Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
PLAIN ECONOMIC SENSE
For release after Dec. 28, 1998
Column 361
Redevelopment and Infill to Reduce Urban Sprawl
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
In Iowa, there are two main policy tools used to encourage redevelopment of core areas and infill to utilize existing infrastructure in metro areas and rural communities. Urban Renewal (Chapter 403 of the Iowa Code) provides for establishing Tax Increment Financing (TIF) Districts and Urban Revitalization (Chapter 404) provides for Tax Abatements.
While some experts and officials may differ, my observation is that TIF is better suited for facilitating new housing developments, demolition and redevelopment of blighted core areas, and industrial development, while tax abatement is better suited for infill of open lots and rehabilitation of commercial and historic districts. While the tools exist, the political will and cash flow risks for using them effectively may not be present in some communities. In addition, both tools currently include some legislative barriers which may limit their effectiveness in reducing urban sprawl.
The stated purpose of TIF code is to improve slum and blighted areas and to provide for a continuing need to alleviate unemployment, shortages in housing, retaining local industries, job training, industrial and commercial development. In order to use TIF, a city must first adopt a resolution finding that one or more slum, blighted or economic development area exists in the community and that rehabilitation, conservation, redevelopment, development or a combination is necessary for public health, safety, or welfare or the residents of the city. Then a general urban renewal plan must be developed and approved by the city.
Such plans can set up TIF districts to rehabilitate core metro areas, demolish and redevelop blighted rural main street areas, and encourage development in targeted economic development areas. A TIF district allows the city to borrow funds from the financial markets to pay for rehabilitation, demolition, redevelopment projects, and placement of public infrastructure for housing. The borrowed funds are paid back over a specified period of years from the incremental property taxes paid on the new valuation created in the TIF district.
The major risks in using TIF are (1) whether the demand for the new or redeveloped housing and property actually exists and (2) whether the new businesses generated are financially viable enough to generate a sufficient property tax increment for paying off the TIF bonds.
As a general rule, cities regard TIF as a critically important tool for stimulating economic development. Meanwhile, counties and school districts regard TIF projects as a drain on their potential tax base because they add demand for services without additional revenues until the TIF bonds are paid off. However, the fact remains that a multitude of economic development projects across Iowa and other states would not have occurred if TIF financing was unavailable.
In recent discussions on land use, rural community leaders suggested that Low and Moderate Income (LMI) requirements imposed by the Iowa General Assembly in the mid-1990s were designed more for metro areas and limit the usefulness of TIF for housing projects in rural communities. Rural counties are adversely affected by the LMI requirements in part because county median incomes used to calculate the LMI requirements are lower in rural counties while the cost house construction and materials are about the same. Recent news reports suggest that while some rural communities need more LMI housing, others have a surplus in LMI housing.
In contrast, many rural community leaders attending housing conferences during the past five years universally identified a need for middle-income housing for working families. For the most part, the demand for high-income custom homes is being served because many builders regard this market segment to be the most profitable. With some tweaking, Iowa's TIF code could be adjusted to encourage more middle-income developments with smaller lot sizes to satisfy economic development as well as land use goals.
The stated purpose of the tax abatement code is to improve areas (1) where there are dilapidated, deteriorated, and obsolete buildings, overcrowded population, or other conditions detrimental to public health safety or welfare; (2) where there is incompatible land uses, inadequate street or lot layout, deterioration of improvement; (3) historical buildings needing restoration; or (4) an area defined as an economic development area appropriate for public improvements related to housing or construction of low and moderate income housing.
Similar to the TIF process, cities may only exercise tax abatement authority after a city has adopted a resolution finding that (1) rehabilitation, conservation, redevelopment, economic development or a combination is necessary for an area, (2) it is in the interest of the public health safety or welfare of the residents, and (3) the designated abatement area meets the criteria defined in the purposes. This means that tax abatements for infill or rehabilitation can only be granted in approved urban revitalization districts.
From an urban sprawl and infrastructure cost perspective, it would be cheaper and more efficient for cities to encourage infill on open lots where street and public infrastructure already exist throughout the city compared to encouraging new developments with more costly new infrastructure. This is true for areas of a city that do not have an urban revitalization designation as well as areas that do. However under the present Urban Revitalization code, cities cannot designate empty lots throughout the community where infrastructure already exists as individual urban revitalization areas qualifying for tax abatements. Again, tweaking the Iowa Urban Revitalization Code would make tax abatements more useful in achieving economic development goals while reducing urban sprawl.
Edelman is a professor of economics and an extension public policy specialist at Iowa State University.
Extension programs are available to all without regard to race, color, national origin, religion, sex, age, or disability.