mustang-close-upIn recent years, I’ve had the pleasure of teaching a class on urban revitalization strategies for graduate students at the University of Colorado Denver Masters of Urban and Regional Planning program.  For our “incentives and ethical trade-offs” session, we’ve used Aurora’s Gaylord incentive agreement as a featured item of study and discussion.  In just 37 pages, the June 2011 incentive agreement leverages nearly $300 million in subsidy from an empty swath of farmland located out near DIA – in my nearly 30 years of economic development experience, it truly is a work of art and unprecedented creative genius.  It also may be illegal, as determined last week by an Adams County judge.  Much like the DIA bronco with devious eyes that killed its maker, the Gaylord deal may soon collapse under its own gratuitous weight.

Since the Gaylord deal hit the scene nearly four years, it has raised serious questions about community accountability and the use of urban renewal, special district and supplemental tax incentives.  The largest incentive ever offered a private company in Colorado would help develop an all-inclusive hotel and convention center with help from a public “investment” of $125,000 per service job.  Add an additional tourism incentive sought from the State of Colorado and the subsidy is raised to more than $150,000 per job.  Guided by the region’s most powerful attorneys and lobbyists, the affected governments quickly lined up behind the deal.  Perhaps the most notorious was the Brighton School District, who might be called upon to train many of the new service workers, and their willingness to forego revenue sharing millions of tax increment dollars in exchange for the benefit of holding all of its future senior proms at the resort.

Time has not been helpful to the Gaylord deal.  Shortly after securing its big bag of incentives, the project was sold to a new developer.   Hotels throughout the state sued to stop the state tourism subsidy deal.  And another suit brought on by two Aurora residents last week found the agreement violated TABOR by not allowing Aurora residents to vote on elements of the package.

Moving forward, there are lessons to be learned from this exercise in civic excess:

Incentives Should Have a Time Limit:  Much has changed in the marketplace since the Gaylord deal was approved in 2011.  The national economy has largely recovered and capital markets are much more forgiving.   Certainly a respected developer could secure a greater share of private financing for a resort hotel deal in metro Denver, one of the nation’s hottest regional economies.

Size Incentives to Project Need:  Neither Gaylord developer has had to justify the size of its incentive to Aurora, and the current developer states that the overall project cost has actually decreased by about $100 million.  In Denver, developers must demonstrate the need for a tax increment financing incentive by opening their books and determining the expected rate of return on a project.  This “but for” analysis is also standard with many federal urban development incentives.

Be Honest and Transparent:  Last week’s judgment focused on one of the more shady elements of the Gaylord deal in which one individual voter, representing the one affected land parcel, was able to approve layers of supplemental taxes.  Another gem in the Gaylord agreement, which is akin to winning the Lotto, is the ability for the developer to choose to receive its subsidy over time as the project generates revenue, or up front through the issuance of ironically named “moral obligation bonds”.   If Aurora issues bonds to provide the money upfront and the project goes south, moral obligation bonds do not legally require the city to repay investors, but the city’s credit rating would take a serious beating.  In effect, today’s Aurora City Council was passing any risk in the project to future leaders, and nowhere was there any intention to take this to voters to decide.

Despite its ethical, and now legal, challenges, I’d wager 50/50 that much of the Gaylord incentive will still get paid to the developer – there’s simply too much of a bounty to be had and Aurora leaders are too stubborn to walk away.   Let’s hope that the Gaylord deal marks a turning point in how we develop and use economic development incentives in Colorado, and that reform follows in a measured and intelligent way.