Embedding futurity in urban governance: Redevelopment schemes and the time value of money

Abstract

Whether appraising development projects or underwriting bonds to finance infrastructure, municipal governments rely on “time value of money” (TVM) techniques to discount and convert hypothetical future cash flows into objects of knowledge in the present. I analyze these calculative techniques through participant observation and interviews with professionals involved in redevelopment projects funded by Tax Increment Financing (TIF) in the Midwestern United States. I find that the TVM assumptions used in models to estimate future values help embed financialized modes of futurity into governance, leveraging the tax base for entrepreneurial urbanism. I describe the contexts in which these techniques are used and, drawing on the literature on the social construction of value, the future imaginaries they perform. I explain why the local state adopts the private sector’s low discount rates and the material effects of this mimicry: inflated estimates of future property values, which are capitalized into larger amounts of public subsidy and, possibly, higher actual values. Future values are also the basis for co-rent-seeking, whereby the state attempts to repay debt on infrastructure through the production of surplus value in land. With institutional support, the techniques and assumptions underpinning these land value capture strategies intensify development and create a reinforcing spiral of asset appreciation.

Keywords

Financialization governance expectancy time value of money redevelopment

Introduction

Future asset values are a critical focal point for urban governance; they form a beacon on the horizon guiding planners and developers through the choppy waters of financial volatility and competitive claims on public resources. In an era of austerity and antagonism toward tax rate hikes, municipal government policies, spending, and borrowing all depend on growth in property values. To catalyze property value appreciation, the local state enters into transactions with real estate developers and their financial backers, who seek assurance that future returns will be sufficient to make investments in today’s built environment.

Yet these future values are also “an absent, imaginary vanishing point” (Bourdieu, 1979 in Beckert, 2016: 23), a remote goal approached but rarely reached. Values could always be higher—so the goal is not a fixed point but rather a constantly rising target. Moreover, future property values are not controlled by any one actor or institution. Market actors influence values by investing in and exchanging property in a more or less uncoordinated manner. Their collective behavior is uncertain, sensitive to herding and rumor, and prone to missteps and dumb luck. In US cities, multiple government agencies (e.g., county assessors, state governments, school districts) have purview over property values. Each is beholden to different regulatory precepts, some of which (fairness, accuracy, austerity) can depress values.

Precisely because of this uncertainty, urban governance rests on a foundation of expectancy and speculative future-thinking. Municipalities are in positions in which they are frequently asked to calculate future property values, and doing so inscribes them in the present. For example, the local state uses estimates of future values to determine the amount of subsidy for major redevelopment projects, which in turn influences private decisions, such as the timing and scale of new construction. Rather than chart their own course, however, municipal planners often use financial feasibility modeling techniques borrowed from the private sector to speculate on the direction and degree to which property values will change over time.

The importance of the routinized ways in which public and private development actors practically anticipate the forthcoming raises questions about how they come to know the future and render it actionable. At the core of feasibility techniques lies the premise that money has a “time value.” The time value of money (TVM) is a market device that allows professionals to telescope the future down to the present and project current values outwards toward the beacon on the horizon.¹ Whether valuing a prospective development project or underwriting a property-backed bond to finance new infrastructure, actors rely on this concept to “discount” and convert hypothetical future cash flows into concrete objects of knowledge in the present. Each property appraisal, estimated sales price, and bond prospectus contains within it assumptions about the degree to which property values will be greater tomorrow than they are today (even if the same dollar is worth less).

My case study is of the TVM techniques used in a particular urban policy: Tax Increment Financing (TIF). A variation of “land value capture” or “value uplift” strategies used across the globe, TIF is the most popular economic development tool in the United States (Merriman, 2018).² I describe and analyze the calculative techniques grounding the administrative processes involved in the decisions to use TIF for infrastructure and developer subsidies. These were observed through attending city council and planning meetings in municipalities across the US Midwest, conducting interviews with analysts working in city halls, state houses, and consulting firms, reviewing textbooks used in real estate investment analysis, and collecting journalistic and expert accounts of the TIF designation and subsidy allocation processes.

The article is structured in a non-traditional manner: It begins with the empirics, describing the use of TVM techniques surveyed from several years of interviews and participant observation of TIF negotiations. It then unpacks the meaning, influences on, and probable effects of such valuation techniques through the application of diverse theoretical traditions. Influenced by critical anthropologies of the state and sociologies of quantification, I take a constructivist approach to studying the under-the-radar calculative practices that local government planners, consultants, and private developers use to establish inter-temporal values. Like double-entry bookkeeping (Carruthers and Espeland, 1991), yield curves (Zaloom, 2009), and the spread plots used by arbitragers in mergers and acquisitions (Beunza and Stark, 2004), these market devices help build out imagined futures by shaping expectations in the present. By examining the “technicalities of practitioner knowledge,” however, I am not avoiding “core economic concepts” (Konings, 2018: 42), but rather approaching concepts like valuation, speculation, and capitalization from the bottom up. Some may mistake detailed knowledge of quotidian techniques for methodological fetishism, but when such techniques are omnipresent in everyday administrative decisions, they can have profound material effects. Indeed, I argue that TVM techniques allow planners to capitalize expected rent gaps into present-day property values, which, in a self-reinforcing manner, can intensify development activity, raise asset prices, and compound the asset-based inequalities ubiquitous in urban areas. They are part of a suite of tools and calculative devices that municipalities use to aid capital, but best illustrate the expectancy that is the subject of this paper.

A constructivist interpretation of such calculative practices runs the risk of oversubscribing agency to inanimate algorithms that are used differently in diverse settings. It can also overstate their material effects. This is why I describe the politics and contexts of the use of these techniques in addition to their internal logics. Doing so requires reconciling insights into knowledge-based micro-practices with a more structuralist approach to understanding the financialization of the economy and of the local state, so as to demonstrate how knowledge practices enable and result from certain political-economic structures. I argue that, by working with and through the calculative devices borrowed from the financial sector, TVM techniques and assumptions help to embed financialized modes of futurity into governance in ways that leverage the tax base for entrepreneurial urbanism.

TIF and the projection of future property values

What is TIF?

TIF allows municipal governments to pay for private redevelopment expenses from future tax revenues generated from properties in a designated district (the “increment” is the incremental difference in taxes on the properties in the district in the current year relative to the year in which the district was approved; for a primer on TIF, see Johnson and Kriz, 2019).³ These revenues are sequestered from the general fund and can only be spent on land acquisition, financing, and construction expenses in the designated district—not on operating expenses for local governments. Starting in the 1970s, municipalities have used this tool to finance everything from infrastructure (roads, bridges, transit stations) and affordable housing to industrial facility expansions and mixed-use projects. TIF is the most commonly used economic development incentive in the United States (Warner and Zheng, 2013); 49 states and the District of Columbia have passed enabling legislation (Merriman, 2018). However, adopters tend to be municipalities in the West and Midwest that engage in competition for business investment with their neighbors, have relatively high tax rates, and host a large number of overlapping tax jurisdictions (Byrne, 2005; Man, 1999).

Property development companies may initiate the designation of TIF districts, or municipalities may do so if they see the need for area-wide infrastructure upgrades. Upon designation of a TIF district, developers queue up to receive subsidies from the fund to cover expenses they would otherwise have to assume. They pitch projects to the municipal government, proposing to convert a parking lot into a hotel or to build a shopping center on formerly industrial land. They proffer renderings, blueprints, and spreadsheets to narratively stage the proposed project. They hire specialized consultants to make a convincing case of public benefits (Weber and O’Neill-Kohl, 2013). Municipal planners also hire consultants to help them decide whether proposed projects should receive a subsidy and, if so, how much the local government should provide.⁴ Projects are more likely to be approved if they conform to the TIF Redevelopment Plan, which depicts an ideal future for the district (e.g., new buildings and public spaces, more efficient traffic patterns) and is often drafted by the same consultants that determined the subsidy was necessary (Dardick, 2020). A final vote in city council cements the deal.

TIF is also an instrument that “assetizes” differential rents generated from land in the district (Weber, 2010). In some cases the municipality floats bonds to cover up-front expenses and uses the tax revenue increments to pay them off. In others, developers pay for the expenses and are repaid with the tax increments generated. In both instances, as well as in other cases of tax- and land-based debt, public and private actors borrow against the future values of property in a designated area. Developers try to convince the city, the city tries to convince banks, and banks try to convince investors of the future profitability of the subsidized project and its potential to pull up the values of the surrounding parcels.⁵ They are dependent on and influenced by each other’s expectations of appreciation. In this way, claims made on future values form the basis for the TIF subsidy that is the focus of the ensuing redevelopment negotiations.

Financial feasibility modeling for TIF projects

Municipal planners allocate TIF funds in ways that mimic the manner in which the private sector invests in real estate. Any kind of financing secured by future asset values requires that property values be estimated in the present for different intervals of time (1-, 5-, or 20-year projections). Estimates of values and project cash flows are produced and compared to present-day costs in “financial feasibility,” “project appraisal,” or “viability” models.⁶ They are estimated not because of any formalized legal or policy directive, but have “emerged in an incremental and ad hoc manner” as part of property negotiations between public and private actors (McAllister, 2017).

Feasibility models rest on the notion of the “time value of money” (TVM). TVM is the belief that a dollar today is worth more than a dollar tomorrow because the cash available now can be invested to produce additional income in the future (and because, in the case of real estate, property improvements depreciate over time even if land values increase).⁷ Discount rates reflect exactly how much more a dollar today is worth than a dollar tomorrow. When a project’s benefits are only expected to materialize in the distant future, a low discount rate treats those benefits more favorably. Conversely, a higher discount rate treats future benefits more skeptically. Discount rates are applied to relevant costs and cash flows, which are extrapolated over time. Discount rates have been widely accepted components of project appraisal and real estate investment analysis for over a century (see textbooks by Babcock, 1924; Graaskamp and Jarchow, 1991; and Miles et al., 2015) and are used in most forms of TIF analysis (Gromacki, 2014; Hefferren, 2017).

I followed the progress of several major TIF redevelopment projects in Illinois and Wisconsin from 2011 to 2017.⁸ When feasible, I asked the planners, consultants, and developers involved to show me their models and explain their spreadsheets. I also worked with investigative journalists and watchdogs researching these deals and reviewed project documentation that was both publicly available and that had been released as a result of Freedom of Information Act requests. The author’s invited participation in several city- and community-led efforts to reform the TIF allocation process in Chicago provided multiple access points to data and perspectives that are not widely available (for a similar approach, see McAllister, 2017).⁹ I also reviewed textbooks and handbooks for professionals in the field. Contextual detail is kept to a minimum to protect the anonymity of individuals involved in these processes and because the calculative methods, rather than the specifics of any one project or deal, are the focus of this research project.

For example, the city of Bloomington, a small city of approximately 78,000 in north-central Illinois, established a TIF district in its downtown. In 2016, the municipal government contracted with a third-party consultant, SB Friedman and Company, to help it evaluate a request it received from the Bloomington Downtown Redevelopment Partners LLC for US$13 million in TIF funding and a half-acre city-owned parking lot, on which the developer sought to build a hotel and conference center (SB Friedman Development Advisors 2016). The consultant projected out the tax revenues that the completed project could generate, including hotel taxes, food and beverage taxes, sales taxes, and incremental property taxes in the TIF district, and calculated the associated present value of all these revenue streams. Using TVM techniques and other assumptions to estimate the future sales price of the project, the consultant concluded that the built-out project would generate a present value of US$16.9 million in tax revenues, assuming a 25-year holding period and a 4.5% discount rate. Moreover, the consultant capped the project’s leveraged internal rate of return (IRR) at 18%, which it determined to be a reasonable rate of return for a project of this scale and scope. The estimated values allowed the consultant to conclude that Bloomington could more than cover the developer’s financing gap, which it estimated as being between US$8.2 and US$11.2 million (compared to the original ask of US$13 million) for the roughly US$50 million hotel project. With the usual caveats about future uncertainties, the consultant urged the municipal government to proceed with the project but to offer a slightly smaller up-front subsidy than what was originally requested.

Through cases such as these, I found that TVM techniques were employed in at least five specific moments in TIF negotiations (Table 1).

Table 1.

Descriptive statistics.

TIF Calculation	Formula	Assumptions
Present value (PV) of future rental income in a stabilized year	$P V = \frac{{NOI}_{n}}{r - g}$	NOI_n = net operating income in stabilized year nr = discount rateg = annual change in income, assuming both NOI and V change at the same rate
Rate of appreciation of TIF district property values	$r = \sum \frac{(A V_{n} - {A V}_{n - 1})}{{A V}_{n - 1}}$	AV_n = cumulative assessed value of the property in year n (year following both the designation of the TIF district and construction of the proposed project)
Depreciation rate of TIF district property values	-1* $r = \sum \frac{(A V_{n} - {A V}_{n - 1})}{{A V}_{n - 1}}$	AV_n = cumulative assessed value of the property in year n (year following both the designation of the TIF district and construction of the proposed project)
Internal rate of return calculation for developer’s equity investment	$0 = \sum_{n = 1}^{n} \frac{{C F}_{t}}{(1 + IRR)} - I_{0}$	CF _t = cash flow in year nI₀ = initial investment in year 0IRR = internal rate of return of the investment (i.e., the discount rate at which the net present value of future cash flows is equal to the initial investment)
Present value (PV) calculation of TIF subsidy to developer	$P V = \sum \frac{(A V_{n} - A V_{b}) * T R_{n}}{{(1 + r)}^{n}}$	AV_b= assessed value of the individual property in the base year (i.e., the year TIF was designated) TR_n= property tax rate in year n r = discount rate

First, the municipality requires an estimate of the “terminal” fair market value of a proposed redevelopment project—that is, its property value once constructed. The expectation is that this value will be greater than the parcel’s current value as vacant land or improvements for which there is less demand. The income capitalization method of appraisal estimates what purchasers are likely to pay using assumptions about the present value of future rental income (NOI or net operating income) in its “highest and best use.”¹⁰ Market values are converted into assessed values for the purpose of levying property taxes.

Second, the municipality forecasts a hypothetical rate of appreciation for the new project and for the surrounding parcels in the TIF district, estimating the future value of parcels whose present values have been recorded by the tax assessor. Inflation rates assume that the annual change in property values remains constant throughout the district’s lifespan, which is commonly around 20 years. The TIF district is supposed to generate enough incremental property taxes to repay any debt floated to front-fund the project.

Third, the municipality may calculate a depreciation factor, often the negative “mirror image” of the positive appreciation rate mentioned above, to paint a foreboding picture of what would happen if the TIF is not designated, if subsidies are not provided, and if the redevelopment projects are not built. In other words, even though there is no necessary relationship between the two rates, the reverse of the inflation factor represents the worst-case scenario in the event of inaction.

Fourth, the developer discounts future values to determine how much equity to contribute, with and without the TIF subsidy. The net present value (NPV) of a project is the discounted value of a series of cash flows over time compared to some initial equity investment (made in “year 0”—i.e., the present). It reveals how much investors would risk in today’s dollars for the promise of specific cash flows over a period of time, assuming that the discount rate represents a market rate of return. Knowing how much TIF subsidy they will receive to offset project costs is paramount for developers and their prospective equity providers. When considered with the leverage provided by whatever debt they incur, the subsidy determines the expected return on their investment (i.e., IRR) within a given turnover time (i.e., the “holding period”). To strengthen their case for government subsidies, developers perform their own feasibility analyses, generating IRRs with and without different contributions of TIF funds. Demonstrating that their returns would fall below what would be considered reasonable by “the market” provides justification for a developer's request for public assistance.

Fifth, to estimate a subsidy amount, the municipality “backcasts” the present value of the future incremental tax revenues generated by the properties in the TIF district over its remaining life by applying a discount rate. The calculated present value of the TIF incremental revenue stream then forms the ceiling for the subsidy that the municipality will allocate to developers with funds secured by these revenues. It can be compared to estimates of the developer’s financing “gap” to negotiate a final subsidy amount.

What’s inside a discount rate?

The history of TVM

Financial feasibility modeling can be read as reflecting assumptions about the future that are in vogue during different historical periods (Crosby and Henneberry, 2016). Dulman (1989) locates the origins of TVM in the practices of engineers working in capital-intensive industries like railroads, telecommunications, and petro-chemicals in the United States around the turn of the last century. Before this, long-lived capital investments were considered operating expenses, and monopoly capitalists focused primarily on how to rein in short-term costs. Efficiency-seeking engineers, and later economists (see, for example, Fisher, 1906), experimented with different mathematical formulas to improve the criteria used to consider the future prospects of alternative investments. They found in the concept of a discount rate a way to put those costs and benefits occurring at different points in time on equal temporal footing. Against the backdrop of capitalist modernity and the optimism of the roaring 1920s, stochastic calculation lengthened the time horizons of corporate decision-makers. With the proliferation of quantitative models, prophecy moved from religious to economic spheres and was subsequently adopted by the technocratic state (M. Weber, 1905, 2013).

Today, relatively little disagreement exists about the basic structure and necessity of financial feasibility analyses in real estate transactions. Graaskamp and Jarchow’s canonical 1991 textbook on the topic is taught in most introductory real estate courses in the United States. Graduate training in business, engineering, or public policy schools expose students to these methodologies (although the degree to which they have “traveled” to other countries is up for debate; see Bardet et al., 2020). Around the turn of the 19th century, engineers and managers relied on written tables with factors based on different interest rates to apply to cash flows in specific years (Dulman, 1989). TVM models became significantly easier to use with the advent of financial calculators and spreadsheet software like Excel, which “transforms what looks like an impossible exercise (given the uncertainty that weighs upon each of these parameters) into a copy-paste-like task” (Doganova, 2011: 8). With numbers arrayed in spreadsheet form, the analyst simply selects the cells with relevant cash flows and applies their choice of discount rate.

Like the London Interbank Offered Rate (LIBOR), analysts treat discount rates as “a benchmark—a gauge of market conditions, expressed as an interest rate” (Ashton and Christophers, 2015: 190). They are a mysterious composite of three factors—the cost of capital, the rate of inflation, and an enumeration of possible risks—whose relative weights are unspecified and unknown. The values resulting from any of the five kinds of TIF analysis described above will change significantly if assumptions about discount rates are modified by even the smallest gradient. If analysts raised the discount rate used in the Bloomington example to, say, 4.75% from 4.5%, a project promising 25 years of tax revenues would suddenly appear infeasible, and the consultant might have discouraged the public sector’s investment.

Analysts wielding these models recognize the difficulty of choosing the “right” discount rates to perform the necessary calculations. They know they possess tremendous latitude to select the other input parameters, including holding periods and relevant cash flows (Doganova, 2011). Even the grandfather of real estate feasibility modeling, Jim Graaskamp (in Graaskamp and Jarchow, 1991: 376), acknowledged that “real estate is a soft commodity, perhaps the softest commodity in the world. When you buy real estate, you buy a set of assumptions about the future,” with discount rates among the “softest” of assumptions about the future. In a primer for city managers on calculating TIF revenue, Hefferren (2017) similarly notes: “The starting point for all projections is the assumptions. The reasonableness of the pro forma assumptions is a large part of examining the reasonableness of this analysis.” These models are less masked illusio (Bourdieu and Wacquant, 1992), smokescreens that few can see through, than openly probabilistic means of estimating values.

Despite recognizing that discount rates are “assumptions,” most professionals frame the conundrum of value-setting as one of subjective manipulation, inaccuracy, or uncertainty about model inputs. For example, practitioners commonly joke that MAI, the acronym for the professional distinction accorded to Members of the Appraisal Institute, stands instead for “Made as Instructed.” In this sense, they adopt a realist or foundational approach, assuming it is difficult but still possible to isolate “correct” rates that will “accurately” reflect property values. In other words, “while the contents of the … formula seem to be extremely flexible, its structure appears rigidly robust” (Doganova, 2011: 13).

Constructivist approaches to valuation methods

Challenging the idea that discount rates represent market conditions or that the TVM-based models actually predict future values, social constructivist approaches to valuation treat values as unequivocally flexible.¹¹ Values are always malleable, debated, and doubted, reflecting a “plurality of fictional expectations circulating in markets” (Beckert, 2016: 85). In arguing against “ontological value foundations,” Konings (2018: 4) points out that calling values “elastic” misrepresents their nature; if values are stretched out, they will neither bounce back to an original state nor snap if stretched to capacity. It is better to refer to them as “plastic” in that values can reproduce themselves through continuous changes in their relational form. Apart from their speculative context in dynamic and uncertain real estate markets, property values have no intrinsic, fixed, or essential mooring.

A constructivist approach would not view the property appraisal and tax assessment practices used to negotiate TIF deals as estimating values based on past and present data. Instead, the anticipatory pragmatics of valuation actively construct values. Valuation as a process of worth attribution involves a series of judgments, assumptions about what counts, and choices of methods and assumptions (Chiapello, 2015). Constructivists assume a property’s value depends on “how valuation is done, when, by whom, and for what purpose; and that to value is a highly creative process. The value of an asset is, so to say, entirely in [the practitioner’s] hands” (Muniesa, 2011: 28 cited in Konings, 2018: 3).

Despite the plurality of methods and inputs, users cannot fix discount rates and values just as they would like them to be. The value claims made by a developer or planner still must be viewed as credible, valid, and legitimate by the epistemic communities of professionals that encounter and use them. Therefore, constructivists are less interested in whether a prospective project’s future value is true than whether this fiction is believed (Beckert, 2016). In other words, the power of property value projections lies not in their ability to accurately represent the future, but in their ability to enroll and satisfy other stakeholders (Doganova and Muniesa, 2015). One planner in Wisconsin noted: “Eventually you find the right (discount) rate to make everyone happy.” Relevant stakeholders must trust the values that result from the calculations or at least suspend disbelief when using them.

TVM calculations are one of those forward-looking “magical practices” at the heart of contemporary capitalism that makes the future seem calculable (Appadurai, 2013: 243). Because it does not yet exist, the future is entirely imagined. Through their use, the future emerges as a subject of knowledge, an imaginary, helping practitioners to overlook its unknowability and to stabilize and manage contingency. Reaching beyond known facts, TVM has taken its place alongside other probabilistic methods to convert uncertainty into risk, reduce the infinite number of alternatives into a range of possible scenarios, and coordinate various claims on the future. The use of TVM techniques in public–private redevelopment enables orderly property speculation even as the multiplicity of projections created for a site spawn a bewildering number of possible futures for it.

Constructivist scholars study how calculative devices perform the time they profess to measure through their use in specific contexts (Adkins, 2018). TVM techniques, for example, allow economic actors to “pirouette and swivel” to face multiple temporal directions simultaneously (Adam, 2010: 362). While there is a past orientation for most scholarly empiricism (i.e., we can only gather evidence from the past, not from the future), practitioners are generally looking toward the future. They have “a practical understanding that includes a future orientation and a focus on outcomes of plans, decisions, hopes and fears and anchors these with reference to their place and location in chronological time” (Adam, 2010: 362). The stories the professionals interviewed told about possible futures, using the outputs of TVM calculations to “measure” incremental revenue streams, also influenced public and private investment behavior in the present.

The calculative devices described above can result in material effects: the construction of projects articulated in TIF Redevelopment Plans and in the area-wide appreciation that parties to the deal interpret as success. When redevelopment occurs, municipal governments naively assume that it was their intervention—their subsidies and zoning bonuses—that led to the construction of the project. They assume the discount and inflation rates used ex ante were accurate because discount rates used to build projects that are ultimately constructed, tenanted, and spur area-wide redevelopment are rarely questioned after the fact. However, property values may appreciate as a result of the iterative feedback of these parties acting on comparable hunches at roughly the same time. Outcomes may have resulted from actions motivated by their shared belief in expectations. In other words, these techniques are performative; they do not merely record a reality independent of themselves, but also contribute powerfully to shaping, simply by measuring it, the future (Callon, 1998).

Applying the insights of constructivism to the cases of TIF redevelopment deals observed, I argue that the calculative techniques professionals use perform the following kinds of imagined futures:

A future measured in money. Although obvious, TVM calculations express ideas about the future through the medium of money. The meaning of a dollar as a promise to pay remains stable throughout future periods, even if its value changes. Future value calculations reinforce the notion that money can bridge present and future states.

A future that engenders linear and divisible time. Market devices generate their own time structures (Preda, 2006). The rates of return used in TVM calculations in TIF deals are expressed in annual terms, and occasionally in smaller units of quarters or months. Time’s arrow, the telos of the economy, has an expected duration, limited by the 20-years-plus lifespan of the individual TIF district (Li, 2017). The developer’s envisioned “holding period,” expressed as an ordered series of columns representing years in a spreadsheet, is another way of demarcating property time. Breaking the future down into similar-sized units on a spreadsheet reinforces the illusion that the future of a property or market can be rendered visible and calculable.

A planned future. Quantitative techniques do not have to bear the heavy weight of convincing actors about the future on their own. The calculative practices used in redevelopment deals get a boost from the public planning documents that accompany and inspire them. For example, TIF Redevelopment Plans narrate a future of positive improvements for a given geography. Although typically drafted by private consultants (Weber and O’Neill-Kohl, 2013), they come with the authority of the state behind them as they express the commitment of the local government to a particular future. These plans are seductive and unabashedly speculative—describing a future of new construction, growing demand, increasingly efficient infrastructure, and rising property values.

For example, in 2015 the City of Bloomington hired planning consultants PGAV to draft a TIF Redevelopment Plan for its Empire Street Corridor, itself a somewhat fictional geography that did not exist before the municipality commissioned the Plan.¹² Although the area was not considered “blighted” for the purposes of eligibility, it took advantage of an exceptional category in Illinois TIF law allowing “conservation areas” that could become blighted and could become detrimental to the public safety, health, and morals in the future. The Plan details several projects that it expects the private sector to undertake with public assistance (for land acquisition, site assembly, and infrastructure improvements), such as the redevelopment of an obsolete retail shell and construction of a mixed-use facility on a vacant site.

Multiple, liquid, and contingent futures. Part of the attraction of spreadsheet-based feasibility models is that they allow users to effortlessly project out multiple futures as scenarios. Value consequences are derived from alternate scenarios—for example, if a developer has to contribute US$1 million less in equity, if interest rates go up by 50 basis points, if rents escalate by 2.5% instead of 2% annually—with the underlying assumption that investors could always pull their money out and invest it in another project (Chiapello, 2015). Experts change the assumptions embedded in the spreadsheet models with a click of the mouse and compare different outputs. The power to change the future so easily on a computer screen gives the impression that each scenario is caused by actions taken in the present, even if causation is ambiguous. Scenario-building incorporates the idea that, despite planning’s best intentions, the future is contingent and that municipal planners need to engage in on-going dialogues with “unfolding situations” (Beckert, 2016: 59). Feasibility models rarely project out a radical shock or Black Swan, as doing so would undermine the assumptions of steady, incremental change embedded in TVM techniques (i.e., the future is worth the same amount less every year). Future scenarios are different than the present, but not radically so.

An inflationary future. TIF financing schemes only “succeed” if properties in the designated area appreciate at a rate that exceeds that at which property “naturally” loses its value because of inflation, risk, and obsolescence (Weber, 2002). If appreciation and discount rates are the same (if values inflate at the same rate at which they are discounted), property values would not be projected to increase and the future would look just as it does today. One interview subject noted that it would be like walking down the “up” escalator at the same pace as the force propelling you upwards; that is, there would be no forward momentum. Not altering the future is not an option; development scenarios projecting out a status quo, no-growth situation inevitably see decline, given the opportunity costs involved in refusing to plunder the riches of the future. When actors use a depreciation factor to estimate the counterfactual of no subsidy or development, they capitalize on possibilities to compel action in the present as doing nothing appears ruinous, a step backward from the horizon of constantly appreciating values (Amoore, 2013).

A mimetic future. To improve the credibility of their TIF calculations, experts use discount rates that closely track what other actors in the same market use, reinforcing the idea that the concept of value is self-referential. The world of TIF finance is small and guild-like; I observed the same handful of consultants operating in the Midwest, and they often worked both sides of the deal (although perhaps not in the same city). These experts sell their skills to divine the future, generating technical reports that help governments observe how market actors think and that aid in the dissemination of market devices from the private to public sectors (Linovski, 2018; Weber and O’Neill-Kohl, 2013; Miller and O'Leary, 2007). In their analysis of the King’s Cross redevelopment project in London, Robin (2018) found the mobilization of certain calculative techniques encouraged the adoption of financially narrow definitions of risk and suppressed community opposition. By mimicking the discount rates and feasibility techniques of developers, municipalities allow private actors to shape “the rules of the game, which in turn determines whose values and knowledge(s) are accounted for in urban decision-making and performed through redevelopment schemes” (p. 7).

Constructivists’ emphasis on performativity intentionally blurs the distinction between processes of imagining the future (in which assets undergo judgments of value through calculation) and processes of producing the future (in which rents are created, so as to be of value). However, constructivist approaches can also give the false impression of pluralism and parity between economic actors. Not all stakeholders in a development deal possess equal ability to influence and perform future property values. The built environment, despite the appearance of constant flux, is not so radically contingent that anyone with an interest in a parcel of land can shape its development or the circulation its value. In other words, not all calculations will be equally performative (Svetlova, 2012); their impact on the production and circulation of property capital will depend upon who applies them within specific markets and institutional settings. Claims about the boundless plasticity of future values, therefore, must be reconciled with “explanatory factors outside the realm of the calculative” (Christophers, 2016: 323) – something I attempt to do in the following sections.

Capitalist futures

Few scholars have connected expert and technocratic knowledge practices to the material dimensions of urban projects, redevelopment, and governance. The few who have (see Christophers, 2014; Crosby and Henneberry, 2016; Robin, 2018) show how capitalist property relations, institutional design, and politically circumscribed project timelines determine the degree to which models like those described in previous sections are performative of material futures. Extending their work, I argue that the power to value the future built environment and to control the organization of space in TIF redevelopment schemes favors those owners and financiers best able to appropriate rents from landed property. The local state, as both owner and financier, accommodates capital by mimicking the calculative logics of rentiers and internalizing their low discount rates. This section explains why, refracting theories about the social construction of value through a critical political-economy lens.

The political-economy of property valuation I: Macroeconomic trends

TIF negotiations reveal the local state’s inability or unwillingness to implement an agenda that potentially diverges from the expectations of finance capital (Guironnet et al., 2016). In theory, municipal governments could push back against investors’ interest in inflating and extracting differential rents from land by raising discount rates higher than those the private sector uses in their TVM calculations. Raising discount rates in the context of TIF deals would slow turnover times considerably by assuming greater future risks (due to weaker demand or oversupply of buildings) but also would protect taxpayers from subsidizing development schemes beyond what they generate in revenues. A discrepancy between public and private discount rates would not be novel or exceptional: Starting in the early half of the 20th century, the “new welfare economics” school proposed that public sector planners use a higher “social discount rate” due to the public sector’s stewardship of public goods, risk aversion, and openness to interest-group pressures (Pigou, 1920). The state, it was argued, needed to protect the interests of future residents against the effects of the self-interested present and to make cost–benefit decisions on behalf of “society.”

However, low discount rates are both cause and effect of the growing financialization of capitalist production, and, as such, have become increasingly difficult to boost. Defined as a “pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production” (Krippner, 2005: 14), financialization is shorthand for the variety of ways in which economic and political systems have been restructured to favor financial markets, institutions, and logics (see, for example, Duménil and Levy, 2004; Froud et al., 2000; see also criticism of the concept by Christophers, 2015 and Mehrling, 2017). To pave the way for the financialization of the economy, “anti-growth” moves such as higher discount rates have been actively opposed at multiple scales. Starting in the 1970s, orthodox economists challenged the practice of using social discount rates in public–private transactions. The public sector, they argued, could better absorb and spread risks among a greater number of individuals (see, for example, Arrow and Lind, 1970). It could afford to pay lower interest rates due to the tax-exempt nature of investment income derived from government debt. Neoliberal think tanks disseminated these ideas across countries and scales (Peck, 2010). For example, in a pitch to encourage public investment in transportation infrastructure, the Grattan Institute in Australia urged the state to “unfreeze” its “rigidly” high discount rates and to index them instead to the plummeting cost of capital (Terrill and Batrouney, 2018).

In addition to ideological justifications, the growing structural power of capital to suppress discount rates is reflected in monetary policy after the dismantling of the Bretton Woods accord in 1973 and the stagflation and interest rate volatility that followed. This period marks the beginning of what observers refer to as “the socialization of finance” as ordinary households invested their savings in securities, were switched to “defined contribution” pension plans, and, accordingly, developed a vested interest in financial market performance (Langley, 2008; see also Cooper and Mitropoulos 2009, who argue that the household was instrumental in earlier US imperial-financial expansions as well). Credit policies and heightened demand for financial instruments created pressure to raise the asset prices securing those instruments, propelling a general shift in the focus of policy from wage- to asset-based welfare. In their moves to use housing wealth to offset reductions in welfare spending (“residential capitalism”) and increase household borrowing, central governments reduced interest rates (Lowe et al., 2012; Stein, 2010).

The cost of capital is usually inferred from government borrowing costs, signaled by the interest rates on US Treasury bills. The Federal Reserve reduced the rate its banks charge depository institutions on overnight loans (also, confusingly, called the “discount rate”) from their double-digit peak in the early 1980s to a historic low point of 1.25% in 2001. As a result, the financial and property sectors went into a prolonged ascent (even more so in other Anglo-American and Western European countries than in the United States), despite sharp declines in other kinds of corporate output. These trends also intensified the struggles between labor and capital over the distribution of asset-based wealth and widened inequality (Piketty and Saez, 2003).

Waging a simultaneous “war on inflation” restrained monetary supply to protect financial profits. In 1980, the Federal Reserve’s “Volcker shock” raised the federal funds rate to its highest point in history to dampen rising prices and allow financial markets more power over interest rates. In the 1990s, central banks began publicly announcing ranges of expected inflation over specified time periods so that investors could build inflation into the discount rates they used when capital budgeting. As performative policy moves that cannot be disentangled from their effects, anti-inflationary policies served to shape investor expectations of the future (McCormack, 2012). Such policies also signaled a shift toward reliance on financial markets in shaping monetary policy. Along with the favorable tax treatment of investment losses, the central government minimized risks and encouraged overaccumulation (which could be written off as excess capacity). Similarly, the local state encouraged the spatial articulation of overaccumulation—overbuilding—by lowering discount rates and providing subsidies and regulatory accommodations for new construction (Weber, 2015).

The political-economy of property valuation II: Financialized urban governance

In addition to the macroeconomic dynamics placing downwards pressure on discount rates, financialized governance at the local level creates incentives for municipal agencies to adopt the discount rates of its private partners rather than applying separate, higher ones. Urban political economists and economic geographers beginning in the late 1980s noted an “entrepreneurial turn” whereby cities privileged growth, the creation of business-friendly environments, and partnerships with the private sector (Harvey, 1989). The entrepreneurial state’s move toward financialization a decade later included strategic deployment of the municipal bond market and novel exotic financial instruments (Launius and Kear, 2019; Weber 2010), use of financial engineering techniques to privatize public infrastructure (Pike et al., 2019), and management of its real estate portfolio to maximize private returns and reduce social obligations (Beswick and Penny, 2018). Financialized urban governance was also evident in the growing influence of financial firms, instruments, and intermediaries (e.g., ratings agencies) in policy making (Guironnet, 2019; Peck and Whiteside, 2016; Sanfelici and Halbert, 2019). The turn toward finance heightened interest in and dependence on future asset values and in the market devices that could push them higher.

The power to generate and extract rents from land allows private property owners and their financial partners outsized power to “bend the production of … future values around their own position(s)” (Konings, 2018: 16).¹³ For example, in TIF negotiations consultants modulate the rates used in TVM calculations to maximize projections of incremental value. Lowering discount rates inflates the terminal and future property values for the proposed project and TIF district. Recall that it is not taxes on a property’s value crystalized at any one moment in time that is critical to project feasibility, but rather the “rent gap”—that is, the difference over time between a property’s value in its undeveloped and its redeveloped state (Smith, 1987). Taxes on the differential rents yielded through the redevelopment process, whereby public investment improves land’s locational advantages, are then capitalized into the present and projected property values (Haila, 1988).

Entrepreneurial local governments assist capital in staying ahead of the potential risks and depreciation that can dampen future values. They sell publicly owned land to developers at below-market costs. They reduce the value of private property that developers are about to purchase by stigmatizing their previous use value (e.g., industrially zoned land) as “blighted” and “obsolete,” attributes necessary to designate the TIF district in the first place (Weber, 2002). They implement austerity or preservation policies to devalorize property, helping values plummet to their nadir before they are pumped up through a mutually reinforcing cocktail of ambitious plans, optimistic value projections, and generous subsidies.

In Chicago, for example, developer Sterling Bay was anxious about receiving a US$1.2 billion TIF subsidy the city had promised to help build its Lincoln Yards project, a mixed residential, retail, and entertainment development on 55 acres of previously industrial land. The dollar amount of subsidy was set based on optimistic assumptions of future property tax growth, spill-over effects, and the discount rates used by private partners. In early 2019 Mayor Rahm Emanuel pushed the subsidy decision through the city council before he stepped down from office. The speed at which the decision was made was due not only to his imminent departure but also to the fact that property values were rising rapidly in the TIF district in anticipation of this ambitious project (Dardick, 2019). Because rapid appreciation would disqualify the area from being designated as a TIF district (it would no longer qualify as “blighted”), the decision needed to occur before the Cook County Assessor’s new valuations were made public.

The City of Chicago was, in effect, racing to get out ahead of the speculation that its own policies induced in order to maximize taxes on the differential rents that would pay for the subsidy it had already committed. The Lincoln Yards redevelopment is also an example of the state aiding capital by adopting the calculative practices of its private partners to estimate appreciation. Using private sector discount rates inflates differential rents by increasing the terminal value of a proposed redevelopment project as well as calculations of the incremental value created by it. Low discount rates also enlarge the potential subsidy for the developer-owner, which increases the fiscal productivity of land, the private return on investment, and the price of future assets. In this way, TIF allows property owners to capitalize optimistic views of time into larger subsidies in the present, “generating profit-making opportunities from temporal relationships” (Zaloom, 2009: 252).

Part of the collective confidence of both state and market in an expanding future can be traced to the spreadsheet models that give the illusion of predicting future property values with precision. But to turn their enthusiasm into self-fulfilling prophecies, public planners and private real estate actors also rely on institutional strategies to alter expectations upwards. City governments use the power of public investment to enhance the value of new construction by siting new transit stations, upgrading infrastructure, and using eminent-domain powers to condemn and convey property for “shovel-ready” projects. They commit public funds to demolish older structures and convert land uses to make way for hyped megaprojects like Lincoln Yards. They aggressively promote “hot” neighborhoods to create the buzz that adds to subsidy- and credit-fueled appreciation, using imagery and branding to encourage consumption. They relax the regulatory burden placed on developers, loosening permitting requirements and allowing up-zoning.

Why would the public sector show such benevolence toward private developers and investors in adopting their lower discount rates and de-risking the future? The volatility and uncertainty of property values that secure the TIF-backed debt create a need to coordinate modes of action across public and private spheres (Adkins, 2018). Deal partners leverage uncertainty by persuading the other partners to invest in its promises of growth as a hedge against that uncertainty (Konings, 2018: 16). Calibrating calculative devices to each other’s frequency allows public and private actors to harmonize their expectations about the future. The discount rate bridges their interests, allowing for the conversion of a future dollar of property tax revenue for the municipality into the equivalent of a present dollar of equity for the developer.¹⁴

Other scholars argue that the state’s use of the private sector’s calculative devices is evidence of the “colonization” of the state by the financial sector. Chiapello, for one, singles out TVM calculations as a financialized method of valuation because they “examine[s] everything from an investor’s viewpoint” (2015: 18). Even the lifespan of a TIF district is a nod to the financial sector, as the 20-year duration was developed to accommodate bond maturities and the turnover times of capital (Johnson, 1999). The hegemony of financial time horizons and metrics of feasibility may reflect the hiring of business school graduates, convergence in education for finance and public policy careers, contributions of the financial sector to political campaigns, and the proliferation of privatized expertise (available in lengthy reports commissioned from consultants to support redevelopment projects) (Fainstein, 1994; Linovski, 2018; Robin, 2018). Although contextual factors influence their positionality, government planners’ frequent acquiescence is also due to their weaker bargaining position in redevelopment transactions.¹⁵ Grounded in place, dependent on mobile capital, and seeking to steer investment toward illiquid assets like buildings and infrastructure, municipal governments give succor to the private sector.

To these arguments about coordination and colonization, I would add that adopting the private partner’s discount rates and optimistic value projections aids the state in co-rent seeking through redevelopment projects. City governments increasingly seek to finance infrastructure through the “planning gain,” “value uplift,” and capture of land value surpluses (Gielen et al., 2017; McAllister, 2017; Robin, 2018). For example, municipalities tap TIF funds not just to provide developer subsidies but also to pay for new transit stations, school facilities, and street improvements while avoiding tax hikes (at least overtly). Maximizing differential rents reduces the public sector’s risk of non-payment for the debt financing redevelopment projects. Or as Harvey (1985: 37) asks rhetorically, “How … was the debt on urban infrastructures to be paid off if the latter did not enhance surplus value production?” Land value capture strategies like TIF have important implications for urban governance: They create a structural imperative for the state to engage in activities that push property values higher. Suppressing discount rates in project-based revenue calculations is one of the administrative micro-practices that helps guarantee the appreciation that is overdetermined by these strategies. Like the most basic credit relations, with their assumption that borrowers repay debts with cheaper dollars in the future, the valuation techniques used for land value capture policies like TIF build in assumptions of appreciation.

Imagining an upwards trajectory of values over time reflects a utopian element of capitalism that promises endlessly increasing growth (Beckert, 2016) and conceives of the future as containing a “free resource base” (Adam, 2010: 369). Envisioning infinite reserves of wealth to exploit motivates not just private investors but also the capitalist state, which promises an ever-enlarging property tax base to achieve its planning objectives, pay its bills, and justify its vigorous support of the real estate sector. In contrast, future risks (of an economic downturn, of overbuilding) are steeply discounted.

Polarized futures: Fast, new, broke

What are the implications of these governance shifts and the techniques underlying their enactment? Estimates of future values can catalyze a series of chain reactions. If Bloomington’s municipal government believes that a new hotel and conference center will be assessed at a higher property value than the city-owned parking lot on which it is proposed and that it will also lift up the values of nearby parcels, it will be more likely to offer the project developer a subsidy from future TIF revenues. The subsidy will inflate the developer’s return calculations and will aid in raising debt and equity. The selective advantage provided by the subsidy will reduce developer competition for the site and create a de facto monopoly that allows the owner to charge higher rents. The leverage provided by the additional debt will inflate present and future values and lower the risk of a financing gap or debt non-payment. Embedding optimism into the spreadsheet models will convince the developer that they will be able to sell the project down the road instead of being stuck with a depreciating asset. And, to complete the circle, projecting out a higher sales price and rents will lower the cost of capital, suppressing discount rates.

In this kind of self-reinforcing cycle, the projections forming the linkages in the chain act as “a source of profit or loss” (Beckert, 2016: 121). They have the potential to accelerate the pace at which buildings are produced, junked, and reproduced. Rosy future projections increase the liquidity of property capital and normalize change in the built environment as more developers and investors are drawn to real estate as an outlet for their surplus capital. Optimistic expectations of upward price movement increase the pace of transactional activity, pushing property values upwards.

Neoclassical theory assumes new supply dampens market-wide prices, rents, and values, at least in the long run (Glaeser, 2011). But owners of ground-up construction often charge a premium just for being new, and new buildings are the ones that set prices in most submarkets. Therefore, a spate of new construction activity can push markets toward a higher pricing structure rather than helping to equilibrate a previous one, as appraisers weight their estimates of present value on optimistic projections or toward recent comparable sales—no matter how speculative the sale prices (Weber, 2015). Economists suggest this is caused by price “stickiness,” a resistance to sharp downward price movements (Case, 2008). Instead of slashing prices in the face of additional supply, property owners fix prices below which they will not sell, holding out hope for higher bidders and anticipating stronger future appreciation. Their hope is partly fueled by the optimism embedded in the valuation techniques described above.

Of course, not all actors benefit from the inflationary effects of optimistic future projections. Capital’s strong position within redevelopment transactions allows it to transfer exposures to those who are not a party to the contracts governing deal terms and who depend on the use values of the property base in play (Logan and Molotch, 1987). Indeed, TIF has sparked protests among community residents in cities such as Baltimore, Kansas City, Chicago, and Indianapolis— particularly renters and owners who fear they will be unable to pay higher rents or property tax bills (see, for example, Sherman, 2016). Asset ownership becomes increasingly untenable as sales prices rise, forcing tenants to face housing precarity or to mortgage their lives (García Lamarca and Kaika, 2016). Unlike imagined cash flows and future sales prices that the parties to the TIF deal estimate, future affordability is not easily quantified with a few keyboard strokes in Excel. Or if it is considered, forecasters assume magically increasing incomes, wealth, or debt that will allow households to afford the inflated values. Optimistic future property values compel present-day investment behavior, but concerns about future affordability rarely do. In the calculative techniques described above, the “voices” of unbuilt buildings drown out those of future occupants.

Exacerbating the problem of affordability is the potential for land value capture instruments to raise property tax rates for all residents. The political compromise underlying TIF is that overlapping taxing jurisdictions, such as school and park districts, sacrifice tax revenues and, city-wide, property owners shoulder higher tax rates than they would otherwise (Weber, 2003, 2010). In the United States, the law vests municipal governments with the unilateral power to capture a portion of expected property taxes generated over two decades, enclosing the future tax base. In contrast, taxing jurisdictions that provide critical public goods are denied access to those same future resources. As a result, non-municipal taxing bodies often raise tax rates to pay for the revenues lost to TIF. When the overlapping jurisdictions that share their tax base with TIF districts attempt to compensate for the incremental value captured by private developers and the state, TIF shifts the burden of financing private development expenses to the property owners in the entire municipality, and all taxpayers can end up paying more for local services.

Ironically, despite the higher tax rates, TIF can starve the state of needed revenues. For example, when TIF-financed housing attracts new families with school-aged children, school districts must increase the number of teachers it hires or require existing teachers to instruct larger classes (Weber, 2003). The overlapping taxing entities most harmed are generally the ones who make non-developmental expenditures intended to stimulate collective consumption and enhance the use value of land (Logan and Molotch, 1987). School, library, and park districts are not courting capital so the social services and infrastructures they provide are less easily priced, enclosed, and commodified. In this sense, land value capture schemes can redistribute collectively generated tax revenues from socially productive uses to urban rentiers.

Overly optimistic property tax projections can even harm developmental state agencies. Subsidies are underwritten based on estimates of future property tax growth. When those estimates turn out to be higher than the actual tax proceeds collected, municipal governments may need to make up the difference to whoever is holding the TIF debt. Even though the City of Chicago transfers some of the repayment and default risk of TIF to developers (Weber, 2010), interview subjects there stated that the bond holders “take a haircut” when expected revenues do not materialize. In these instances, the city “sullies its reputation and its future,” which may jeopardize future access to debt.

Conclusion

Constructivist approaches to understanding the calculative techniques used in redevelopment deals supplement and complicate our understandings of urban governance. They show how predictive models are less useful at accurately predicting the future (in this case, future property values) than they are at actively constructing that future. I draw on these approaches and on literature examining the financialization of urban governance to interpret original material collected from participant interviews and observation of negotiations over TIF subsidies. I conclude that assumptions embedded in the TVM techniques used in land value capture schemes express the capitalist state’s relationship with money and time as well as the kinds of futures it anticipates.

To match the accelerated tempo, impatience, and future orientation of real estate speculation, municipal governments adopt the calculative practices of the private sector. The suppression of discount rates bakes financialization into technical processes like project feasibility assessments that on their surface appear value-neutral. Lower discount rates evoke imaginaries of a perpetually expanding built environment and a future of inexhaustible values that can be harvested for present-day deals. These imaginaries allow developers to maximize government subsidies and rents yielded through the appropriation of public property (in this case, property tax revenues). Modeling output forms the basis of the subsidies that the state makes available to private developers, which—aided by zoning amendments and plans—helps to produce the differential rents to bolster the monopoly ones associated with location. Meanwhile, land value capture strategies that rely on TVM techniques and inflated projections have the potential to test the claims of residents to the city and to intensify uneven development.

Footnotes

Acknowledgments

I would like to thank Lisa Adkins, Melinda Cooper, and Martijn Konings from the University of Sydney for the invitation to present this research at the workshop “Money and the City: Urban Property Inflation, Wealth Inequalities, and the Role of Public Policy” held October 15–17, 2018. The paper benefited from the thoughtful feedback and editorial comments provided by the workshop organizers and participants. I also appreciate the generosity of my interview subjects and the advice of colleagues Phil Ashton, Lucia Shimbo, Fabrice Bardet and Brett Christophers, and Environment and Planning A editor Kathe Newman.

Declaration of conflicting interests

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author received no financial support for the research, authorship, and/or publication of this article.

Notes

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