Is raising taxes the only solution for cities perched on a fiscal cliff due to COVID-19? For many, it appears to be the default option. But I believe there is an alternative, one that provides greater stability and is far more palatable to your residents and businesses. By professionally managing your own real estate assets, your city could potentially generate millions of dollars of new revenue, stabilizing your general fund and increasing the tax base. Untapped possibilities reside in your city’s land and property holdings, and now is the time to mine them!
Lack of Asset Management
Imagine a new revenue stream that could be used to fund new capital projects, relieve existing debt, or provide upgraded services to residents. That goal is obtainable with a comprehensive real estate strategy, but many cities miss this opportunity because of poor asset management.
Since the pandemic hit, we have been advising our city clients to immediately analyze their real estate holdings—land and property, which are tremendous assets that are often overlooked and mismanaged. Once a city has determined the valuation of publicly owned land, dialogue can begin on how to better manage or increase the value of those assets.
Another source of potential tax growth can be found on privately owned lots or assemblages that are underutilized or undervalued. It behooves a city to find a way to encourage development on those sites or support some other form of improvements to increase the taxable value of surrounding land. This has been a long-running problem for municipalities that focus on zoning and land use, but do not pay attention to the value of the land, real estate, and its impact on the general revenue fund.
Lack of management of a city’s real estate holdings is not a new issue. A GAO report in 2012 discussed the need to improve management of excess and underutilized property in great detail.1
In our consulting practice today, we recognize this is an obstacle that ultimately must be overcome and is now mission critical. It is imperative for city leaders to allocate the time to do the work of analyzing where potential growth in their tax base can be harvested.
Rising from the Red
According to recent reports in many publications, including US News and World Report, the pandemic will drastically reduce local government revenues, and this downward trend will continue well beyond 2021. Even cities that were in good financial shape, with reserve funds, are considering employee layoffs, reduced services, budget slashing, and of course, raising taxes.
The toll that COVID-19 is having on municipal budgets will continue to unfold, and many city leaders will be walking a tightrope for quite some time. Recent reports are anticipating revenue shortfalls of approximately $360 billion over the next three years.2 These shortfalls are impacting local economies and families across the country as city leaders consider furloughs, layoffs, and cutting investments in infrastructure and services. And while some municipalities hoped that aid from the federal government would lend assistance, severe restrictions on the funding have left little in substantive help.
This is devastating news for communities as local governments play an integral role in funding critical services, including law enforcement, fire stations, and everyday municipal services such as trash collection. In addition, cities and counties tend to be a major employer in many cities.
While all these jarring reports and the declining tax base numbers themselves could easily send city leaders into a panic response, by taking a proactive, instead of a reactive stance, cities can make an enormous difference in their long-term financial stability.
A Better Game Plan
In my 30 years of experience of working with city leaders in real estate redevelopment and city- sponsored economic development, I have seen the success of cities that create step-by-step action plans and understand how to implement them. Here’s an outline for developing a successful real estate for government strategy.
1. Evaluate Taxable Values
Analyze and chart where the bulk of your city’s taxable value comes from; these are key sources of revenue to carry the city through the pandemic and beyond. This exercise is extremely beneficial—do not put it off.
Case in point: At the peak of the pandemic in South Florida, cities were desperately trying to figure out how to assist struggling businesses, so they quickly created programs to distribute public funds to local retailers. On a first-come, first-served basis, businesses could receive anywhere from $2,500 to $20,000. The problem was twofold; first, there was no indication the business would survive, or that the funding would have an impact, let alone have any measurable result. Second, the larger issue was a lack of connection to where most of the city’s tax base was generated from. The city we analyzed had over 73 percent of their taxable value coming from the residential properties—not commercial—so they were more cautious in distributing the spread of public funds for COVID-19 relief. This is proving to be a wise decision as they have not lost many retailers, and still have funds available if needed for residential programs.
While this example relates to the COVID-19 crisis, a similar approach is required for cities to target and proactively prime the pump on specific real estate parcels, industries, or land uses that are generating the bulk of the wealth for the city.
2. Create an Inventory of Developable Parcels
Target both public and privately owned land and prioritize development goals according to future taxable value.
In an International Monetary Fund article from 2018, titled “Unlocking Public Wealth,” it was stated, “National and local governments own a potential gold mine of assets, mostly in the form of real estate and government-owned companies. With better governance, many of these assets—such as outdated buildings, undeveloped land, brownfield spaces, and air rights—could generate value and a revenue stream to fund government budgets, lower taxes, or pay for vital infrastructure.”3
The IMF article also points out how some cities have used their larger assets, such as ports and major development sites to generate revenue. Those are excellent examples of how to reevaluate and potentially reuse existing assets to create revenue.
Understandably, many cities do not have the luxury of owning such large assets; however, most have accumulated more real estate than they realize. Once an inventory has been taken and publicly owned assets have been mapped out, a valuation exercise will reveal where opportunities exist for an increase in revenue.
The city of Pompano Beach owned a five-acre site across from the beach that was being leased to a private company to operate a surface parking lot for a paltry rental agreement of $10,000 a year. We suggested they terminate the lease, build their own garage, and consider adding a limited number of restaurant and beach-oriented retail uses. A master developer was selected through a bid process and the site was master planned into eight parcel ground leases keeping the property and the revenue in the city’s hands. While the project is not yet completed, the current revenue to the city exceeds $700,000 per year and continues to grow.
Even more impressive, the parking revenue stream from the city-built garage and on street parking has increased from $500,000 a year to over $2.5 million per year. The valuation of the parking assets was a secondary analysis that revealed tremendous revenue gains and was enabled by creating a parking enterprise fund. Now, the city is in an enviable position of being able to fund additional parking garages throughout the city through the parking enterprise fund.
3. Identify Issues with Sites
Parcels of land are often bypassed for development due to several key reasons. If you feel your city is consistently being overlooked while your neighboring communities are attracting key developments, review this checklist.
- Investigate zoning obstacles.
- Review lack of development rights.
- Evaluate your city’s brand and image.
- Check for environmental issues.
- Assess the political climate; the private sector will avoid contentious commissions.
While all of these elements are equally critical, not all of them are quick fixes. However, a city’s control over its land use and zoning is one of the easiest routes to creating public wealth. Similar to the real estate analysis previously mentioned, a review of the city’s zoning can lead to tremendous opportunity with a few revisions. Land use and zoning are the low hanging fruit that any city can use to generate new revenue. Here are three immediate action scenarios:
- Zoning provisions that hinder restaurants from opening due to excessive parking or other requirements should be immediately changed or removed.
- Develop zoning rules to encourage specific types of business to create special districts, including culinary, arts, and culture.
- Expand the zoning regulations to allow alleys, small pocket parcels, side roads, or other public spaces to become locations for outdoor food and beverage activity.
4. Develop a P3 Strategy
Public-Private Partnerships (P3) require technical expertise, but every city parcel has the possibility of becoming a successful P3 project if managed correctly. P3s are simply an agreement for the public sector and private sector to collaborate on the development of a site to create new value.
The strategy is not a new one. In fact, both the Erie Canal and Transcontinental Railroad were pioneering P3s of the nineteenth century.4 The model has remained intact and is experiencing a renaissance as more cities are seeking alliances in solving the toughest challenges in their communities. In 2014, Chicago used a P3 to invest in its Riverwalk, a downtown area that once unused and neglected, and today, this area has seen major revitalization and economic development.5
To be attractive to the private sector, a city must have all the elements for success in place. It is imperative that the initiatives below have been carefully executed:
- Analyze the current valuations within a city.
- Identify public- or private-owned parcels that are undervalued.
- Ensure that the correct land use and zoning are in place.
Once this foundation is firm, any parcel—public or private—can become a P3.
5. Create a Marketing and Communications Campaign
If you want to attract the private sector, they need to know you are open for business through targeted promotional materials. Probably one of the most overlooked initiatives from city management is marketing itself effectively. Every city has a brand and an image, whether good, bad, or indifferent. An honest evaluation of how your city is perceived is a critical step in attracting the right partners to invest in your city.
Aspirational marketing is one of our main reinvention tools. In one particular case, we were able to completely reposition the city of Oakland Park’s image from a tired, outdated bedroom community with a blighted Main Street, to one of the hottest real estate markets in the county.
Another marketing success story was North Miami, a city desperate to emerge from the shadow of the famed destination to the south. We developed the “To NoMi is to Love Me” campaign to enhance the community’s unique character and vibe, focusing on its authenticity with descriptive words such as “tasteful,” “rhythmic,” and “eccentric” featured on an array of marketing collateral.
The COVID-19 pandemic has tested the mettle of every municipal leader. Responding with compassion to the health crisis, while managing the business and economic fallout, continues to be a tremendous responsibility. As the global emergency ebbs and flows, this period of disruption also provides an opportunity for innovation and reinvention. City leaders who capitalize on the lessons learned during this time will create more resilient communities for the future.
1. United States, Government Accountability Office, National Strategy and Better Data Needed to Improve Management of Excess and Underutilized Property, (GAO, Washington: 2012).