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Judge allows Coralville to proceed with Von Maur project

IOWA CITY– A district court judge has ruled that Coralville may proceed with a multi-million dollar economic development deal, at least for now.
Plaintiffs in a March 1 petition had asked the court for a temporary injunction to halt the City of Coralville’s proposed land sale to Von Maur department store. The deal would give Von Maur an estimated $14 million in incentives to relocate from Sycamore Mall to Coralville’s Iowa River Landing (IRL) area, paid for through Tax Increment Financing (TIF).
Sixth Judicial District Judge Marsha Bergan filed a ruling on Monday, March 26, denying the plaintiff’s application for a temporary injunction, stating that plaintiffs failed to show a likelihood of success on their claims.
Both sides presented arguments last week during an expanded hearing for the temporary injunction that would have kept Coralville from closing on the land sale until the court could rule on a permanent injunction. The plaintiffs are still seeking a permanent injunction.
The 26 plaintiffs in the case are members of Citizens for Responsible Growth and Taxation (CFRG&T). The group formed after learning the details of the city’s proposed incentives to Von Maur and other prospective tenants in the IRL, details the citizens’ group said did not become public until late 2011. The Coralville City Council approved a $1.5 million grant to a California development firm, OliverMcMillan, with the stipulation that the funds be used to acquire the land and then sell it to Von Maur for $10. Additional proposed incentives to Von Maur include reimbursement for relocation expenses, and the expense of termination of its lease at Sycamore Mall up to $650,000; a cap on Von Maur’s annual property taxes at $150,000 per year; $9.5 million to offset Von Maur’s construction costs; and certain infrastructure improvements such as a parking lot, sidewalks and landscaping.
The lawsuit stated that the deal violates Iowa law by gifting the property, rather than selling it at fair market value, and circumvents the provisions of Iowa Code by using a third party that does not meet the law’s standards as an urban renewal agency to transact the deal.
In addition, the petition claims moving Von Maur from one portion of Johnson County to another does not meet state requirements for adding diversity to the economy, attracting or retaining businesses to generate tourism, or generating public benefits compared to funds dispensed.
“We are requesting an injunction because of irreparable harm that would be suffered by the plaintiffs, some who own property in Coralville, some own property near Sycamore Mall. Plus, if an injunction is not entered now, the plaintiffs would lose any opportunity to challenge what we see as absolutely illegal activity,” said plaintiffs’ attorney Robert Hatala, of Simmons Perrine Moyer Bergman PLC.
Attorneys for the City of Coralville argued the city was well within its legal rights under Iowa’s TIF law by hiring a developer with a proven track record to transact the land sale and oversee the subsequent development of the IRL. The move would allow for competitive bidding and the submission of other development proposals as well as careful consideration of how to appropriately develop the previously blighted area near the river. The move would expand Von Maur from its current 60,000 sq. ft. to 80,000 sq. ft. of space, thereby adding jobs and attracting new and unique businesses to the IRL, said city officials.
Judge Bergan allowed both sides to take depositions and call witnesses.
The first was plaintiff Kevin O’Brien, owner of nine area McDonald’s restaurants, including the one adjacent to Sycamore Mall, and one on First Avenue in Coralville.
O’Brien testified on March 20 he is concerned, not only about decreased business if Von Maur is moved out of Sycamore Mall, but that the McDonald’s Corporation might remove the restaurant altogether when its current lease expires in three years.
“If Von Maur is taken out of that mall, the mall may or may not survive. McDonald’s could walk away from that location, which would essentially wipe out any equity I have in that business,” said O’Brien.
Further, O’Brien said, commercial property tax owners cannot financially compete with city-funded projects.
“The (lease) rates and build-out (costs) are extremely competitive,” said O’Brien. “I don’t know of any other privately-owned business that could compete with the thousands of square feet that are going to be developed in Iowa River Landing.”
Finally, O’Brien noted the incentives provided by the City of Coralville to other businesses are paid through property tax dollars.
“I would be subsidizing the competition, and this type of diversion of funds only continues to keep our taxes very high in the state, making it difficult for Iowa to compete for new businesses,” he said.
Defense attorney David Tank, of Dorsey & Whitney LLP in Des Moines, asked O’Brien if he had ever received economic benefits from the City of Coralville for his development projects. O’Brien said he was able to take advantage of leftover flood recovery bonds that were issued by the state but dispensed by the city in 2010.
“The key is, I paid it all back in full at a reduced interest rate. I paid back the entire bond plus my property tax goes up by 25 to 28 percent,” O’Brien said.
Tank questioned why the plaintiffs had waited so long after learning of the Von Maur deal to file the lawsuit.
“Why these plaintiffs would lay in wait, while contracts were signed and deals were done, and say nothing to anybody, then come in and get an injunction on the brink of the construction season of 2012 is simply wrong and not authorized by law,” Tank said in his opening arguments.
O’Brien responded that members of the citizens’ group had met numerous times with Coralville city officials to see if there were other ways to structure the deal.
“We did whatever we could to avoid litigation,” O’Brien said. “We all have to live together when this is all over.”
Additional witnesses for the plaintiffs were called on Wednesday, March 21, including Gerry Ambrose, an Iowa City-area real estate developer, and economics expert Dr. Peter Fisher, research director of the Iowa Policy Project.
Ambrose testified that 13 years ago he and other property owners made a proposal to the City of Coralville to redevelop 11 acres in the blighted area with a Harley Davidson shop, a Village Inn, a Handi-Mart and a strip mall.
“About three or four days after we had this meeting with the city, (the landowner) said he couldn’t sell the property because the city of Coralville wanted the property for a convention center,” Ambrose said. He also said he and other associates approached the city in 2005 about building a casino– which was eventually built in Riverside– next to the city’s convention center. The proposal never gained traction in Coralville.
“But days later, I was watching the local news and (Coralville) Mayor Fawcett was quoted as saying we never talked to anyone about a casino. I was floored,” Ambrose said.
Ambrose offered his opinion that the $1.5 million OliverMcMillan would pay for the 7.4 acres of Von Maur property was below market value. In his estimate, it’s worth closer to $2.5 million. The actual market value of the property is important, as cities are not allowed to sell property at less than market value.
Fisher, an outspoken opponent of current TIF practices, told the court that he feels TIF law should be reformed, and estimated Coralville’s incentives to Von Maur at close to $16 million.
“That is premised on the land being worth $1.5 million, which the city was transferring to OliverMcMillan,” Fisher said. “The land in fact was worth, on the market, much more than that and a higher figure should be part of the cost to the city, because transferring it to Von Maur the way they did, they could have gotten higher market value for it.”
Fisher said the transaction would bring no real gains to either the area’s economic base or to taxpayers, which is also one of the considerations cities must make when relocating a business from one part of the state to another.
“If it proceeds, we will have the same retail sector we did beforehand; the same set of stores, one slightly larger. By virtue of Von Maur’s moving from one part of the county to another, we will not have done anything to increase the economic base or consumer purchasing power. Something has to give, and it’s likely to be sales at competing stores.”
Under Tank’s cross-examination, Fisher acknowledged that Iowa’s TIF law allows cities legal authority to award economic grants like the one to OliverMcMillan, award financial incentives to developers and dispose of property in designated urban renewal areas.
Tank criticized Fisher’s analysis of the project because Fisher admittedly did not try to put a value on the project’s potential economic benefits to area residents and the local economy.
“You went through the expense that would be incurred by the city and actually put some numbers with that. But you haven’t tried to quantify the potential benefits numerically using the same rigorous economic analysis brought to bear in analyzing the costs,” Tank said.
Coralville City Administrator Kelly Hayworth took the stand to be questioned by Whitney & Dorsey defense attorney William Miller. The testimony and cross-examination took over an hour.
Hayworth testified the Coralville City Council had made revitalization of the Iowa River Landing area a goal since the mid 1980s, with the idea of putting an anchor tenant in the location. The city hired the Desco Group, and a series of other firms to develop the area, but no company was successful in attracting an anchor tenant before the city began working with OliverMcMillan in 2008.
In August 2010, the city entered into a Master Development Agreement with OliverMcMillan that required Coralville to pay OliverMcMillan a $3 million master developer fee plus additional fees based on a percentage of project costs, estimated at close to $1 million.
Hayworth said at least two other anchor tenants were under consideration before Von Maur was chosen, and that the $1.5 million grant to OliverMcMillan was not contemplated until October 2011.
However, Hayworth admitted that neither the city’s 2011-12 budget, nor the 2012-13 budget, which was certified March 15, contained a line item for the $1.5 million payment to OliverMcMillan.
Also at issue was the city’s transparency in adopting OliverMcMillan’s proposal.
The Coralville City Council adopted a resolution approving OliverMcMillan’s development proposal on June 22, 2010, and the city gave until July 27, 2010 for additional development proposals to be submitted.
“So OliverMcMillan had over a year and a half to work on its proposal, and all other interested developers had 35 days to put together their proposals, right?” asked Hatala. “Does it seem a little unfair to you?”
“We didn’t have any other interested parties,” Hayworth replied.
“How in the world do you know?” Hatala rebutted.
A public records request asking for OliverMcMillan’s proposal was made by the citizen’s group in December 2011, but according to the plaintiffs, that document has never been produced. Hayworth said he was aware that someone had made a request, and the city attorney had asked him for certain items, but he had not reviewed the open records request specifically, nor had he looked for the document.
Further, the plaintiffs contend the City of Coralville did not give public notice of the land sale.
“Do you remember having any kind of a public hearing on disposal of the property after August 13, 2010?” Hatala asked.
“I do not remember any,” Hayworth said.
In September 2011, the Coralville council passed a resolution for the sale and grant to OliverMcMillan, Hatala continued.
“That was the very first time there was any public notification at all of the $1.5 million grant to OliverMcMillan, right?” Hatala asked.
Coralville’s council agendas, packets and notices of public hearing are available on the city’s website one week before the meetings, and the council allows public comment at all of its meetings; however, Hayworth acknowledged there was no publication in any newspaper of the public hearing on OliverMcMillan’s grant.
In the court’s decision, Bergan noted that Iowa law allows wide discretion to city councils in carrying out urban renewal laws, and courts have “little power to interfere.”
Bergan weighed the city’s argument that the transfer of the property to OliverMcMillan is a sale, pursuant to Iowa’s Urban Renewal laws, not a gift, and concluded “the court is not convinced that the city violated Iowa Code section 364.7.”
As for the fair market value of the property, Bergan said the Iowa law appears to support the defendants’ argument that monetary payments alone are not a measure of fair value. An appraisal of the land offered by the plaintiffs assumed the property is unencumbered and may be bought or sold in the market without limitations. In this transaction, Bergan said, the city council has limited buyers to anchor tenants, the sale is conditioned on specific dates the retail operation must begin and the duration for which it must continue, and contains default clauses, thus imposing strict limitations on the sale.
Finally, Bergan cited instances where resolutions adopted by the Coralville City Council specifically addressed the state code’s requirements in exercising urban renewal practices. Documents of record included factors listed in Iowa Code Chapter 15A– considerations for relocating the Von Maur store to expand the operation, attract additional tenants and add economic diversity.
Both parties claimed a potential for irreparable harm, but Bergan sided with the city’s argument that the harm of granting an injunction would impact the city immediately: construction bids could not proceed, construction would not begin and Von Maur’s anticipated May 2013 opening would not occur.
“The impact on plaintiffs is less dramatic and somewhat less predictable,” Bergan wrote. “Plaintiffs also note that Von Maur will leave the Sycamore Mall, which will harm plaintiffs. There is, however, no evidence that an order granting plaintiffs’ request for an injunction will result in Von Maur staying at the Sycamore Mall in Iowa City.”