It’s not theater: ‘The Pirates of River Landing’
The Coralville City Council recently approved an astounding incentive package to entice Von Maur from Iowa City’s Sycamore Mall to Coralville’s Iowa River Landing project. The city has agreed to build a $9.5 million store for Von Maur. It doesn’t matter how well your store is doing; if someone offers you free rent in perpetuity, that gets your attention.
But the $9.5 million is only half the story. The city also agreed to:
- give Von Maur the $1.5 million building site for $10,
- pay $650,000 to buy out the company’s lease at Sycamore Mall,
- pay all of Von Maur’s expenses of moving from the mall to Coralville, and
- pay all of the cost of constructing necessary streets, sidewalks, parking lots, landscaping, street lighting, water, sewer and storm sewers associated with or needed by the store.
And that’s still not the end. This was a TIF deal, where the rationale is that you are creating tax base, in the long run.
Well, guess what happens to most of the tax revenue — the city rebates it to Von Maur, with no ending date, because this TIF is in a “blighted area,” which means the TIF goes on forever.
So I guess the day after perpetuity, the schools and the county will start collecting all the taxes normally due them from this project.
The property tax deal caps Von Maur’s liability for property taxes at $150,000 per year (inflated each year by the consumer price index or 2 percent, whichever is less). If you take the building cost and add the land value you get $11 million. Then throw in another $1.0 to $1.5 million for the value of interior improvements made by Von Maur that count as part of the real estate, and you get a taxable value of about $12.2 million. At the current total property tax rate in that area of $36.57 per thousand, that is about $450,000 per year for a total property tax bill.
Under the agreement, Von Maur pays only $150,000, the city pays the remaining $300,000. There is no time limit on the cap. But if we assume that the store will have an economic life of 20 years, we can calculate the present value equivalent of giving them $300,000 a year. It’s about $4.5 million (using a 3 percent discount rate). You could argue about the time frame, or the discount rate, or about how much faster property taxes will go up than the 2 percent limit on the cap (which means the rebate amount will increase).
But you will in the end come to the conclusion that the tax cap is worth a lot — $4 million to $5 million. That is, giving Von Maur $4 million to $5 million up front would be worth about the same as giving the company $300,000 a year for 20 years. That means the total incentive package is worth at least $16 million (9.5 + 1.5 + .65 + 4.5). “At least,” because that figure doesn’t include all of the city infrastructure costs, which will be substantial, or the moving costs. Von Maur, meanwhile, has to come up with just the cost of finishing the interior space to its specifications, an expense that is likely to be in the $3.5 to $4.5 million range, plus $150,000 in property taxes each year, and its share of maintaining the common property (mostly parking lots).
Total up-front project cost: $16 million to $17 million plus infrastructure. The city’s share: at least 75 percent. In the economic development world, that is an astounding fraction. That’s even larger than Iowa’s scandal-ridden film tax credit, which briefly promised “half-price filmmaking” before the program was shut down. In addition to covering three-fourths of the up-front costs, the city will pay two-thirds of the annual property tax bill.
Coralville Council members — perhaps soon to be known as the Pirates of River Landing — apparently think this is a wise use of taxpayer funds. We can hope that the taxpayers of Coralville have a more sensible view of the world.
Posted by Peter S. Fisher, Research DirectorBudget and Tax, Economic Opportunity, Organization
Tags: Coralville, economic development, Iowa City, Iowa River Landing, Peter Fisher, property tax breaks, subsidies, Sycamore Mall, tax credit, tax incentives, tax reform, tax-increment financing, TIF, Von MaurYou can comment below, or link to this permanent URL from your own site.