The first installment of a three-part series that examines the current health of North Liberty’s business economy, the ins and outs of small business ownership, and the future of doing business in North Liberty.
NORTH LIBERTY– How’s business?
It’s hard to say, and depends on who you ask.
Commercial storefronts continue to open and close in North Liberty, while in the background, the city utilizes its available tools to develop a prosperous business sector.
But Tax Increment Finance (TIF) practices and the state’s plans for changes to commercial property taxes have garnered big attention from both policy wonks and policy makers in recent months, and will continue to be hot button issues as the legislative session continues. A state committee is reviewing cities’ TIF practices and political campaigns are gaining momentum across the state between now and November.
But tax laws are only part of the big economic picture, according to North Liberty Development President Dennis Tallman.
“I think the question that really should be asked is, ‘What is the local government’s role in economic development overall?’” Tallman said.
It’s a good question, but one with likely as many answers as there are people willing to offer their opinions.
A number of big businesses have benefitted from setting up shop in North Liberty in recent years, as the town’s population boom, proximity to Interstates 80 and 380, and its standing as a power player in the Technology Corridor created a trifecta for the perfect business location. Heartland Express Trucking, Maytag, J.M. Swank, and the Sleep Inn Hotel and Suites, along with the more moderately-sized businesses of Energy Mizer and the Education Station, are establishments that have received incentives from the City of North Liberty in the last six years– all agreements which were supported by TIF. Cole’s Quality Foods also received city assistance in the form of grant money.
When the University of Iowa Community Credit Union proposed building its headquarters in North Liberty, and the city planned to finance the $12.2 million land purchase using TIF to make it happen, some citizens were incensed enough to file a legal petition for an injunction to halt the deal. Though the injunction was first implemented and then lifted, the city stepped away from the land purchase in January 2011, and instead agreed to rebate property taxes paid by the credit union and A&M Development, LLC– the development organization that purchased 40 acres adjacent to the credit union site also slated for development– up to $7 million each.
Out of that experience came the desire of some city leaders to create a written strategy for how the city would financially assist businesses looking to locate in North Liberty in the future.
The result was a document that offers general guidelines for assisting “businesses in the expansion and new construction of high-quality industrial or commercial facilities, where such assistance would boost employment opportunities and/or tax base within the city.” It lists seven criteria for the city to use when considering the use of TIF to rebate or abate property taxes, acquire land for economic development projects, construct infrastructure to support and improve involved properties, and provide loans or grants for projects of “extraordinary employment and/or property value expectations.”
As a North Liberty business owner, Tallman– who owns Alphagraphics, a printing and marketing communications franchise– is also watching what happens with TIF laws at the state level.
“I think everyone agrees that it’s a good economic tool, but what they don’t agree on is, can cities keep diverting money away from the schools and the county for up to 20 years?”
And beyond school and county budgets, using TIF can cost small business as well, said David Swenson, Associate Scientist in the Department of Economics at Iowa State University.
“Some communities have seen a lot of development, but that development has been underwritten by the aggressive use of TIF. Often, cities create TIF districts on the edge of town, so they basically subsidize intense competition for Main Street businesses,” he said. “While the commercial power centers on the edge of town thrives, their downtown starts to look like hell. (The TIF area businesses) are not paying property taxes on the burden for the local economy, and that shifts the onus to taxpayers.”
It hits existing businesses twice as hard.
“First, the city is helping firms compete with you for products and goods in highly advantageous locations, and second, your property taxes go up, all in the name of economic growth,” Swenson said. “Meantime, there is a lot of stress on businesses that aren’t in those power territories.”
With its documented population growth and increase in taxable land valuation, the North Liberty business sector does not appear to be experiencing that kind of stress. But are appearances deceiving?
The task of evaluating North Liberty’s business health has not been undertaken, and for anyone with less than Swenson’s experience and credentials, deciphering the available numbers is daunting. The Internal Revenue Service collects income and payroll statistics on businesses that operate in any given year, but their reports lump many varieties of business into single categories, counting all employer firms with at least one person on the payroll. Sole proprietors or single partnerships are counted differently in certain reports.
So the employment rate– or unemployment rate, more specifically– can be one indicator of an area’s economic health, said Dr. Charles Whiteman, Associate Dean of the Tippie College of Business at the University of Iowa.
“There is a fair amount of nuance in the numbers,” Dr. Whiteman said. “You can look at a city’s unemployment rate, but that is tricky because it can be high for a variety of reasons. You have to look at other things together, such as overall employment growth, what sectors are growing, and if there are any in decline. If something were to happen to a major employer, it might be the effect of economic conditions internationally that impacts the local picture.”
Further, many municipalities don’t track the number of businesses that open or close within their city limits.
North Liberty does record applications for zoning compliance certificates, required for any new business, whether moving into an existing building or new construction. In 2011, the City of North Liberty issued 53 zoning compliance certificates to new business start-ups in the community. At a recent meeting hosted by North Liberty Development, Tallman used his own databases to estimate– admittedly a very rough estimate, he noted– that between 80 and 100 new business start-ups were created in North Liberty in the last three years.
At face value, both numbers indicate a robust business climate.
What they don’t show is the number of businesses that have tried and failed. Even North Liberty officials don’t know that figure, as North Liberty currently does not track its business closures, said City Planner Dean Wheatley.
“To the best of my knowledge, that’s common,” Wheatley said. “Many cities rely on chambers of commerce or other business groups to get a handle on that. Many times we lack the expertise on staff to really be able to talk the language of commercial business. There are a lot of aspects of commercial development and operation and real estate that are very different from residential development, for example.”
Real estate is the language local Realtor Karla Davis speaks, also as one measure of a city’s economic well-being. Property sales are measureable, and the residential market in North Liberty has not seen the same level of despair as housing markets in other parts of the country, according to Davis.
“Residential wise we are doing really well,” said Davis. “We are still a very strong market.”
However, the amount of vacant commercial property in North Liberty is considerable, Davis added.
“Commercial sales have definitely taken a slide. So far, 2012 is looking stronger than the last quarter of 2011, but we still have a lot of space to fill in North Liberty,” said Davis.
According to the area’s Multiple Listing Service (MLS), a collection of real estate properties listed with various realty agencies, there were 48 commercial spaces available within North Liberty’s city limits as of January 2012. Some of them are new construction, and some are locations that previously housed small business ventures. Currently on the market are the well-established businesses of Eggy’s Restaurant on 965, Common Threads Quilt Shop and The Field House– previously DC’s, and Drinks before that.
Take a drive around town, and it’s easy to find dozens of additional vacant properties that are available for sale or lease, but not currently listed on the MLS.
Some commercial properties, like the large and well-situated building that is the former home of Rugger’s Cafe, Fireside Grill and Casa Tequila Mexican Restaurant, haven’t been able to support a business with any longevity.
Add them to the list of small North Liberty businesses that have closed their doors within the last few years: NAPA Auto Parts Store, Dollar Daze, Nick & Willy’s Take-n-Bake Pizza, the UPS Store, Cocina del Mundo, MidAmerica Hobbies, Los Potrillos Mexican Restaurant, Al & Irene’s BBQ, Northside Fitness, Ms. Susan’s Catering and Events Hall, Pinnacle Wireless and Ladies Workout Express, among others, have all closed their doors after relatively brief stints in the North Liberty business community.
It speaks to a different side of the world of small business ownership, and one that might well be cast in the shadow of North Liberty’s unparalleled residential growth of the last 10 years.
Of course, a certain amount of business turnover in any community is to be expected, said Swenson.
“Generally speaking, for a start-up business, the likelihood of surviving one year is 80 percent. The likelihood of making it five years is 50 percent,” Swenson said. According to data released in 2000 by the U.S. Small Business Administration, the likelihood of going out of business after 10 years is about 66 percent, and only about 26 percent of all businesses survive for 15 years or longer. Those are national averages; Swenson noted that Iowa has a slower rate of business starts, but the state also has the lowest rates of failure.
But the number of local closures leaves Realtors like Davis uncomfortable.
In this part of Johnson County, property taxes have a huge impact on a business’ economic viability, she said.
“Rents have not been able to keep up with property tax increases. Landlords aren’t really keeping up with their expenses, so they are just trying to hang on to the tenants they have. Sometimes they have had to reduce rents in order to keep those tenants, and hope that the market will turn around. Tenants are strongly negotiating their rents at this time,” Davis said.
Also making changes to accommodate this market are property developers. As the city’s population increased from 5,367 in 2000 to 13,374 in 2010, there has been an increase of developers asking to rezone property from commercial to residential uses.
According to North Liberty City Planer Wheatley, there have been four properties so rezoned in the last year. At a June 2011 meeting between the North Liberty City Council and the Planning & Zoning Commission, local developer Gary Watts said commercial property is abundant in North Liberty– maybe too abundant, as his firm had been trying to sell commercial property in Liberty’s Gate for 12 years.
“I think there is way too much commercial selection,” Watts said. “The rules [for design standards] changed. It’s hard to get money for commercial right now. (Our land is) right on the Interstate, and we have 20-some acres left in commercial. It’s an extremely tight commercial market right now.”
But Wheatley said any market is driven by demand, coupled with the motivation to make a profit.
“When developers or landowners have property, they are looking to maximize its value. Historically, they have wanted property to be zoned commercial because it is usually sold by the square foot instead of by the lot, which makes more profit.”
So historic trends may account for the abundance of commercial property available in North Liberty, Wheatley concluded. However, he added, whether it’s overbalanced is somewhat a matter of perspective.
“For a developer, the short term is really important, because that is their livelihood. They are concerned about producing income from their properties. Right now, there is a high demand for multi-family housing, so many developers would like to convert their land to multi-family residential because there is more potential for immediate profit,” he said.
So far, no requests have been denied; the city has accommodated developers and allowed market factors to dictate their success.
That’s not to say the city is going to give up using TIF incentives for future economic development it finds beneficial, though. At a January public forum on TIF, Mayor Tom Salm declared, “It’s legal, and we will continue to use it until we are told we can’t.”
City Administrator Ryan Heiar said the city’s proposed economic development policy– he prefers to call it a strategy– lays the ground work for how the city will consider granting incentives to bigger companies, in order to compete with regional and state-to-state markets, Heair said.
“In order to be competitive, we need to keep our options open and consider requests on a case-by-case basis,” Heiar said. “
Next week: An inside look at small business ownership in the North Liberty business climate.