May 10, 2014

Belleville plans to increase monitoring of incentives offered to businesses

For every $1 million Belleville has offered businesses in development incentives, the city is getting at least $22 million in private investment.

And city officials are working on a new plan to monitor how businesses follow their development agreements.

From 2008 to present, city leaders approved 50 agreements.

The city got about $82.1 million in private investment through these agreements, according to Eric Schauster, the city's economic development specialist and grants coordinator.

The city has offered no more than $3.7 million in incentives, Schauster said. This number includes the city's portion of sales tax but does not include about $1.2 million in possible abatement of sales tax to the state.

Some businesses do not use all the incentives they are eligible for. For instance, some businesses are offered a rebate of any increases to their property tax, but they never request a rebate.

Leading up to the municipal election in April 2013 and in the months since, Alderwoman-at-Large Lillian Schneider has said the city needs to keep better track of whether businesses keep up their side of the bargain.

"The taxpayers are relying on us to look out for their money whether we're giving the business sales tax abatement, they get money up front or they get their real estate taxes back," Schneider said.

Schneider said city staff should be checking in with businesses yearly, on the anniversary of the business agreement, and have a record of findings.

Schneider also said businesses should be required to report revenue and tax information to the city, just as businesses do to the state, in cases where the development agreement requires the business to make a certain amount of revenue subject to sales tax each year.

After meeting with Schneider, Schauster and City Attorney Garrett Hoerner this month, Mayor Mark Eckert said his staff is creating a form that will be used to evaluate businesses annually.

The city likely will ask businesses with existing agreements to sign a document certifying that they meet the terms of the agreement.

And, the city has altered its penalty section of agreements to something more enforceable.

"We're going to be mindful as we write these things in the future," Eckert said.

Eckert and city staff say the new form complements a system that already has checks and balances in place to make sure businesses are in compliance.

"We have not looked the other way," Eckert said.

Schauster said the city asks for proof before cutting businesses a check for property tax rebates, facade improvements and demolition.

For example, the city will ask for an invoice for the facade work or demolition, or a copy of the property tax payment, Schauster said.

Sometimes businesses are resistant, arguing their finances are proprietary information, but businesses comply because they want the incentives, Schauster said.

Development agreements typically include incentives such as cash payments, money for demolition, facade improvements, the abatement of sales tax for building materials and rebates on increases in property taxes.

Businesses typically get a mix of these incentives but the most common incentive is a tax break on building materials.

In return, the other party agrees, for example, to invest a set amount of money into opening or remodeling their business, create a certain number of jobs, stay open for a period of time or meet an annual sales quota.

The form will be a checklist of sorts: Did the business create as many jobs as promised by the second year? Did the business meet its sales revenue projection at the end of the year?

Schneider said it is good that the city is developing a form, but the city should have had a uniform, consistent verification process in place long ago.

Schneider wants the city to check on existing businesses, but she has also voiced concern over the city not recouping money from shuttered businesses.

Schauster said there aren't as many closed businesses as Schneider thinks.

Of the 50 businesses with agreements since 2008, four closed: B.W.E. & T.M.E. (Harold Smith Pharmacy), MARLI Investments (Taps and Corks), Arctic Food Service and Market Fresh Pizza.

Harold Smith Pharmacy's agreement with the city allowed for sales tax abatement up to $10,846, property tax rebate up to $7,665 and $8,000 for demolition.

After the pharmacy closed, the city recovered the $8,000 for demolition, Schauster said. The pharmacy never asked the city for a property tax rebate, so there was no loss there.

As for sales tax abatement on building materials, the city said it's difficult to track where businesses buy building materials.

The other three businesses that closed only got sales tax abatement as an incentive.

Since the incentive allows businesses to buy materials anywhere in the state, if the business doesn't buy materials in Belleville, the city can't recoup money it didn't lose, Schauster aid.

The state, however, now has a system through the Department of Revenue that tracks sales tax savings on construction. Businesses have to log in with a unique certificate number and the system automatically calculates how much tax the business will save with the registered contract information.

The system is meant to prevent businesses from using the sales tax rebate incentive to buy materials for projects unrelated to the business agreement.

Schauster said the new program will help the city keep track of sales tax losses. However, the amount is typically low and does not justify legal fees to recoup costs if a business were to close.

The four businesses that eventually closed made a total investment of $729,215, Schauster said.

The most the city would have lost in sales tax for building materials was about $4,219, and that is only if these businesses bought materials in Belleville, Schauster said.

"Without any incentive, these businesses wouldn't have done anything in the first place, so we're getting buildings remodeled and we're not losing out on anything," Schauster said.

Eckert said some residents and city officials criticize the city for not being business friendly. But one way to help businesses is through development agreements and being flexible with businesses through the recession, Eckert said.

"When you have an old city, there's already a lot of challenges for businesses to do business here and we have to be reasonable," Eckert said.

Belleville is celebrating its 200th anniversary this year.

The city recognizes that business ventures keep buildings from being vacant or even eyesores, and there are perks to private investment that can't be measured just by job creation or sales tax.

"So how do you measure a business' success?" Eckert said. "You have to be understanding and you have to have common sense. You don't take a business to court and ruin that business because they said they would create five jobs but only created two.

Eckert said the city would not take lightly to "gross misrepresentation," such as, hypothetically, a business that said it would create 50 jobs but only retained five employees.

The city believes Fischer Lumber breached its agreement with the city when it closed in 2011, and the city is seeking a repayment of $135,000.

The 2004 agreement gave the business money back for incremental property tax increases up to $355,000. In return, the business was supposed to invest $2.58 million and stay open for 15 years. The trial is set for October.

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