District Improvement Financing (DIF)

What is it? Click here for an explantion.

Here is my explanation of DIF. Cities and Towns are given money (Bonds) for infrastructure improvements to lure businesses to expand the tax base. The theory is that without these infrastructue improvements, the project would not be feasible for the developer.

The City or Town must then prepare a plan showing how once the infrastructure is done and the developer finishes their project, the increased tax revenues will pay off the bond. In other words, if all goes well, the bonds are paid by new revenues from the project thus costing the underlying City or Town nothing, while expanding tax base. Make no mistake about it, however, the City or Town must pay back the bond, even if there is no increased tax revenues so there is RISK.

Here is analogy. Assume you have a business, but decide to build an addition that will cost $200,000 or $2,000 per month for 10 years. You build the addition and your profits go up $2,000 per month. Theoretically the $200,000 loan cost you nothing, since your profits went up and eventually the business will be more profitable when the debt is paid back. There is RISK to the business-owner. If the business does not increase with the addition, the owner still has to pay back the $200,000.

Just like the business who takes out a $200,000 note, there is risk for the City of Worcester with District Improvement Financing, but it is to the tune of $64,000,000. Originally the Commonwealth required that the underlying project had to have 300,000 square feet leased. Why? The Commonwealth wants to make sure that there will be additional tax revenues to pay the bond. This week I read the Commonwealth has dropped this requirement to 140,000 of square feet. This concerns me. Where will the increased tax revenues come from to pay some 64,000,000 in DIF bonds if there is only a commitment of 140,000 square feet to be leased?

Here is a real good summary of the project, click here. Bottom line is we need alot of increased taxes from this district and new revenues from the parking garage to pay back 64,000,000 in bonds. If we do not come up with the additional revenues, the payments still need to be made from the General Fund.

City Square is very important to the future of downtown, but do we not want to be in the real estate speculation business? I think we are taking a big business taking on this debt not having at least 300,000 square feet (as originally planned) in a good market. Now that the real estate market has turned, we are willing take this risk with less commitments?

Reminds me building a train station without parking? Seriously we need to think twice about reducing the initial development requirements, especially when we are on the hook for $64,000,000.