Kentucky economic development officials are curbing the amount of state tax incentives to a city and state program that has repaid Lexington developers $9.4 million in tax rebates for infrastructure improvements over the past several years.
On Thursday, the board of the Kentucky Economic Development Finance Authority gave final approval to two new tax increment finance districts in Lexington: the Fountains at Palomar and the Lexington Center Corporation, which runs Rupp Arena and the convention center.
Both projects received less than what they asked for in state tax rebates.
Tax increment financing districts were originally designed to spur investment in blighted areas. Developers that pay for infrastructure in a district — such as sewer upgrades, roads, sidewalk and parking garages —can recoup some of those costs by receiving a portion of new taxes generated from the improvements.
Under an agreement approved Thursday, the Fountains at Palomar, a proposed Webb and Greer companies shopping plaza with a hotel, restaurant and retail at Man O War and Harrrodsburg Road, will receive up to $634,000 in state property taxes over 20 years in exchange for sewer and stormwater upgrades the city would have spent taxpayer dollars to do.
That’s on top of the up to $3.6 million in local property and payroll tax rebates previously approved by the city. The project had applied for $800,000 in state tax rebates over 20 years, according to its TIF application with the city. The Fountains at Palomar must spend a minimum of $10 million to receive city and state tax rebates.
The Lexington Center asked for up to $90 million in state tax incentives but was approved for less than half that —$41 million over 30 years. To get any taxes back, Lexington Center must spend at least $200 million. The qualifying infrastructure expenses are only for the parking garage - which is projected to cost $98 million. That number includes financing costs.
That TIF district includes the current convention center expansion, Rupp Arena improvements, the still-under-construction Krikorian Theater complex, Town Branch Commons, a proposed parking garage, retail and restaurant space.
The state can give up to 80 percent of the new taxes generated from the project. Instead, it only pledged 40 percent of those taxes for the Lexington Center, according to state documents.
The state also did not give the full state tax rebate to another recent Lexington TIF application — the University of Kentucky Coldstream Research Park.
UK had requested $16 million in taxes rebated to help pay for infrastructure improvements to build a new hotel, multifamily housing, retail space, offices and a laboratory at the 735-acre research park. It was approved for $4.6 million from the state economic development officials in March.
Brandon Mattingly, a spokesman for the Kentucky Cabinet for Economic Development, said the decline in state participation in TIF districts is recent but driven by poor performance. To date, the state has given either preliminary or final approval to 35 TIF districts statewide, according to economic development cabinet numbers.
“In the past, some of those projects frankly did not work out,” Mattingly said. “I think that’s the percentage you are going to see going forward.”
Some high-profile TIF districts that have struggled include a Louisville TIF project for the KFC Yum Center. An audit of its finances showed it had grossly miscalculated how much new taxes the project would generate.
As the state curbs the amount it is willing to rebate to developers, the city of Lexington continues to pledge the full amount — 80 percent of new city property and payroll taxes generated from the project.
For example, the Lexington Center project could receive up to $11.6 million in local tax rebates over 20 years under an agreement passed by the Lexinton-Fayette Urban County Council in 2018. That’s the full amount it could receive. In addition, the city borrowed $20 million to help pay for the Lexington Convention Center expansion.
Kevin Atkins, chief development officer for Lexington, said Mayor Linda Gorton is looking at whether the city should continue to offer the tax incentive given the state’s decision to decrease its participation.
“The mayor thinks we need to do a deep look at how the TIF program is working ,” Atkins said.
State economic development officials have warned Lexington that it will no longer offer payroll and state sales tax rebates for Lexington tax increment financing districts going forward unless it results in net new revenue gains to the state, said Wes Holbrook, a senior official with the city’s department of finance
“The state has told us we are TIF(ed) out,” Holbrook told a council committee this week.
“We have nine TIF districts. That’s more than any other city in the state but Louisville,” Holbrook said.
The laws governing tax increment financing districts say that for the state to offer rebates for all state taxes including payroll and sales taxes, the jobs must be new to Kentucky or a new revenue stream, Holbrook told the council’s Budget, Finance and Economic Development Committee on Tuesday.
“That requirement is more challenging for Lexington because we are in the center of the state,” Holbrook said. Border cities such as Louisville, Owensboro and even Bowling Green can attract more out-of-state jobs and companies, he said.
Mattingly said the type of state taxes eligible for TIF projects depends on the type of TIF project. For example, the Fountains at Palomar only qualified for property tax rebates. The convention center project is called a signature TIF project. It qualified for rebates for all state taxes, Mattingly said.
The state employs a consultant that estimates the potential new taxes generated from a project. It’s the consultant that recommends the level of state participation, according to TIF documents.
As of Dec. 31, 2018, six Lexington TIF districts have received a total of $9.4 million in state and local taxes, according to data the city released this week. The Summit at Fritz Farm, an upscale restaurant and retail shopping plaza on Nicholasville Road, has received the most at $6.8 million. The vast majority of that total,$6.4 million, is from the state.
Other TIF districts that have spent the minimum amount required to receive tax dollars back: 21c Hotel, City Center, Midland and Third Avenue, Red Mile and the former Turfland Mall.
In total, those six TIF districts have received or are scheduled to receive more than $2.5 million in city taxes.
Other TIF districts that have been approved but have not spent the minimum needed to receive money back include UK Coldstream Research Park, the Lexington Center and the Fountains At Palomar, the three most recently approved TIF districts.