Ex-State Farm Building Developer Has 'Delivered' On Projects, With Public Help
Government and community leaders are breathing a sigh of relief now that State Farm has finished the sale of its historic headquarters in downtown Bloomington. But it’s likely their work to save the skyscraper is just getting started.
Other cities have rescued some of their iconic buildings, and it is rarely simple.
Rockford mayor Tom McNamara spoke with pride and a tinge of envy when talking with a reporter about Urban Equity Properties' planned $40 million renovation in Bloomington.
“Don’t take him for too long, we want him still developing up here,” McNamara quipped.
McNamara's city has been ground zero for Urban Equity Properties’ rise over the last decade, renovating 10 shuttered and, in some cases, dilapidated properties, converting them into luxury living spaces and breathing new life in what had been a downtrodden downtown not that long ago.
“He’s always in the 92%-to-95% (occupancy rate), which is really phenomenal especially for a downtown, which seven years ago, nobody really wanted to live downtown,” McNamara said.
McNamara is referring to Urban Equity's President and CEO Justin Fern. Fern has poured millions of dollars into Rockford's downtown.
Each project has one thing in common: government assistance. That's tax dollars in one form or another, to minimize the developer's risk. McNamara said these projects don't happen without it.
“There’s a lot of projects, quite honestly, there’s projects you can’t do without city help,” he said. “That’s just a fact.”
McNamara said Rockford's economic tool of choice has been tax increment financing. In a TIF district, a developer gets a break on property taxes as they build. That money gets funneled back into the project.
Advocates say it's a win-win because these properties do not generate tax revenue without the development. Critics consider TIFs a form of corporate welfare that strips tax dollars that could otherwise pay for things like schools and roads.
One of Urban Equity's first projects in Rockford is a 40,000-square-foot, mixed-use complex. The city gave the developer $400,000 in two installments that the company later repaid. That doesn't happen in Rockford anymore. McNamara helped the city rewrite its policy to avoid upfront payouts.
“I pushed for a change in how we do tax increment financing,” McNamara said. “I’m much more of a pay-as-you-go type person for the tax increment financing, and before I got there they weren’t doing that.”
Incentives Often Given, Rarely Simple
Economic developers throughout the Midwest say tax assistance provides the fuel that keeps their economic engines running. But Rita Conner, the economic development coordinator in Des Moines, Iowa, said the help is not as simple as cutting a check.
“My No. 1 advice is dig in and don’t lose hope," Conner said. “These deals are extremely difficult to structure and finance.”
Connor said her office specializes in gap financing to help make development projects happen. Iowa’s capitol city fashions itself as a hub for downtown hotels, but it wasn’t always that way.
Conner said Des Moines has used economic incentives to secure agreements to redevelop a dozen of its historic buildings, including Hotel Fort Des Moines. Developers are engaged in a nearly $40 million project to restore the historic building to its original century old form. The bulk of that money came through tax incentives.
Connor recalled that wasn't an easy sell to the public.
“I remember some folks struggling with that because that seemed like a high number and how are we going to do that and why were we going to do that,” Conner said. “We leaned really hard on that narrative of, 'We need this fabric, we need these pieces, we’ve got the right people involved, we’ve got the financing sources.'"
Des Moines has set aside tens of millions of dollars in incentives to redevelop projects. The city combines its offerings with a menu of federal and state tax credits. Connor said only about a decade ago the city bought historic properties in fear of losing them. One such purchase was a former department store. The city connected with a developer that turned it into apartments, only after a major fire gutted much of the building.
Conner said Des Moines' aggressive marketing strategy was born out of despair, the product of high unemployment and vacancy rates following the 2008 recession.
“The recession, the market collapse, was a strange time for all of us,” she said. “It gave a lot of uncertainty to the market, especially in the downtown area where we were focusing.
“I think that the recognition of those variables, ironically, looking back helped our dialogue with the public.”
Conner said the projects have produced a return on investment for the city. But she warned there is inherent risk, especially in TIF projects where the upfront money comes from a city TIF fund and not the developer. Conner said that's why it's best to seek as many funding sources as possible.
“We all would like to be the last in and we all would like to have our percentage of involvement be less than whoever else, but we’ve had such success with layering sources in with so many different parties,” Conner said.
Another way in which communities have helped redevelopment projects come to life is through loan guarantees. Dubuque, Iowa, did that when IBM called in 2008 looking for office space for 1,300 employees.
A nonprofit economic development board bought the building and secured $25 million in financing through a patchwork of local lenders.
Dubuque Economic Development Director Jill Connors said the city agreed to guarantee the loan in case the project didn't happen.
“That was the piece people were not happy about,” Connors recalled “(They said) ‘What do you mean there’s this private entity coming in and the taxpayer is on the hook if they can’t figure out their project?'"
The project did happen, and even though IBM has gradually reduced its Dubuque workforce in recent years, the company repaid the loan and the city is in the clear.
Connors said she understands why some question these incentives, but she said you have to see the big picture.
“The city can take the larger view,” Connors said. “As a single resident it may be hard to understand what that big picture is and you just think to yourself, that’s my tax dollars, why are you giving that to a company that makes money?”
Connors said local incentives along state and federal historic tax credits all require collaboration. She said that environment has helped the Mississippi River town expand and diversify its economy after most of its manufacturing and agriculture sector caved.
“That’s been the secret sauce in Dubuque for a lot of accomplishments we’ve had here,” Connors declared. “We had 23% unemployment back in the early 80s, and everybody locked arms together and said nobody is coming in riding on a white horse so save us. We are going to have to do it ourselves.”
Dubuque's unemployment rate is now 2.5%, nearly a tenth of what it was in the 80s.
Will Bloomingon Be Asked To Help?
This brings us back to Urban Equity's plans for the former State Farm building in Bloomington. City officials say the company hasn't formally asked for help.
UEP President Justin Fern said previously the company will likely seek some type of local assistance, but indicated it was too early to offer any specifics.
“As with projects in this stage of the development process, local incentives are possible. However, we did not go into this one with the intentions of seeking local incentives to make the deal work,” UEP’s Media Relations Director Jim Hagerty said. “In comparable projects, TIF has come into play as have incentives from the River Edge Historic Tax Credit Program. However, the State Farm building isn't in a River Edge zone, so they will not be part of the capital stack.”
The state offers income tax credits for historic preservation projects in river communities, including Rockford.
The former State Farm building dates back to 1928. It is eligible for federal historic tax credits, which could cover up to 20% of the cost.
Mayor Tari Renner said a TIF would likely be the most appropriate local incentive since the project would likely generate more in property than sales taxes because of a limited retail component. He said that could cover 10% to 20% of the project cost, though he said 20% seems high for a development this size.
For now, Renner said the city is willing to talk.
“Our incentive policy is a little different than perhaps some other communities or Normal,” Renner said. “The project has to pay for itself. By that I’m mean we don’t just take money out of the city’s treasury and give any kind of financial incentives.
“So if there’s going to be new revenue generated by the project, we are open to rebating some of that back.”
Rebates will make some uneasy. District 87 Superintendent Barry Reilly has frequently cautioned the city against handing out property tax incentives too easily. Property tax rebates cut into the district's largest revenue source, so Reilly says he is not likely jumping on board for this project.
“Throwing a 23-year TIF over what I would argue is the most valuable piece of property in the entire county, that is a hard pill to swallow,” Reilly said.
Reilly said he's more inclined to support shorter-term tax abatements like the city approved for Green Top Grocery and the Foundry retail development. He also wants to see clawback provisions where developers have to give back incentives if they don't meet certain benchmarks.
Rockford Mayor Tom McNamara said based on his experience, that likely won't be necessary in dealing with Urban Equity, though he acknowledges company president Justin Fern drives a hard bargain.
“One of the best things about Justin, in my opinion, is when the negotiations are done, he then only does one other thing and that’s simply deliver on the project. He never comes back asking you for this or that because he ran into a snag.”
It remains to be seen how much Urban Equity Properties will ask the city of Bloomington to give as the company prepares to redevelop the 13-story building. But Rockford's mayor said Urban Equity has never broken a promise and the city hasn't regretted any deal it has cut with the company.
Urban Equity Properties closed on the former State Farm building two weeks ago. The company hasn't disclosed the sale price or given a timeline for when the redevelopment would begin.
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