Government

Cedar Rapids project puts ambiguous subsidy in spotlight

City increasingly granting generous 'community benefit' tax break

An Indiana firm is proposing to build a five-story structure with 184 market-rate apartments, a four-story parking garage with 222 spaces, a workout facility, bike shop, a rooftop deck, an interior pool courtyard and space for retail with a small plaza on a block near the downtown Cedar Rapids Public Library. (Illustration provided by city of Cedar Rapids).
An Indiana firm is proposing to build a five-story structure with 184 market-rate apartments, a four-story parking garage with 222 spaces, a workout facility, bike shop, a rooftop deck, an interior pool courtyard and space for retail with a small plaza on a block near the downtown Cedar Rapids Public Library. (Illustration provided by city of Cedar Rapids).
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CEDAR RAPIDS — An out-of-town developer seeking above-the-norm tax breaks to convert the “Banjo block” near the Cedar Rapids Public Library and Greene Square into an apartment complex has put the spotlight on how Cedar Rapids deploys its most loosely defined and most generous tax subsidies.

The plan for the project proposes twice the 10-year incentive allowed under the city’s standard slate of economic development packages, prompting concerns the city is giving away too much and creating a slippery slope for exceeding its practice that could make it harder to say “no” in the future.

“To go from 10 to 20 years for an outside company when we are not hard up for market-rate housing down there, that is a concern,” said B.J. Hobart, of Hobart Historic Restoration, a Cedar Rapids-based developer that has completed several high-dollar historic renovations and new builds without exceeding the standard incentives.

The city has an economic development exemption called “community benefit,” a catchall category, for projects that meet a city-defined need but have a financial gap exceeding what the standard incentive would provide. These could be for very large projects or smaller ones.

Cedar Rapids City Council member Scott Olson, who has a background in commercial real estate, laid out a series of concerns with providing up to a 20-year tax break projected to be worth $5.2 million for the Banjo block project.

He considered the benefit to the community unclear, and suggested the city may be bankrolling a premium price tag for purchasing the land — opening a “Pandora’s box” for developers to push for more lucrative incentives in the future.

“When you go from 10 years to 20 years, we have to have a solid reason,” Olson said. “We have to define what a community benefit is.”

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The City Council has granted only six “community benefit” exemptions in the past, but the pace is quickening.

After approving three in four years, 2014-2017, the council approved two last year and one already this year — a 20-year tax break worth $10.6 million, plus a $3 million completion grant, to redevelop the downtown Guaranty Bank block into two hotels.

The Banjo block project would be the second of the year and seventh overall. Three more projects are on the horizon.

Developer Steve Emerson’s proposed $72.9 million, 25-story structure at 101 and 109 Third Ave. SE and 312 First St. SE, adjacent to the Paramount Theatre; Hatch Development’s $20 million Art Tech Village in the NewBo District; and a $28 million housing project on the old Loftus Lumber site in NewBo all are expected to qualify for the community benefit exemption, said Jennifer Pratt, community development director.

Not all projects that qualify for “community benefit” get the full 20-year maximum tax break allowed under state law.

For example, the Depot development got a 12-year, 100-percent incremental tax break.

Each project has a different reason for the community benefit exemption. CRST Center qualified because it included flood protection. Sonoma Square included affordable housing units.

The proposed project for the Banjo block, a tract nicknamed after the longtime Banjo Refrigeration business there, meets the defined need of providing urban housing.

In 2014, the City Council adopted an economic development program laying out a set of standard incentives that are automatically granted if a project meets the specifications. The incentives are structured around city-defined needs, such as urban housing, “green” development, workforce housing, historic preservation and brownfield/grayfield redevelopment.

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Those incentives cap out at a 10-year, 100-percent rebate on taxes owed to the city through tax increment financing. Under this mechanism, the property owner continues to pay taxes on the base value, but is exempt from taxes based on the increased assessed value from the project.

At the time, city leaders intentionally created the “community benefit” to provide flexibility in awarding public incentives to projects that fulfilled a city-defined need but had a financial gap greater than the standard incentives would cover, Pratt said.

“This category was very intentional because as much as we want to say we know what the market is, and we know what the developers want to do, we knew that with our standard programs, they’re always going to be those things that don’t fit into the box,” Pratt said. “Council, when they first adopted it, indicated that was very important to them to have a category where it could differ either in scope, or in city assistance, but in order to do that, we have to then hold those to a higher standard.”

She agreed the title “community benefit” may create a misperception about what the threshold is — implying, for example, that the project provide public space or another public use. But the city’s threshold is flexible and simply can be a matter of meeting needs identified in the standard economic development program along with demonstrating the financial need, she said.

Because developments must meet those two thresholds, Pratt said she does not feel the city is at risk of providing the community benefit exemption to projects that don’t warrant it. Developers have to open up their books and show their pro forma demonstrating the financial gap, she said.

The fact there is a stream of major projects that go above and beyond the norm — to the point they would qualify for such a benefit — is a good thing, she and Caleb Mason, a city economic development analyst, said. They want developers “taking it to the next level,” Pratt said.

“We want to see what ideas are out there, even if there’s a financial gap,” Mason said. “We will see if we can work with you.”

Marty Hoeger, a City Council member with a development background, said he, too has concerns about not being specific enough with the community benefit exemption. He believes the Banjo block project qualifies because it fully redevelops a long-dormant block, could spur further redevelopment in surrounding blocks and represents a major financial investment.

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“I think we do need to better define it,” he said. “Almost a checklist, so developers can look at it. I do think there can be the perception, ‘They like that guy better or that project better, so they are giving them a longer term.’”

Former Mayor Ron Corbett was part of the City Council that instituted the policy and now works at the Cedar Rapids Metro Economic Alliance as business retention and expansion strategist. He questioned the need for more rules.

“Every deal is different,” he said. “The council and city manager should have flexibility. The current policy allows that flexibility. The community benefit is subjective; however, it is always up to the will of the council.”

• Comments: (319) 398-8310; brian.morelli@thegazette.com

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