Alberta’s Community Revitalization Levy: Proposed Downtown Edmonton Arena District

This is the third part in a three-part series on Alberta’s CRL.

In the first part of the series, we looked at Alberta’s CRL legislation, identifying how it works and what the process is for creating a new CRL. In the second part of the series, we looked at Alberta’s three existing CRL projects, to get an understanding of how the funding mechanism has been used in the province thus far. Now we’ll look at the proposed downtown Edmonton Arena District, to see how a CRL might be used for that project.

Introduction

I am by no means the first to write about a CRL in relation to the proposed arena. Last month, Andy Grabia of Why Downtown? wrote a popular post on the proposed CRL. The use of a CRL has been a frequently cited potential source of funding since at least August 2009, but it was mentioned long before that actually. Notably, in the City Shaping: Summary Report of the Leadership Committee for a New Sports/Entertainment Facility for Edmonton (PDF) from March 2008, there’s this statement:

There is precedent in Alberta for the use of a community revitalization levy (CRL) for enabling projects such as this.

At the time that statement was made, the Rivers District CRL (the first in Alberta) was less than a year old. The three current CRLs are being used to revitalize large areas, and they are not centered around any specific development like an arena. Only one of them has received full approval and moved on to full implementation. I don’t think it’s fair to say there’s precedent for the use of a CRL to enable the arena project now, and it certainly wasn’t an accurate statement three years ago.

I point this out, because it seems as though that report has formed the basis of many other related decisions in the intervening years. It treats the CRL as if it is a well-known, well-established funding mechanism, which I don’t believe is true. Certainly TIFs have been used elsewhere in North America, but our context here is different.

What’s the potential?

As we saw in part one, there can be significant upside to a CRL, assuming development does occur and property values do rise. We also learned that there are a variety of factors that can affect this.

That same City Shaping report offered some financial estimates on the proposed arena CRL:

We have estimated the potential for $2.5 billion in additional assessment growth representing $20 million in incremental municipal and provincial property tax revenue annually. This estimate was reviewed for reasonableness by the City Assessor.

Back in February, Gary Klassen, GM of Planning & Development at the City of Edmonton, estimated that $1 billion in investment would generate $14 million a year in taxes.

Given that we don’t have another Alberta-based example of a CRL like the one being proposed for the arena, I asked the Katz Group to help me out. Can we really get the economic lift that proponents of the arena suggest? They pointed me in the direction of Columbus, which is the focus of a case study on their website. Nationwide Arena, home of the Columbus Blue Jackets, opened adjacent to the city’s downtown in 2000, in an area that once housed a state prison. A report published in July 2008 by the John Glenn School of Public Affairs found that the Arena District was responsible for stimulating more than $1 billion in investment:

"This is really a model of ways to use an arena to help revitalize downtowns," said Glenn School professor Robert Greenbaum.

The report suggests that the Arena District had a significant impact on jobs in the area:

An increase of more than 50 percent in the number of businesses in the Arena District since 2000. In addition to the Blue Jackets, the district’s 172 businesses include coffee shops, a movie theater and professional service firms. These businesses employed more than 5,000 full- and part-time workers in 2006, and between 2000 and 2006 they generated $1.46 billion in payroll and $6.13 billion in revenue.

And on property values:

Appraised property values in the Arena District increased by 267 percent between 1999 and 2008, compared to a 22 percent increase in property values for the entire downtown area.

I encourage you to read through the report. Of course, the findings are not without dispute. You can read another perspective on Columbus here.

Hypothetical CRL Boundary

Though the City of Edmonton has been working with a conceptual model for the arena CRL, they haven’t shared it publicly. In response to Council’s questions, they did offer some insight, however. The model includes:

  • 300,000 square feet or retail built over 20 years
  • 370,000 square feet of hotel built over 6 years
  • 95,000 square feet of casino built in the first year
  • 1,500,000 square feet of office built over 20 years
  • 1,800,000 square feet of residential built over 10 years

The model assumes natural assessment appreciation of 3% per year, and a 3% increase in municipal and educational taxes per year.

The model suggests that $160 million in incremental taxes could be garnered, $125 million of which could be dedicated to the arena while the remaining $35 million would go to other public infrastructure.

You can download the relevant spreadsheets in PDF here.

As for the conceptual boundary, which also remains private, the following information was shared:

  • The boundary includes the Aurora project, which they estimate could generate $4.1 million in tax revenue
  • The boundary includes a redeveloped casino, which they estimate could generate $0.8 million in tax revenue
  • The boundary includes the EPCOR Tower, which they estimate could generate $5.0 million to $6.8 million in tax revenue

That shows how much more lucrative commercial development like an office tower can be. There’s a risk, however, in that it is quite likely the EPCOR Tower will be completed before a CRL is approved, which means it would generate very little or no lift in property taxes. Remember the baseline assessment is set to December 31 of the year in which the CRL is approved.

I have absolutely no inside information on what the CRL boundary for the proposed arena district might look like, but here’s a hypothetical example:

You can see the proposed Edmonton Arena District in the middle (the dark part), and the red is the hypothetical CRL boundary. Why did I choose that boundary? A few reasons:

  • The hypothetical boundary covers an area of 1.4 square kilometers, which is right in the middle of the three existing CRL boundaries.
  • The hypothetical boundary includes the Aurora project, as well as the EPCOR tower.
  • It highlights a risk, that the CRL might be located adjacent or very close to the Quarters CRL, potentially affecting the success of both projects.

We should learn more about the City’s model and boundary when City Council meets on January 17, 2011.

Is the timeline realistic?

The Oilers’ lease at Rexall Place expires on June 30, 2014, and the Katz Group has said it has no intention of renewing that agreement. That gives the project a deadline of less than four years. As we learned in part one, the ideal process for obtaining a CRL takes roughly two years, and in part two, we found out that only the Rivers District CRL happened that quickly. Mayor Mandel recently suggested a decision could be made by April 2011, which makes the window of time to obtain funding and complete construction more like three years. It just doesn’t seem likely to happen. Here’s the response from Administration when asked about the timeline:

The Katz group has identified that if an arena project goes ahead it will happen concurrently with development of an office tower in the district.  The expected construction window for both the office tower and arena is 18 – 24 months.  This schedule for concurrent development is aggressive.  For comparison, the current  EPCOR office tower project is scheduled to be constructed over 36 months.

It’s certainly possible that a CRL could be approved in the given timeframe, but rezoning, building permits, design, and all the other elements of construction would likely take more time than is available (given the Katz Group’s deadline).

What are the risks?

In Administration’s answers to Council’s questions, they addressed one of the bigger risks of using a CRL to fund the project – the current economy. The answer notes rising office vacancies downtown and declining lease rates, and goes on to say:

A significant component of the Katz Group proposal is the construction of new office and commercial space.  This type of space would contribute considerably to the front ending of a CRL area, however, the current market conditions suggest that there is considerable risk if anchor tenants are not committed to the space before construction.  The Katz group intent is to attract new business to the City that currently does not have a place in the market.  If this is not possible it may result in existing businesses moving from other parts of Edmonton to the new development.

Another answer gave similar information:

A faster assessment lift would occur if the Katz Group was to construct certain developments (i.e. in advance of natural demand) that could increase incremental taxes within the boundary.  Unless new tenants are coming from outside Edmonton that otherwise would not locate here, then these incremental taxes (in advance of natural development) may only reflect a shift in tenants from one area of downtown to the other.

Those answers highlight an issue that Scott Hennig of the Canadian Taxpayers Federation has frequently pointed out – the potential that the resulting development isn’t actually new, and is just a shift from other areas of the city. That would have the side effect of taking taxes that would have been in general revenue and locking them into the CRL. Scott told me:

The only way a new hotel (or bar) will get built next to the arena and not just shift demand is if all of a sudden people’s incomes go up (in aggregate, not just say, construction workers) as a result of the new arena and development and therefore they want to use that money to purchase additional products, or if it can be shown that Edmonton’s population will grow faster as a result of the new development, or if you can increase tourism.

It’s an issue that is certainly worth thinking about. How can you prove that a business located in the area specifically because of the arena? How can you prove it wouldn’t have been built elsewhere in the city were it not for the arena? How can you show that tourism increased as a result? How can you show that the arena caused population to grow faster than it would have normally? All of these things are hypothetical benefits that are difficult to prove in practice.

Scott also made a good comment on demand, in response to a question about the arena potentially inducing a housing development that would not have occurred in Edmonton otherwise:

You can be sure that if there was a demand for additional housing to be built, it would get built. The city didn’t use a CRL in anywhere else in the city and houses, condos, apartment buildings, townhouses and other housing still got built over the past 100 years.

Another risk, of course, is that not enough development takes place over the 20 year timeframe of the CRL, leaving the City burdened with the remaining debt.

Sharing The Risk

Both Mayor Mandel and the Katz Group have repeatedly said they want to negotiate a deal that is fair to all parties involved. More specifically, the Katz Group has said:

We seek a functional partnership with the City and a fair balancing of risk between the parties.  Neither the City nor the Katz Group should bear risk disproportionately.

Could that sharing of risk apply to a CRL? We know that an important part of the plan for a CRL is to outline how any potential shortfall would be covered. By default, the City would have to cover the debt out of general revenues, taking on all the risk and potentially impacting the services it provides to citizens. Perhaps the Katz Group and the City could agree to share that responsibility, something that Administration has confirmed is an option:

An agreement can be attempted to be negotiated between the parties with respect to the issue of a guarantee to cover debt servicing if projected development does not occur in the CRL area.

Paula Simons has noted in the past that a similar deal in San Diego took place, but at the time the Katz Group wasn’t interested in such an arrangement. More recently they have indicated that such an arrangement could be a part of any negotiations with the City.

Sharing the risk could also refer to the resulting ownership of the project. It is important to recognize that a CRL is public money. Mayor Mandel has stated that if public funding was used to build the arena, there would be “big time say by the city and citizens.”

Transparency

I think both the City of Edmonton and the Katz Group have done a poor job of informing constituents about the CRL thus far, and I’d like to see them both address that shortcoming.

On the Katz Group’s Answers page, there’s a question about public investment that states:

The Community Revitalization Levy (CRL) is drawn from the enhanced tax revenue from the developments in and around the district.  The CRL would pay down the city’s loan and then create a revenue stream in perpetuity.

No introduction or link to more information on the CRL. It’s as if “public investment” and “community revitalization levy” are one and the same, whereas the CRL is just one of a variety of public funding options. The City of Edmonton is guilty of jumping the gun as well. The questionnaire that was made available last month included a question about the CRL, without explaining what it is. Handouts were made available at the open houses that took place, but just 300 people attended those – compared to nearly 29,000 responses for the questionnaire. The City has since added a page on the funding model.

The City’s findings from that public consultation reinforce the idea that more education needs to be done. Participants noted that more study on the CRL is required, and that the “concept is very hard to understand.”

I asked Scott Hennig a bunch of questions about the CRL, and one of his comments in response stood out for me:

Unquestionably, the city can spend tax dollars to make certain locations more attractive, or using zoning laws or their land ownership to make certain types of buildings mandatory, but they don’t need a CRL to do that.

I think it’s really important that both the Katz Group and the City of Edmonton are transparent about what the CRL is, what the CRL is not, and how it might be used.

If Council decides a CRL is appropriate, the process of obtaining it needs to be much more open as well – when did you first hear about the Belvedere or Quarters CRL? My guess is not until the discussion about using a CRL for the arena started. That’s unacceptable, given that public consultation is a key component of obtaining a CRL.

Transparency on this issue moving forward is key.

Two Basic Assumptions

Let’s revisit the “two basic assumptions” we identified in part one. Is the arena project worth the risks associated with using a CRL to fund it? Public opinion on this seems mixed. Some people feel that a new arena is unnecessary and will do little to revitalize downtown. Others think the arena is a game-changer, an important catalyst project (as identified by the Capital City Downtown Plan). The truth likely lies somewhere in-between. As for the second assumption – is there a sound expectation that development will occur as a result of the arena? The fear is that we end up with another City Centre debacle, where additional development was promised but never built. The Katz group did not provide specifics, but did try to reassure Council that additional development will take place:

Our dialogue with  our consultants and prospective tenants and partners leaves us with a high level of confidence that we will be able to develop a vibrant entertainment district around the arena. We have had substantive discussions with 6 major hoteliers and the level of interest in placing two hotels in the Arena District is very high. We have nine written Letters of Interest from a variety of international, national and local hospitality and entertainment providers and have had numerous other verbal expressions of interest.  We have also had promising discussions with potential anchor tenants for the proposed office towers.  We are confident that there will be a market within the District for both student residences and condominiums.

Final Thoughts

In this three-part series, we’ve looked at how Alberta’s community revitalization levy legislation came into existence, we’ve examined the impact it can have, and we’ve identified the process that must take place for a CRL to be approved. We also explored the three current CRL projects in the province. Finally, we’ve taken all of that information and applied it to help us understand how a CRL might be used for the proposed downtown Edmonton Arena District. There are opportunities and challenges associated with a CRL for the proposed project, and I think it is clear that there’s a need for more specific information.

The arena project is a moving target of course. We’ll learn much more about the City’s business model framework as well as their thoughts on the use of a CRL at the January 17, 2011 City Council meeting.

Alberta’s Community Revitalization Levy:

  1. Introduction
  2. Rivers District, Belvedere, The Quarters
  3. Proposed Downtown Edmonton Arena District