Some More Thoughts on the Economic Revitalization of Small Town Downtowns: Financial Tools

N. David Milder
DANTH, Inc. and Andrew Dane, Short Elliott Hendrickson Inc.

Introduction

In April 2013, we published our article, "Some Thoughts on the Economic Revitalization of Small Town Downtowns" (1). We've been most pleased by its reception and republication. Since then, we have completed additional projects, gathered more data and visited other revitalized small town downtowns. Consequently, we decided to write a follow-up series of articles to share what we have learned. This is our first in that series. It focuses on an issue that we believe has hindered needlessly far too many small town downtown revitalization efforts: the deep concerns of local leaders that it will be impossible to find the required financial resources. To the contrary, the primary objective of this article is to demonstrate that they can chose from a wide array of financial tools that, across the nation, small downtowns have been using with considerable success.

One Tool Can't Do It: A Multifaceted Approach to Financing Downtown Revitalization is Required

Different financial tools often are best suited for different types of revitalization projects. Consequently, small communities are most likely to succeed by adopting a multi-tool approach — even at the project level. For example, the development and operation of Mitchell Park in downtown Greenport NY (population 2,2000) used these financial tools:

Village Funding:
- The Village spent a total of $4 million of its own money on the $14.9 million project
- It acquired the site from a bank that had foreclosed on the property, using funds raised from a $1.2 million general obligation bond offering.
- Park development was also funded with $1.5 million from the Village's Capital Improvement Fund.
Grant Funding.The Village obtained 25 grants from a wide range of local, state and Federal agencies.
Private Funding:

From the estate of Pauline Mitchell for park maintenance.
Northrop Grumman Corporation donated a full-sized carrousel.

Park operational costs are largely offset by fees including:
- Boats docking in the park's marina.
- About $200,000 from the carrousel's 100,000 riders per year.
- Admissions to the wintertime outdoor skating rink.

The Financial Toolbox for Small Town Downtown Revitalization

The following list of financial tools that small downtowns can use is certainly not exhaustive, but hopefully it still demonstrates their range and their number. However, the availability or utility of some tools will vary by state. For example, tax increment financing (TIF) is not available in all states and the legislation for it varies across the states that do, as does its frequency of use and impacts.

Funding from the municipality.This is essential. The municipality must have skin in the game if it hopes to get grants from other government agencies, foundations or significant investments from the private sector. Municipal funding can be especially important in the initial stages of a revitalization process to get the vitally needed organizational and planning work done.

Municipality-owned assets. Many small towns and villages will have tangible assets that can be used in the revitalization process, most likely parcels of land. These properties might be moribund and underutilized park land that could be transformed into attractive and well-activated public spaces. They also might be downtown properties taken for tax delinquency or gross neglect and decay that a developer might turn into new housing units, offices and/or storefronts for small businesses.

Timing projects to tap annual budgets for more than one year.Sometimes simple steps, such a breaking a project down into phases that then can be affordably funded over several of the municipality's fiscal years, can be very effective.

Grants from other government agencies and private foundations. This is often the go-to tool for community leaders in the initial stages of a revitalization process. Getting free outside money for your downtown's revitalization is understandably attractive and its potential benefits are undeniable. However, this tool also can have its drawbacks. For example, pursuit of such grants, can take many months or several years to succeed. Furthermore, grant givers have their own programmatic objectives and ideas about the projects they want their grant recipients to do. That often means that downtown leaders find that there is little grant money available for their high priority projects, but relatively easy money is available for low priority projects. Simply following the available money, in these instances, can distract a revitalization effort. In the worst cases we have observed, a few communities have based their revitalization projects on available grants rather than a sound strategy and implementation plan, with resulting slowed progress. On the other hand, well-conceived revitalization strategies and project plans can substantially increase a proposal's chances of being funded. They also help prioritize action steps/projects and it is usually a good idea to tie funding efforts to this prioritization.

Contributions from private sector firms: Grants and gifts. For example, the Northrup Grumman Corp donated the carrousel from the company's former amusement park to the new Mitchell Park in nearby Greenport NY

Individual donations. For example, in Valparaiso IN (population 32,000) half of an estimated $8 million expansion of its downtown Central Park Plaza will be funded by private donations, with $3 million coming from one local family.

Profit/fee-generating projects.Earned income streams can do much to offset the operating costs of parking facilities and public spaces. However, as Andy Manshel has noted about his experience developing them very successfully for NYC's Bryant Park: " Creating earned income streams was long process. It took flexibility and patience to create those streams. There were loss leaders to create a profile for the space." Here are some types of earned income streams:

Fees - campgrounds, carousels, skating rinks, marinas, parking garages and lots, on-street parking fees, etc. See description of Mitchell park's fees above
Rents – for: restaurant spaces, food stands and kiosks, shade at a pool, event spaces for birthday and wedding celebrations
Sponsorships. They are always easier to get when significant user traffic has been proven or when a potential sponsor is convinced it is highly probable. One interesting example of sponsorship is the I Love Chester Express in Chester, NJ (pop 1,838). The Express is a shuttle that takes shoppers from a nearby rail station to the borough's main commercial areas. It is sponsored by The Streets of Chester Shopping Center, Alstede Farms and The Historic Chester Business Association
Selling naming rights. This is an increasingly popular subset of sponsorships. An example: Valparaiso's Central Park Plaza gets $67,500 annually for the naming rights to its amphitheater.
Sales of Downtown Gift Certificates. In Chippewa Falls, WI, these certificates accounting to over $60,000 in downtown spending.

Tax incentive programs. These come in various forms. Here are some examples:

In Sherwood, WI (pop 2,800) a new tax increment financing (TIF) district was created in the downtown in order to receive excess increment from a growing commercial district. The community leaders recognized that stimulating downtown redevelopment would require some public subsidy, so they wanted to have the subsidy tool in place. TIFs basically work by taking the increased real estate taxes on property that result from its redevelopment to pay off the bonds that financed the infrastructure improvements and other incentives needed to make the redevelopment happen.
In Pompton Lakes, NJ (population 11,137) a developer will make a payment in lieu of taxes, a PILOT, that reflects a roughly 33% property tax savings on a 55-60 unit downtown residential project.

Historic Preservation Tax Credits. These types of credits can be used in smaller communities as well as larger cities. In Kaukauna, WI (pop. 15,462) the City is working with a developer to convert a former flour and paper mill into a project in the downtown. The City has committed to leasing a portion of the renovated space for its brand new library, effectively helping to subsidize co-located commercial spaces. HPTC will be sold to an investor to cover a portion of development costs.

Low Income Housing Tax Credits.A 40 unit senior housing complex in downtown Chilton, WI (pop. 3,933) benefitted from low income housing tax credits. The 1 and 2 bedroom apartment building is three stories, attractive, and provides a base of close by consumers to patronize downtown shops.

Revenues from special assessment districts, including BIDs, SIDs and MSDs. For example:

Hendersonville NC (population 13,000) used funds raised from a Municipal Service District (MSD) to fund a change in the street pattern on Main Street and to install planters;
Mat Airy NC (population 10,000) used MSD funds to improve and maintain downtown off-street parking lots.
Sherwood, WI used traffic impacts rather than geography as the basis for specially assessing a quarry outside the downtown area in order to help fund a local road to improve pedestrian conditions downtown.
In Chippewa Falls, a BID provides about 36% of the Main Street program's revenues

Using the assessment revenue stream to back the issuance of bonds and/or to obtain bank loans. Cranford NJ (population 23,000) used the assessment money raised by its new SID to issue and pay off $3.5 million worth of bond money that was used on a downtown wide streetscape improvement project

Obtaining loan guarantees from federal and state programs.For example: the BID in Washington Borough, NJ (pop 7,000), borrowed money from a nearby community bank to rebuild an important downtown parking lot. The BID obtained a USDA loan guarantee that made the private bank loan possible.

Crowdfunding. This is a young financial tool, enabled by and birthed on the Internet. Its use to finance downtown revitalization projects is even younger, but its growth in the number of users and the range of projects it has been used for has been nothing short of phenomenal. For example, Save Our Screens initiatives across the nation have used crowdfunding to help small movie theaters traverse the digital divide. Pagosa Springs, CO (population 1,727) used crowdfunding to fund construction of an observation deck. Its use for downtown real estate projects is in its infancy and appears to be mostly in larger communities, but that probably will change as the use of this financial tool grows and its full range of applications becomes better known. For example, Craftund.com is a new crowdfunding site established in Wisconsin, which allows local residents and community members to invest in food, drink, and real estate development.

Community Owned Businesses. According to Josh Bloom: "Community-owned businesses differ from traditional businesses in that they are motivated by a purpose. They usually arise to fill a void where the marketplace is too slow to act on its own, or the risks appear too high (think decayed downtown). Founders of community-owned businesses don't just see an opportunity that the market failed to see, but in times when capital for funding new ideas is scarce, they can give life to new business ideas" (2). They can be cooperatives, a community owned corporation, a small owner group or a community-based investment fund. For example, the nine-member police department in Clare, MI, (pop 3,084) formed a corporation to buy and operate a favorite nearby bakery that was about to close. It was renamed Cops & Doughnuts.

Volunteers. This can be a useful tactic, but the number of volunteers and the quality of their efforts can often be difficult to maintain. The Chippewa Falls Main Street program maintains a roster of 300 volunteers. It uses VolunteerMatch.org to recruit and mobilize volunteers for Earth Day Cleanup events as well as festivals and there is a great response.

Energy Audits. The Chippewa Falls Main Street program partnered with Xcel Energy, which provided energy audits for 56 downtown properties. The audits identified $87,000 in annual energy savings, money which can now go toward strengthening and expanding businesses instead of just keeping the lights on.

Traditional Small Town Fundraising. There is a small town culture of banding together to fund all sorts of projects through raffles, barbeques., car washes, etc. These should not be forgotten, though small towns may need to brand and re-frame downtown projects to fit that model of fundraising.

Conclusions:

Small downtown leaders don't' need to be financial innovators in order to come up with an effective financing plan for their revitalization program. Dozens of tools exist and have proven successful in small town downtowns across the nation. However, downtown leaders may need outside help to first identify the tools appropriate for their projects and programs and then to tailor a customized approach that meets the unique needs oftheircommunities.

Of critical importance is having a comprehensive revitalization strategy in placebeforedeciding which tools to use and for what purposes. A real strategy looks at not only market potential for various downtown functions (housing, retail, etc…) but also marketing, organization, and other key factors including land use and transportation.

The revitalization strategy can then be used to guide the selection of a set of appropriate financial tools. Key steps include:

Identifying a range of tools appropriate for the job.
Figuring out which of the tools are best suited to the projects the downtown's revitalization strategy recommends, and
Properly applying these tools in combination with other sources of funding to best leverage all of the investments. For example, a key to the successful use of most of these downtown revitalization financial tools is the leveraging of public funds to attract private investments.