Community Reinvestment Area Agreements Downtown

There have been a few questions raised about why the city is so generous with Community Reinvestment Area (CRA) property tax breaks downtown.  These agreements encourage people to reinvest in lower income neighborhood and business districts by waiving property taxes for a period of time to offset the property owner’s investment into the building.

The CRA geographic area must be defined and the area must be in lower to moderate income neighborhoods.   There are a lot of federal rules associated with the program and the above is a vast simplification to explain the concept of the program.

Our CRA agreements downtown waive property taxes for a specific time period for investment in the building.  The waiver only applies to the increase in value of the building, not the “as is” value of the building before the investment.

As an example, let’s say a downtown building is worth $100,000.  The owner invests $50,000 into the building in façade improvements, new heating and air conditioning, roof, etc.   For the purposes of the example, we’ll say the owner gets the whole value of his or her investment and the building is now worth $150,000 ($100,000 before investment plus $50,000 in improvements.)  The CRA agreement waives the property taxes on the additional value of the building only.   What this means is that the property owner will continue to pay property taxes on the original value ($100,000) but the city will waive additional property taxes due on the increased value ($50,000) for the time period of the CRA agreement.

So why do this?  Several reasons.

First, some of our economic development incentive programs require the city to actively spend your collected tax dollars to recruit companies to the city.  This program only costs us future dollars we are not currently getting now.  In the example above, we would always get the property taxes due on the $100,000 value of the building.  That doesn’t change whether the investment takes place or not.   By incentivizing reinvestment, we only lose the future property taxes due on the new investment for the period of the agreement.   We weren’t getting these dollars now and we wont see them under the agreement.  Without the agreement, we have an unimproved building.  In the example above, we get the same tax dollars as we get now but we have a renovated building ready for new business.

Yea, but what if the business fails?  Statistically, about half of all new businesses fail within the first five years.   The beauty of the program in my view is that it is the value of the building and not the viability of the first business in that determines the success of the program.   Many of the downtown building fell into serious disrepair over the past 20 years.  Roof, heating and air conditioning, plumbing, electric, etc., all needed to be upgraded to be business ready again. If the business that performs the improvements to the building ultimately fails, we now have a building that has been renovated with new roof, mechanicals, residential upgrades upstairs, etc., that is ready for business again.   The hard, most expensive work has been completed, and a future new tenant business need only build out the property to their specific needs, not the general property needs of the building.

Third, I’m more interested in vacancy rates than the viability of any particular business.  I hope every one of our downtown businesses flourish.  Statistically, as I said above, about half of them won’t for various reasons.  As we renovate each building, it becomes easier and easier for the building owners to keep that building occupied and for the downtown district to become more viable and sustainable as a business district.   It’s never going to be a 1950’s downtown again, nor is that what we are trying to create.   It can be a community gathering place for events and small business development and urban living however, and a sustainable, valuable part of the overall city.

We have blue collar and white collar jobs here.  We have people who like arts and other who don’t care about them at all.  As much as possible, we ought to build a Middletown that offers something for all tastes and preferences.   Downtown will be part of that offering.    CRA agreements help make downtown buildings easier to rent for both businesses and upstairs apartments and they make it easier to open new businesses downtown.   I like them and I think they serve a limited purpose in reviving Middletown.

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