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ABOUT THE BORDER REGIONHistory: Adopted by the Tennessee Legislature in 2011 by a vote of 85-3 in the House and 26-0 in the Senate, the Border Region Retail Tourism Development District Act gives Tennessee cities near state lines a way to compete with neighboring states for commercial and retail development. Tennessee has one of the highest state sales tax rates, at 7 percent with a local option add on, in the country but has no state income tax. The legislation allows border cities in Tennessee to collect part of the state’s share of sales tax gains from new development, in order to pay for additional new retail projects and pass along incentives to retailers and developers.How it works: Within the border zone, 75 percent of state sales tax gains are returned to local governments to spend on border region development. After deducting education earmarks, border region incentives are equivalent to a roughly 4.13 percent tax return. Cities and builders are allowed to report border region construction and improvement costs over a period of 12 years — two years prior to border region designation and 10 years after — and recoup those costs over a period of 30 years, or until repayment is completed, at which time the border region is dissolved. East Ridge received its first border region reimbursement last fall in the amount of $772,200.Where can it be offered: The Border Region Retail Tourism Development District Act required eligible cities to lie within 12 miles of a state border, have an interstate nearby and be able to land a major, “triggering” retail development which will draw an estimated 1 million visitors a year, and require a $20 million investment.Why more cities didn’t participate: The Border Region Retail Tourism Development District was phase out a year after its adoption in 2011 with only three participants taking part in the program: East Ridge, Kingsport and Bristol. State revenue officials were concerned the state would forgo too many millions of dollars in potential state sales taxes if the program remained open to new regions.
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TALE OF THREE CITIESBristol - Developer Steve Johnson has built of a sprawling 200-acre, $150 million-plus retail and commercial development called the Pinnacle along Interstate 81 near the border with Virginia. The project includes a Bass Pro Shop, a city lake and park and dozens of retail shops and restaurants and is estimated to represenet a $300 million investment upon total build-out.Kingsport - Although Kingsport is credited with coming up with the border region idea and there are ongoing talks between developers and city officials, there has been no significant development in the area that borders southwest Virginia.East Ridge - A $25 million Bass Pro Shop will open by June and will anchor a 50-acre retail and commercial development called Jordan Crossing Centre, which could cost upwards of $100 million to complete.
Back in the midst of the greatest economic recession since the Great Depression, East Ridge officials were trying to figure out how to grow the city's tax base.
East Ridge relies heavily on the Ringgold Road corridor, packed with restaurants and retail outlets. But city leaders watched helplessly as aging hotels and stores were torn down or converted to flea markets and rental apartments while across the border in Fort Oglethorpe a giant Costco was built.
The leaders of Chattanooga's biggest suburban city were anxious to lure more big-name retailers by using its prime location on Interstate 75 with the first exit in Tennessee for northbound travelers. But many big box retailers had stopped opening new stores.
"Prior to 2008, Target might have opened 50, 60 stores a year," recalled John Anderson, East Ridge's city attorney at the time who helped work on a plan to revive retail development. "After 2008, they might have opened six."
Anderson saw a chance four years ago to help the city with a new piece of legislation called the Border Region Retail Tourism Development District Act, a program created by officials in Kingsport, Tenn., to encourage development on the Tennessee side of border towns. The legislation helped offset Tennessee's higher sales tax rate compared with neighboring states by allowing cities and developers on the border to keep a share of the state's sales tax to pay for major retail developments of $20 million or more.
The incentives seemed ideal for East Ridge, which offered a prime recreation facility at Camp Jordan and nearby land at Exit 1 but suffered from higher sales tax rates than neighboring Georgia.
With extra city help for retailing, a trio of Chattanooga developers - John Healy, Matt Wood and Ethan Wood - entered into an agreement with the city to purchase land off Camp Jordan Parkway near Exit 1 in East Ridge. The city was going through negotiations with TDOT to have the land declared surplus so it could be sold to the developers.
"Once we were aware of [the border region act] and and after talking with the Kingsport folks, we understood immediately the implications," Anderson said.
East Ridge officials worked quickly, sometimes forcing developers and attorneys to race across the city on deadline day to secure signatures to apply for the border region program.
East Ridge made it in - and just in time. All three border region cities in Tennessee were approved in 2012. The legislation, amid numerous applications from other cities and fear from state leaders over potential forgone sales tax money, was sunset.
Among the three cities that created border regions for retail tourism, Bristol has succeeded the most, Kingsport is still waiting for much development and East Ridge is finally beginning to see the fruit of its effort.
The Bristol bounce
Bristol, like East Ridge, got an approved border zone in 2012 and has seen tremendous growth along Interstate 81 next to the Virginia border.
A sprawling 200-acre, $150 million commercial development called The Pinnacle has sprung from pasture lands, with retailers like Bass Pro Shops, Marshall's, Dick's Sporting Goods and Michael's calling the strip home.
The Pinnacle project is expected to eventually include a total of 1.2 million square feet of commercial and retail space and represents a total $300 million investment upon total build-out.
Steve Johnson, owner of Bristol-based Johnson Commercial Development, saw an opportunity to seize upon the Tri-Cities metropolitan area, which is home to more than than 500,000 residents but no major shopping centers. Johnson said it was the incentive of sales tax money that made The Pinnacle work.
"Without question, nothing would ever have happened without (the border zone incentives)," he said.
Johnson says the key to success at the Pinnacle has been a methodical approach in tenant selection and construction phasing. Like East Ridge, Bristol started with a Bass Pro Shops anchor. Johnson said despite appearances, however, nothing about developing a project like the Pinnacle is easy - starting with the boulevard he built through the heart of his property.
"If you can imagine going to the amusement park, and you go to that big roller coaster, you know the longest line in the park to ride," he said. "It starts up that biggest incline, and that chain's pulling it up and it's clink, clink, clink, clink, clink, clink, clink. And it just feels like forever until that roller coaster gets to the very top of that, but instead of a chain pulling that up, it's you pulling that up. By hand. And a rope, inch by bloody freaking inch."
But at some point, the coaster tops the hill, and gains some momentum of its own.
"Eventually it's a free fall, and you're not pulling anymore," he said.
Johnson said ultimately what makes the border region so successful is that the upfront risks are on private developers like himself and others taking advantage of the program elsewhere, even though there are financial benefits for developers in the long run, also.
Despite the success at the Pinnacle project, one expert on Tennessee's border regions cautions East Ridge against making too many comparisons to Bristol and what Johnson has done there.
Mark Mamantov, a commercial attorney with Bass Berry and Sims in Knoxville, specializes in public finance and works closely with all three border region cities in Tennessee.
Mamantov wrote the Convention Center and Tourism Development Financing Act of 1998, which was used by Pigeon Forge, Sevierville and Chattanooga officials to finance construction of convention centers. The legislation was also used to finance the construction of a stadium for the Tennessee Titans NFL team in Nashville.
The key to the border region act, says Mamantov, is that developers and cities are reimbursed for money spent in border regions. And state sales tax reimbursements from border region sales can only be used for border region projects.
In Bristol, Johnson invested millions turning open, empty land into a massive commercial space there. But he also essentially started with nothing, making the impact of every dollar spent in the border region clearer, and setting up the city - which invested $25 million into construction of a Bass Pro Shops - and Johnson to reap big tax returns over a base year with relatively no sales tax revenue in the border region to compare it against.
In East Ridge, however, the border region includes over 900 acres of land between Interstate 75 and Missionary Ridge, largely along Ringgold Road, which has been developed for years. Therefore, the city's base tax year, against which annual sales increases are compared, shows existing sales and must be maintained in order for new sales to be actual increase.
Mamantov said this creates unique challenges for East Ridge, outside of construction of Bass Pro Shops and the greater new developments off Exit 1 in the city.
"By including existing business, you really jeopardized your potential growth," said Mamantov.
He helped city leaders redraw the lines of their border region last year, and in the process, city leaders intentionally cut out properties deemed at high risk to have existing businesses close.
"We tried to exclude businesses where there's not much upside, and include parcels where there's only upside," he said.
Mamantov said this isn't to say East Ridge is in a bad position, or that it's in any worse position than Bristol. He said East Ridge has an opportunity to spend money on existing infrastructure and its main corridor and get that money back over the next three decades.
"I think it's going to be much more of an incremental approach in East Ridge than it was [in Bristol]," he said. "It's truly trying to raise the ship, the entire city's retail base."
Since the border region designation was approved in East Ridge, a new Wal-Mart Neighborhood Market has opened on Ringgold Road, inside the border region.
East Ridge received its first state sales tax reimbursement last fall, in the amount of $772,200. City leaders say they expect that number to go up next year.
Tennessee Senate Pro Temp Bo Watson, R-Chattanooga, sponsored the Border Region Retail Tourism Development District Act of 2011, back when his district included Chattanooga and East Ridge.
"It's a tremendous piece of legislation, man," said Watson. "A great economic piece."
Watson was aware that based on the requirements in the border legislation - written by officials from northeast Tennessee - the act could have great influence in his area. The border region act was approved 26-0 in the state Senate, and 85-3 in the state House.
State Rep. Joanne Favors, D-Chattanooga, a peer of Watson's in the General Assembly, was one of the three legislators who voted against the act, which critics complain can provide an unfair subsidy for some retailers at the expense of others.
Tennessee Department of Revenue Commissioner Richard Roberts made his position well known to Watson and other legislators during the border region act's genesis.
"He hates it!" Watson jokes. "He hates it!"
Former State Rep. Vince Dean, R-East Ridge, and Anderson both also say Roberts made his opposition to the legislation clear.
Roberts was "concerned that this was too generous of an incentive and moved to have the legislation cut off for anybody who had not already applied," Anderson recalls.
"Commissioner Roberts didn't really like the idea of the concept," said Dean. "He really didn't like the idea of giving taxes."
Kelly Cortesi, spokeswoman for Roberts' office, said "the sunset was put in place because it was determined that these districts were costly, and it made sense to limit the program."
The Department of Revenue had the final say on all border zone creation, and the department distributes reimbursements to cities with existing border zones.
Tennessee is dependant on state sales tax revenues, since there is no state income tax. According to state documents, 55 cents of every state tax dollar comes from state sales taxes. State sales tax make up the largest source of revenue for Tennessee.
Mamantov says there were a handful of other cities either already in the pipeline to apply for the border region or in the works of preparing proposals in 2012 when the legislation was sunset.
The only three cities to make the cut were Bristol, East Ridge and Kingsport. The city of Kingsport came up with the idea but it's where the program has had the least success. Some experts believe Kingsport and Bristol were too close together for both to successfully capture big developments, and Bristol was first to get a Bass Pro Shops commitment.
There are now only six remaining years for cities with border regions to claim costs for reimbursements under the program.
Watson thinks the border region act has done what it was designed to do.
"This is one of those things where you're happy to see that something you created as an idea is actually executed successfully," he said.
Dean, now Hamilton County Criminal Court clerk, believes the program will be successful at the local level, despite the roadbumps it has faced in East Ridge.
"This is the trigger. I think the big boom is going to come after," he said. "I think in spite of itself, the city of East Ridge may end up seeing a huge benefit."