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Redevelopment Basics

One of the key tools available to assist in rebuilding and improving portions of a city is redevelopment. The State of California established the redevelopment process to aid local governments in improving areas of physical blight or economic distress.

Perhaps the most misunderstood aspect of redevelopment is its impact on taxes. Redevelopment does not increase taxes. It redirects property tax monies generated by new developments within the project area to the redevelopment agency for reinvestment in the project area.

Another common misperception is that redevelopment funds are simply given as a gift to private developers. The fact is that funds are used as an investment in the redevelopment area. A private developer typically would not invest private funds in the redevelopment area if the redevelopment agency did not make this investment. The agency investment is for a public purpose, such as construction of streets, utilities and other public infrastructure to support the new development.

How Redevelopment Works

The most important redevelopment tool, granted in the State Constitution, is tax increment financing. Under this tool, all increases in property taxes within the redevelopment project area go to the redevelopment agency "to pay the principal of and interest on loans, moneys, advances to or indebtedness… incurred by the redevelopment agency to finance or refinance… the redevelopment project."

Here is how it works in a hypothetical case. When this hypothetical redevelopment project begins, the uses in the area are generally physically and economically distressed and generated property tax income of only $300,000. A redevelopment plan is prepared wherein private developers would be encouraged to invest $200 million in new development, yielding $2 million in annual property taxes. The difference between the before and the after tax income, $1.7 million, is the tax increment generated by the redevelopment project.

All of the tax increment flows to the redevelopment agency for reinvestment in the project. A projected future annual tax increment income of $1.7 million would allow the redevelopment agency to borrow approximately $19 million today, the principal and interest for which would be paid back over 20 years at $1.7 million per year. During this period, all taxing bodies (city, county, school district) would continue to receive their share of the base property tax of $300,000, and would share in the new property tax of $1.7 million beginning in the twenty-first year.

The basic premise of the law is that the property would remain blighted if it were not for the investment by the redevelopment agency. Without redevelopment, property tax income for the area would remain at $300,000, and the City would live with a blighted area, which could cause adjacent properties to become blighted. It is only because of the investment by the redevelopment agency that private developers invest in redeveloping in the area (in this case a private investment of about $200 million). The extra property taxes generated by the new development are then used to reimburse the agency for its investment.

The City and other taxing bodies do not lose money, because the extra tax dollars would not exist if it were not for the redevelopment. These taxing bodies could actually realize an increase in tax revenue due to the positive effect of the redevelopment on surrounding properties.

The redevelopment agency is independent of the city which formed it; therefore, its debt is not a burden on local taxpayers. According to the State Constitution, the redevelopment agency must have debt in order to collect and utilize tax increment funds are only available to redevelopment agencies for investment in redevelopment projects. They are not available to cities or other taxing bodies to support general fund services such as police and fire.