The following is a transcript with slides of the presentation I made to the Kyle City Council on 12.6.16. The presentation was the first step in bringing this program to reality. I will now begin working with city staff to draft an ordinance for council consideration in early 2017. You can watch the presentation online by clicking here.
I think we can all agree that commercial development in Kyle is a good thing. It provides jobs, sales tax revenue, property tax revenue, and opportunities for our residents to purchase goods and services right here in Kyle. And as most of you know, I made owning a business a major part of my platform when I ran for city council earlier this year. Something I often heard from residents while campaigning was that the city could be more equitable in its treatment of the commercial community. Their point was that in the last ten years most of our incentives have gone to large, master-planned commercial developments who recruit large businesses and franchises to fill the space. These entities negotiate agreements that include property tax refunds, sales tax refunds, city bonds to pay for infrastructure, and dedicated staff time drafting agreements to help their projects succeed.
But smaller, local businesses have not received similar opportunities to partner with the city, at least not in the same way. And as a small business owner who built my business in the city, I must say I agree. This proposal is my attempt to start changing that narrative and making it crystal clear that we value all businesses who invest resources into our community.
Before I explain the specifics, I want to make one thing clear, and to do so I want to take us back a few years. In the last few months I have spent considerable time studying our commercial economic development initiatives – specifically dating back to 2004 when we created our first TIRZ district and then subsequently partnered with two developers that helped us recruit Seton and Target. The following aerial photographs are intended to show just how impactful some of these partnerships have been in terms of bringing in the level of commercial development we see today. Many of the new residents who live in Kyle probably don’t realize that 12 years ago the I-35 corridor was virtually baron. FM 1626 did not exist. Kyle Parkway did not exist. The entire corridor had virtually zero value to the city in 2004. In fact, unless you are very familiar with the Kyle terrain, it’s hard to notice exactly what we’re looking at. So I’ve added a few markers to help. Now, 12 years later,the TIRZ district alone is valued at over $103,000,000 and that does not include the Seton development with Walmart and Lowes. These projects have generated millions of dollars of city revenue annually. Some of that money goes to pay for the debt associated with the infrastructure, and some of it goes to the general fund to defray the tax burden from our residents. Either way, it was a great investment for Kyle that will only get better as the years go by.
My point is that commercial incentives paved the way for us to essentially reshape the I-35 corridor in Kyle. Because of these partnerships, I truly believe we have the nicest and most well planned commercial district along the interstate when compared to our neighbors north and south. And the best part is that we still have a lot more capacity to attract terrific retailers and businesses to the area.
But with all the good brought about by Kyle’s economic development policy, we have failed to place enough value on the smaller businesses who invest in the community. The very nature of master planned commercial districts means developers ask top dollar for pads and specifically focus on filling those spaces with large chains like Walmart, HEB, Lowes, and McDonalds. These companies have proven brands and deep pockets. They can afford to pay for the premium sites and reap the rewards of their economies of scale. And the synergy they create further attracts national retailers and drives up land prices. That’s good for them and good for the city, but what it creates is a barrier to entry for small businesses who perhaps have a good model but are woefully undercapitalized and inexperienced.
For over a year now I have been grappling with this problem. I have studied all kinds of small business incentive material from the National League of Cities, the Main Street America program, and more. I have poured over the budget to find dollars that we could use to accomplish some of these ideas. I have considered proposing incubator spaces, micro lending programs, marketing coops, reenergizing our now defunded Downtown Revitalization Grant program, and more. These are exciting programs to be sure. But each time I researched a proposal I came up realizing it was likely to be either ineffective, ceremonial, or not so much about partnering with small businesses as subsidizing them. And that’s not the mark I have set out to achieve.
My primary goal with this proposal is not to subsidize the small business community or give them lip service. Rather, I want to give them a square deal – something like what the major developers get, and something measurable in terms of ROI to the city. If they invest in us, I want to invest in them.
Thus, the conclusion I have come to is that I think we should build a program that is essentially a mini developer agreement using the same type of reasoning we apply to large developers, only simplified, on a much smaller scale, and outside our already incentivized development areas.
The first and most logical phase to this plan – and the only thing I am proposing tonight – should be a property tax based incentive that is measurable in terms of ROI to the city. I call it “First Year on Us.” Under the “First Year on Us” commercial development plan, owner occupied businesses may apply for a one-time tax credit up to $5,000 for improvements on real and personal property calculated on a 1:1 basis. Non-owner occupied businesses and developers may apply for the same credit up to $2,500 calculated on a 1:2 basis.
- First, this program very intentionally puts a premium on owner-occupancy and is very intentionally capped at $5,000. I calculate owner-occupancy as a business owner who maintains a minimum of 25% ownership in the business and 25% ownership in the real estate. Just as homeowners are intrinsically more desirable to the community than renters and therefore receive a homestead property tax exemption, business owner-occupants also have an invisible value. Owner-occupants are likely more vested in the community and likely local to the area, though not always. They are also likely more stable as a business and will not be subject to as much turnover. In this scenario, business revenues have the best chance to circulate through our economy many times over. And that means I want to place a premium on incentivizing those types of businesses. If a company builds or improves a facility that generates real and personal property taxes up to $5,000 over the land value to the city, I want to offer a one-time credit dollar for dollar. But if a developer builds a strip center, for example, and leases the space out, I still want to credit that company, but at a 50% rate, and only up to $2,500. Similarly, a business who leases a space may receive a one-time credit against their city tax bill up to $2,500 for 50% of their personal property.
- Second, this program is designed to incentivize commercial property only. The “First Year on Us” plan applies to all commercial property zoned R/S, W, and CM in the city limits that is not part of any other city incentivized developments. This would exclude businesses operating out of a home from receiving any credits for real or personal property. This would also exclude businesses in the TIRZ district, the SCC Kyle Partners development, the HPI development, or anyone who negotiates any other type of city incentive.
- Third, and perhaps most importantly, this program credits against improvement value only as verified by Hays CAD. It’s critical we design the program to correspond with an increase in the tax base. The credit therefore passes the “but for” argument, meaning that “but for” the improvement we would not receive those tax dollars and therefore the credit is against future earnings and does not cost the current taxpayers. Say a business purchases an existing commercial facility. That facility already generates revenue to Kyle. In this case, crediting the business for their first year’s property taxes does not pass the “but for” argument because it takes away from revenues the city was already collecting. What we want to incentivize is new development because that’s how we can justify the ROI. If the business fails, the improvement survives, and therefore the credit is not without financial merit. The credit would apply to facility expansion, however. If a business purchases or operates out of a facility but wants to significantly improve the property, such an improvement would pass the “but for” test. In this case, we would offer a credit ONLY on the increased taxable value. Furthermore, just because a property is undeveloped doesn’t mean we are not collecting property taxes. My store, Mitchell Motorsports – if I may use it as an example – was zoned R/S before I built the dealership. The land was taxed at $300,000 before improvements. The “but for” test means we should only credit against the improvement value and not the land because the land was already being taxed.
- And finally, because real property taxes are prorated in the year of construction, owner occupied businesses and landlords may elect to defer their credit until year two in order to receive the maximum credit based on taxation.
I would like to conclude with a few closing remarks about how this program specifically helps businesses and how we can market it to attract new businesses. It is said that 90% of businesses fail in their first year, and of the remaining 10%, 90% of those fail in the first five years. To be clear, these businesses do not fail because they lose money. They fail because they run out of money. In other words, the problem is not likely profits, but cash flows. Businesses who build or expand are often leveraging a great deal to make that happen. They sink all their resources into land, building, equipment, and inventory. And that means, when the first year’s tax bill comes due, oftentimes companies struggle to pay that bill. The “First Year on Us” program precisely helps with that challenge. It provides relief from expenses in the most critical period of a business’ operation, and it does so in a way that does not cost the current taxpayers.
The point of this program is to establish a new baseline for how we market our city to those who wish to invest in our commercial sector. This final slide shows an example of how we can frame the program to prospects. By receiving the first-year credit, the cumulate tax rate for the improvement can be averaged out over several years and results in Kyle being a smart option for those who are not sure in which city in the area they plan to build.
My hope is that, by pursuing this program, we can move past the days when commercial incentives in Kyle were reserved only for large scale projects, and confidently say that, regardless of size, if you want to invest in Kyle as a business, we want to invest in you.