Are We Paying Some Developers to Develop Less?
Last week the Post-Dispatch reported on a proposed $130 million luxury tower in the Central West End, to be named "One Hundred," that if built would be among the tallest residential buildings in the state, vaulting 36 stories and touting a modern design that will certainly stand out as residents leave nearby Forest Park. But one thing sticks out in the story about the project: it's gotten larger, thanks to fewer tax incentives.
The story begins like so many tales of tax incentives. The building's developers had been expecting taxpayer help with the project, and indeed the project appears set to receive a 15-year tax abatement—a "95 percent tax abatement for 10 years and 50 percent tax abatement for five years." As reported, that subsidy will account for about 8% of the project, translating into a tax incentive of around $10 million. That's serious money.
That abatement, however, was actually less than what the developers asked for, which led to this remarkable revelation in the St. Louis Post-Dispatch's report on the building (emphasis mine):
Mac Properties initially sought 20 years of full tax abatement, officials said. Pushback by city officials prompted the developer to increase One Hundred’s height by seven floors to accommodate about 50 more apartments and spread out the project’s cost, Roddy said.
To repeat: the project is set to receive fewer incentives than planned, and to make the project work, the developer actually increased the size of the building.
We have often talked about the risk that's put on taxpayers when marginal development projects are underwritten by the public, but the story of the One Hundred building shows another risk we haven't talked about at length: that taxpayers could also be subsidizing the return on investment of private actors to the point that those actors settle on smaller, less risky projects. If a developer can make the same amount of money filling 250 rooms with a subsidy as 300 rooms with a smaller subsidy, a developer would do so. The former is less risky and the return is going to be about the same.
In practice, then, taxpayers may actually be paying some developers to develop less. Maybe it's time not only to emphasize the inequity of putting development risk on the public, but also to start talking about the potential of these subsidies to actively damage the state's growth potential.