14
Jan
2003
The city governments of Bettendorf and Davenport are both considering property-tax-incentive packages for business development, and they couldn't be more different. Bettendorf is considering giving developers the property taxes stemming from higher real-estate values for a commercial development to replace declining Duck Creek Mall, while Davenport is looking to give a $2.9 million grant for a six-story office building downtown.
Yet even though these projects don't seem to have much in common except for the financing tool, under the surface is the same nagging question: Are these projects appropriate uses of municipal economic-development incentives?
Consider that in the case of Bettendorf's proposed Tax Increment Financing (TIF) package for the Duck Creek project, the city is effectively putting no cap on how much money the developers can get back in incremental property taxes, and that incentive will essentially be used to create low-wage retail and fast-food jobs. In addition, the TIF district - which would run for 10 years from the completion of both phases - will most likely eat up the property's highest-value years. (The district could exist for as many as 14 years.) Those incentives could be worth $6 million to the developers.
The plan involves the demolition of Duck Creek Mall by developers Equity Growth Group and Daly Group (doing business as Equity-Dalan), and the shopping center's replacement with a Home Depot, an as-yet-undetermined grocery store, a Marshalls, a Walgreen store, and other retail establishments. The first phase would include roughly 200,000 square feet of the planned 300,000-square-foot development and is slated for completion in fall 2003. The second phase is scheduled to be finished in fall 2004, and completion would trigger the 10-year clock.
In the Davenport situation, Ryan Companies plans to build a "Class A" office building at Second and Harrison streets that has already secured two tenants - Lee Enterprises and RSM McGladrey - who will use two-thirds of the building's 90,000 square feet. The main question here is whether it makes sense to spend nearly $3 million simply to retain business in downtown Davenport.
But there are other issues. Why is Davenport planning to use the property-tax increment for 20 years to service debt on the incentive's bonds? And why are the city and developers in such a hurry? They announced the project on January 9, the same day it was considered by the Community Development committee and six days before the full city council is scheduled to vote on it.
Proponents of both projects argue that the respective goals - beefing up Bettendorf's flagging retail center and bolstering Davenport's downtown business climate - are too important to not provide the incentives, even though they don't fit the traditional criteria for Tax Increment Financing. These projects have the potential to be image-altering, supporters claim.
Bettendorf and Duck Creek Mall
Bettendorf City Council Member Joe Douglas in many ways sounds like an adamant opponent of the Duck Creek Mall proposal. He thinks the term of the TIF is too long, scoffs at the no-limit incentive, and acknowledges that the project won't create living-wage jobs.
But assuming that developers Equity Growth Group and Daly Group make some concessions to city concerns before a city-council vote - which will most likely take place January 21 - Douglas said he's inclined to support the proposal.
"This is a special instance here," he said. "We've been losing all our retail in Bettendorf. It says something about where we're going as a community."
The assessed value of the Duck Creek Mall property has fallen dramatically in recent years, from $12 million as recently as three years ago to $9.9 million now. "We should anticipate the property will fall even further" without new development, said City Attorney Greg Jager.
The Duck Creek Mall issue takes the city into new territory on a number of fronts. Bettendorf has traditionally tried to limit its Tax Increment Financing districts to less than 10 years, and this is its first major commercial TIF project. Typically, property-tax incentives are reserved for high-paying jobs, not low-wage commercial and fast-food employment.
"It's a tough call," Jager said. The test for the appropriateness of the incentive is, he said, "Will anything happen in the absence of council involvement?"
Douglas isn't convinced. "It's a bluffing game whether they're going to develop without our assistance," he said. He also said that developers are smart to make outrageous requests of elected city officials, especially considering that members of the city council are "amateurs": "I'd come in asking for the sky, too. You ask for a little more than you think you'll get."
The developers expect the Duck Creek Mall project to boost the property's value to roughly $30 million. With the TIF district, that would mean property-tax rebates to the developer of roughly $600,000 a year.
At last week's Committee of the Whole meeting, Douglas raised objections about the scope of the incentives, calling them "unreasonable. ... It's overreaching."
The city-council member stressed in an interview that the TIF proposal is probably not in its final state. "I don't think we've heard the final version of this," he said.
The developers claim they've already made concessions to the city. At last week's Committee of the Whole meeting, William Hoag of the Daly Group touted that the developers had shifted time frames to include the Marshalls store in the first phase. "We've front-loaded the project ... to give you as much as we can give you in Phase One," he said. And Equity Growth attorney Terry Giebelstein answered a question about the term of the TIF by saying Iowa statute allows TIF districts to exist for up to 20 years.
Giebelstein also said the incentive is important because of risk associated with the development. "This project is not a financial automatic," he said.
Douglas said he doesn't think passage will be a given for the incentive package, which was supposed to have been voted on at the last two city council meetings. "If we'd had to vote the other night, I think it would have been voted down," he said last week. The proposal will likely be on the city council's January 21 agenda.
The structure of the Tax Increment Financing is unusual beyond its commercial nature and length. First of all, the city is not issuing bonds for the project. Second, the city is putting no cap on the amount of money the developer can get from TIF.
"Normally, we agree to pay a certain dollar amount up-front," Jager said. In those cases, the property taxes from increased value are used to pay off bonds that were issued at the genesis of the project.
Douglas said the lack of a cap is a positive for both the city and the developer; the city gets the benefit of not increasing its bonded indebtedness, while the developer's potential for capturing property-tax dollars isn't limited up-front. In addition, the open-ended financial arrangement gives the developer an incentive to increase property values as much as possible.
Douglas noted that the issue of the "life expectancy" of this commercial development is "an excellent question." By the time the TIF expires, will the property value again be sliding - thus meaning that taxing bodies get little benefit from the development in the long run? "After 14 years, you [the developer] are going to be coming back to us asking for assistance," he said in an interview.
Davenport and Its Office Building
The Ryan Companies' downtown-office-building project would at first seem to be a less contentious issue. The jobs of those who work there will pay well, and it continues downtown momentum. The project's backers are quick to note that this will be the first multi-tenant office building constructed in Davenport in two decades.
Yet the two secured tenants are already based in Davenport and have presented no evidence that they planned to leave the city, let alone the Quad Cities. The 250 Lee and RSM McGladrey employees in the new building - tentatively called One Renaissance Plaza - are already in the Quad Cities, and nearly all already work in Davenport. (The building is expected to eventually have 360 people working there.)
"We looked at some other sites," said Lee Enterprises President, CEO, and Chairperson Mary Junck. And RSM McGladrey Managing Director Jim Kadavy said his company has explored "many attractive location options throughout the Quad Cities."
Others said there was little chance the companies would even leave the city. "They would go to greenfield sites," said Tara Barney, senior vice president of downtown economic development for DavenportOne. "I don't believe they would ever leave Davenport." DavenportOne's Downtown Partnership has committed to give up to $200,000 to the Ryan office building.
The question of job creation - one of the traditional criteria for TIF - has been brushed off by the developers. Jeff Smith, president of the Midwest Division of Ryan Companies, said his company will target companies not currently in the Quad Cities for the remainder of the office building and a planned second structure, although no time frame for building that facility was given.
But at Monday's Committee of the Whole meeting, Ryan Vice President Rick Collins basically said jobs should be left out of the discussion. "This is really an urban-re-development project rather than a jobs-creation project."
In terms of jobs, the ones that are being promoted most heavily right now are the 400 to 500 construction jobs over the course of a year, and "the great majority, if not all, the subcontractors would be local laborers," according to Collins.
Discussions about the project began last summer, but it only became public on January 9, the same day the Tax Increment Financing was considered by the city council's Community Development committee. That left less than a week for public discussion about the property-tax incentive, because the city-council is scheduled to vote on the incentive January 15. Yet at two city-council meetings at which the proposal has been discussed, only Fifth Ward Alderman Wayne Hean has asked sincere questions about the deal's details.
Collins said there is an urgency. Both tenants, he said, needed commitments on the new building by January 31 because of expiring leases. If the issue drags on beyond that date, he said, Ryan might lose its two anchor tenants.
Collins also said that the $2.9 million TIF grant allows Ryan to set lease rates competitive with those for suburban office buildings. He said the cost of parking downtown (renting spaces in one of downtown Davenport's new parking deck) and the higher cost of building a six-story building (compared to a one- or two-story building in the suburbs) make it necessary for an incentive package "to level the playing field."
He said nobody would build an office building downtown without an incentive package. "We could not make the cost to build in downtown Davenport," he said. "I don't think that's hard to believe, given that nobody's built multi-tenant, Class A office space for 20 years."
The NAI 2002 Real Estate Planning Guide for the Quad Cities market supports the contention that rates are indeed higher for Class A office space downtown. The report states that rental rates per square foot per year for downtown Class A range from $20 to $25, while those for suburban Class A run from $16 to $22. (Class B rates range from $9 to $16 downtown and $12 to $16 in the suburbs.)
The downtown Davenport project shares much in common with a recent Ryan project in Cedar Rapids, and the company has pointed to its efforts there as an example of why Davenport should support this project. The City of Cedar Rapids gave a $2.5 million loan to Ryan and its partner, 2001 Development Corporation, for an eight-story, 150,000-square-foot, $17-million office building that opened in January 1999 on the city's downtown riverfront.
And while the financial package here is similar to one given to the office-building project in Cedar Rapids that also included Ryan Companies, the term is much longer - 20 years in Davenport compared to 10 in Cedar Rapids. The Cedar Rapids TIF will pay off $1 million in public improvements along with the $2.5 million loan.
The anchor tenant for the building is GreatAmerica Leasing, which re-located from another building in Cedar Rapids and has committed to eventually leasing four floors.
"There were no Class A office buildings in downtown Cedar Rapids that weren't full," said Tom Aller, executive vice president of 2001 Development Corporation. The TIF incentive, he said, was "strictly ... to equalize the [lease] rate," because construction costs would have made the lease rates too high for the market. The building is currently 90-percent leased, he said.
Richard Luther, Cedar Rapids' development manager, acknowledged that the project, by itself, hasn't brought new jobs to Cedar Rapids. Nonetheless, he said, "with a building that size, the jobs will come." He added that the TIF incentive was less about jobs and more about a providing a re-development spark for the area. "It was more of a community issue," he said, "to help change the character of that area. We needed to encourage new development downtown, along the riverfront."
Since the GreatAmerica building opened, the city has added new nightlife venues, an IMAX theatre and science center, and a new federal courthouse to its downtown. The GreatAmerica building was a catalyst for the courthouse project, Luther said: "That proved to them [the federal government] that there was development potential."
Yet the new Class A space hasn't boosted demand or rents for lower-grade office space. Since 1999, a lot of office space has gone on the market, Aller said. "There's a lot of pressure on rates to go down," he said. While it doesn't show declining rates, the NAI Real Estate Planning Guide does say that vacancy rates downtown have gone up significantly. Downtown Class A vacancy has risen from 7.5 percent in 1999 to 11.0 in 2002, while the rate for Class B jumped from 4.7 percent to 10.5 percent in the same time frame.
Aller attributed that to the faltering economy, and not to any failure of the project.
In Davenport, Ryan and the supporters of the project argue that One Renaissance Plaza will boost demand and rental rates for all downtown office space.
Collins said the fact that Ryan is leasing to RSM McGladrey - currently a tenant of the Ryan-owned Wells Fargo bank building - and Lee Enterprises - a tenant of the Putnam Foundation, which is selling Ryan the land for the office building - shows his company's confidence. If it didn't think that it could fill its soon-to-be-vacated Class B space, "we ... would not choose to build a building for one of our own tenants," he said.
Yet even though these projects don't seem to have much in common except for the financing tool, under the surface is the same nagging question: Are these projects appropriate uses of municipal economic-development incentives?
Consider that in the case of Bettendorf's proposed Tax Increment Financing (TIF) package for the Duck Creek project, the city is effectively putting no cap on how much money the developers can get back in incremental property taxes, and that incentive will essentially be used to create low-wage retail and fast-food jobs. In addition, the TIF district - which would run for 10 years from the completion of both phases - will most likely eat up the property's highest-value years. (The district could exist for as many as 14 years.) Those incentives could be worth $6 million to the developers.
The plan involves the demolition of Duck Creek Mall by developers Equity Growth Group and Daly Group (doing business as Equity-Dalan), and the shopping center's replacement with a Home Depot, an as-yet-undetermined grocery store, a Marshalls, a Walgreen store, and other retail establishments. The first phase would include roughly 200,000 square feet of the planned 300,000-square-foot development and is slated for completion in fall 2003. The second phase is scheduled to be finished in fall 2004, and completion would trigger the 10-year clock.
In the Davenport situation, Ryan Companies plans to build a "Class A" office building at Second and Harrison streets that has already secured two tenants - Lee Enterprises and RSM McGladrey - who will use two-thirds of the building's 90,000 square feet. The main question here is whether it makes sense to spend nearly $3 million simply to retain business in downtown Davenport.
But there are other issues. Why is Davenport planning to use the property-tax increment for 20 years to service debt on the incentive's bonds? And why are the city and developers in such a hurry? They announced the project on January 9, the same day it was considered by the Community Development committee and six days before the full city council is scheduled to vote on it.
Proponents of both projects argue that the respective goals - beefing up Bettendorf's flagging retail center and bolstering Davenport's downtown business climate - are too important to not provide the incentives, even though they don't fit the traditional criteria for Tax Increment Financing. These projects have the potential to be image-altering, supporters claim.
Bettendorf and Duck Creek Mall
Bettendorf City Council Member Joe Douglas in many ways sounds like an adamant opponent of the Duck Creek Mall proposal. He thinks the term of the TIF is too long, scoffs at the no-limit incentive, and acknowledges that the project won't create living-wage jobs.
But assuming that developers Equity Growth Group and Daly Group make some concessions to city concerns before a city-council vote - which will most likely take place January 21 - Douglas said he's inclined to support the proposal.
"This is a special instance here," he said. "We've been losing all our retail in Bettendorf. It says something about where we're going as a community."
The assessed value of the Duck Creek Mall property has fallen dramatically in recent years, from $12 million as recently as three years ago to $9.9 million now. "We should anticipate the property will fall even further" without new development, said City Attorney Greg Jager.
The Duck Creek Mall issue takes the city into new territory on a number of fronts. Bettendorf has traditionally tried to limit its Tax Increment Financing districts to less than 10 years, and this is its first major commercial TIF project. Typically, property-tax incentives are reserved for high-paying jobs, not low-wage commercial and fast-food employment.
"It's a tough call," Jager said. The test for the appropriateness of the incentive is, he said, "Will anything happen in the absence of council involvement?"
Douglas isn't convinced. "It's a bluffing game whether they're going to develop without our assistance," he said. He also said that developers are smart to make outrageous requests of elected city officials, especially considering that members of the city council are "amateurs": "I'd come in asking for the sky, too. You ask for a little more than you think you'll get."
The developers expect the Duck Creek Mall project to boost the property's value to roughly $30 million. With the TIF district, that would mean property-tax rebates to the developer of roughly $600,000 a year.
At last week's Committee of the Whole meeting, Douglas raised objections about the scope of the incentives, calling them "unreasonable. ... It's overreaching."
The city-council member stressed in an interview that the TIF proposal is probably not in its final state. "I don't think we've heard the final version of this," he said.
The developers claim they've already made concessions to the city. At last week's Committee of the Whole meeting, William Hoag of the Daly Group touted that the developers had shifted time frames to include the Marshalls store in the first phase. "We've front-loaded the project ... to give you as much as we can give you in Phase One," he said. And Equity Growth attorney Terry Giebelstein answered a question about the term of the TIF by saying Iowa statute allows TIF districts to exist for up to 20 years.
Giebelstein also said the incentive is important because of risk associated with the development. "This project is not a financial automatic," he said.
Douglas said he doesn't think passage will be a given for the incentive package, which was supposed to have been voted on at the last two city council meetings. "If we'd had to vote the other night, I think it would have been voted down," he said last week. The proposal will likely be on the city council's January 21 agenda.
The structure of the Tax Increment Financing is unusual beyond its commercial nature and length. First of all, the city is not issuing bonds for the project. Second, the city is putting no cap on the amount of money the developer can get from TIF.
"Normally, we agree to pay a certain dollar amount up-front," Jager said. In those cases, the property taxes from increased value are used to pay off bonds that were issued at the genesis of the project.
Douglas said the lack of a cap is a positive for both the city and the developer; the city gets the benefit of not increasing its bonded indebtedness, while the developer's potential for capturing property-tax dollars isn't limited up-front. In addition, the open-ended financial arrangement gives the developer an incentive to increase property values as much as possible.
Douglas noted that the issue of the "life expectancy" of this commercial development is "an excellent question." By the time the TIF expires, will the property value again be sliding - thus meaning that taxing bodies get little benefit from the development in the long run? "After 14 years, you [the developer] are going to be coming back to us asking for assistance," he said in an interview.
Davenport and Its Office Building
The Ryan Companies' downtown-office-building project would at first seem to be a less contentious issue. The jobs of those who work there will pay well, and it continues downtown momentum. The project's backers are quick to note that this will be the first multi-tenant office building constructed in Davenport in two decades.
Yet the two secured tenants are already based in Davenport and have presented no evidence that they planned to leave the city, let alone the Quad Cities. The 250 Lee and RSM McGladrey employees in the new building - tentatively called One Renaissance Plaza - are already in the Quad Cities, and nearly all already work in Davenport. (The building is expected to eventually have 360 people working there.)
"We looked at some other sites," said Lee Enterprises President, CEO, and Chairperson Mary Junck. And RSM McGladrey Managing Director Jim Kadavy said his company has explored "many attractive location options throughout the Quad Cities."
Others said there was little chance the companies would even leave the city. "They would go to greenfield sites," said Tara Barney, senior vice president of downtown economic development for DavenportOne. "I don't believe they would ever leave Davenport." DavenportOne's Downtown Partnership has committed to give up to $200,000 to the Ryan office building.
The question of job creation - one of the traditional criteria for TIF - has been brushed off by the developers. Jeff Smith, president of the Midwest Division of Ryan Companies, said his company will target companies not currently in the Quad Cities for the remainder of the office building and a planned second structure, although no time frame for building that facility was given.
But at Monday's Committee of the Whole meeting, Ryan Vice President Rick Collins basically said jobs should be left out of the discussion. "This is really an urban-re-development project rather than a jobs-creation project."
In terms of jobs, the ones that are being promoted most heavily right now are the 400 to 500 construction jobs over the course of a year, and "the great majority, if not all, the subcontractors would be local laborers," according to Collins.
Discussions about the project began last summer, but it only became public on January 9, the same day the Tax Increment Financing was considered by the city council's Community Development committee. That left less than a week for public discussion about the property-tax incentive, because the city-council is scheduled to vote on the incentive January 15. Yet at two city-council meetings at which the proposal has been discussed, only Fifth Ward Alderman Wayne Hean has asked sincere questions about the deal's details.
Collins said there is an urgency. Both tenants, he said, needed commitments on the new building by January 31 because of expiring leases. If the issue drags on beyond that date, he said, Ryan might lose its two anchor tenants.
Collins also said that the $2.9 million TIF grant allows Ryan to set lease rates competitive with those for suburban office buildings. He said the cost of parking downtown (renting spaces in one of downtown Davenport's new parking deck) and the higher cost of building a six-story building (compared to a one- or two-story building in the suburbs) make it necessary for an incentive package "to level the playing field."
He said nobody would build an office building downtown without an incentive package. "We could not make the cost to build in downtown Davenport," he said. "I don't think that's hard to believe, given that nobody's built multi-tenant, Class A office space for 20 years."
The NAI 2002 Real Estate Planning Guide for the Quad Cities market supports the contention that rates are indeed higher for Class A office space downtown. The report states that rental rates per square foot per year for downtown Class A range from $20 to $25, while those for suburban Class A run from $16 to $22. (Class B rates range from $9 to $16 downtown and $12 to $16 in the suburbs.)
The downtown Davenport project shares much in common with a recent Ryan project in Cedar Rapids, and the company has pointed to its efforts there as an example of why Davenport should support this project. The City of Cedar Rapids gave a $2.5 million loan to Ryan and its partner, 2001 Development Corporation, for an eight-story, 150,000-square-foot, $17-million office building that opened in January 1999 on the city's downtown riverfront.
And while the financial package here is similar to one given to the office-building project in Cedar Rapids that also included Ryan Companies, the term is much longer - 20 years in Davenport compared to 10 in Cedar Rapids. The Cedar Rapids TIF will pay off $1 million in public improvements along with the $2.5 million loan.
The anchor tenant for the building is GreatAmerica Leasing, which re-located from another building in Cedar Rapids and has committed to eventually leasing four floors.
"There were no Class A office buildings in downtown Cedar Rapids that weren't full," said Tom Aller, executive vice president of 2001 Development Corporation. The TIF incentive, he said, was "strictly ... to equalize the [lease] rate," because construction costs would have made the lease rates too high for the market. The building is currently 90-percent leased, he said.
Richard Luther, Cedar Rapids' development manager, acknowledged that the project, by itself, hasn't brought new jobs to Cedar Rapids. Nonetheless, he said, "with a building that size, the jobs will come." He added that the TIF incentive was less about jobs and more about a providing a re-development spark for the area. "It was more of a community issue," he said, "to help change the character of that area. We needed to encourage new development downtown, along the riverfront."
Since the GreatAmerica building opened, the city has added new nightlife venues, an IMAX theatre and science center, and a new federal courthouse to its downtown. The GreatAmerica building was a catalyst for the courthouse project, Luther said: "That proved to them [the federal government] that there was development potential."
Yet the new Class A space hasn't boosted demand or rents for lower-grade office space. Since 1999, a lot of office space has gone on the market, Aller said. "There's a lot of pressure on rates to go down," he said. While it doesn't show declining rates, the NAI Real Estate Planning Guide does say that vacancy rates downtown have gone up significantly. Downtown Class A vacancy has risen from 7.5 percent in 1999 to 11.0 in 2002, while the rate for Class B jumped from 4.7 percent to 10.5 percent in the same time frame.
Aller attributed that to the faltering economy, and not to any failure of the project.
In Davenport, Ryan and the supporters of the project argue that One Renaissance Plaza will boost demand and rental rates for all downtown office space.
Collins said the fact that Ryan is leasing to RSM McGladrey - currently a tenant of the Ryan-owned Wells Fargo bank building - and Lee Enterprises - a tenant of the Putnam Foundation, which is selling Ryan the land for the office building - shows his company's confidence. If it didn't think that it could fill its soon-to-be-vacated Class B space, "we ... would not choose to build a building for one of our own tenants," he said.
