City of Cleveland Property Tax Reduction: The Study, Key Findings and Recommendations | Kohrman Jackson & Krantz LLP
In the summer of 2019, the Cleveland Office of Community Development and the Equitable Community Development Task Force commissioned a study (the “Study”) to identify historical use of the tax abatement program (the “Program”), as well as the benefits the Program provides to the City 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 recommendation.
After six months of analysis, the study reached several key conclusions.
ECONOMIC ACTIVITY STRENGTHENS
First, the program has generated significant economic activity in the city. Of the abatement examined, the study found that in 2018, 59% returned to City tax rolls. New tax revenue from the program provided $2.2 million to the city, $7.7 million to the Cleveland Metropolitan School District, and $2.3 million to Cuyahoga County. Several Cleveland neighborhood populations are growing, public and private social programming has returned to various neighborhoods, and positive activity is attracting new community members from inside and outside the area.
While the new tax revenue is a sign that the City’s reduction program is working from an economic benefits perspective, it’s also ultimately a sign that the program is working in relation to its original purpose: to revitalize the park. housing and build new housing to house people who contribute social and economic benefits for the general good of the community. On a practical level, as the evidence for the economic reward of Cleveland’s urban development continues to grow, in Cleveland the discount is needed to offset the higher cost of an urban development compared to developing pristine or rural areas. For example, most urban developments have higher site acquisition costs, permits, zoning costs and other rights and review times, costs of inherited environmental conditions, costs related to design of smaller sites and higher overall construction cost structures, among other elements.
AN INCREASINGLY ISOLATED ECONOMIC ACTIVITY IN SPECIFIC NEIGHBORHOODS
Second, although the program has resulted in substantial economic activity in the city, this activity has become increasingly isolated in specific neighborhoods and increasingly focused on a smaller variety of projects. Specifically, the program was seen as driving large multi-family developments in or immediately adjacent to downtown areas such as Ohio City, Tremont, Detroit-Shoreway and University Circle, while others Inner Ring neighborhoods have seen little or no investment under the Program. Areas that have seen new residential development have implemented several positive neighborhood factors to attract residents, such as: proximity to complementary land uses such as parks, trails, walkable neighborhood shopping districts , events and programs of private or public activities, major employers and and easy access to transport networks. As positive neighborhood factors build up in initial nodes, the pull of development is expected to transfer to adjacent areas as new businesses and residents become attracted to existing communities and businesses. and that residents see value in investing in or maintaining existing businesses or properties.
NO CONSISTENT LINK BETWEEN THE PROGRAM AND THE DISPLACEMENT
Third, although the program has often been the subject of concerns that the development it aims to stimulate will displace low-income members from neighborhoods being redeveloped, the study found no consistent link between the program and displacement. The study did not identify a significant impact on overall sales transactions, home sale prices, foreclosure activity, or increased property tax burdens. At the national level, the interaction between supply and demand continues to strongly influence rents and house prices and the issue has been on the radar of policy makers for decades. The regions of the country which have experienced heavier and more sustained development creating movement problems addressed the issues in a way other than changes to the property tax abatement.
In addition to these findings, the study identified that local institutions, observers and residents recognize the value of the program but want a balance between this value and the protection of current residents from displacement. The displacement is a function of the evolution over time. Households within neighborhoods change over time due to a myriad of factors such as expansion and contraction, employment and retirement, among others. As a household’s status changes over time, its housing needs also change. A household consisting of a young family with two parents and two children has different spatial housing needs than a household with an empty nest close to retirement age. Although some households may choose to remain in place for the duration of their existence, it is common for households to move to accommodation that best suits their needs or tastes. If there is an attractive housing stock in a neighborhood suitable for all needs, displacement – on a neighborhood scale – is less likely to occur. To the extent that the reduction program encourages housing development, the reduction program itself can prevent or mitigate the impacts of displacement at the neighborhood level. However, preventing displacement at the household level would likely require a much higher level of community and government involvement and cost due to the common progression of household changes and their causes. A property tax abatement program alone is not ideal for dealing with displacement related to household changes. Therefore, a property tax abatement program should not be calibrated to deal with household displacement as it is not the only tool for the job. If Cleveland’s reduction program, as it exists for new and newly rehabilitated housing, is not accomplishing the city’s wide range of goals, including displacement prevention, perhaps the reduction program can be extended or modified to incentivize on-site households to invest in their current properties at less intensive levels and stay in place? The tax relief associated with other forms of action by local authorities and actors beyond local government is likely to have a greater likelihood of success in preventing displacement at the household level than tax reduction alone.
The study’s overall findings informed its recommendations to modify the program to provide broader and more equitable investment and economic development across the city while protecting current residents. Many of the study’s recommendations were eventually incorporated into the final program update.
One recommendation from the study that received near-universal support and was incorporated into Cleveland’s final ordinance was the continuation of the green building standards program. These standards, as set out in Cleveland’s Green Building Standard Handbook, include requirements such as building homes that
- Affordable to operate and maintain
- Low consumption
- Accessible and transit-oriented
- Reduce stormwater runoff
- Provide green spaces for community members
While meeting these standards can increase the cost of construction and renovation, green building standards save long-term savings, improve the quality of existing communities, and attract new residents to the city. Properties developed with green building certifications tend to achieve increase in rents and selling prices due to their increased appeal to landlords, tenants and investors. Compliance with green building standards is a critical factor for developers seeking capital to consider given the increased presence of environmental, social and governance (ESG) criteria used by investment funds.
Another of the study’s key recommendations is to cap abatements for single-family homes at $300,000. Such a cap would continue to benefit the vast majority of single-family residences in the City – 99% of which sold below this threshold in 2017 and 2018 – while limiting the City’s tax losses on higher value properties. Ultimately, the City adopted a version of this recommendation, capping the abatement at $350,000 for single-family dwellings in the City’s “Market Rate” zones, and $450,000 for single-family dwellings in the “Intermediate” or “Opportunity” zones.
The final major recommendation from the study that is incorporated into the revised program is the use of Community Benefit Agreements (CBAs) for certain new developments. These CBAs would require builders to set aside a certain percentage of units in multi-family developments as affordable housing or pay a fee for each unit that does not meet the requirement. For multi-family development in the city’s market rate areas, 25% of units must be set aside for affordable housing, along with 15% in mid-market areas and 5% in opportunity areas. The development and operation of affordable housing development is subject to various additional charges. Changing the incentive structure for reduction may not be enough to drive the development targeted by policy makers. Continue dialogue among all community stakeholders to increase awareness of opportunities and issues to enable the greatest potential for problem solving and shared success. Some communities have turned to community development organizations as vehicles to mitigate the impacts of displacement.
This article is intended to be the first in a series on Cleveland’s property tax reduction program. KJK will continue to monitor the progress of Cleveland’s property tax abatement program.