Legal and Business Reasons Why Downtown Development Programs Should Involve Secured Loans—Not Grants

<p>Dr. Blaine Beeper is a retired hospital administrator who was recently elected to council in the Town of Bushwood. Dr. Beeper thinks he has figured out how to jumpstart revitalization of Bushwood’s historic downtown. He proposes for the Town to offer annual cash grants to any owner who redevelops a commercial property within the downtown. Dr. Beeper reasons that redeveloped properties will carry a higher tax assessed value, and the additional tax revenue can be “granted back” to the owners in the form of cash grants for five years, calculated as some percentage of the additional property taxes received by the Town.  When Dr. Beeper floats this idea, he runs into resistance from the Town Attorney and the Economic Development Director, each for different reasons. The Town Attorney raises serious concerns about the legality of such a program, while the Economic Development Director says it doesn’t make good business sense and a loan program would better address owners’ financing needs. This post explains the legal and business reasons why Dr. Beeper’s proposed grant program should be scrapped in favor of a loan program.</p> <p>The Legal Reasons</p> <p>When state constitutions across the nation were written, they included “gift clauses” to ensure that state and local governments did not make gifts to private entities (see this law review article). In North Carolina, a local government isn’t even allowed to make a donation to a charitable nonprofit entity. See my faculty colleague Frayda Bluestein’s blog post on the topic here. A local government can enter into a contract and pay [...]</p>