Module 6 HW - 8 Total questions on managerial economics

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  • Using the annual payroll estimate of $150,000 and the financial positions in Exhibits 6 and 7, what will be the monthly rents in the proposed development? Are these calculations reasonable?
  • Cincinnati has a proportional income tax of 2.1%, for both residents and workers in the City. Without considering inflation, what amount of payroll would John Blatchford need to create in order for Cincinnati to break-even on the CRA tax abatement using the assumptions in the memo?
  • The ordinance reports a positive ROI for the City of Cincinnati. However, does the tax abatement, in its entirety, generate a positive ROI for the region?
  • Will some industries generate a higher ROI for a given property tax abatement? Why or why not?
  • Any future development contains uncertainty. How should an applicant calculate future payroll and employment, knowing that the answers will affect the value of the tax abatement. Is there an inherent ethical conflict?
  • Should Cincinnati request any additional information in its CRA application?
  • Cincinnati’s income tax of 2.1% applies to both workers in, and residents of, Cincinnati. Based on the two statements below, do you think that the City Administration properly calculated the ROI?

a) Section 13.C. CRA Tax Exemption Agreement

Community Reinvestment Area Employment. The Company shall (i) adopt hiring practices to ensure that at least twenty-five percent (25%) of the new employees shall be residents of the City of Cincinnati and (ii) give preference to residents of the City relative to residents of the State who do not reside in the City when hiring new employees under this Agreement.

b) Footnote to CRA Tax Exemption Agreement Memo for 205WM, LLC

The revenue gains from the Cincinnati earnings tax associated with the CRA may be impacted if the positions created or relocated to Cincinnati are filled by Cincinnati residents previously paying the earnings tax on wages earned outside Cincinnati. Potentially, the net revenue impact may be reduced because Cincinnati may be collecting all or some of the earnings tax from resident employees.

  • What improvements can be made to the CRA tax abatement program?

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If needed, attach a spreadsheet to your post to support your answers. Your analysis for each question should be on a separate tab. 1. 2. 3. 4. 5. 6. 7. Using the annual payroll estimate of $150,000 and the financial positions in Exhibits 6 and 7, what will be the monthly rents in the proposed development? Are these calculations reasonable? Cincinnati has a proportional income tax of 2.1%, for both residents and workers in the City. Without considering inflation, what amount of payroll would John Blatchford need to create in order for Cincinnati to break-even on the CRA tax abatement using the assumptions in the memo? The ordinance reports a positive ROI for the City of Cincinnati. However, does the tax abatement, in its entirety, generate a positive ROI for the region? Will some industries generate a higher ROI for a given property tax abatement? Why or why not? Any future development contains uncertainty. How should an applicant calculate future payroll and employment, knowing that the answers will affect the value of the tax abatement. Is there an inherent ethical conflict? Should Cincinnati request any additional information in its CRA application? Cincinnati’s income tax of 2.1% applies to both workers in, and residents of, Cincinnati. Based on the two statements below, do you think that the City Administration properly calculated the ROI? a) Section 13.C. CRA Tax Exemption Agreement Community Reinvestment Area Employment. The Company shall (i) adopt hiring practic es to ensure that at least twenty-five percent (25%) of the new employees shall be residents of the City of Cincinnati and (ii) give preference to residents of the Cit y relative to residents of the State who do not reside in the City when hiring new e mployees under this Agreement. b) Footnote to CRA Tax Exemption Agreement Memo for 205WM, LLC The revenue gains from the Cincinnati earnings tax associated with the CRA may be impacted if the positions created or relocated to Cincinnati are filled by Cincinnati residents previously paying the earnings tax on wages earned outside Cincinnati. Potentially, the net revenue impact may be reduced because Cincinnati may be collecting all or some of the earnings tax from resident employees. 8. What improvements can be made to the CRA tax abatement program? 1 Sorting out the Rules for Corporate Tax Incentives On May 22nd, 2017, Cincinnati City Councilmember and Budget and Finance Committee member, Kevin Flynn, would cast his vote on whether to recommend that a tax incentive be approved by City Council. The City’s Administration proposed that John Blatchford receive a property tax abatement in order to develop a six-unit, apartment building in Over-the-Rhine, a neighborhood in downtown Cincinnati. The incentive would be an 8year tax exemption for 100 percent of the value of the improvements to the property. The incentive was projected to cost Cincinnati an estimated $12,613 in foregone property taxes over the life of the incentive. In exchange, the City expected to receive $31,325 in income tax revenue from construction jobs and permanent jobs located at the property in connection with the development (Exhibit 1). These types of property tax abatements were not without controversy among City Councilmembers. At a City Council meeting on May 10th, Councilmember Yvette Simpson declared “I’ve implored our community and economic development department to please, please, please…decide with all the remaining parcels in Over-the-Rhine what our requirements are going to be upfront….do not bring me another development project in Over-the-Rhine that does not take these things into consideration…figure out what the rules are, let us know what we need to do to get it done.”1 At the same May 10th Council meeting, Kevin Flynn and other City Council members criticized the many times that the City of Cincinnati’s administration presented tax incentives to Council in which there was only a day or two to review the documents before voting. While the value of this particular tax abatement was relatively small, other property tax abatements have much been larger. In 2013, a property tax abatement worth $2.5 million was approved for an apartment complex in downtown Cincinnati.2 Councilmember Flynn was also concerned that City Council generated little discussion about the costs and benefits within a larger economic development strategy. He said “I would ask us to be consistent up here, yes we are the policy makers, yes we can make whatever decisions we want. I was looking back through the records, I have not seen us reject a LEED3…tax abatement on this council yet.”4 On May 10, 2017 the City of Cincinnati City Council voted to send the Over-the-Rhine tax abatement proposal to the Council’s Budget and Finance Committee for further review before a full Council vote on May 24th, 2017. Members of the Budget and Finance Committee were responsible for a detailed examination of the tax abatement proposal and the recipient’s qualifications before making a recommendation to the full City Council. As a member of both groups, Councilmember Kevin Flynn needed to decide how to cast his vote. Community Reinvestment Area (CRA) Tax Exemption The State of Ohio introduced the Community Reinvestment Area (CRA) program to encourage developers to renovate or construct new buildings, with the eventual result of increased economic development in the surrounding areas.5 Under the CRA program, property tax abatements are available for up to 15 years on both residential and 2 commercial developments, and may be granted on 100% of property tax liabilities. To be part of the CRA program, a city, village, or county must petition the Ohio Development Services Agency (ODSA) to grant the designation to a geography in which investment has lagged.6 ODSA approved the entire City of Cincinnati to be a Community Reinvestment Area (CRA).7 The details of each program, including the application and approval process are the responsibility of the local government that administers the program (Exhibit 1).8 As part of the CRA program, Cincinnati offers property tax abatements to both residential and commercial properties, including multifamily properties of three or more units. In order to qualify, the proposed plan must include at least $40,000 in renovation improvements as well as the creation of net new jobs.9 The term of the abatement varies depending on whether the property is renovated or newly constructed, as well as the level of LEED certification.10 To achieve LEED certification, all new buildings must satisfy certain requirements regarding water efficiency, indoor air quality, energy efficiency, and other environmentally sustainable criteria.11 In addition, the applicant must submit an annual report and include an annual monitoring fee of 1% of the annual exempted taxes. This fee may be no smaller than $500, but no greater than $2,500 per year. The City of Cincinnati also requires that the developer enters into a separate agreement with the school board to pay 25% of the abated taxes as a “payment-in-lieu of taxes” or PILOT.12 In 2015, City Council also asked that developments which were located close to the City’s streetcar rail lines contribute 15% to fund operations of the streetcar.13 This additional payment is known as a Voluntary Tax Incentive Contribution Agreement (VTICA), and it offsets some of the costs that the City of Cincinnati pays to operate the public transportation system. While the law allows for a 100% property tax abatement, the net effect for many developments in Over-the-Rhine is a maximum property tax abatement of 60%. A Rocky History of Tax Incentives in Cincinnati For years, Cincinnati’s City Council received questions from the media and residents about the fairness and success of the tax incentive program. In 2014, the local newspaper, the Cincinnati Enquirer, released an analysis that found that nearly 5,000 properties in the City received a residential property tax abatement. Collectively, these properties were worth $1.1 billion according to the local auditor, but were taxed on only half of this amount. This reduction in the taxable amount of the properties meant that these owners paid more than $14 million less in taxes than they would have in the absence of the CRA program. The analysis also found that “four neighborhoods [Hyde Park, Mount Lookout, Columbia Tusculum and Mount Adams] combined hold 7 percent of the city population, but account for 26 percent of the residential abated value.”14 These four neighborhoods have the highest household income among the 52 neighborhoods in the city of Cincinnati, and were all in the top 10 neighborhoods which received property tax abatements. 3 The author of the analysis noted that the reduction in property taxes resulted in a loss of revenue to local government services like public education, county parks, libraries, police communications, and mental health services.15 In 2015, in an attempt to answer whether city tax incentives spurred economic development, Cincinnati hired HR&A Advisors, a consulting firm specializing in real estate and economic development to analyze 218 tax incentives approved by the city between 2005 and 2015 for economic development purposes.16 The consultant compared Cincinnati to similar programs in Cleveland, Louisville, Nashville, Kansas City, Missouri and Richmond, Virginia and found that other cities implemented a more stringent application and approval process. 17 For example, several cities included a scoring system to “align deals with development goals,” or use “commercial tax abatements within neighborhoods struggling with persistent food deserts.”18 In the same year that the consultant was hired, the Cincinnati Enquirer asked city officials about $250 million in incentives that were granted since 2008 and they were provided no response.19 The Enquirer’s inquiry also found that “the city did not have a set of standards that identified a good deal from a bad one.” They discovered that City Council approved many deals without detailed scrutiny because they were given details at the last minute.20 On two occasions, City Council told the City administration to evaluate the effectiveness and economic impact of the of the incentive programs.21 Since then, several City Council members have exhibited their own frustration with how the abatements have been handled. One Councilmember, Chris Seelbach, said "I have been frustrated about things since I got here in 2011…Council does not want to be a rubber stamp even when they are good deals."22 Both Yvette Simpson and Kevin Flynn have been vocal about the lack of consistency in the deals that have been approved. In one City Council meeting, both council members expressed frustration with the changing goal posts for abatement applications.23 Further, Kevin Flynn expressed frustration that on occasions, he was handed an memo with tax incentive application as he ascended the platform on which he was to meet.24 Kevin Flynn Kevin Flynn was elected in 2013 to serve as one of the nine members of the City of Cincinnati City Council. In late 2016, he announced that he would not be seeking reelection.25 Flynn was a graduate of the University of Cincinnati and the University of Cincinnati College of Law and also worked with the law firm Griffin Fletcher & Herndon LLP.26 His “law practice focuses on real estate financing, residential and commercial transactions and development.”27 Flynn spent 23 years teaching a course in Real Estate Transactions as an adjunct professor at the University of Cincinnati, College of Law. His focus on real estate extended to his city duties as he was the only council member to serve on the Tax Incentive Review Council. The Tax Incentive Review Council served to “review annually each owner’s compliance with exemption agreements entered into pursuant to this Legislative Resolution, and shall make written recommendations to this 4 Council as to continuing, modifying or terminating such agreements based upon the owner’s performance of the agreement.”28 The Tax Incentive Application On March 29th, 2017, Cincinnati’s City Manager released a memo regarding John Blatchford’s application for a LEED CRA Tax Exemption Agreement for 205WM, LLC (Exhibit 2). However, City Council was not asked to take a vote on the CRA application until May 10th, 2017, when a second version of the memo was released to City Council (Exhibit 3). 5 Exhibit 1: City of Cincinnati Community Reinvestment Area (CRA) Process 1. The Company submits an initial CRA application. 2. The City of Cincinnati’s Department of Community Economic Development (DCED) reviews the application and determines a recommendation. 3. City Council approves the recommendation and passes an ordinance and a CRA agreement is executed by the City Manager. 4. The Company begins construction of the improvements. 5. The Company enters into a Payment in Lieu of Taxes (PILOT) agreement with Cincinnati Public Schools (CPS) and registers the agreement with Ohio Development Services Agency (ODSA). 6. The Company submits a completion application to DCED once construction is completed. 7. DCED sends all agreement materials to the Hamilton County Auditor. 8. Hamilton County Auditor assesses improvements and puts the abatement into effect. 9. The Company submits annual reports and fees during the term of the abatement. 10. DCED submits an annual report on all agreements to ODSA in March, and presents the information to the TIRC in June and City Council in September. Source: City of Cincinnati Tax Incentive Review Council 2017 Annual Meeting https://joneseconomicsmy.sharepoint.com/personal/m_jones_joneseconomics_com/_layouts/15/guestaccess.aspx?docid=13d2d65 3f504f4ec39702ab37ddc0a55e&authkey=ATCvfgsmj9YljlI4kaNy1I0&e=ohg5O3 6 Exhibit 2: Memo, March 29th, 2017 To: Mayor and Members of City Council From: Harry Black, City Manager Subject: LEED CRA TAX EXEMPTION AGREEMENT – 205WM LLC – 205 W MCMICKEN IN OVER-THE-RHINE Attached is an Emergency Ordinance captioned as follows: APPROVING AND AUTHORIZING the City Manager to execute a Community Reinvestment Area Tax Exemption Agreement with 205WM, LLC, thereby authorizing an 8-year tax exemption for 100% of the value of the improvements made to real property located at 205 W. McMicken Avenue in the Over-the-Rhine neighborhood of Cincinnati, in connection with the remodeling of a building into six residential apartments, which remodeling shall be completed at a total construction cost of approximately $456,372. Recommendation The Administration recommends approval of this Emergency Ordinance. Rationale: This project will result in the rehabilitation of 6 market rate apartment units at the southeast corner of W. McMicken and Elm Street in the Over-the- Rhine Neighborhood of Cincinnati. Assuming no increase in real estate value or payroll over the life of the exemption, this project will generate $5.81 of payroll taxes for the City for every $1 of real estate taxes forgone by the City. This calculation does not include income taxes from new residents of the renovated units. Assuming no real estate tax rollback, this property would generate $14,692 in real estate taxes for the City annually upon expiration of the exemption. This project will support the creation of 6 construction jobs with total annual payroll of approximately $350,000 and 7, new, full-time jobs with an annual payroll of $400,000.00. This incentive is consistent with the uniform rules for Community Reinvestment Areas adopted by Council Ordinance No. 119-2007, as amended. Current Status of Property The property is located at 205 W. McMicken Avenue, west of Elm Street and east of Dunlap Street in Over-the-Rhine. The building on this site is currently vacant and has not been occupied within the last five years. The building is in need of new mechanics and complete renovation. The redevelopment of 205 W. McMicken will reduce blight, create jobs, attract private investment, increase property values and the tax base, as well as support small businesses in the Over-the-Rhine Neighborhood. 7 Project Description 205 WM, LLC plans to renovate both the exterior of the building and the six residential, market rate apartment units inside the structure. The total project cost is estimated at $456,372. The project will support the creation of 6 construction jobs and 7 permanent jobs with total annual payroll of approximately $350,000 and $400,000 respectively. This project represents Plan Cincinnati’s Vision to Compete by making a targeted investment and Vision of Live to support and stabilize our neighborhoods. This incentive is consistent with the uniform rules for Community Reinvestment Areas adopted by Council Ordinance 119-2007. Development Entity The principle owner of 205 WM, LLC is John Blatchford, 1328 Race Street, Cincinnati, Ohio. Mr. Blatchford has experience as a general contractor for three, Over-the-Rhine historic renovation projects and has been in the construction and development industry for four years. Proposed Incentive The Emergency Ordinance provides for a net 60 percent, 8-year, CRA tax exemption. The exemption applies only to the increase in value attributable to the new construction. Taxes and Payments not Foregone: $5,984.00 (1) The property owner will continue to pay ordinary property taxes of approximately $260.67 annually. This is the amount of taxes paid on the preconstruction value of the property. (2) Two third party agreements will annually commit a payment of 25% and 15% $3,628, and $2,177 respectively, to Cincinnati Schools and streetcar operations (VTICA). Taxes Foregone: $69,660 The tax liability for this property will be reduced by an estimated $8,708 per year. This represents 60% of the difference between the actual pre-renovation value and the estimated post-renovation value. The City share of the foregone taxes is estimated at $1,577 annually or $12,613 over the life of the exemption. 8 Job and Revenue Summary1 Year 1 Year 2 8-year Total Jobs Permanent jobs created 2 2 7 Temporary construction jobs created 6 0 6 Total Jobs 8 2 13 Permanent payroll taxes (est.) $8,400 $8,400 $67,200 Construction payroll taxes (est.) $6,125 $- $6,125 Total tax revenue $14,525 $8,400 $73,325 Tax Revenue Source: CRA Tax Exemption Ordinance, March 29th, 2017 https://joneseconomicsmy.sharepoint.com/personal/m_jones_joneseconomics_com/_layouts/15/guestaccess.aspx?docid=085aebbb 083294eee8fa163b81c7764ad&authkey=AWO6f8niu_60XjiMFLLsM9M&e=ZbUiYw 1 Based on estimates provided by the developer; assumes no increase in real estate taxes or payroll over the life of the exemption. The revenue gains from the Cincinnati earnings tax associated with the CRA may be impacted if the positions created or relocated to Cincinnati are filled by Cincinnati residents previously paying the earnings tax on wages earned outside Cincinnati. Potentially, the net revenue impact may be reduced because Cincinnati may be collecting all or some of the earnings tax from resident employees. 9 Exhibit 3: Memo, May 10th, 2017 To: Mayor and Members of City Council From: Harry Black, City Manager Subject: CRA TAX EXEMPTION AGREEMENT - 205WM LLC - 205 W MCMICKEN OVER-THE-RHINE – B VERSION Attached is an Emergency Ordinance captioned as follows: APPROVING AND AUTHORIZING the City Manager to execute a Community Reinvestment Area Tax Exemption Agreement with 205WM, LLC, thereby authorizing an 8-year tax exemption for 100% of the value of the improvements made to real property located at 205 W. McMicken Avenue in the Over-the-Rhine neighborhood of Cincinnati, in connection with the remodeling of a building into six residential apartments, which remodeling shall be completed at a total construction cost of approximately $456,372. Recommendation The Administration recommends approval of ...
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GeraldTut55
School: Cornell University

Attached

Running head: TAX ABATEMENT

1

Name of Student
Student Affiliation
Date of Submission

TAX ABATEMENT

2

If needed, attach a spreadsheet to your post to support your answers. Your analysis for
each question should be on a separate tab.
1. Using the annual payroll estimate of $150,000 and the financial positions in Exhibits 6
and 7, what will be the monthly rents in the proposed development? Are these
calculations reasonable?
Estimating that the numbers of units are 50, the total annual rent is as shown below.
(Total, garden, mid and high-rise
Net operating
income
less capital
expenditure
less annual payroll

1400100
189900

150,000
1,060,200
So the monthly rents will be=1,060,200/12
=$88,350 for 50 units
Revenue will be 11%
11%*150,000=16,500
The calculations are reasonable, as both the city and the investor is generating
income. However, it would be much better if the city could tax the investor because the
revenue would be much higher as it could be generated from the investment and payroll
taxes.
2. Cincinnati has a proportional income tax of 2.1%, for both residents and workers in the
City. Without considering inflation, what amount of payroll would
John Blatchford need to create in order for Cincinnati to break-even on the CRA tax
abatement us...

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