As the Davenport City Council nears its final consideration of a financing mechanism to pay for road improvements for a Super Wal-Mart store at 53rd Street and Elmore Avenue, there are plenty of reasons to take a hard look at the issues.

The City of Davenport is poised to give the developer, THF of St. Louis, and Wal-Mart a major tool to develop a new store, even though THF and the city have clashed about the developer's obligations in the past; even though legal agreements to protect the city aren't finalized; even though studies to demonstrate need and impact don't exist; and even though the retail stores planned for the area provide nearly exclusively low-wage jobs.

On the other hand, THF assumes all the risk; if the projects fail, the company is still left with a higher property-tax bill and the legal obligation to build roads. The city appears to have little to lose and some property- and sales-tax revenue to gain.

Still, this decision has larger implications. The city is traveling on a new road, one that allows any developer to create a new taxing district to pay for infrastructure improvements that were once required to come from its own pockets, and one on which the traditional criteria for city-supported incentives - such as the creation of good jobs or re-development of run-down areas - no longer apply.

THF is impatient. Michael Staenberg, the company's president, said timing is critical if the development is to move forward this year. "We need to start grading by June 1" to meet a target opening date of June or July 2002, he said.

If city-council approval doesn't come this month, Staenberg claimed, THF won't begin construction or make road improvements until 2002. He also hinted the Wal-Mart project might not even happen if approval is delayed. "I might or might not" go forward, he said.

Past Obligations

At its meeting May 2, the Davenport City Council approved two zoning ordinances for THF Realty for property northeast and southwest of the intersection of Elmore Avenue and 53rd Street.

On May 16, the council is scheduled to vote on two Self-Supporting Municipal Improvement Districts (SSMIDs) for the same properties. SSMIDs are special districts created by the city in which land-owners agree to pay additional property taxes to offset the cost of improvements in or near the district.

The northeast SSMID is the linchpin for THF's planned $60 million development of the property into a Super Wal-Mart store and other retail establishments. Although the zoning was approved last week, "we really can't do the deal without the SSMIDs," claimed Tom Pastrnak, a Davenport attorney for the developer, at an April 26 committee meeting. Eight members of the city council must vote "yes" for the SSMIDs to be approved.

Staenberg said that THF cannot afford to make the $4.3 million in road improvements required by the zoning without a funding mechanism. He also said that THF is shouldering an enormous burden for this development. "Has any other developer made $4 million in improvements?" he asked.

The city council has attached numerous conditions to its approval of the zoning - including landscaping, architectural consistency, limitations on the use of some of the property, an agreement on Wal-Mart's marketing of the store it will be abandoning on Elmore, and eventually a schedule for infrastructure improvements.

Staenberg said the city started with nothing and negotiated a good bargain for itself. "I think they've gotten a heck of a deal," he said.

Yet there are some gaping holes in the bargain made all the more problematic by THF's history with the City of Davenport.

In 1997, the city approved zoning changes to land southwest of 53rd and Elmore that required certain road improvements. THF bought that property from Davies Development in February 2000 and assumed all obligations on the property. However, it never made the improvements.

THF disputed some of the requirements, claiming the legal language was vague and the zoning was unenforceable because the ordinance was only given two readings (one of numerous instances of illegal zoning in Davenport over the past three years). Construction on the land never began because, essentially, the city and THF couldn't agree on how much the developer had to build - improvements totaling $400,000 or $625,000.

That struggle lasted until February, when THF and the city signed a memorandum of understanding about the disputed infrastructure improvements. THF agreed to build and pay for all the improvements the city claimed it had to under the original zoning.

Now those very same road improvements are part of the southwestern SSMID ordinance, meaning that even though THF agreed to these improvements in February, it's now asking for the city to give it a revenue stream to pay for them.

Both the city and the developer agree that if the city council rejects the southwestern SSMID, THF is still required to make those improvements. (Pastrnak said rejection of the southwestern SSMID would not jeopardize the Wal-Mart project.)

Clayton Lloyd, the city's director of community and economic development, offered no defense for a SSMID even though THF had already agreed to pay for the improvements. He said only that the law allowed the use of SSMID funding for the project.

This is a typical response in the debate over the role SSMIDs play in THF's developments. City officials and others familiar with SSMID law talk about what the city can do but not what it should do.

SSMID Implications

SSMIDs have been popular tools for downtown revitalization for a number of reasons. For one thing, unlike Tax Increment Financing (which gets its revenue from increased property values), the property already has significant value and can therefore bring in a lot of revenue up-front. And also unlike Tax Increment Financing, SSMIDs do not deny property-tax money from local government bodies; SSMID taxes are levied above and beyond the regular property-tax bill.

But the most unique feature of SSMIDs is that there is generally no reason to turn them down. "It's self-imposed," said Thom Guzman, coordinator of the Iowa Main Street program in the Iowa Department of Economic Development. "That's the beauty of the whole process."

But the SSMIDs proposed by THF are different than any other self-imposed district the state has ever seen. Instead of being downtown, these SSMIDs are in the fastest-growing part of the city, and undeveloped land to boot. And the two districts would include land owned exclusively by one entity, THF or its subsidiaries, unlike every other SSMID in Iowa.

City officials agree that THF's proposed SSMIDs are unusual.

"It's not how I had ever thought about using a SSMID," Lloyd said.

"I can't think of any other" similar SSMID in the state, said Robert Josten, Davenport's current bond counsel and executive director of the League of Cities when the SSMID statute was passed by the state legislature in the mid-1970s.

Defenders of what Davenport is doing return to one point: Even if these districts are different than the historical application of SSMIDs, the law does not preclude them.

Guzman, Lloyd, and Josten all emphasized how few restrictions the legislature put on the use of SSMIDs.

"The difference [with the THF SSMIDs] is there aren't very many property owners," Josten said. "That's perfectly okay under the law." (The law uses the plural "property owners," however, which might cause some headaches for THF if anybody chooses to challenge the SSMIDs.)

Josten said the SSMID law was crafted to be very broad based on one principle: "If they're willing to be taxed, who should say they shouldn't be taxed?"

The broadness of the law wasn't an accident, Josten stressed. "There are many statutes that say you have to have a minimum of 50 people," he said. "There was no intent to limit this to 100 separate property owners. ... People say that this is not the intent, but it is. ... The legislature knows how to write laws, and they know what they want to do."

Even so, a quarter century has passed without anybody applying SSMIDs the way THF is proposing to do. "One would wonder why it [a single-owner greenfield SSMID] hasn't been done before," Pastrnak said.

The law's broadness has created some confusion in other areas.

The statute specifically requires the Planning & Zoning Commission to "with due diligence, prepare an evaluative report for the council on the merit and feasibility of the project."

Without that study, the council "shall not hold public hearings or take further action on the establishment of the district," the law says.

The city got a one-paragraph recommendation from its Planning & Zoning Commission without any report that addresses the merit or feasibility of the SSMIDs.

Yet the city claims it has followed the law.

"Nobody's ever defined 'merit' and 'feasibility'" in the statute, Josten said. As a result, the phrase "means whatever the people locally want it to mean," he said.

In other words, even though the recommendation of the Planning & Zoning Commission in this case doesn't address either component, "I don't see that it has to," Josten said.

Critics claim the city is hiding behind general legal opinions on the assumption that nobody will bother to challenge its interpretations in court. But the net effect is that the city is approving a huge development project without the critical data that a merit and feasibility study would have produced.

A Different SSMID

THF doesn't plan to pay the SSMID taxes itself. The company will pass them on to the tenants, according to Staenberg. That means that although the justification for the broadness of the SSMID statute is that the taxes are self-imposed, this will not be the case for THF.

Lloyd and Josten said the distinction is not important. "You and I as consumers pay the tax," Josten said. "It's neither the landlord nor the tenant that pays the tax. I don't see how you can avoid it."

Pastrnak added that THF will pass as much of the tax as it can to the retail stores, but "I don't expect the tenants will pick up 100 percent." And THF has sole legal responsibility for the tax, he said.

But if the cost is largely being absorbed by consumers, why is the SSMID so important to THF? Charging Wal-Mart and other tenants higher lease rates to pay for infrastructure is no different than passing along the SSMID taxes to them.

Pastrnak said that the SSMIDs guarantee THF's lenders that there is a revenue stream identified for re-paying the costs of infrastructure. "One of the things that people care about is whether there's a dedicated cash flow," he said.

SSMIDs weren't THF's preferred choice for paying for infrastructure, but "there weren't a whole lot of options," Pastrnak said. Lloyd said a number of economic incentives the city has at its disposal would not apply to the Super Wal-Mart store because of city policy.

One of the more common tools the city employs is Tax Increment Financing, in which increased property values over the life of a district generate more property-tax revenue, which is typically used to pay off bonds that were issued for physical improvements. But that is reserved for "primary" businesses that "create new wealth" in the community, Lloyd said.

The city can also make direct loans to a developer, but those aren't available to retail businesses.

City government has good reasons for limiting how development tools can be used. Restrictions on TIF and direct loans are meant to ensure that city-backed incentives are used for genuine economic development - good jobs that increase the community's income and projects that give a boost to struggling areas.

But the city hasn't put any such limits on SSMIDs, falling back on the broad state law. The City of Davenport is setting a precedent that SSMIDs will not be held to the same requirements as other city incentives - thus giving developers a tool that reduces their risk with the city's blessing and no demonstrated positive impact on the community.

That's okay, Pastrnak argued. TIFs and direct loans have requirements because the city is putting its money on the line. If a project fails, "the city has lost something," he said. "Ultimately it affects the general obligations of the city."

But SSMIDs are different. "Here, the city is not out anything," he said.

The city has generally required developers to pay for road improvement necessitated by their projects out of their own pockets; but now, any developer can ask for a SSMID, which will then generate income to be used to re-pay itself for those improvements.

Pastrnak thinks that's not a bad thing. "This is probably a precedent that's a good precedent," he said. It allows the city to spur development without putting itself at risk, he said.

The Impact Question

One of the challenges in the debate about a Super Wal-Mart has been determining what the city gains from approving the SSMIDs. THF has estimated increased property-tax revenue for the city of $860,000 a year once development is complete, and Staenberg said a Super Wal-Mart will allow Davenport to remain a regional shopping center drawing dollars from other communities. (Ironically, Wal-Mart predicts that a new Super Wal-Mart in Davenport will absorb 20 percent of the sales of its Moline store, reducing sales-tax revenue for that city.)

Pastrnak noted that developers are normally asked to pay for portions of roads. "The developer [traditionally] was responsible for two lanes, not four, not six," he said. "I can argue I'm paying for Target's mistake. ... Who really gets the benefit of this? The consumer and the public get most of it."

But considering that Super Wal-Mart merely replaces an existing store, the benefits of this deal to the city seem marginal. At the very least, THF and Wal-Mart have the burden of showing what other benefits the community is getting.

Critics such as Alderman Wayne Hean, who has been the only consistent voice of opposition to the Wal-Mart deal on the city council, have demanded an economic-impact study of the new store, but one has never been done.

In a March memo to the City of Davenport, Eugene Norber, president of the THF-hired consulting firm Economic Development Resources, wrote that it is "virtually impossible to predict the net impact of the opening of this store on the City." He went on to note a number of factors that make a study difficult, including that Super Wal-Mart's market "is not confined to the City of Davenport," that the area's demographics are changing, and that grocery sales are difficult to track because of exemptions from sales tax.

While significant obstacles, those factors don't make a study impossible, city and THF officials concede.

"I don't think it's impossible, no, but I do think you have to make assumptions to control the variables," Lloyd said.

The key is in the phrasing. It is impossible to predict impact; it's not impossible to formulate educated projections.

Staenberg claims the city's narrow focus made an economic-impact study impossible for THF. If the city had asked for a study of the store's impact on the Quad Cities as a whole and not just Davenport, THF and its consultant could have complied, he said.

"We're not avoiding the issue," Staenberg said. "The City of Davenport only cares about itself."

But Staenberg said he would object to any further delay, even for an economic-impact study that might appease those with doubts about the Wal-Mart development. "This zoning issue has been out there for nine months," he said. "Everybody's had their chance."

The debate isn't over, however.

Ward 2 Alderman George Nickolas has pledged to vote against the SSMIDs if all appropriate documents - including a schedule for infrastructure improvements - aren't finished by next week's meeting. (Pastrnak said several outstanding documents - the development agreements for the SSMIDs; the build-out schedule for infrastructure; and the dark-store agreement - should be finalized by the May 16 meeting.)

Nickolas is also among several aldermen demanding that THF promise not to apply for a property-tax exemption for which it might be eligible. ("We're not asking for anything else," Staenberg said. Pastrnak added, "I would endorse signing whatever waiver is requested.")

But in the end, the city is approaching ground zero with the THF deal, scrambling to get all the documents in order and still unable to demonstrate why the Wal-Mart development is a good deal for Davenport. The big question that remains is whether eight members of the city council will vote "yes."

A lot of citizens and developers are waiting for the answer.

The second part of this story can be found on this Web site.

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