Could tax stabilization agreements make a comeback in Providence? Developers make their pitch.

PROVIDENCE – A set of six tax stabilization agreements for four projects will be presented to the Providence City Council's Finance Committee on Tuesday night.

Housing developers say the agreements are key to getting new units constructed during a housing crisis.

For developer Dustin Dezube's conversion of the Tockwotton Home in Fox Point into 75 housing units, the tax stabilization agreement submitted over a year ago was part of the financing for the conversion, which is about half complete.

Dezube said he is worried that the current City Council might frown on the agreements and hopeful that they see the agreements as key to getting new housing built in the city as rents continue to show some of the steepest rises in the country and single-family home prices are up nearly 50%.

For developer Eric Edelman, the only way to alleviate the housing crisis is to build a lot more housing units – and the agreements help make that possible.

How did we get here? Rhode Island's housing crisis is at a breaking point.

What is a tax stabilization agreement?

A tax stabilization agreement, or TSA, is a deal the city cuts with the developer of a project to reduce their tax bill for a set number of years and then increase it until the deal expires, usually in 20 years.

Edelman said the tax deals are usually great for cities because sacrificing a little bit of tax income in the near term results in more tax revenue down the line. That comes from two sources: increased taxes on the property near the end of the agreement, and from turning what is usually either an empty lot or a not-very-valuable building into an asset with a much higher assessed value.

Why do developers say tax stabilization agreements are needed?

Developers say tax stabilization agreements are necessary in Providence because the commercial tax rate is very, very high.

According to Edelman's calculations, the commercial tax rate in Providence is 29% higher than New Bedford, 29% higher than Boston and 32% higher than Fall River.

Providence's commercial tax rate is $35.10 per $1,000 of assessed value, the highest in the state. That means a property valued at $10 million has a yearly tax bill of $351,000.

More: Rhode Island's housing crisis is at a breaking point. How did we get here?

The second reason developers say they need the agreements, especially now, is that interest rates have doubled and construction costs, including labor and supplies, have soared. That means it is harder for developers to get loans big enough to cover their construction costs.

It's nearly the same problem pushing many would-be buyers out of the housing market as lenders refuse to offer mortgages to buyers with a debt-to-income ratio that is too high.

"When property taxes are so high, it's exacerbated by the fact that interest rates are so high and we're facing exorbitant construction costs," Dezube said.

With the 3.5% property tax rate, it makes it very hard for developers to build without the stabilization agreements, he said.

What happens if the City Council frowns on tax stabilization agreements?

If the City Council sours on future tax stabilization agreements, Dezube said he will start having to write deals without them, which will make it much harder to build anything in the city.

Before 2016, few apartment buildings were being built because the rents were not enough to justify the cost of building. When rents rose, more developments became viable.

Unlike a home mortgage, where a borrower's income is used to calculate how much they can borrow, for development loans it is based on how much income the project will bring in.

A tax stabilization agreement brings down the amount that has to be borrowed in the first decade of the project.

In June 2023, the city passed its first residential tax hike in a decade at the same time it decreased the commercial tax rate.

Here’s what to know. Providence City Council passes first residential tax hike in a decade.

What about income-restricted housing?

Councilman Miguel Sanchez said he wants deed or income-restricted units to be part of any future tax stabilization agreements. Under that scenario, a developer would agree to rent a number of units to people making below 80% of the area median income and keep the rents lower than their market-rate counterparts.

With the current margins, high interest rates and sky-high construction costs, reducing the revenue from a building would be "challenging," Edelman said.

In Massachusetts, developers are incentivized to add income-restricted units to projects through the Chapter 40B statute. Instead of getting a temporary break on their taxes, developers are freed from the constraints of local zoning rules to build as big and dense as they want.

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Reach reporter Wheeler Cowperthwaite at wcowperthwaite@providencejournal.com or follow him on Twitter @WheelerReporter.

This article originally appeared on The Providence Journal: Developers pushing tax stabilization agreements in Providence