It is the single most hotly contested claim of Toronto’s mayoral election: John Tory says he can use tax increment financing to raise the $2.7 billion he needs for his SmartTrack surface rail line.

This would be a world record.

Tax increment financing (TIF) has never been used, anywhere, to pay for a project so big. The vast majority of TIF initiatives are local improvements that cost somewhere between millions and tens of millions of dollars.

How big is Tory's project? The United States is the country that pioneered TIF. At $2.7 billion, SmartTrack would be bigger than all of the tax increment financing bonds issued in the U.S., combined, in any of the years 2000, 2001, 2008, 2009, or 2010, according to figures published by the government of Maryland.

To explain the unprecedentedly ambitious proposal, Tory has provided three vague paragraphs on his website. Those paragraphs, and his campaign's responses to questions this week, include so few details that it is impossible to definitively say whether or not the plan will work: there is too little to test.

Our detailed analysis, though, suggests the doubts expressed by Doug Ford (open Doug Ford's policard) and Olivia Chow are reasonable. There is a real chance of failure.

Tory is assuming Toronto will continue to boom for 30 years. That may not happen. And success is not assured even if overall growth remains strong: Tory needs major growth to happen in particular parts of the city he plans to designate as TIF zones. That is even less certain.

Tory is promising to build SmartTrack “without increasing property taxes.” If the needed growth doesn't materialize — if TIF fails — a tax hike is likely. In fact, higher taxes are possible even if TIF is “successful.”

Real-life examples

Boiled down to the very basics, tax increment financing is a three-step process. One: Declare certain neighbourhoods TIF zones for a certain number of years. Two: Borrow money. Three: when property values increase in the TIF zones, take all the extra tax revenue and use it to pay back off the debt, instead of paying for other programs and services.

Let’s use the 26-storey PwC Tower as an example. The tower caused the assessed value of its property, 18 York St., to rise from $22 million to $286 million. This increase produced an increase in taxes. If the tower was in a TIF zone, the city would continue to normally collect the amount of money it used to get when 18 York St. was worth $22 million. But all of the extra tax money — the “increment” — would go to SmartTrack.

One of the few TIF projects on the scale of SmartTrack is Atlanta’s BeltLine, a massive initiative to build new parks, trails, transit and housing on a 35-kilometre former railway corridor. A form of TIF was supposed to raise $1.7 billion, 60 per cent of the project cost of $2.8 billion.

After the U.S. recession, the revenue estimate dropped to $1.45 billion while the estimated project cost jumped to $4.3 billion — leaving officials “scrambling to find new funding sources,” the Atlanta Journal-Constitution reported in July.

“We were well along in the process to issue TIF bonds when the great recession hit,” Keenan Rice, president of MuniCap, a consultancy that has worked on the BeltLine, told the Star. “Suddenly we found ourselves navigating a very different financial environment with an extremely risk-averse bond market.”

Rice’s firm came up with the new revenue estimate for the project in 2011. On account of the recession and other unforeseen challenges, Rice said, “Just about every fundamental assumption needed to be revisited.” Officials, he said, are now “aggressively pursuing other sources of funds, delaying phases of the project when prudent, and scaling back as necessary.”

Chicago and its suburbs have generated $5.9 billion through TIF since 1986. Chicagoland has 435 active TIF zones.

Tory's sparse plan suggests he could cover the cost of SmartTrack merely with “projected new office development” in three zones: the “central core,” the East Don Lands, and Liberty Village.

But “this is not an exhaustive, nor exclusive list,” Tory’s campaign said in response to questions from the Star — suggesting he might seek to create additional zones somewhere along the 53-kilometre length of the SmartTrack line.

The campaign would not detail the number of zones or their location. Asked if Tory would use the revenue from only office development or from residential development as well, the campaign said, “Both.”

Voters can’t yet be certain that Tory would need TIF to raise “only” $2.7 billion plus interest. That number is Tory’s own estimate of the city’s share of SmartTrack costs, which he says would total $8 billion. But it is not at all clear that the $8 billion figure is right, nor is it clear that the provincial and federal governments would contribute $5.3 billion.

For the sake of simplifying the analysis, we’ll assume Tory’s numbers are accurate. The big question, then, is whether values will rise enough in TIF zones to generate $2.7 billion, plus interest.

Tory asserts they will. To justify his optimism, he regularly cites two figures he got from a Toronto Life article in February: $25 billion spent on condo development since 2000, $7 billion in office development.

“If we just continued at that pace of development, and it’s spread over a 30-year period, we would have more than enough money to pay for SmartTrack and have new money coming in to the city coffers at the same time,” he said Wednesday.

Tory’s figures, however, are estimates, calculated by the journalist who wrote the article after speaking with industry sources. Even if they are perfectly correct, they are secondary. What’s important here is not total investment: it’s how much property values increase, and where.

Debt and taxes by another name

TIF was originally intended to stimulate development in blighted areas. Tory’s TIF plan, like many others in recent years, would rely heavily on tax revenue from development that was going to happen anyway.

Even if Tory's TIF is “successful,” in that it raises the funding SmartTrack needs, it isn’t free money. Rather, it is debt and taxes by another name: it simply allows the government to spend future taxes in the present by borrowing the money up front.

Devoting future taxes to SmartTrack would mean those taxes would not be available to the government for standard purposes: the TTC, parks, pothole repairs, everything else the city pays for — including the new infrastructure and services required by the new development.

“You are taxing assessment growth and using it for a specific purpose. . . Quite frankly, what is the difference between that and what we’re doing for the Scarborough subway?” city manager Joe Pennachetti said when asked about TIF in August.

That planned subway is being funded through a dedicated 30-year property tax increase. Tory says TIF would let him fund SmartTrack “without increasing property taxes.”

“TIFs, in effect, are the same thing,” Pennachetti said. “You’re setting aside money, assessment growth that would have gone to the general revenues of the city, now specifically for that transit project. And that’s why council needs to be informed, understand what this tool can do, and make that decision.”

If Tory’s TIF creates a hole in the budget, property taxes will have to be hiked in the future by more than they otherwise would have. In other words, he could essentially be shuffling taxes around so as to claim his favoured project doesn’t require tax hikes.

Downtown office development

The current municipal tax rate on office buildings is 1.6 per cent. Tory has vowed to continue reducing it.

In a magical scenario in which the office property values immediately soared at the beginning of the 30 years, before SmartTrack was even built, they would have to go up by about $6.4 billion to raise $2.7 billion by Year 30, at a hypothetical 1.4 per cent tax rate. In the more likely scenario that property values increased gradually, those values would have to go up by billions more.

For example: if values jumped only after Year 7, when Tory claims SmartTrack will be ready, they would have to go up by $8.4 billion to produce $2.7 billion by Year 30.

Toronto is experiencing a boom in office construction. But over the past 12 years, the city's total commercial property value has increased by only $4 billion across the city. While new office buildings have gone up, others have vanished, replaced by condos. In each of the years 2003, 2005 and 2007, the total value of commercial properties actually dropped.

Mike Williams, the city’s economic development chief, says the property value of offices can range from $100 per square foot to $800 per square foot. Let’s use the number in the middle, $450 per square foot. At that amount, the city would need 18.7 million square feet of office construction to produce $8.4 billion in new value.

According to figures from brokerage Jones Lang LaSalle, 9.2 million square feet of office space has been built downtown since 1994. Five million more is expected between now and 2017.

In sum: for Tory to raise $2.7 billion only using office development, Toronto would probably need to exceed its total 1994-2017 downtown intensification — and all of that new growth would have to happen in TIF zones.

It is far from assured that Toronto will see all of that growth in total, let alone in particular districts.

“That’s a bit, I think, optimistic, in my opinion,” said Eamonn Murphy, executive vice-president of Jones Lang LaSalle Toronto, when asked if it is conceivable the city could continue to see millions of square feet added.

“I think there’s opportunity for more space to come on. It’s going to be really conditional upon the tenants securing leases in new buildings. The tenants have to make a commitment to the buildings before they’re going to be built.”

Stuart Barron, national director of research for Cushman & Wakefield, said he sees “all the elements” necessary for continued office growth. But he cautioned: “You can never truly predict the future of supply and demand.”

None of the Star’s calculations take into account the hundreds of millions in TIF interest payments that will require property values to rise by billions more. Further, as University of Toronto municipal finance expert Enid Slack pointed out, our calculations may be “overly optimistic”: they don’t take into account the fact that both commercial and residential tax rates decline gradually over time as property values rise.

An extra hurdle: incentives

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Even if the office growth continues, Tory will not be able to use all of the new taxes for SmartTrack: the city is already giving some of the cash back to developers to encourage them to build.

Under an incentive programWilliams strongly supports, certain companies have been given a 60 per cent tax rebate, over 10 years, on revenue produced by their new office buildings. The government ends up with only 40 per cent of what it would otherwise collect.

All six of the downtown office buildings expected to open between now and 2017 are getting the rebate. If a high percentage of future buildings also got the rebate, which is very possible, Tory could have a big problem.

East Don Lands

At first glance, the East Don Lands district near the lake is Tory’s best candidate for easy TIF success: developer First Gulf has proposed a huge new commercial district with 12 to 15 million square feet of office space.

But there are significant caveats.

First, the development may not happen if the eastern Gardiner Expressway is not torn down or realigned. Tory supports the realignment proposal, but it has not yet been fully studied.

Second, First Gulf only owns about half of the land in the area it is talking about, according to chief executive David Gerofsky. The company is likely to build about half of the 12 to 15 million square feet he has floated. Gerofsky said it is possible that a few million square feet could go up quickly — but new transit would be needed, he said, before the whole district could be completed.

This is the third issue. Gerofsky said it is “critical” to have a light rail line to the area, plus a GO Transit stop at the north end. All of that transit would cost hundreds of millions to build and operate — but SmartTrack would be taking all of the new tax revenue.

“Without the public transit, the development would be much, much smaller and much less ambitious,” Gerofsky said.

Fourth: the district would not be completed for 20 or 25 years.

“Of course, you’re not going to drop 15 million square feet down in five years. That wouldn’t make sense,” Gerofsky said. “It would be a multi-year, multi-phase project that would probably take place over 20 or more years.”

Liberty Village and the suburbs

Liberty Village, best known today for its condos, has also been a popular spot for offices for about 15 years, Murphy said, especially with tech tenants who like the vibe of its “brick and beam” buildings.

But those are existing buildings, not giant new office towers that produce giant spikes in assessed value.

“There’s certainly some planned development. There’s nothing coming out of the ground (right now),” said Michael Caplice, senior managing director of office leasing at Cushman & Wakefield. “The scale of anything in Liberty Village is not going to be on the scale of the financial core. You’re talking 300,000-square-foot buildings, not 1-million-square-foot buildings.”

Tory’s campaign suggests he could create additional TIF zones along the SmartTrack line north of downtown. Seven of the 22 proposed stops are in Scarborough. But there may not be demand there: the suburban market has “gotten a little softer,” Murphy said, as tenants have moved back to the thriving downtown.

“New buildings in some of the suburban markets — it’s going to be very slow, it’s going to be selective,” Murphy said. “And suburban buildings are a lot smaller.”

Residential development

Tory would have an easier time raising $2.7 billion if he uses revenues from housing development in addition.

The current municipal tax rate on residential development is less than 1 per cent: 0.52 per cent.

In the magical scenario in which property values immediately soared at the beginning of the 30 years, they would have to go up by $17.3 billion to raise $2.7 billion by Year 30. If values jumped only after Year 7, they would have to go up by $22.7 billion to get to $2.7 billion in revenue.

How realistic is that possibility? During the Toronto condo boom, between 2004 and 2013, residential property values across the city increased by $42.9 billion. Tory would only be able to use increases from specific designated TIF zones covering a small fraction of the city.

There has been little development in Scarborough. Between 2009 and this year, only 16 new condo buildings have gone up there, just 6 per cent of the city’s 277, according to the research firm Urbanation. New transit might make the area substantially more attractive to developers, but it might not.

Education tax

Tory could raise far more money for SmartTrack if the province let him take the tax money usually devoted to education. On office buildings, for example, the education tax rate is 1.3 per cent, nearly the same as the 1.6 per cent municipal tax.

Pennachetti believes the education money is needed by the city to make TIF a sensible option: otherwise the city will essentially just be grabbing its own money. But it is not clear the province is willing to surrender that cash. Finance Minister Charles Sousa was noncommittal this week, and his Liberals have not previously relented.

A tough road ahead

Tory is asking voters to trust him. The city’s recent growth makes him so sure TIF will work, he says, that he does not even need a backup plan.

Citywide growth of some sort, though, clearly doesn’t mean Tory’s world-record TIF will succeed. Tory needs extensive, sustained growth, and he needs it in specific locations he has not yet precisely identified. Voters must decide how comfortable they are with his breezy assurances.

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