Complex funding mechanism back in the spotlight

WASHINGTON — A hotel developer eyeing Washington has asked the city for roughly $1.5 million over the course of 10 years, paid for with “tax increment financing,” or TIF.

The first step to do so is already complete: declaring the proposed development land as an “urban renewal area,” where the city can divert some property taxes for schools and the county to itself for a set number of years.

The second step, a development agreement, is where the money comes in. The business would pay its taxes as usual, but get some of the city’s cut of that money back every year for the length of the agreement. The exact amount depends on the change of the property’s taxable value (or “tax increment”) and on negotiations with the city itself.

In the case of Washington Hotel Group LLC, the business has asked for a maximum rebate of $1.5 million over 10 years. The business had previously asked for $1.8 million, but revised the number in recent weeks after recalculations, according to city staff.

Once the TIF period ends, the business continues to pay taxes as normal, sending previously nonexistent dollars to local governments and schools, thanks to the heightened property value. In the case of the proposed hotel, the plot is expected to soar from a value of $50,000 to around $5.5 million after construction.

“After the hotel is said and done and we’ve rebated back the money to them for 10 years, (the city) will then collect from them approximately $80,000 a year of our own taxes,” City Administrator Deanna McCusker said. “Right now, we’re not collecting any tax dollars.”

The process is anything but straightforward. The math required to make a TIF agreement is sophisticated, and the Iowa Department of Management’s training video for the practice clocks in at 98 minutes long. The Iowa League of Cities recorded overview of the subject exceeds 2 hours.

“Even people that have been working in it for a long time, you understand it, but yet, it’s hard to understand,” McCusker said.

Washington has championed TIF for years, with one page on the city website calling it, “The most versatile and common form of financial assistance that is available to companies looking to expand or build a facility in our community.”

McCusker said it worked because, unlike a traditional tax break, TIF doesn’t require the city to pay anything upfront. It’s funded directly by revenue collected from the business.

“I think there’s been a lot of misunderstanding, some people in the community think we’re taking their tax dollars, and using those to pay (the hotel) back, and that’s not the case at all,” she said. “We’re basically paying them their own tax dollars back … we won’t rebate back to them until they’ve paid their taxes.”

The practice’s impact is visible. Notable TIF projects in Washington’s recent history paid out tax rebates totaling $55,000 for infrastructure around Dollar Tree, $390,000 for construction at Bazooka Farmstar, $100,000 for a stormwater retention area at Iowa Renewable Energy, $450,000 for development of the Oakwood subdivision and $1.4 million for The Reserves at Briarwood.

While the proposed hotel has a higher overall budget than any of the above — a cool $8.5 million total, according to some city memos — McCusker said the $1.5 million TIF ask was a smaller share of the sum (18%) than many other TIF projects had received.

In return for that investment, she said the business’ success would spill over to other areas of the local economy.

“A hotel will bring more economic opportunities, because if people are staying in Washington, they’re also going to be spending money at restaurants, they could be shopping,” she said. “It’ll be a ripple effect. The hotel comes, then, I can see within five years, a couple restaurants coming, and it will help everyone, in the end.”

Some decision-makers, however, are not entirely on board with the proposed arrangement.

City Council Member Bethany Glinsmann said she was hesitant about the prospect of leaving $1.5 million of potential tax dollars uncollected over the span of a decade. While she said she sincerely hoped to see the hotel built, she’s skeptical of the sum developers requested.

Glinsmann is also not sold on the economic development argument. She said the opportunity cost of turning down the agreement was not as bad as others might believe.

“That argument is assuming that this is the only shot we have at a hotel, or frankly, any other development going in at that property,” she said. “I just can’t believe that to be true … If we ultimately don’t approve this TIF agreement and this group of developers doesn’t move forward with the hotel, I have to think there’s another group out there that, eventually, would move forward without such a large tax break.”

The prospect of a hotel on the east side of town has long excited municipal officials, who approved designation of the location as an Urban Renewal Area earlier this year. Washington Hotel Group LLC publicly announced several details of its plan at a city council meeting in early October, where Spokesperson Dave Waite said the building would have 54 rooms, and could finish construction as early as Nov. 1, 2024.

While most council members voiced enthusiasm for the hotel itself, several requested more time to sift through the details. It has not been discussed at meetings since then.

“I want to be behind it,“ Council Member Fran Stigers said. ”But like you say, these numbers, I’m not sure I understand them all, yet.“

The council plans to resume those conversations at its 6 p.m. meeting this Tuesday. While an agenda for that meeting is not posted as of this article’s publication time, multiple city officials said they — and the developer — planned to discuss and field questions about the hotel’s proposed development agreement.

Comments: Kalen.McCain@southeastiowaunion.com