Easy Money

Developers like the Sansone Group are using a state law to rake in millions of tax dollars for retail projects in the burbs. Trouble is, the legislation was designed to help blighted inner cities.

In the waning moments of the meeting, after many in attendance had already departed, Curran engaged in a debate with the Olivette city attorney, who argued that the TIF commission should rubber-stamp the plan despite its omissions because the city would ultimately make the final decision on approving the TIF project. Instead, the TIF commission voted to continue the public hearing in 60 days.

Among the requisite items missing from Olivette's TIF plan were the following:

*A cost-benefit analysis, including a fiscal-impact study on every affected political subdivision.

*Sufficient information from the developer for the commission to establish whether the project as proposed is financially feasible.

*Evidence of commitments to finance project costs.
*An affidavit signed by the developer or developers attesting that provisions of the redevelopment plan have been met.

*A relocation plan to assist displaced businesses and residents.
*An agreement with the Missouri Department of Transportation about traffic control for the proposed development.

"We were just supposed to trust the city that those things would occur," says Curran. "The upshot of it is that he (the city attorney) just wanted us to vote yes, regardless of the fact that we had never even seen the site plan, much less discussed it before I walked into the room that night."

In a deal struck last year, Cleveland-based Developers Diversified Realty (DDR) acquired 13 shopping centers in the St. Louis area from the Sansone Group, according to recent Security and Exchange Commission (SEC) filings. As part of the agreement, DDR also gained a 50 percent ownership in Sansone's management and development companies. The SEC report indicates that DDR invested a total of $163 million for its acquisition of Sansone's properties and half of the St. Louis company's business interests. At or around the same time, DDR's board of directors approved a two-for-one stock split for shareholders of record on July 27, 1998.

DDR is a real-estate-investment trust (REIT). Under a federal law passed in 1960, individuals and institutions are allowed to pool their investment resources into such trusts. During the 1990s, the number of REITs has mushroomed. REITs are exempt from corporate income taxes if they meet specific requirements, including the distribution of at least 95 percent of their net income to shareholders as dividends.

According to SEC documents, DDR distributed $95.1 million in dividends last year. The profits were generated through the ownership or co-ownership of 161 shopping centers in 35 states."Substantially, all of the shopping centers are anchored by a Wal-Mart, Kmart or Target," according to DDR's annual report.

Before hooking up with Sansone, DDR entered into a partnership with the Prudential Real Estate Investors (PREI), whose ultimate parent company is the Prudential Insurance Company of America. Under the agreement, DDR and PREI would be involved in several joint ventures in which the latter company would be responsible for 75 percent of the funding responsibilities. PREI manages more than $9.5 billion in commercial-real-estate investments for more than 400 institutional clients worldwide.

DDR's annual report indicates that 9.3 percent of the company's shopping centers are occupied by a Wal-Mart store.

As Wal-Mart has ventured into urban areas in the past few years, it has carried a reputation of having a devastating effect on independent, small-town retailers. The results of a 10-year study of Wal-Mart's impact on local economies, published by Iowa State University in 1995, found businesses in the smallest towns suffered losses in sales ranging from 16 percent to more than 45 percent after a Wal-Mart opened in their communities.

Last year, Wal-Mart rang up $118 billion in sales, far exceeding any of its competitors. Sales volume, for the king of discount chains, is predicted to double in the next five years, according to industry analysts.

Every indicator shows Wal-Mart, Prudential, DDR and Sansone to be profitable enterprises capable of gathering enough investment capital for their own developments. Nevertheless, the city of Olivette has offered $38.9 million in TIF subsidies to lure the mass merchandiser inside its borders. If a Wal-Mart does open in Olivette -- with the help of taxpayer dollars -- it raises the question of whether there will be a reduction of business or even a closure at the nearby Grandpa's, a locally owned discount store.

Meanwhile, the latest effort at reforming the TIF law died in the Commerce Committee of the Missouri House of Representatives during the last session. The sponsors of the bill, Republican Reps. David Levin and Michael Gibbons of St. Louis County, had hoped to restrict the use of TIF by tightening the definition of blighting.

"There is no momentum in the Legislature currently to address this issue," says Gibbons, who favors reforming the TIF law rather than scrapping it.

"Our goal has not been to just eliminate the projects but to try and focus them in those areas that really need the assistance," says Gibbons. The city of Wellston in North County is a good example of an economically depressed area that could benefit from the prudent use of TIF, says Gibbons. Using TIF in affluent areas defies the reason why the law was initially enacted and sets a bad precedent, he says. "I don't know of any commercial retail development going on right now or redevelopment that is not a TIF project," says Gibbons. "One of the concerns I have is that the TIF statute allows for up to 23 years to pay out on the bonds. That's about the same age as West County. So you're issuing bonds for a term at the end of which the facility is obsolete again.

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