Hopeful development: Do North Loop tax subsidies make any sense? | Neighborhood News | Chicago Reader

Hopeful development: Do North Loop tax subsidies make any sense? 

By the time the City Council's Finance Committee got around to officially approving the so-called FJV deal--a $400 million Loop redevelopment project--almost all of the aldermen had gone home for the weekend.

It was well after six on a Friday evening, and a handful of preservationists had just finished explaining to the committee why they opposed the plan, in a council chamber that was virtually empty.

Not that full aldermanic attendance would have changed the outcome. The project, targeted for the block just east of the Daley Center, had all the trappings of a done deal.

At issue is whether it is in the city's interest to take a loss now, in hopes of a major payoff in the future. Under the plan, the city will use its power of eminent domain to buy the properties on the block bounded by State, Dearborn, Randolph, and Washington, then sell them to developers for less than their current value for an office and retail complex. Supporters predict that the immense tax revenues generated by such a complex will more than make up for the city's investment.

The developers are FJV Venture, an ad hoc consortium that includes JMB Realty Corporation, the Levy Organization, and Metropolitan Structures. The principals, Stuart Nathan, Lawrence Levy, and Bernard Weissbourd, are among the most successful urban real estate barons in the region.

Mayor Washington, Planning Department commissioner Elizabeth Hollander, both major newspapers, and Crain's Chicago Business all wholeheartedly championed the plan.

"The $400 million project," reads a recent article in Crain's Chicago Business, "would include two towers with a total of 900,000 square feet of office space, and 300,000 square feet of retail space. It also would create both construction and full-time jobs, and provide a much needed shot in the arm to retailing in State Street. The developers also have promised to include an affirmative action program, and have pledged to donate 1,250 labor hours to neighborhood and community groups."

With that kind of support behind the plan, it was not at all surprising that the Finance Committee ratified it (even though the final version had not been published, let alone been read by the members, when the vote was taken), nor was it surprising that a week later, the entire City Council signed on with a minimum of debate. The black aldermen backed it without dissent, as they have virtually every other measure strongly pushed by Mayor Washington. For any alderman, black or white, there was little to gain from opposing the development plan or asking tough questions about it.

"The administration made it very clear they wanted smooth sailing on this one," says one alderman, who asked not to be identified. "They had a just-shut-up-and-vote-for-it attitude. They wanted to show the world that they could make big deals with big developers without anyone getting in the way by asking too many questions."

Which is a shame. The FJV proposal is a challenge, but it's also a risk. And it certainly merits much more investigation and inquiry than it got. It may, as its backers contend, transform forever a ramshackle part of the Loop. Or it could flop, costing the city unforeseen millions in ungenerated property taxes at a time when the city--particularly the schools--needs cash the most. At the very least the deal, five years in the making, raises important questions about the much publicized pros and some overlooked cons of city subsidies of downtown development.

"If there really was a demand for this project, private developers would put it up, with or without a subsidy," says Arthur Lyons, director of the Institute of Taxation and Economic Policies, a think tank for community activists. "There's unsubsidized development going up all over the Loop. But there's very little going up in the North Loop. And that's because, I think, the city is trying to control the market. I would like to see what would happen if they let the market there run its course."

The supporters of the development contend that the tax money brought in by subsidized downtown development helps the poor and the neighborhoods. "That's just trickle-down," argues Lyons. "No one has established that it works. I say if the city really wants to help the poor neighborhoods, then that's where they should invest their money."

Mayor Daley first conceived of plowing public funds into the North Loop, a six-square-block area roughly bounded by Wacker Drive on the north, State Street on the east, Washington on the south and Clark on the west.

At one time, the area thrived with commerce and entertainment. But by the 1970s, many of the office buildings had fallen into disrepair. Transients and panhandlers had taken over the Greyhound bus depot at Randolph and Dearborn. The movie houses either showed porno flicks or catered to fans of kung fu and blaxploitation movies. It was clear that most white residents and commuters had abandoned the area as a night spot.

Daley said that the district, by virtue of its central location, should be a hot spot for business and entertainment, generating much more in property and retail taxes. To make money here, Daley reasoned, the city would have to invest money here, in the form of either a direct subsidy or a tax break. And just about every editorialist and downtown planner agreed.

"The sickly North Loop has been robbing taxpayers for a decade," the Sun-Times wrote in an editorial from the late 1970s. "It needs a forceful push from the mayor's office, and some creative thinking and financing to get things done."

Daley planned to assign a redevelopment scheme to Arthur Rubloff, the late multimillionaire developer, who might have had the money and moxie to work magic in one or two sweeping government-subsidized deals.

Jane Byrne continued the dream of a superdeveloper rushing to the rescue, only she dropped Rubloff and recruited a fellow by the name of Charles Shaw.

By then it was the early 1980s, however, and one-man power brokers were clearly overmatched. The city was mired in a severe recession with soaring unemployment and interest rates. There were few boosters willing to invest time (let alone their own money) in the North Loop.

So Byrne altered her strategy. The area was divided into blocks or parcels that would go out to bid as separate projects (the FJV project, for instance, is on block 37). What was needed, most everyone agreed, was a big boom project--a flagship development--to get the ball rolling. That deal, Byrne announced, would be the construction of a Hilton hotel near the intersection of Wacker and State.

To promote the hotel, Byrne proposed to buy the land, sell it to Hilton at less than cost, and cut property taxes on the site to 16 percent of market value for 13 years, instead of the usual assessment rate of 40 percent of market value. For Hilton that meant a $90 million tax break.

The loss of tax dollars, Byrne argued, would be temporary. In time, she contended, the city's tax coffers would overflow as property values, spurred by the Hilton investment, soared.

"Hilton said they would close their hotel on South Michigan to open the new one in the North Loop," recalls Lyons, who compiled research for opponents of the deal. "So what do you gain? If your ultimate goal is to bolster your business district, what's the point of robbing from the South Loop to feed the North Loop? It makes no sense.

"Besides, the deal was opposed by a large group of hotel owners who had recently refurbished their hotels without a tax break. Now all of a sudden the city was going to, in effect, subsidize Hilton to compete against the other hotels. The city said they were trying to help businesses, and the deal didn't even seem fair to most hotel businessmen."

Thomas Hynes, Cook County assessor, denied the proposed tax break, and the deal died. Ironically, Hilton expanded its hotel on Michigan, which helped facilitate a regeneration of the South Loop.

It now seems that though the activists had won the Hilton battle, they've lost the war. Starting with Byrne and continuing under Washington, subsidies have become a fixed vehicle for downtown development. In one form or another, subsidies have been given to the Civic Opera House, the Chicago Theatre, the Chicago Board of Options Exchange, and, most notably, Presidential Towers, the upscale, high-rise residential complex on West Monroe.

In addition, about 42 percent of nearly $100 million in federal Urban Development Action grants, intended to revitalize depressed areas, has been pumped into the Loop since 1978, according to a report commissioned by the Chicago 1992 Committee.

Planners have insisted from the outset that block 37 could not be developed without some sort of subsidy. "Mayor Washington said, 'Find a way to develop the North Loop without taking from the neighborhoods,'" Hollander said at the Finance Committee hearings. "We came up with TIF [Tax Increment Financing]. That means the North Loop is self-financed. Long after we have pumped this money in, it will generate more money."

In many regards, the philosophy of TIF is not much different from what Byrne had in mind with her proposed Hilton land deal. As with the Hilton deal, the city agreed to acquire the land, then sell it to the developers at a discount. The estimated value of block 37, for instance, is $32.5 million. But the city will sell it to FJV for $12.5 million. (FJV also agrees to donate an additional $4 million for Loop renovation because their project requires the demolition of the McCarthy building, a city landmark.)

In addition, the city will limit the amount of property taxes FJV must pay on the property until the project is completed. That means FJV will probably only pay about half of what the property now generates in taxes.

To purchase the land, the city has borrowed money by issuing 20-year bonds, due in 2008. To pay back the bondholders, the city plans to spend the new tax dollars generated by the redeveloped property. "Right now, block 37 generates about $1.5 million in taxes," explains G.A. Finch, deputy planning commissioner. "That's lower than it should be because it's a blighted block. But when you put that block to its best and highest use of office and retail, well, you're going to generate a greater revenue stream. You're going to raise more in property taxes. And those new property taxes will pay for the public expenditures on the project; the developers will raise the rest.

"We expect the property to soar in value as the development continues. We expect the first phase of development will be complete by 1991, and the taxes will be roughly $840,000. By 1992, the taxes will be at $1.1 million. By 1993 it will go up to $3.6 million. By the year 2000, it will be $15 million.

"All of that extra revenue will be used to repay the bonds. Once the bonds are repaid, the money goes into general revenue funds, and the city is that much better off."

Or, as Hollander said at the Finance Committee meeting to an alderman concerned that the schools could ill afford to sacrifice any money from property taxes, "We are giving our schoolchildren a future on State Street."

But what if State Street is no place to be in the future? What if, for instance, development of block 37 is slowed by strikes, storms, or fluctuations in the money market? Then there would be no new revenue from the block, but the city would still have millions and millions of bonds to repay.

Such delays are unlikely, Finch maintains, given the expertise of the developers. Nonetheless, the First National Bank has guaranteed to issue more bonds in the event of delays. This, of course, would extend the debt on the project past the year 2008, and, as a result, further limit the tax yield from what ought to be prime downtown real estate.

And then there's the matter of lawsuits. Almost certainly some of the original property owners on block 37 will sue, contending that their land was worth more than the city paid them. If the court agrees, they will win rebates that could push the cost of acquisition up by about $12 million.

That will compel the city to issue more bonds. The project will be hard pressed to pay back bondholders on its own. If this is so, the city will have little choice but to finance the deal with money generated from taxes collected on properties outside of block 37. And that means, activists fear, a raid on taxes raised on neighborhood residential property.

"This TIF is a gimmick," says Joe Crutchfield, a member of SON/SOC, a coalition of organizations from the northwest and southwest sides. "It takes 25 years sometimes for the property to come fully on the tax roll. No residential property in the neighborhoods gets breaks like that."

"Most of this criticism is based on speculation," counters Finch. "It's based on the worst-case scenarios. And we don't expect the worst case to happen. First of all, these are some of the most successful developers in the country. They have deep pockets. They plan to raise $400 million to build the project on their own. They want to win.

"Secondly, look at what's happening in the North Loop these days. You have the Leo Burnett office project, you have Elzie Higginbottom's apartment complex, you have the ABC studio rehab: the North Loop is happening!"

Indeed, the Loop in general has undergone a remarkable boom, with nearly $7 billion in rehab and new construction over the last decade. But a lot of this investment sprouted less from demand than from federal tax loopholes (since closed) that sheltered real estate investment. The result is a glut of office space in the Loop, rivaled only by that in the western suburbs. Rents in the Loop are depressed and there is heated competition for tenants.

"In many ways it's like the Hilton deal," says Lyons. "The subsidized acquisition costs will enable the developers to offer concessions on rent. The low rents allow them to take renters from the South Loop, or north of the Chicago River. The point is that there's a limited demand for Loop office space. You move tenants from the north to the south, or the west to the north. It's a shell game. You're not adding new taxes or jobs to the city; you're just shifting people around."

FJV's developers and city planners disagree, but they cannot completely prove their case. If there is a strong demand for North Loop office space, why then does FJV merit a break on acquisition costs? On the other hand, if demand is weak, why build two skyscrapers no one wants?

To answer these questions, proponents have settled on an explanation that seems like a contradiction. "There is a strong demand for office space in the Loop," Michael Tobin, vice-president of Metropolitan Structures, told the Finance Committee. "But there is a large supply. Having marketed the building, I can tell you the situation is not perceived as good today as we think it will be later."

In other words, the FJV project will be, like the Hilton hotel project was meant to be, the flagship development that inspires other developers to build and move to the North Loop. "We're standing on the brink of a State Street renaissance," Hollander told the aldermen.

"These developers [FJV] are like the last cowboys; they're entrepreneurial cowboys," says Finch. "They see a pot of gold, where others see sludge. They're willing to take a chance. We're fortunate to have them."

Lyons, among others, is not so confident. More importantly, he's not so sure the benefits will trickle down to the neighborhoods even if the FJV project is a smashing success. "If this project causes tenants to move to the Loop from Schaumburg, great," says Lyons. "But I wonder if our subsidies only create an artificial demand in the Loop. We may have tax gains on [block 37]. I hope they are not offset by tax losses on other blocks in the Loop, or in the neighborhoods, which could really use such a major investment."

Art accompanying story in printed newspaper (not available in this archive): photo/Bruce Powell.

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