Cedar Rapids increasingly turns to tax breaks for growth

CEDAR RAPIDS — Four years ago, when developer Joe Ahmann signed an agreement with the city to construct a six-building office and retail park called The Fountains on farmland, some questioned the use of a public incentive — five years of tax reimbursements worth an estimated $3.7 million — for his private company.

The incentive helped jump-start, and remove some of the risk from, the $35 million gamble Ahmann would find in a market for hundreds of thousands of square feet of retail and office space.

The incentives came with a catch, though.

The Fountains had to hit a minimum assessed property value of $20 million by 2020, construct high-end office space in 80 percent of three office buildings, certify annually 300 full time jobs from 2020 to 2027 and set aside 30 percent of the 18 acres as green space with a lighted pond, fountain and outdoor seating.

'People think of TIF like a magic ATM,' Ahmann said. 'But you put in your money and get a portion back. Look at what we've created in tax value in two years that wouldn't have been here.'

Economic development agreements — or economic incentives made possible through tax increment financing — have been a key strategy in rebuilding Cedar Rapids after the 2008 flood. They've been connected both to high-profile projects such as the redevelopment of Westdale Mall and building the CRST Center, as well as smaller projects including renovation of the Ideal Theater.

While critics question economic development agreements as unnecessary or government interference in the private sector, city officials are committed. They say the tool has successfully spurred growth that otherwise would not occur in a city where the property tax base has stagnated and is creating a stronger, better planned city in the long run.

Tax giveaways triple

TIF lets communities capture extra revenue created by property tax growth in pre-defined areas and reuse it in targeted ways in those areas. This could be for road and utility improvements, or the practice more common in Cedar Rapids — using the money to entice businesses through economic development agreements.

The number those deals awarded per year tripled in Cedar Rapids from seven in 2012 to 21 in 2015. The expected giveaway connected to those deals climbed nearly fivefold in that period, from $7.5 to $35.5 million.

Number of projects receiving tax breaks by year

Year	Projects	City incentives	Business investment	Assessed value	Jobs created	Jobs retained
2012	7	$7,530,385	$68,276,000	$54,839,700	370	472
2013	11	$19,404,235	$143,680,000	$105,802,000	841	625
2014	15	$17,673,892	$102,883,649	$58,023,400	214	n/a
2015	21	$35,519,137	$143,090,257	$82,841,000	373	71
2016	8	$2,181,606	$36,840,000	$16,701,900	132	84

In total from 2012 through 2016, Cedar Rapids has awarded an estimated $82 million in tax breaks to 62 companies. The awards have leveraged $495 million in private investment, 1,930 new jobs, 1,252 in retained jobs and nearly $318 million in anticipated property value, according to city figures.

Overall, Cedar Rapids has approximately 275 tax incentive agreements on the books corresponding to $795.5 million in new property values over the next decades.

The practice of tax increment financing is regulated by the state.

Municipalities are required to file annual urban renewal reports detailing TIF use with the Iowa Department of Management. The most recent report for the 2015 fiscal year shows Cedar Rapids had 21 urban renewal districts, generated $14 million that year in TIF revenue, spent $11.5 million and had $182 million in outstanding TIF revenue.

By comparison, Des Moines reported 14 urban renewal areas, generating $26 million in TIF revenue, spending $25.5 million and having an outstanding revenue balance of $251 million.

Effects on the market

Critics are dubious, contending the system disrupts the private market, is unnecessary because people would invest anyway and diverts money from schools, police, firefighters, libraries and other needs,

Number of tax breaks promised by the city in the coming years

Shown are the total number of tax breaks that are estimated to be granted by the city to businesses and residents. The numbers are broken down by fiscal year. These are based on current agreements from the city. More could be added over time.

'You freeze the value, so the schools and everything that gets the tax money are stuck at that frozen level,' said Karen Guse, a Cedar Rapids real estate investor who hasn't used tax incentives. 'I just don't think that is fair.'

Guse said the incentives have been used well in some cases to spur reinvestment in deteriorated areas, such as upgrading the First Avenue NE Hy-Vee. But they have been misused in others, such as the $13 million and closing off Second Avenue SE from 10th to 12th Street to lure Physicians' Clinic of Iowa from Hiawatha to downtown Cedar Rapids.

'The city too often kowtows to large investors, who I don't think need it,' she said.

Cindy Golding, who owns a building on 33rd Avenue SW, said two tenants were lured to a downtown Cedar Rapids project backed by tax incentives. Golding sees it as the city interfering in the private sector.

'You are giving money to businesses and developments that couldn't make it on their own, and when the money goes away they can't stand on their own,' Golding said.

Developers take advantage

Economic development agreements have been linked to many major projects in recent years here.

• The redevelopment of Westdale Mall received $11.7 million;

• Erecting the new 11-story CRST Center downtown received an $8.35 million pledge;

• And a developer wants $23 million in city aid for a proposed $103 million, 28-story downtown high rise called One Park Place.

Tax deals also have gone toward much smaller projects, such as an estimated $20,000 break for the $700,000 historic rehabilitation of the old Ideal Theater in NewBo.

Cedar Rapids has approved eight agreements so far in 2016, and has another four in the works, including recently introduced plans by West Side Wolf Pack V for a new brewery, which qualified under the grayfield exemption for underutilized property.

The development promises to restore the property value to $570,000 after it slid from $351,657 in 2008 to $110,400, and seeks $95,000 in tax incentives.

'The most compelling argument against TIF is that the development would happen anyway, but the developers I talk to say it is very problematic to get a project going without it,' said City Manager Jeff Pomeranz, who was hired here in 2010 partly because of his success in growing West Des Moines.

Incentives are directly connected to growth in tax value, so as city officials see it the system has built-in protections.

A property owner continues to pay taxes as usual on the base value before improvements. The ultimate amount of the tax break is determined when the property is assessed. If it is worth more than expected, the tax break could be greater than the estimate. If it is less, the incentive would be lower or possibly nothing if the plan falls through.

'If they don't spend what they said they would spend, they don't receive the rebate because it is based on value,' Pomeranz said.

City demystifies tax incentive program

City officials are confident in the approach. They're actively marketing the various types of tax incentives available for development.

'We'd been doing it for years, but we wanted to be more proactive,' said Jennifer Pratt, the city community development director. 'We wanted to make sure we didn't lose out on people not familiar with our community.'

The city published online exactly what qualifies for an economic development agreement, and detailed the terms.

A project devoting 75 percent of the property to housing can get a 10-year, 100 percent tax exemption or reimbursement, and commercial projects can qualify for a 10 year, 44 percent tax exemption or 10 year, 50 percent tax reimbursement, as long as they meet city code and gain City Council approval.

Projects have to fall into one of nine categories that fit city needs.

'Open for business'

'We needed to create a culture of being open for business in Cedar Rapids,' Mayor Ron Corbett said. 'And it was extremely critical after the flood of 2008.'

The approach after years of watching businesses being lured away has fueled a transformation in Cedar Rapids, he said. Corbett points to the revitalization of downtown including construction of the CRST Center, The Fountains, redevelopment of the old Nash Finch property along Blairs Ferry Road NE and Westdale, and vibrancy in the New Bohemia District.

'It's been communitywide,' Corbett said. 'It's about creating jobs and increasing our tax base.'

City Council member Scott Olson, who also is a commercial broker, has been lukewarm on the use of tax incentives.

'The important part is to have a system to measure the benefits,' Olson said. 'We have to be careful it is not damaging something else in the community because of the incentive. You have to have a pretty darn good reason to get it.'

Olson said he is confident the checks and balances are in place, and notes the City Council has backed away or pushed back on agreements that didn't meet the test, such as a request for an incentive for Terex to move across town to The Fountains.

Parties won't call the Terex deal officially dead, but The Fountains is moving ahead without.

2 districts near end

TIF districts have 20-year time limits, and two districts from 1996 are coming to an end.

The Southwest TIF, which is north of The Eastern Iowa Airport, saw its base value increase from $39.5 to $250.3 million.

The city invested $31 million from the additional taxes to infrastructure improvements, such as the Edgewood Road viaduct and improving the Sixth Street and Wright Brothers Boulevard intersection, and $6 million as incentives to business, such as Nordstrom, National Computer Systems and the Prairie View Technology Park.

In River Ridge North, near Blairs Ferry Road NE and Ushers Ferry Road, the value increased from $13.8 to $49.4 million, with the majority of the TIF funding, $2.4 million, used to help Toyota Financial expand into a new building.

In the case of The Fountains, four of the buildings are erected and 90 percent occupied, and the foundation for the fifth should be in by winter, Ahmann said.

The property value has increased from $9,304 in 2006 to $10.4 million now, and a recent 10-year lease by BMO Harris financial services promises 175 full-time jobs, which should push the development past the 300 threshold by spring.

'They are not one of the bad ones'

The state created TIF as a tool to help address areas that had deteriorated, were under performing or were losing property value, said Dave Swenson, an economist at Iowa State University who tracks the use of tax incentives.

'Using them broadly to develop willy nilly makes no sense,' he said, 'but using them in targeted areas makes sense.'

Cedar Rapids has $295 million worth of assessed property value tied to TIF districts, which ranks it No. 7 in Iowa, with Des Moines No. 1 and Coralville No. 2.

The overall value of Cedar Rapids TIF property is not surprising, considering it is the second largest city in the state, but what is more telling is the proportion of TIF compared with the total property tax base, Swenson said.

Cedar Rapids has 4.5 percent of its $6 billion property value tied to TIF, which is low compared with other Iowa cities. By comparison, Coralville has 43 percent of its tax base in TIF.

Swenson has some criticisms — that cities shouldn't use tax incentives for retail or housing development — but considering TIF is such a small portion of the city's tax base, he said Cedar Rapids appears to be using the power prudently.

'Cedar Rapids is not abusive,' he said. 'They are not one of the bad ones. They are using it wisely.'

Economic development tax breaks: 2014-16

Business	City incentives	Business investment	Assessment	Jobs created	Jobs retained	Community benefit
Westdale	$11,675,501	$90,000,000	$60,000,000	500		Redevelopment of declining mall, new jobs
Mercy Care	$10,300,000	$10,300,000	$7,200,000	28		New High Quality Jobs
CRST	$8,350,000	$31,000,000	$18,000,000	80		Expansion of local business, downtown reinvestment, floodwall
The Depot	$5,426,400	$17,000,000	$11,900,000	100		Brownfield Redevelopment, core district housing
The Fountains	$3,700,000	$35,000,000	$26,000,000	300		Class A office construction
Cornerstone Place	$3,458,000	$13,000,000	$2,300,000			Historic presrevation, adaptive reuse, core district housing
The National	$2,600,000	$2,600,000	$950,000	15		core district reinvestment, grayfield redevelopment
Northtowne Market	$2,128,000	$16,000,000	$10,400,000	60		brownfield/grayfield redevelopment, new jobs
42nd & Edgewood	$1,596,000	$12,000,000	$8,400,000	85		New High Quality Jobs
Kingston Pointe	$1,569,400	$5,900,000	$1,920,000			Core district housing
Lofts at Red Cedar	$1,509,250	$9,200,000	$6,500,000			Downtown Housing
Great Furniture Mart	$1,500,000	$5,330,000	$3,500,000			Core housing
West Side Transport	$1,400,000	$13,250,000	$9,275,000	250	450	Expansion of local business
Great Furniture Mart	$1,330,000	$0	$0			Historic property: downtown housing
Water Rock	$1,287,440	$11,000,000	$5,600,000			brownfield redevelopment
Sanctuary at Ellis	$1,239,894	$4,200,000	$3,830,000			Core district housing
Smulekoffs Building	$1,229,743	$15,000,000	$4,500,000	50		Historic Preservation, downtown housing
Geonetric	$1,200,000	$4,500,000	$4,122,300	60		Expansion of local business
Coventry Lofts	$1,183,700	$4,450,000	$1,720,000			Adaptive reuse, core district housing
Mott Building	$1,123,989	$4,661,257	$900,000			Historic Preservation, core distric housing
Intermec	$1,100,000	$12,500,000	$6,343,900	200		Reinvestment in downtown
Cornerhouse	$1,074,200	$6,000,000	$4,200,000			grayfield redevelopment
NewBo Station	$1,064,000	$4,000,000	$2,800,000	12		Core district housing, new jobs
RuffaloCODY	$1,034,000	$15,000,000	$13,179,400			Expansion of local business
600 3rd Ave SE	$1,024,000	$5,400,000	$4,832,400	9	106	Reinvestment in downtown
Monroe School	$931,000	$3,500,000	$4,100,000			historic preservation, workforce housing
Kingston Village	$836,000	$9,766,000	$5,000,000			core district housing
GRR-DTE -Sullivan Bank	$750,000	$6,000,000	$7,000,000	25		Historic property; downtown housing
New Pioneer	$731,500	$5,500,000	$1,289,800	50		new jobs, adaptive reuse
The Gardens CCRC	$727,000	$16,000,000	$8,700,000	80		New skilled care nursing units
Apache Hose	$683,700	$7,310,000	$7,200,000	15	27	Local business expansion, new jobs
Raining Rose	$676,385	$7,750,000	$7,887,400	15	97	Reuse of brownfield property
Green Develoment Sokol	$665,000	$2,500,000	$576,000	12		Historic Preservation, core district housing
Thompson Truck and Trailer	$660,000	$8,300,000	$4,350,000	10	34	Expansion of local business in target industry, new jobs
MidAmerican Aerospace	$585,200	$5,000,000	$5,000,000	40		adaptive reuse of strip center
Miron Construction	$510,245	$4,000,000	$2,500,000	14	4	LEED Certified, New Jobs
Knutson Building	$500,000	$7,000,000	$0	$0			Historic Preservation, core housing
Bowling Street Flex Space	$480,000	$4,700,000	$1,234,400	77		Facility-type new to the market
Cedar Rapids Day School	$480,000	$3,500,000	$1,750,000	15		Downtown Reinvestment, new jobs
Kenworth	$433,840	$4,200,000	$2,922,500			expansion of local business in target industry
Acme Electric	$357,000	$1,500,000	$213,400			core district housing
Center Point Apartments	$350,000	$5,500,000	$3,300,000			Core housing, stormwater mitigation for McCloud Run
Creekside Apartments	$350,000	$5,500,000	$3,300,000			Core housing, stormwater mitigation for McCloud Run
NADTA (CRST Truck Training)	$270,000	$2,800,000	$3,997,100			Expansion of local business
Commonwealth	$264,000	$12,992,649	$2,000,000			Historic Preservation, core district housing
Fleck Sales	$235,000	$2,000,000	$6,621,700			expansion of local business
Diamond V Mills	$230,000	$4,500,000	$7,961,300	12	98	Expansion of local business
Auxiant	$220,000	$1,825,000	$1,189,900			downtown reinvestment, expansion of local business
Vspec LLC (IGD Industries)	$174,606	$3,600,000	$2,800,000	30	50	Expansion of local business
Pinnacle Engineering	$150,000	$1,026,000	$792,200	7	24	Expansion of local business
Oakhill Villages	$148,428	$558,000	$531,000			Core district housing
Edgewood Station	$147,000	$2,200,000	$1,384,400			new jobs
Acme Graphics	$137,734	$1,400,000	$1,148,100	2	17	Flood-impacted business
Amtek	$130,000	$600,000	$1,983,800	14	45	Expansion of local business
Armar Ventures	$95,000	$800,000	$941,500		redevelopment of strip mall
Cona & KN Properties	$87,780	$750,000	$845,000	35		Downtown Reinvestment, new jobs
Iowa Brewing	$52,668	$2,611,000	$315,000	16		Downtown Reinvestment, new jobs
Rowell Hardware	$40,000	$500,000	$210,000	4		Historic Preservation
OPC Allan Investments	$40,000	$500,000	$306,900	4		Historic Preservation
1612 Development LLC	$36,652	$350,000	$148,600			core district housing
Green Development 12th Ave	$20,000	$240,000	$120,000	4		Historic Preservation
Ideal Theatre	$20,000	$700,000	$215,000			Historic Preservation

l Comments: (319) 339-3177; brian.morelli@thegazette.com