Champaign's recent development philosophy: Build now, pay later
CHAMPAIGN — Last year was a big one for development in Champaign's core, and 2014 is off to a strong start.
But there is a price tag associated with the most lucrative projects, and it's one that will cost the city for years to come.
City officials defend their use of incentives for developers as a low-risk, high-reward venture in luring new business, new jobs and new tax revenue to Champaign. To this point, the city's biggest deals have not been cash-up-front for builders, but rather promises of future tax rebates or pay-as-you-go disbursements for jobs or new high-tech office space.
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Between May 2012 and this week, the Champaign City Council has signed off on incentives for developers that could cost up to nearly $14 million over the next 13 years under what is called the "infill redevelopment incentive program."
If the developers fail to meet their goals for job creation or tax generation, what the city pays out will be that much less.
In return for the $14 million officials have promised, the city got relocated car dealerships on Anthony Drive, a soon-to-be redeveloped Carriage Center on South Neil Street, a hotel and a Black Dog restaurant in downtown Champaign, a Gander Mountain in place of the closed Circuit City on North Prospect Avenue, and expansions at Yahoo! and Kraft.
But is it worth it? That's the gray area. The deals have passed with overwhelming city council support.
"It's a gamble," said Mayor Don Gerard. "Would they come (without the incentives)? I don't know. But could somebody slip in and offer a little bit of incentive to take them away?"
Much of the $14 million will be paid in the form of sales, food-and-beverage and hotel-motel tax rebates. Essentially, city officials argue that they will forgo new revenue that wouldn't have ever existed anyway had the projects not moved forward.
Gerard said denying those incentives and potentially losing developers' business — and the "immense future revenue" that could come with it — is not a risk he's willing to take.
"Nothing ventured, nothing gained," Gerard said.
If you look at a timeline of development deals the city has approved during the past decade, you'll see several in the mid-2000s, somewhat of a lull during the recession that began in 2008 and a strong comeback starting in 2012.
In 11 agreements between 2000 and 2012, the city has paid $5,651,368, with room for $3,458,580 or more between now and 2023.
Those numbers include $1.1 million in hotel-motel tax rebates for the Hilton Garden Inn and Homewood Suites; up to $3 million in hotel-motel, food-and-beverage and property tax rebates for the iHotel and up to $3.7 million in contributions to the M2 development in downtown Champaign.
The six post-2012 deals get bigger — the city has yet to write a check, but it has promised up to $14 million between now and 2027 assuming the developers meet all their goals.
"I think it's a sign that the economy is heating up once again," said city council member Tom Bruno. "We can influence the borderline decisions that developers always make by offering some incentive for them to make those decisions in a way that has a good impact on Champaign. We never know what would have happened if we would have said, 'No, we're not willing to talk about this.'"
While the city has promised $14 million, it has guaranteed little. In a worst-case scenario — say, if the Hyatt Place hotel in downtown Champaign never books a room or the new Ford City never sold a car — the checks the city writes would be very small and maybe even nil.
Call the bluff?
Under the typical way it does business, the city is gambling with money that doesn't exist yet and might not exist had it never played the game.
Many of the agreements involve the city giving back to the developer new tax revenues created by the project after it's finished and in full operation. But as long as city council members keep signing of on those tax rebates, whether that promise is necessary is a question that will go unanswered.
"The risk is maybe that we could have cut a better deal by not doing anything," Bruno said. "I think that's not a big enough downside."
Incentives are a "double-edged sword," said Erik Kotewa, deputy director of the Champaign County Economic Development Corporation. They're necessary because everyone has them.
"We're in a very, very competitive environment nationwide, statewide, globally," he said.
When the EDC is working with a business scoping out a new location, often the company has done four or five levels of screening by the time its officials check out Champaign County, Kotewa said. Depending on the operation, the cost of doing business here versus somewhere else might have a gap. And if it's a few million dollars or less, maybe it's a gap the city can close.
"I think incentives do play a critical role in getting deals to happen locally," Kotewa said.
What the city is willing to pay is based on a "but-for analysis" as the developer is working out the financials, said Bruce Knight, Champaign's planning and development director.
"What's the gap 'but for' filling that, you'd be able to make it work?" Knight said.
Sometimes the gap is the difference between the cost of the project and the financing the developer has secured; sometimes it's the cost of environmental cleanup of a site. In the case of Gander Mountain occupying the old Circuit City building on North Prospect Avenue, it's about $575,000: the cost of bringing a 39,000-square-foot commerical space up to usable condition.
The key is that, the way the incentive is structured, it's the developer accepting the risk and not the city.
"They take on the risk, they make the investment, they generate the return," Knight said.
'A good gamble'
What the city gets in return depends on the project.
In the case of the Yahoo! expansion, it's a number of high-paying, high-tech jobs and office space. The city will pay Yahoo! $1,000 for each new employee and $3 per square foot of space in the new building at the University of Illinois Research Park, up to a maximum $290,000.
For Gander Mountain, the city cares less about the store and more about cleaning up a blighted commercial property.
"I think it's a good gamble to offer some incentive," Bruno said. "If this kept Gander Mountain from leap-frogging over other development and building their store on a vacant lot, that's really something that we wouldn't want to see happen."
Gander Mountain is "just the engine to get that building fixed," Knight said.
With the Hyatt Place hotel, the city is finally filling the hole at Neil and Main streets that plagued downtown Champaign for years after the Metropolitan Building burned down in 2008.
"Left unattended, it would continue to be a blight on downtown," Bruno said.
And don't forget the financial benefit to downtown businesses. That's all kinds of new people and new money staying in downtown who will need to eat and be entertained somewhere, Knight points out.
Because it rebates a big portion of new tax revenues to each of the developers, the lion's share of financial benefit to the city will only be realized as the agreements expire at different points over the next 13 years — sometimes on a specific date and sometimes once a payout cap is reached.
Knight said the city plans to re-evaluate its infill redevelopment incentive program sometime in the near future to ensure its policies are in line with the goals it's trying to achieve.
One of the things to look at: Should there be a cap on the amount of money the city is willing to give out?
"Maybe we want to do that," Knight said. "Maybe we lose some deals if we do."
When he's voting on an incentive deal, Bruno said, he puts a lot of trust in city staff. He does not have a specific number in mind on how much might be too much.
"I don't know," Bruno said. "I think our staff is pretty good at testing the waters and driving a hard bargain."
Gerard does not pinpoint a specific number, either. "I'm not going to give away too much if it's not something that's going to substantially better our community or produce a substantial return on investment," he said.