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Commissioners grill Collins on plans for tax increment financing

Hubbard County commissioners took a skeptical look Wednesday at two economic stimulus tools facing taxpayers and developers of two downtown projects - even though commissioners have little control over either one.

The proposed construction of a 48,000-square-foot J&B Foods supermarket would entail the city creating a tax increment financing (TIF) district to spur redevelopment near the Post Office.

The second project involves a request for a tax abatement for the Park Rapids Business Center north of Rocky's Pizza.

Commissioners took a hard look at the tax implications of both projects and seemed inclined against them, to the occasional consternation of Regional Economic Development Director David Collins.

Tax increment financing and tax abatements are increasingly being used by cities after federal and state funds dried up for economic development a decade ago.

In tax increment financing, a city can designate a blighted or underdeveloped area for renovation. Taxes on the property in the district are frozen for a period of time - in this case 26 years at 2008 levels.

Two tax streams are then created. In the first, the taxing entities, the city, county and school district, will continue to receive tax revenue based on the 2008 assessed market values of the property.

A second tax stream is created once the J&B project is begun. The additional tax money generated - the increment - by the increased property value is segregated to pay the debt accrued in financing certain aspects of the project.

The district created that will be home to the J&B project will raise $4 million to be used for demolition, moving utilities, environmental cleanup and street work.

Commissioners questioned whether developers were getting a competitive advantage.

"Why create a TIF for J&B and not Coborns or Wal-Mart?" Collins said. "It's to level the playing field. There was no demolition on the Wal-Mart site. It makes the site cost comparable."

But Collins also addressed the concerns of commissioners, who did agree to waive the 30-day notification to the county so the concept can proceed. This is not the city's first TIF district, and future development is slated for the area aside from the J&B project.

"The important thing in TIF is that you don't create an unfair advantage for anyone already there," Collins told commissioners. "I think this will spur development."

Collins asserted that the TIF district would increase economic development nearby, which would be taxed at full value. His position is that essentially there's little risk because the foregone tax revenue wouldn't have been available in the absence of the development.

Hubbard County Assessor Bob Hansen acknowledges that there are philosophical arguments for and against TIF districts. He takes no position on either.

Opponents of TIF districts argue that there's a "what if" factor that escapes attention, Hansen said. If the property value would have increased on its own without creating the TIF district, the taxing entities that share in the revenue stream with the city - in this case the county and school district - lose out because the city is capturing the increment to retire the bonds.

"If the property would have increased in value anyway, the school district and the county have their taxes frozen at those predevelopment levels," Hansen said.

During the lifetime of the TIF district, as the overall tax burden increases, the taxes are spread throughout the county. That causes a slight increase to other taxpayers. This increase appears to be the basis for commissioner Lyle Robinson's objections.

"The payment is spread throughout the county," Robinson said. "The tax rate on everyone's property is higher." Robinson, from Benedict, questioned what benefit he and other rural county residents would see from a city redevelopment project.

"If we create a district everyone else will have to pay for it," he asserted.

Collins responded that the economic growth will eventually create jobs and grow the local economy, adding to the overall tax base. The "tax loss" is on anticipated taxes, not those actually realized, he told the board.

And he suggested that if commissioners were concerned, they could adopt county-wide policies for the creation of economic development incentives.

Hansen pointed out the other "but for" argument. "Would this have been built anyway?"

Bob Hensel, co-owner of J&B, said no. J&B would have been unable to expand its southside store on US Highway 71 to the size contemplated in the current plan. It would have been cost prohibitive and would eventually have violated zoning ordinances, eating into available parking space.

Hensel said many TIF districts may be appropriate in underdeveloped, underused areas.

"Take the old Armory building," he said. "It's had minimal use for years. The senior citizens have used it for meetings. The question has come as to whether it should be demolished or spend the money trying to renovate it."

Hansen said that might be prohibitive. "If nobody's willing to take the risk to renovate it or do something else with it, slowly but surely over a period of years without some kind of maintenance it will deteriorate."

Hansen said another issue frequently arises with respect to TIF districts.

"The value that's captured or frozen, as other property values inflate or deflate, that one stays constant and over a long period of years," he said.

"So over the next 26 years the question that isn't answered and isn't looked at is what would have happened to that property through normal inflation or deflation because that is never taken into consideration," he said.

"As other property values go up or down based on what the market's doing, the value is frozen and the assumption is that the value goes up because of construction but that's for the first year. Beyond that who knows?"

If property values deflated over the next two decades, there would be little increment to pay off the debt "other than you look at the deflation that would take place on something more than what was there to begin with," he said. "You had a bare lot and now you have a lot with a building on it."

The decision on creating the TIF district is out of county hands. Tax increment financing districts are the purview of cities, and the city will conduct a public hearing before approving the district. The only input county commissioners will have is to voice their opposition at the hearing, set for 7 p.m. July 15 in the courthouse basement.

The second development tool to come under fire was the request for an abatement by Allen Zemek, who ran into unanticipated costs renovating the former Riverside United Methodist Church.

Although Zemek's request would be similar to creating a TIF district - he's asking for a freeze on property taxes to the pre-improved value of the site, with the increased value abated - commissioners vocally opposed the request.

"Do they really deserve an abatement?" questioned commissioner Don "Doc" Carlson.

"The downside of abatements is that you then have to make cuts," Robinson said. "You've gotta be sure you understand what you're doing. Are you creating something people need?"

Zemek is a developer who took a risk refurbishing an old building into commercial space that's handicapped accessible on all three floors. The cost of converting the old building was much higher than he anticipated, he told the city council earlier this month.

Once again Collins urged commissioners to "establish a committee to look at statutes and what other cities do and then develop your own policy and criteria before you do anything."

Unlike a TIF district, which is controlled by the city, requests for tax abatements must go before each taxing entity, which act independently of each other.

But while Hubbard County has policies in effect to abate property taxes for disaster relief, it doesn't have economic development abatement procedures in place.

Zemek said refurbishing old buildings is a benefit to all communities, but is often more expensive than building from scratch. Cities lose their character when they bulldoze older properties down just because it's the cheap thing to do, he told the city.

Zemek will make his abatement request to the city, school district and county. Although county commissioners, who could ultimately face the question once a policy is instituted, seemed inclined to deny the request, that decision would not be binding on the other two taxing entities. The city hearing on the abatement request is 7 p.m. June 24 in the courthouse basement.

Robinson questioned whether tax abatements are wise public policy decisions - ones that he can justify to his constituency. "We have to go out and defend these," he said, adding it will be a tough sell in rural Hubbard County.

"Everybody else can pay it so I don't have to," he characterized the debate.

Commissioners questioned who Zemek was and where the developers were located. Hansen told them the address listed on the permit was California.

"That's all I need to know," Robinson said.

Friday morning Collins put a positive spin on the meeting. He said he met with Robinson after the commission meeting to share additional information.

"I thought it went real well at the first meeting," he said. "It's a very complicated subject and there was good information and misinformation that came out. That's not a good place to debate it."

Commissioners at Wednesday's meeting often talked over each other and interrupted Hansen's explanations of his TIF districts work.

"I thought they responded very, very positively to the TIF thing and as far as the abatement thing they've asked for more information," Collins said. He said he may not change some commissioners' minds, but he admires them for being forthright.

"We're just asking them to start down that road of looking at the pros and cons of what policies (they might want to adopt) and once they understand it they can make a decision as to whether they want to do it," Collins said. "It's a good tool to have in the tool box."