RE: [CPEO-BIF] Different kinds of subsidies

["Robert Paterson" <rgfp@mail.utexas.edu>]

Okay Bruce,

As I recall from discussions with developers, the go/no go decision is based
on a pro forma analysis that shows that the developer will cover all
operational costs of project development plus between 18-20% return on
investment.  That 18-20% return on investment is the equivalent of what
folks with a regular salary job must earn to make a living, everything over
the "development costs" plus the "minimum return on investment" is the realm
of development profits.  So our calculations have to be reasonably good at
estimating what it will take to equalize the brownfield development costs
with the market's comparable greenfield alternative, or the nearest
comparable greyfield alternative, and it must account in some fashion for an
agreed minimum return on investment, to make sure we are not giving away too
much each time--does that square with your thinking?  

Not sure I concur on the discounted net present value comment since the
timing of the flows of revenues and payments is also a major consideration
in the pro forma analysis for the developer, subsidies can be lumpy and that
can be problematic for project planning....

Bob

-----Original Message-----
From: brownfields-bounces@list.cpeo.org
[mailto:brownfields-bounces@list.cpeo.org] On Behalf Of Bruce-Sean Reshen
Sent: Thursday, November 02, 2006 6:05 AM
To: lsiegel@cpeo.org; 'Brownfields Internet Forum'
Subject: RE: [CPEO-BIF] Different kinds of subsidies

"Has anyone ever attempted to categorize subsidies by purpose or
function?"  I believe this is a very helpful question.  It speak
directly to a point I was trying to emphasize.

One type of subsidy, which I have termed a "pure" subsidy, has the
function of bringing the developer's rate of return to market.  In this
case, "market" means to a sufficient level to entice the developer to
remediate the brownfield and redevelop the site.  It is a trial and
error process.  Most experienced agencies start low and eventually reach
an equilibrium amount with the developer.  The form of the subsidy
matters only in terms of monetizing its value.  Direct cash subsidies
are viewed most favorably by the developer.  Tax incremental financing
for example, while direct, have less value since the higher taxes on the
back end will decrease the value of the project.  But the type of
subsidy itself does not matter.  Only the present discounted value of
the sum of payments needed to induce the developer to proceed with the
project.

The different form of payment is what I call a cash reward to the
developer to induce particular outcomes.  Some examples are the creation
of greater open space, the set aside of a portion of the residential
development to low income housing or the generation of a threshold level
of job creation.  These are not true subsidies.  They are offered to
induce behavior, not to compensate the developer for a below market rate
of return.  These payments (in cash or in kind) are necessary to make
the developer "whole" in terms of the added requirements.  It should be
noted that the first two examples are more effective since it is totally
within the control of the developer to create open space or set aside
units for low income tenants.  The third example of a threshold level of
job creation is often favored by federal, state and local agencies.  It
is not as effective though, since the ultimate number and value of the
jobs created is often beyond the direct control of the developer.

I hope this offers a useful framework for analyzing different subsidies.
It also places in perspective the faulty notion of the usefulness of
clawbacks.  Since clawbacks threaten the rates of return required to
induce the development, they end up requiring far greater levels of
subsidy to compensate the developer for the greater risk.  They are
bureaucratic nightmares to administer and a prescription for elongated
lawsuits.  However, it is useful for the development agency to collect
information on jobs and income creation so as to improve future
decision-making.  But the last thing a development agency should be
doing is erecting barriers such as clawbacks to impede the development
process.  Let's grow up, keep our eyes on the prize of rejuvenation of
our communities and not misdirect our attention to the unproductive and
harmful game of "punish the evil developer".

Bruce

Bruce-Sean Reshen
CEO, The MGP Group
733 Summer Street - Suite 405
Stamford, CT 06901
p.  203-327-2888, X18
f.   203-327-2999
c.  917-757-5925
breshen@mgppartners.com
www.theguardiantrust.org
www.mgppartners.com



-----Original Message-----
From: brownfields-bounces@list.cpeo.org
[mailto:brownfields-bounces@list.cpeo.org] On Behalf Of Lenny Siegel
Sent: Thursday, November 02, 2006 2:20 AM
To: Brownfields Internet Forum
Subject: [CPEO-BIF] Different kinds of subsidies

Has anyone ever attempted to categorize subsidies by purpose or 
function? It seems to me that not all incentives are designed to do the 
same thing.

Some are designed to promote reuse of a particular property or group of 
properties. For example, assessment or cleanup grants may lead a 
developer to propose a project in the inner city, where property is 
often blighted and/or contaminated, instead of a "greenfield" on the 
edge of town.

Some are designed to promote a particular reuse. For example, a 
developer may be allowed to build more residential units than zoning 
would normally permitted in exchange for providing below-market units 
for rent or sale.

Some are designed to attract specific companies, such as Intel, Toyota, 
etc. Tax abatement is a common tool used to subsidize companies that are

expected to provide jobs and prestige to a community.

There must be other types.

Lenny
-- 


Lenny Siegel
Director, Center for Public Environmental Oversight
c/o PSC, 278-A Hope St., Mountain View, CA 94041
Voice: 650/961-8918 or 650/969-1545
Fax: 650/961-8918
<lsiegel@cpeo.org>
http://www.cpeo.org


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