Tying industrial revenue bonds to the downtown development plan, as suggested in a consultant's report made public this week, could prove troublesome for the D.C. government.
The report, prepared by Morton Hoffman and Co. Inc., urges the use of industrial revenue bonds (IRBs) and other tax incentives to spur downtown development. But the firm's discussion of IRBs should raise caution flags for District officials in light of steps that Congress took last year to limit their use.
The Greater Washington Board of Trade, which commissioned the Hoffman report, said it serves to "analyze the desirability and feasibility of selected incentives that could assist the District in attaining a mixed-use and diversified downtown."
Previous reports by the board and the Mayor's Downtown Committee had emphasized the use of zoning and tax incentives as possible stimulants to downtown development.
Hoffman recommends, among other things, that the District promote the use of industrial revenue bonds "tied to the implementation of the Downtown Plan."
State and local governments use their tax-exempt-borrowing authority to make IRBs available for business investments in their jurisdictions. In practice, a jurisdiction issues an IRB, which then is bought by a financial institution. Proceeds from the sale then are loaned to a business, which repays the loan at a cost far below prevailing interest rates.
The concept became engulfed in controversy as IRBs were used to finance just about anything from fast-food restaurants to go-go bars, prompting Congress to impose limitations on the use of the bonds.
And the Hoffman report points out correctly that new federal restrictions eliminate the issuance of IRBs for some of the very uses that are to be encouraged in the development of downtown--restaurants, entertainment facilities, etc.
In a discussion of the pros and cons of using IRBs, however, Hoffman suggests a way to get around those restrictions. But the consultant's suggestion for avoiding the problem should set off an alarm for D.C. government officials.
Problems posed by federal restrictions on the use of IRBs can be avoided "by providing the bonds for the office portion of the project in return for the provision of those other uses which are desirable," the Hoffman report advises.
Congressional tax experts question that interpretation, especially in light of restrictions that are contained in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).
Those restrictions were prompted by the scores of abuses in the use of tax-free revenue bonds referred to earlier.
Although Congress believed that state and local governments are best suited to determine the proper uses of IRBs, it concluded that restrictions were needed to help eliminate inappropriate uses of so-called small-issue industrial revenue bonds.
Small issues are limited to $10 million.
Small-issue IRBs may not be issued, for example, if 25 percent of the proceeds are to be used for retail food and beverage services. Those include all eating and drinking establishments, but not grocery stores.
In addition, IRBs may not be used for recreation or entertainment facilities. Space in an IRB-financed office building could be used for other retail functions such as a bank, however.
The Joint Committee on Taxation provides the following explanation in the relative provision in TEFRA:
"Assume that a hotel is to be financed with an issue of small-issue bonds and that the building contains a restaurant (which may or may not be operated in conjunction with the hotel). In determining whether 25 percent of the proceeds of the obligation are used for restricted purposes, the restaurant is treated as a prohibited use even though the restaurant may be considered functionally related and subordinate to the hotel. The cost of the restaurant would include a portion of the facilities used in common with the hotel operations such as parking, lobby, etc."
Put another way, the developer of a building couldn't obtain a $10 million loan if development of space for a restaurant in the property amounted to $3 million. The restaurant wouldn't qualify under the 25 percent rule.
Local business and government officials remain enthusiastic about tying IRBs to downtown development. But reached at his office in Baltimore yesterday, Hoffman acknowledged, "If you ask me, Should they proceed prudently? you probably have a good point."
Hoffman concedes that "we may have combined three thoughts" into one and that the statement suggesting a way around federal limitations on IRBs may be unclear.
One thing is clear, however. In another section on the subject, the report warns that, in the District, "Projects over $10 million should be approved only in rare circumstances and subject to careful controls."