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Fargo's 2-year property tax break for new homes should end, consultant says

A TischlerBise representative also told city officials that business construction incentives should have shorter durations.

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Drywall is delivered to a home under construction Friday, Feb 25, 2022, in a development southwest of Fargo's Davies High School.
The Forum: Helmut Schmidt
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FARGO - A consulting firm hired to study Fargo’s tax incentives for business and housing construction has recommended the city end its two-year property tax exemption for new home construction.

TischlerBise representative Colin McAweeney added that the city should also consider shortening the duration for some business construction incentives.

McAweeney offered those suggestions, along with several others, in a report heard by the City Commission in late February. The same report was also presented to members of two city economic development committees.

TischlerBise’s white paper praised Fargo’s suite of incentives, such as tax increment financing, payment in lieu of taxes programs, Renaissance Zone incentives and residential construction and remodeling tax exemptions, in a comparison with other U.S. cities.

However, encouraging the city to drop a 2-year property tax exemption program for new residential housing construction stood out among the consultant’s recommendations.

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“From our standpoint, this benefit is marginal compared to the overall cost of home ownership … so it’s really not playing an important element in the buyer’s consideration if they should live in Fargo or another neighboring community, all the while reducing revenues for the city,” McAweeney said.

The two-year exemption is common across the metro area, and if Fargo were to act, it would be the first city among its neighbors to remove it.

Mayor Tim Mahoney worries that dropping the incentive, which exempts from taxation the first $150,000 of a home’s value each year for two years, could put Fargo at a disadvantage.

“My concern is if that goes away, I am competing with Horace and West Fargo. We did 360 houses this year, Horace did 248, and West Fargo did 220. There would be a little bit of concern in Fargo, if we dropped that incentive, could we lose out on market share?” Mahoney asked at the City Commission’s Feb. 22 meeting.

McAweeney assured him Fargo’s attraction is strong.

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Work on The Landing building was racing along March 17, 2022, along 10th Street North in downtown Fargo. The economic outlook for the Fargo area looks good through the rest of 2022, according to a North Dakota State University report released Monday, May 2.
David Samson/The Forum

“I think you know folks want to be in Fargo. The other communities are being successful. But I think the market drives some of those decisions. From our standpoint, this would be a move towards limiting some of those incentives for new residents. But Fargo has a strong attractor and folks want to live in Fargo,” McAweeney answered.

TischlerBise is also recommending shorter time frames for business incentive packages. Developments like affordable housing may take 20 years to find financial success, but for-profit businesses are looking at more short-term time frames - three to five years. The consultant group recommends trimming the length of exemptions to something closer to that time frame.

Other recommendations include:

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  • Target companies with high multiplier jobs (jobs that help create more jobs in the community for the dollars spent).
  • Target developments that will bring in sales tax. High sales tax generators help mitigate other property tax incentives.
  • Review time maximums for incentive packages. Developments like affordable housing may take 20 years to find financial success, but for-profit businesses are looking at more short-term time frames - three to five years - and TischlerBise recommends trimming the exemptions to fit that time frame.
  • Increase parking. Before the COVD-19 pandemic hit, parking usage downtown was near capacity. In the short term, many people continue to work from home. However, as more people come to work and live downtown, parking needs to grow with that.
  • Consider land banking, in which the city would manage underused, foreclosed or abandoned properties and make them available for housing or other development.
  • Explore partnerships to develop property along the Red River.

TischlerBise noted that in the Renaissance Zone, which covers much of the downtown core, assessed property values have gone up $349 million over the past 20 years. That’s more than twice the rate of inflation and faster than appreciation in the city’s housing market.
The consultant said there are 28 sites (16 surface parking lots and 12 redevelopment sites or buildings) in the Renaissance Zone that could be redeveloped to add another million square feet of new development.

Fargo also earned kudos for its special assessment financing for infrastructure, which is not used widely around the nation. While developers in most areas take on the full burden of development costs and must recoup them later, the cost burden for roads and sewer and sanitary systems is shifted to the city, allowing smaller builders to more effectively enter the market.

Helmut Schmidt is a reporter for The Forum of Fargo-Moorhead's business news team. Readers can reach him by email at hschmidt@forumcomm.com, or by calling (701) 241-5583.
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