Government

Cedar Rapids defines 'litmus test' for above-the-norm tax breaks

Updates follow questions about what constitutes a 'community benefit'

This proposed $32 million redevelopment last year near Greene Square raised questions about whether a city tax incentive
This proposed $32 million redevelopment last year near Greene Square raised questions about whether a city tax incentive program was too generous and too ill-defined. Although the project gained City Council support, it fell through anyway. (Illustration supplied by city of Cedar Rapids)

CEDAR RAPIDS — An increasingly used public tax break for private developers has been updated in Cedar Rapids after City Council members raised questions last year about whether the “community benefit” incentive was too generous and loosely defined.

The change attempts to clarify a catchall category for projects the city deems worthy of public assistance but that don’t fall neatly under one of the other nine economic development categories targeting projects promising urban housing, high quality jobs, commercial reinvestment and other specific needs, or that require more public assistance than a typical 10-year tax break.

“The main change is simplifying ‘community benefit’ to focus on what it was intended to be,” said Jennifer Pratt, Cedar Rapids community development director. “Community benefit was always intended as a category with flexibility because it is impossible to anticipate every community need.”

The City Council approved changes to the economic development program last month, which was the fourth update to a program created in 2014 to provide predictability to public subsidies, spur private investment around targeted needs and better market the city’s promise of participation to developers in the region.

The community development program drew scrutiny last spring when the council was asked to support a 20-year, 100 percent tax break worth $5.2 million for a high-end apartment complex with little other public use. The proposed $32 million redevelopment near Greene Square gained City Council support, but fell through anyway.

It would be one of three requests exceeding typical city standards in four months.

Council members feared being manipulated into bankrolling premium prices for purchasing land or other costs and opening a “Pandora’s box” for developers seeking more lucrative incentives.

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Council member Scott Olson, who was the most vocal in raising questions, said he is happy with the changes.

“It still is subjective in a way, but it is going to be how it is reviewed,” Olson said. “It is spelled out the scrutiny is going to step up significantly. ... I think the message got out, this is something very special and needs to be taken seriously. We won’t be handing that (20 year tax break) out without a lot of discussion with council before bringing it forward.”

Under the new policy, “community benefit” still leaves wiggle room as a “unique contribution to the community such as expansion of a local business, headquarters facility, emerging industry, or affordable housing.”

The update also sets the standard economic development incentive for a community benefit project at 10-years, 100 percent tax break for residential, and 10-years, 50 percent tax break for commercial projects, which mirrors standards for the other categories.

The city could still exceed its standards up to the state maximum of a 20-year tax break. But rather than call it a community benefit, the city now has spelled out an “above-standard incentives” caveat. which had been used internally.

“There are two parts of the litmus test,” Pratt said. “It must meet needs in the community and then, the second piece, is determining what is the financial need.”

To qualify, the project must fit under one of the 10 categories. And, the incentive amount would be determined through financial analysis with appropriate thresholds, based on the nature of the project, such that:

• Private equity exceeds present value of the city incentive.

• Construction costs, operational expenses, sale and/or lease revenues are verified.

• Developers rate of return is confirmed consistent with local market conditions or industry standards.

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“We don’t want to be the largest investor in the project,” said Caleb Mason, a city economic development analyst. “You have to bring the equity to the table, and you have to be able to secure debt.”

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

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