The Billings City Council will likely have to approve One Big Sky Center twice.
The council, which will change leadership in January, would approve any plans for such a large building project in downtown Billings.
But developers would also need the council's approval if any public financing for the project was granted.
Yet, a recent Gazette analysis of the Downtown TIF district reveals that most public funds are already tied up, and large funding won't be available for at least another four — maybe five — years. That could come as a surprise to council members, developers and some leaders.
Tax-increment financing, or TIF, is public money collected from property taxes used specifically for development and property improvement. The concept is straightforward: Reinvesting in property will encourage development and raise property values, thereby ultimately generating more taxes while fueling the local economy. However, TIF funding is limited to the taxes generated by the increase in property value in the district, which was created by the city council to revitalize blighted areas. For the TIF district to have funds, the taxable value of the district must increase.
Critics of TIF argue that it cannot be proven that TIF money actually pays for itself with increasing property values, which would likely rise during the course of time anyway. Moreover, they argue, developers who want to build will be determined to make a good business decision, regardless of whether TIF funding is available.
When the first set of developers started discussions with the city council, they pegged the cost of One Big Sky Center at as much as $165 million, with $35 million coming from the Downtown TIF district.
That number was aggressive — maybe even shocking to some — because it seemed to exceed the district's funding capacity, and eclipsed the largest project it had ever done.
Two recent factors (a significant decrease in downtown property values coupled with other large TIF grants) have meant the Downtown TIF district has less than $1 million per year to spend, significantly short of what would be needed to fund $25 million to $35 million in TIF funding for One Big Sky Center.
How much money? And when?
One Big Sky Center may hinge on two variables: funding and timing.
When Bob Dunn, president of Hammes Companies of Madison, Wisconsin, spoke to the City Council on Sept. 26, he said it was too early to know if the original developers' plan of $35 million in TIF funding was too much, too little, or just right.
Since then, city leaders, including Billings Mayor-elect Bill Cole, have traveled to Wisconsin to see other Hammes projects. The concept, which will be presented more fully to the city council Monday night, has also changed from a large skyscraper to a district, or group of buildings and venues.
Dunn spoke to The Gazette this week and said because the project is still in a conceptual stage, it's impossible to know how much public funding may be needed. However, it was equally impossible to imagine the project without public funding, Dunn said.
"There must be public financing. That supports the private economic investment there," Dunn said. "There has to be a public-private partnership."
While public dollars in downtown may be tied up for years, that may not be a deal breaker for his development, Dunn and others said. The developer said that public dollars are a necessity because it shows private investors that a city believes enough in a project to invest in it.
Dunn believes that most of 2018 will be used for planning and developing a vision for the project. He said that completing an entire district development may take 10 to 15 years.
That's important, said Downtown Billings Alliance Executive Director Lisa Harmon, because that means TIF financing doesn't have to be in place immediately. She also pointed out that TIF funding isn't given until a project is complete, and documentation for the expenses are in hand — meaning that public funds won't be distributed until parts of One Big Sky are complete. That would allow the Downtown TIF district to finish other commitments that were led by former Downtown Billings Alliance Development Director Greg Krueger, who retired on Thursday.
When developers first floated the idea of $35 million in TIF funding, it was a surprising number to many.
Local financial expert and former state commerce department director Gary Buchanan was asked by the city to help it perform due diligence on the original developers. In an Oct. 24, 2016 letter to the city council, he expressed concern that the project asked too little from the developers and too much from the public. He also expressed concern that such a huge commitment of TIF funding would essentially shut out other possible projects in the district because most of the funding would go to One Big Sky.
Harmon said that while a large portion of funding being channeled to One Big Sky could shut out other projects, she believes the Downtown TIF district would work to set aside even a small amount — maybe $250,000 — for other projects.
Complicating matters, the district got unexpected bad news from the state this year. The state Department of Revenue had reassessed property values, and changed the way it classified one large piece of property, the AT&T building. In 2017, the taxable value for the district dropped 17 percent. That has an immediate impact on the Downtown TIF district because what it can grant is based on property values. A 17 percent loss means a corollary loss in funding ability.
City of Billings Interim Finance Director Andy Zoeller estimates the Downtown TIF has less than $1 million per year to grant for the next four to five years. Using those numbers, the Downtown TIF would not be able to commit more than $3 million to $5 million total during that time, far short of the $35 million that was discussed by developers earlier in the year.
"There really can't be anything drastic or wild until Fiscal Year 2021-2022," Zoeller said. "If developers want to delay the project until then for more TIF funding, then maybe something larger would be a possibility."
Harmon is not concerned that the dip in values and lack of available funding will scare off Hammes or other developers.
"They're willing to go that road with us," Harmon said. "Nothing is even shovel ready — we don't even have a design, so this is a long process."
TIFs and what-ifs
Harmon believes that by the time developers are lined up, projects are approved and construction is completed, the finish date for One Big Sky is years away, which would line up well when more TIF funding would become available.
She also said that the recent 17 percent drop in property values in the district — and the corresponding drop in funding — is a one-time anomaly because of a tax decision by the Montana Department of Revenue. In the long-term, she believes property values will rebound and that the TIF's capacity for funding will grow with it.
Harmon also believes that the redevelopment of downtown through the One Big Sky project, including all the businesses that will be helped because of it, will offset such a big commitment of TIF funding. In other words, the TIF will pay for itself.
However, the ability to commit as much as $35 million may be basing the numbers on the best-case scenarios, Zoeller said.
The TIF district's ability to commit funding is based on several criteria, Zoeller said. It cannot simply borrow as much as it wants.
The Department of Revenue will estimate what the new property or improvements, like One Big Sky, are worth and a bond company will determine the bonding capacity for the district.
Bonding for as much as $35 million exceeds what the Downtown TIF district could do now. Before the recent drop in property values, the TIF had between $18 million and $20 million in bonding capacity. Now that number would likely be closer to $16 million, less than half of the $35 million originally discussed, and well short of even $25 million, another number floated by developers.
In order for the Downtown TIF district to be able to commit to as much as $35 million, the state would have to increase the value of the property, and a bond-rating company would have to give its approval on the higher value — both best-case scenarios.
"Yes, we haven't done anything on this scale before, and we've never seen something of this magnitude," Harmon said. "But this is something we need to have to compete. Look at Missoula, they're already developing. So it's going to be something we're going to have to work through."
Buchanan, who works with bonds daily, is concerned that because the Downtown TIF district is run through the DBA that few people know about the drop in property values or how much funding has already been tied up by recent grants. Because of that, city council members, the developers and other business groups don't know how little funding is available, Buchanan said.
"It goes back to due diligence," Buchanan said.
The DBA receives more than $250,000 in TIF money annually to administer the funds, including developing projects. While the council has final approval for how the TIF funds are spent, it may not understand the Downtown district is nearing its capacity — a condition that is unlikely to change for years.
"(The Downtown TIF) district has lacked the financial discipline," Buchanan said.
He suggested moving the Downtown TIF district under the auspices of the city-county planning department, like Billings' other TIF districts, which he suggested may also save money.
"That way the city could impose the same financial discipline it puts on the others," Buchanan said, referring to the East Billings Urban Renewal District and the South Billings Boulevard District. Those districts, he noted, saw property values increase 25 and 24 percent respectively, according to Department of Revenue statistics.
With Krueger gone, it would also be the perfect time to make the transition, Buchanan said.
Harmon defends her organization, saying that in a short time it has completed more than 285 projects in downtown.
Buchanan worries that since no one has challenged the TIF numbers being tossed around, the developers and the council may not even know about the limited capacity. Moreover, as the city council hires a new administrator, that new leader may be faced with helping to address the project.
"It's important that the city manager should know what little bonding authority is left," Buchanan said.
Even more, Buchanan worries about local businesses if TIF financing isn't there, and the project falls through. A number of local businesses have been buying property and preparing for the project, believing that it was more of a certainty because funding appeared to be solid.
"People make investment decisions based on these plans," Buchanan said. " … they made these decisions around something that was so large that when things fall apart, who it really ends up hurting is the local business folks who have bought or sold property."