FARGO – When city commissioners here voted last week to provide tax incentives for downtown's iconic Black Building, they did so knowing they were going against established city policy.
Generally, the policy encourages creating new jobs that widen the city's economic base or building new homes to expand the tight housing market.
Office buildings and retail space are usually not eligible for incentives, but that's pretty much all the Black Building is. However, proponents say, the nearly $8 million renovation is a substantial investment in downtown that will stimulate growth and increase the city's tax revenue.
Hoping to make city policy match what commissioners are willing to support with tax breaks, a city committee is updating the incentive policy, which was written in another time with different priorities in mind.
"It's been a while, and so we've had some minor issues," Commissioner Dave Piepkorn said last week. "But then also going forward, we're going to have more big projects similar to the Black Building, and so we want to make sure we have a good policy that's consistent and defendable."
Kilbourne Group, the Doug Burgum-owned development firm that recently added the Black Building to its growing list of downtown properties, hopes to build the Block 9 highrise in the near future on the site of the U.S. Bank Plaza.
Not all commissioners feel the incentive policy needs tweaking, though.
Commissioner Tony Gehrig, the only member of the five-person panel who voted against tax incentives for the Black Building, said last week that, in general, such incentives are unfair to other taxpayers who don't qualify and they distort natural economic incentives. His solution: Just cut property taxes for everyone.
There are about a dozen kinds of tax incentives offered by the city of Fargo. The one that's attracted a lot of attention because it's been used in projects that don't meet city policy is called payments in lieu of taxes, or PILOT.
Typically, a business with a PILOT makes no payments for five years and then pays a percentage of the tax it would normally pay for five more years. How much of a discount depends on the kind of business. For downtown businesses qualifying for five-year Renaissance Zone tax exemptions, this can mean paying no property taxes for a decade.
As development in the city has roared in recent years, PILOT exemptions have increased.
According to the city assessor's office, the city exempted 98 properties worth $197.6 million in the 2015 PILOT program, an increase of 3 percent and 29 percent, respectively, from 2010. In that time, the average value of an exempted property increased 22 percent to $666,649.
To qualify for PILOT, businesses usually have to create new jobs in industries that don't compete with others within the Fargo trade area, or create new housing downtown.
But the city has ignored that requirement four times in the past decade, each time for a big investment downtown, said Planning Director Jim Gilmour.
With the Cityscapes Plaza, an $18 million new building, the city agreed to a PILOT for apartments, which is eligible, and retail space, which is not. With the Union Storage building, a $9 million to $12 million renovation project, and the old Woodrow Wilson High School, a $14 million renovation project, the city followed the same path. Also, the school building renovation was allowed a PILOT for an extra five years.
Gilmour said the Woodrow Wilson school and the Union Storage building, which was occupied by squatters before construction workers went in, are both in the less-developed area on the western edge of downtown. City leaders hope they, too, will trigger new investments, he said.
As for the Black Building, Piepkorn touted the project's many economic benefits Tuesday before commissioners approved the incentives. Besides having a more valuable building that will eventually pay more taxes, he said the project will renovate a "deteriorating" historic building, create more space for new businesses and encourage more investment in surrounding buildings.
Piepkorn, who heads up the Tax Exempt Committee that will consider tweaking the PILOT requirements, said the review isn't in direct response to the Black Building deal. It's just an effort to make the policy fit existing priorities.
For example, the more jobs a company creates, the more it qualifies for incentives. But tech companies that the city wants to attract don't necessarily employ a large number of people, though no tech firm has been granted a PILOT incentive that deviated from city policy.
Goals and means
But there are broader questions about incentives that go beyond PILOT for people like Gehrig and, coincidentally, Mike Allmendinger, who manages the Black Building project as the Kilbourne Group's general manager.
One of those questions is what the city is actually trying to achieve with all of the incentives it offers.
On the one hand, Gehrig said last week, the city encourages high-density growth in the downtown core with Renaissance Zone and PILOT incentives. On the other hand, he said, it encourages sprawl with two-year abatements for new homes and low-interest financing for infrastructure in new developments, most of them at the city's edge.
"When you subsidize everything, do you incentivize anything?" Gehrig said.
Allmendinger, who has visited with the Tax Exempt Committee, would agree with that. The Kilbourne Group has consistently pushed the city to stop encouraging sprawl and encourage high-density growth, which is how the firm is investing its money, and he said last week that city policy does seem to encourage both.
However, the sprawl-inducing abatements and infrastructure financing do seem to get through the City Commission with a lot less debate than incentives that encourage high-density growth, Allmendinger said.
Though the total amount of incentives for new homes are not as great as incentives for businesses, they are
growing rapidly. In 2015, the city gave abatements to 631 new homes worth $93.4 million, an increase of 71 percent and 171 percent, respectively, from 2010. The average value of homes with abatements grew 58 percent to $148,000.
Gehrig also has a classic fiscal conservative's objection to government intervention in the market, though he's often the lone dissenting voice on the commission in that regard.
Tax incentives distort the market and may encourage businesses to overinvest, he said. When incentives expire, he said, those businesses would find themselves underwater when economic reality sets in. The government should trust individuals to decide how to best spend or invest their money without choosing for them, he said.
Piepkorn, who also identifies as a fiscal conservative, concedes many conservatives believe that. But he pointed to how the Renaissance Zone incentives have succeeded in making downtown vibrant again.
"As a conservative, technically, you should not support that, but we can see how successful it's been," he said.
"The longer I'm a city commissioner, unfortunately, the more pragmatic I become," he said. "There isn't a perfect world, and you've got to do what works."