What is a California Redevelopment Agency?

Unless you’ve been living under a rock, you may have heard that California has both a major budget deficit and a new governor. One of the proposals to balance the California budget from our new Governor, Jerry Brown, (full disclosure, I voted for him) is to eliminate California Redevelopment Agencies. There have been quite a number of San Francisco projects that have been funded by these agencies, and until I heard about the budget proposal I had really never given much thought to what they are. And why eliminating them would be a good or bad thing. Based on the reading I’ve done so far, I can only surmise that I have a lot more reading to do, but here is a brief summary of what I’ve learned so far.

Background:
California Redevelopment Agencies were first authorized in 1945. The idea is (and was) to fix up blighted, decaying, and forgotten areas, which will in turn raise the value of surrounding property taxes, which will in turn create more tax revenues for everyone.

How California Redevelopment Agencies Work, in a very simple nutshell:
Redevelopment agencies are entities created to make the initial investment to enable redevelopment, and they are allowed to take a portion of future tax increases (created by the increase in taxes due to the increase in value caused by the work) to pay for the initial investments. Its a solution to the classic chicken and egg problem. You believe you’ll make more money in the future if  you invest money today. But you don’t have any money today to invest. So you create the redevelopment agency to issue bonds or other debt instruments, and create a future revenue stream that will provide investors with a level of certainty that their investment will be paid back and they’ll make a little bit of money in the process.

So why is this a California budget issue?
Redev agencies are guaranteed a cut of the future incremental tax increases (take your basline property taxes, the amount that the area currently generates in its blighted condition. Subtract this from the amount of taxes that will be generated when the area is redeveloped and you have your incremental tax increase. Roughly, in a nutshell). And it is that money (the incremental taxes) that Jerry Brown would like to have back, thank you very much, to help balance the budget.

Is this a good idea?
Depends on who is talking. Some feel that these agencies are an inefficient and costly way to achieve development goals, and that there are better ways to accomplish redevelopment in California. Others feel that there is a multiplier effect from the work that has created hundreds of thousands of jobs and additional forms of revenue for the state, and that to eliminate them is a very short sighted and ultimately destructive activity that will come back to haunt California budgets in the future.

Incremental Tax Revenues, California Redevelopment Agencies

Stay tuned for more of my thoughts about this, and what it could mean for San Francisco real estate.

Comments

  1. Max says

    Cities (City of Agoura Hills for instance) are not just fixing up blighted, rundown or forgotten areas. Cities are getting into the construction business and building low income housing on unimproved property (lease program)with these redevelopemnt funds which in essence lowers property values lowering the tax base which appears to contradict the essence of the program. And I’m not talking about building in blighted rundown or forgotten areas. In a time when you can buy homes for half of what it cost to build why are cities doing this. Seems like bad economic sense.

    • Matt Fuller, GRI says

      Max – interesting point. I’ll definitely have to look into that, it does seem like the agencies suffer from “mission creep” and have expanded beyond their original intent. It also seems as though they can be slush funds to funnel projects to politically connected developers…

  2. Joe says

    Redevelopment agencies do much more than just buy up blighted sites and sell them to home builders. I have worked on redevelopment agency-funded projects that included a new library, widening of a freeway overcrossing which opened up a new area to commercial development (read: increased tax base), and many other examples.

    BTW, what is wrong with construction of new housing on redevelopment agency-owned or -funded land when those projects mainly serve low income households which would not be able to enter the market on their own? I have also participated in many redevelopment agency-funded low income or sweat equity housing projects which have opened the door to home ownership or rentals to people who whould not have been able to make it some other way.

    I believe that Governor Brown’s targetting of redevelopment agencies is simply a grab for the pot of money that those agencies are sitting on. Many redevelopment agencies are too small to start projects with a bang, so they have to accumulate funds for a couple of years before they can leverage them or otherwise turn them into a viable project. This is a grab for those unused funds, plain and simple. It is the epitome of “Sacramento knows best!”

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