Bob Gunning bought a brick town home in the Mangêt development two years ago, attracted by the stylish homes near Marietta’s town square and the promise of blocks of similar renewal backed by the city.
The developer cleared 18 acres of aging bungalows in a crumbling neighborhood and built 34 homes, town homes and condos before the real estate crash halted construction. About two-thirds of the development remains empty, the limits of growth demarcated by blue-green sewer connections sticking up from muddy lots.
When the economy tanked, it froze Marietta’s dream of redeveloped pricey neighborhoods and the increased taxes they could generate. Now, the Marietta Redevelopment Corp., charged with guiding the plan, may change its plans.
“We are concerned that they are going to put something cheaper in here, and the original homeowners’ property values are going to go down,” Gunning said.
Marietta’s reputation is also on the line, said Daniel Merriman, a professor of public administration and an expert on tax allocation districts at the University of Illinois at Chicago.
When cities back a plan that stalls, “they have really visible evidence that they can’t sustain growth, and that is going to turn away potential residents and businesses,” he said.
If tax values in the redevelopment district fall below the level they were when the redevelopment began, the city could be on the hook to pay redevelopment costs. That has not happened, but values are on the way down.
To make Mangêt rise, Marietta used a law that allows cities or quasi-governmental agencies to designate a development district and sell bonds to pay for renewal. It builds new infrastructure and buys dilapidated lots to lure private development, which makes tax values go up. But the city freezes its take of taxes at the pre-development level. The increased increment of taxes above the frozen level are used by the city or development agency to pay back the bonds. School boards can also participate in the redevelopment by freezing their take of taxes at the pre-development level. Marietta did that.
More than 20 of these areas, called tax allocation districts, are set up across metro Atlanta. One worked like a charm at Atlantic Station in Midtown. The value of property there has gone up 6,000 percent since the tax allocation district — or TAD — was put in place.
During Atlanta’s boom years, builders and governments touted TADs as the market-driven savior of shabby strip centers, dilapidated housing and struggling downtowns. But with few exceptions, TADs throughout metro Atlanta have stalled with the area’s growth.
Without growth, the taxes level off or drop, which can create financial difficulties. Underperforming TADs in Kansas City left the city paying more than $6 million out of its general funds in 1999, according to published reports.
While property values in Marietta’s tax districts are still above where they were when the TADs began, they are decreasing. That has critics worried.
Larry Wills, a retired environmental consultant and business manager in Marietta, is concerned about the financial implications.
“The county has to reassess property sitting there vacant, and they are going to have to drop the property tax on them again,” he said.
Marietta sold $8.5 million in bonds to begin work in one of the city’s three TADs.
The Marietta Redevelopment Corp.’s 2009 annual report says property values in the districts started at $355 million and have been worth as much as $478 million. But values declined more than $11 million in 2009 to $466 million.
The city paid its annual $851,000 bond payment last December and still has money in reserve, said Reggie Taylor, the corporation’s executive director.
Banks have foreclosed on some of the TAD property bought by developers.
“Banks are still going to pay the taxes, and we are still going to collect. We would have liked to see the buildings get built, but this is the world we are operating in. Some of the things got built and some didn’t,” Taylor said.
That scene is being played out in TADs throughout metro Atlanta.
Woodstock put a TAD in place, but sold less than $300,000 in bonds before the market flattened. It is using the money for downtown traffic and pedestrian improvements.
In Smyrna, two TAD developments are frozen: the Jonquil Plaza strip center and Belmont Plaza, an aging former shopping center cleared to make way for a mixed-use development. The city has not issued bonds.
Officials in Gwinnett County, which set up five TADs, and DeKalb County, which has three, are waiting for the real-estate market to turn before kick-starting their redevelopment.
Kevork Khrimian, a vice president and senior analyst at Moody’s, which assesses credit risks, said the decline in growth has generally reduced the amount of taxes available to pay back bonds.
“To the extent we have had investment gradings, we have had some downgrades,” Khrimian said. He has not seen any defaults in the bonds they graded.
TADs are typically set up very conservatively in Georgia, said John Matthews, a visiting professor of policy and planning at Georgia Tech and Georgia State University. He is unaware of any defaults.
Investors in TAD bonds take the risk of a default, but cities’ bond ratings could suffer and they could pay higher interest rates if the bonds go under. Cities are seen as having a “moral” duty to guarantee the bonds, he said.
Despite the slow market, some TADs are showing signs of promise. Within the next few months, Clayton County officials are expected to announce the construction of the National Museum of Commercial Aviation and a mix of commercial space in a TAD near Hartsfield-Jackson International Airport, said Grant Wainscott, the county’s economic development director.
Atlanta has the most active TADs, with five under way, including its crown jewel: Atlantic Station. The city sold $161 million in bonds to finance cleaning and preparing the former brownfield, which sprouted with homes, offices, a hotel and retail space. Atlantic Station’s assessed property value rose from $7 million in 1999 to $452 million in 2008.
Other active Atlanta TADs are in troubled neighborhoods, such as Vine City near the Georgia Dome and Auburn Avenue. Atlanta’s sprawling Beltline tax district is being developed along unused railroad tracks. The city has sold $550 million in bonds since 2001 to support TADs. Atlanta also has five undeveloped TADs on the books. Between 2001 and 2009, the city’s TADs had a 30 percent growth rate and generated more than $3 billion in new investments, according to annual reports.
Enough growth has taken place to cover the cost of repaying the bonds, said Sonya Moste, spokeswoman for the Atlanta Development Authority. Moste is not sure how slowing development and falling property values are going to affect tax revenues.
Governments should be OK unless property values fall lower than what they were when the TADs started and stay there for several years, said Ken Bleakly of Atlanta’s Bleakly Advisory Group, which advises cities on setting up TADs.
“The challenge of the recession right now is how long it has gone on,” he said. “Developers just can’t get financing,” he said.