William Batt in 2001, for example, showed that Value Capture could have been used to finance the Northway, a nine-mile portion of the New York’s interstate highway system. The added increment of land value attributed to that section of the road came to 11 times the cost of the right-of-way acquisition, road and bridge construction, according to Batt.

A couple of citizens — including Cam Winton, an independent candidate for mayor —appeared before the committees to object to streetcars and the creation of the Value Capture District.

It’s not true, Winton argued, that streetcars spur development. People point to Portland, Ore., as an example where supposedly more than $1 billion in new business activity grew up around its streetcar line. Much of it, according to Winton, was prompted by tax rebates and other giveaways to corporations. Any tax money flowing to the city from new development should, he contended, go to ordinary city functions, such as police and schools.

The Value Capture District will divert tax money from the general fund, but it’s tax money that the city wasn’t previously receiving anyway. That’s one way to look at it.

And to wring $100 million or so for its streetcar line out of the federal government, Minneapolis has to show that it’s making a financial commitment. The Value Capture District allows that without requiring any tax hikes or special appropriations. Like it or not, you have to admit that it’s a pretty clever device.

Next step for Value Capture: a June 25 vote of the full City Council.

You can also learn about all our free newsletter options.

Comments (13)

  1. Submitted by Greg Kapphahn on 06/19/2013 - 10:33 am.

    Back in the Day

    When I lived at the peak of the hill on Nicollet Avenue in Minneapolis, just south of 50th St. across from the Lustron houses, where some of the old streetcar tracks were still embedded beneath the street surface, I longed for the day when I could have just hopped a streetcar at the nearest corner and not have had to jump into my car every time I needed to go somewhere (and that was back when gas was relatively cheap).

    At the time I remember thinking that just about the time they finally dug out all the old streetcar tracks (they tended to cause surface cracks in the pavement) they’d start putting them back in again.

    I’m very happy to see I was right, although it looks as if it will be awhile before they extend the line south of 50th Street, which is too bad, because connection to the paths and trails along Minnehaha Creek, the commercial district and art gallery at Diamond Lake Road and the Cub grocery store and apartment buildings farther south would likely increase traffic considerably, even if the bridge over Minnehaha Creek might need expensive upgrading.

  2. Submitted by Michael Liquori on 06/19/2013 - 12:05 pm.

    Error?

    Hi,

    Spruce Place and 13th never intersect. The box on this map that you might have thought was Spruce & 13th is actually Spruce & Grant, and this is the Magellan Tower.

    So, that leaves the question of what that box is near the Convention Center. I have not noticed any development happening there. Is that something to do with the possible hotel they have talked about? I am under the impression that one is not a done deal yet.

    Enjoy your column and looking forward to the streetcar line (and others I hope).

  3. Submitted by Martin Moen on 06/19/2013 - 12:41 pm.

    boondoggle

    Don’t MTC buses already serve this area? I have a hard time believing ridership will increase and support the local businesses along the corridor just because you change the vehicle people ride in. Who is behind this anyway?

    Glad I live in St. Paul where we only throw money at ballparks.

    • Submitted by Michael Liquori on 06/20/2013 - 08:45 am.

      Not a boondoggle

      I know it may not make a lot of sense at first glance but changing the vehicle makes a big difference. Riding the bus is too slow because people have to slowly board one-by-one going up stairs and paying their fare one at a time, sometimes they don’t have change etc. Streetcars are flat with the sidewalk and fares are prepaid like on the light rail, making it much faster. If you ever ride the local buses which stop every 2 blocks, this seemingly small difference really adds up.
      Also, they are on the electric grid which is much cheaper and cleaner than gas which is only going to get more expensive.
      And, they are quieter for people who live on the street and provide a smoother ride that disrupts traffic and bicycles less (no potholes, no pulling over and merging with traffic again and again).

  4. Submitted by Steven Prince on 06/19/2013 - 01:17 pm.

    Worse than TIF

    This scheme is TIF without an economic rationale. TIF zones were originally created to fund infrastructure improvements in “blighted” zones: the argument was you pay for the improvements by capturing future tax revenue that would not occur but for the TIF investment.

    Problems were threefold: 1) you could never be sure that development would not happen without the TIF (would Block E have remained an empty lot without TIF funds?), 2) the “need” for TIF funds often masks an underlying weakness in the project (Bock E) and 3) where the TIF succeeds you create growth without a way to pay for the city services necessitated by that growth (Minneapolis for the last decade).

    TIF zones are an easy way for politicians to mortgage Minneapolis’ future by trading development today (which politicians love) for financial shortfalls tomorrow (which will be someone else’s problem). In Minneapolis we have already been down this road and it took us to a place where way too much tax base was exempt from supporting city services. How can any council member who has struggled with City budgets for the last 8 years support this silliness?

    If street cars make sense then figure out a way to pay for them, but don’t short-sell the City’s future by stealing needed tax revenue from our schools, parks and city services. The rush to create this “son of TIF” is to capture tax revenue growth that we already know is going to occur with or without the streetcars, negating any rational argument for this scheme.

    • Submitted by Michael Liquori on 06/20/2013 - 08:48 am.

      Just look at how much development has occurred and is occurring along the light rail line. It obviously works in a way that Block E never did nor would. Secondly, if it succeeds it means a lot more tax-paying city residents and businesses, that should more than pay for the TIF in a way that, again, Block E never did or would.

  5. Submitted by David Frenkel on 06/19/2013 - 01:42 pm.

    history

    Someone should report on the history of the old street car system in Minneapolis and why it was torn out and the street cars burned. A prominent Minneapolis business person was behind the removal of the street cars with some help with a well known auto company. It is interesting how like light rail, street cars are coming full circle.

    • Submitted by Scott Stocking on 06/19/2013 - 03:06 pm.

      The streetcar system

      in the Twin Cities was owned by a private company Twin Cities Rapid Transit Company, and it was failing company. Streetcar ridership peaked in the 1920’s and the line limped along until the early 1950’s. The rise of the automobile, an aging fleet and infrastructure (that TCRT had to maintain), and the inability to keep the streetcars running on fare capture alone doomed the system. Please read “Twin Cities by Trolley.” It is an excellent history of the streetcar system in Minneapolis/St.Paul.

  6. Submitted by John Ferman on 06/19/2013 - 02:27 pm.

    A Bit of History

    I grew up with street cars. My earliest years were during the depression when cars were few. In my later growing up years it was wartime with gas and rubber rationing and the few cars didn’t go far on 4 gallons a week. So streetcars were essential. Double tracks, one for each direction, in the middle of the then narrower street – there were no curving into curb at the corners and there were no bump outs so passengers getting on and off had to cross a car-width (Model A Fords size mostly) to get on or off. There were some incidences of cars wiping out passengers but not many. With today’s large number of cars dominating the roads I would think there would be a serious passenger safety issue.
    At least through the war, streetcars had spitoons for you know who and some cars had open rear platforms for the cigar and cigarette crowd and kids who wanted to act manly. Some cars had conductors besides the motorman. Two of our fall tricks were to grease the tracks where there was a hill and to sling a pair of old tennis shoes up to wrap around the wire and then wait behind some bushes to watch the fun.
    One last piece of history – on my very first date I walked to her house, took her on the streetcar downtown, saw a movie and had a Bridgeman’s ice cream treat, took her home on the streetcar, and walked myself home – that was before the necking days.
    In your picture, is that car in the background T-model Ford?

  7. Submitted by Jeff Klein on 06/19/2013 - 04:23 pm.

    Could have seen that coming

    A stop every two blocks. This thing will take two hours to go five miles.

    Also, why does funding any sort of public transit take all kinds of crazy shenangans but roads and bridges to Sprawlville, WI seem to grow on trees?

  8. Submitted by Kevin Watterson on 07/08/2013 - 02:28 pm.

    It seems to me that how to pay for operating a transit line is the FIRST question that should be answered, NOT one to kick down the road and figure out later. This is unbelievably poor government.

  9. Submitted by Rachel Kahler on 06/21/2013 - 10:36 am.

    Fewer stops

    I agree with fewer stops. One of the things that makes buses so inconvenient is that so many of them stop way too frequently. There is no reason that a bus should stop every block and a half in a residential area. Reducing the frequency by half only increases foot travel distances by a block or maybe two. Plus, in areas that are serviced by more than one bus, alternate stops can result in local service with faster times and relatively little walking (the Downtown Minneapolis stops on Marquette and 2nd seem to be working pretty well). Though, it wouldn’t hurt the majority of us to walk a little more–myself included.

  10. Submitted by John Ferman on 06/25/2013 - 12:26 pm.

    Fewer Stops Reply

    Fewer stops of every 2,3,4 blocks would be no strain for the young and able. But for the aged and less mobile, there would be a burden and a discouragement to use a streetcar.

Leave a Reply