In the summer of 2019, Cleveland’s Office of Community Development and Equitable Community Development Working Group commissioned a study (the “Study”) to determine the historical use of the City’s tax break program (the “Program”), as well as the benefits of the Program the city offers over time and what changes could be made to the program to improve housing and investment equity across the city.
The study, conducted by the Reinvestment Fund, PFM, the Greater Ohio Policy Center, Neighborhood Connections and Leverage Point Development, focused on these three key questions – historic use, value to the city and changes in recommendations.
After six months of analysis, the study came to several key conclusions.
ECONOMIC ACTIVITY STRENGTHENS
First, the program has spurred significant economic activity in the city. Of the cuts examined, the study found that by 2018, 59% had returned to the city’s tax lists. New tax revenue from the program has brought $2.2 million to the city, $7.7 million to the Cleveland Metropolitan School District and $2.3 million to Cuyahoga County. Populations are growing in several Cleveland boroughs, public and private social programs have returned to various boroughs, and positive activities are attracting new community members both within and outside the area.
Ultimately, while new tax revenue is a sign that the city’s mitigation program is working from the standpoint of economic benefit, it’s also a sign that the program is working in terms of its original intent: to revitalize the housing stock and build new housing, to accommodate people who contribute to social and economic benefits for the greater good. On a practical level, while evidence of the economic rewards of urban development in Cleveland continues to mount, mitigation is needed in Cleveland to offset the higher costs of urban development compared to suburban or rural greenfield development. For example, most urban developments have higher land acquisition costs, permitting costs, zoning and other permissions and review times, legacy environmental costs, costs associated with small lot design, and higher overall construction cost structures, among others.
ECONOMIC ACTIVITY IN CERTAIN NEIGHBORHOODS INCREASINGLY ISOLATED
Second, while the program has spurred significant economic activity in the city, these activities have become increasingly isolated in certain neighborhoods and increasingly focused on a smaller variety of projects. In particular, the program has been believed to advance large multifamily development projects in areas within or immediately adjacent to downtown — such as Ohio City, Tremont, Detroit-Shoreway, and University Circle — while other inner-ring neighborhoods have seen little or no investment through the program. The areas where new residential areas have been developed have several positive neighborhood factors to attract residents such as and easy access to transport networks. As positive neighborhood factors accumulate in the first nodal points, the attractiveness of the development should carry over to adjacent areas as new businesses and residents are attracted to communities and existing businesses and residents see value in investing in or acquiring existing businesses or real estate receive.
NO CONSISTENT LINK BETWEEN PROGRAM AND TRANSFER
Third, while the program was often the subject of concerns that the development it was designed to spur would displace low-income residents from neighborhoods undergoing regeneration, the study found no consistent association between the program and displacement. The study found no significant impact on total sales transactions, home sales prices, foreclosures, or increased property tax charges. At the national level, the interplay of supply and demand continues to strongly influence rents and home prices, and the issue has been on policymakers’ radar for decades. Areas of the country that have experienced greater and more sustainable development that caused perceived displacement problems have addressed issues in ways that go beyond property tax reduction changes.
In addition to these findings, the study found that local institutions, monitors and residents recognize the value of the program but want a balance between that value and protecting current residents from displacement. The shift is a function of the change over time. Neighborhood households change over time due to a variety of factors including expansion and contraction, employment and retirement, among others. As the status of a household changes over time, the housing needs of the household also change. A household consisting of a young family with two parents and two children has different spatial living needs than an empty nest household shortly before retirement age. While some households choose to remain in place for the duration of their existence, it is common for households to move to an apartment that best suits their needs or tastes. If there is an attractive housing stock in a district that meets all needs, displacement – on a district scale – is less likely. To the extent that the mitigation program incentivizes housing development, the mitigation program itself can prevent or mitigate the impact of displacement at the neighborhood level. However, preventing evictions at the household level would likely require a much greater level of community and government involvement and costs due to the collective progression of household changes and their causes. A property tax reduction program alone is not ideally suited to counteracting displacements associated with household transitions. Accordingly, a property tax cut program should not be designed to address household displacement, as that is not the sole tool for the job. If the Cleveland mitigation program, as it exists for new and newly renovated housing, does not meet the city’s wide range of goals, including preventing evictions, the mitigation program may be expanded or modified to provide incentives for existing households to to invest in their current properties at less intense level and persist? Tax breaks combined with other measures by local government and non-local government actors are likely to have a greater likelihood of success in preventing crowding at the household level than tax breaks alone.
The overall results of the study justified their recommendations for changing the program to ensure broader and more equitable investment and economic development across the city while protecting current residents. Many of the study’s recommendations eventually flowed into the final update of the program.
One recommendation from the study, which garnered near-universal support and was included in the final Cleveland ordinance, was to continue the program, which was tied to green building standards. These standards, as provided in Cleveland’s Green Building Standard Handbook, cover requirements such as building dwellings
- Affordable to operate and maintain
- energy efficient
- Barrier-free and transit-oriented
- Reduce rainwater runoff
- Provide green space for community members
While compliance with such standards can increase construction and renovation costs, green building standards provide long-term cost savings, improve the quality of existing communities, and attract new residents to the city. Developed properties with green building certification tend to achieve higher rents and sales prices because they are more attractive to owners, tenants and investors. With the increasing presence of environmental, social and governance (ESG) criteria used by investment funds, achieving the green building standard is a critical factor for developers looking for capital.
Another key recommendation from the study is to limit single-family home discounts to $300,000. Such a cap would continue to benefit the vast majority of single-family homes in the city — 99% of which sold below that threshold in 2017 and 2018 — while limiting the city’s tax losses on more valuable properties. Ultimately, the city adopted a version of this recommendation, capping the reduction at $350,000 for single-family homes in “market price” zones of the city and $450,000 for single-family homes in “intermediate” or “opportunity” zones.
The final key recommendation from the study, which was included in the revised program, is the use of Community Benefit Agreements (CBAs) for certain new developments. These CBAs would require builders to reserve a certain percentage of units in multifamily buildings for affordable housing or pay a fee for each unit that fails to meet the requirement. For multi-family development in the city’s market zones, 25% of the units must be reserved for affordable housing, 15% in the mid-market zones, and 5% in the opportunity zones. The construction and operation of affordable housing are associated with various ancillary costs. Changing the incentive structure for mitigation may not be enough to drive the development that policymakers seek. Continuing dialogue between all community stakeholders to raise awareness of opportunities and problems to enable the greatest potential for problem solving and shared success. Some communities have turned to community-based development organizations to help mitigate the impact of displacement.
This article is intended to be the first in a series on the Cleveland Property Tax Reduction Program. KJK will continue to monitor developments on the Cleveland property tax reduction program.