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High rent, empty storefronts shouldn’t tempt City to intervene in the downtown market

BY DI EDITORIAL BOARD | JUNE 15, 2011 7:20 AM

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A vibrant downtown with equal proportions retail, entertainment, office, and nightlife facilities has long been a dream of the Iowa City City Council and many residents.

But with several businesses (and most of them retail) forced to move out of downtown because of high rents, the transition from a bar-heavy district to one with more balance may prove tough. If city officials are planning to diversify downtown, they will consistently run into the rent problem. As unfortunate as these circumstances are, the tools the City Council has at hand are inadequate to solve the problem; the ones that could ease the changes run the risk of overly interfering with the market’s adjustment.

This is a particularly thorny issue. Prior to the 21-ordinance, the ability to make money was in part responsible for the abundance of bars downtown. In response, the City Council sought alternate measures — including a 500-foot rule — to limit the number of bars.

In the past, and with a very different composition of the Editorial Board, we came out against the 500-foot rule, stating that there was no guarantee closed bars would be swiftly converted into more productive businesses. Now, with the rule in effect and the downtown-bar scene dwindling, the 500-foot ban would prevent a procession of doomed-to-fail bars, clearing the way for a procession of retail operations, which might take some experimenting to get right.

“Some of the businesses in the downtown area have been there for years,” City Manager Tom Markus told the DI Editorial Board on Tuesday — and they’ve been there despite the high rent.

“You’d probably have to look at their business model, which includes how they service customers, and you’d probably find that those businesses which are successful are at the very high end of service.”

Markus stressed the importance of city encouragement directed by good data and evidence. A report commissioned by the city and many city business owners suggest that the downtown is a very desirable location for commerce, even with high rent factored into the operating costs.

Still, if high rent drives out businesses that can’t quite afford it — and it takes a while to find retail operations with the economic clout to stay — it may be tempting for the city to intervene. Some ideas tossed out by Markus: Self-Supported Municipal Improvement Districts, recruitment, and tax-increment financing.

The former two are unlikely to help businesses struggling with high rent; the latter is an uncomfortable infringement into the market, and Self-supported Municipal Improvement District proposals have met with a mixed reception from Iowa City businesses. This method consists of an increase in property taxes to fund city marketing and the hiring of a business-development manager.

Supporters say that it would improve the collective economic power of Iowa City; opponents say that it is an unnecessary financial cost. And the opponents may be right: By all accounts, the collective economic benefit is unlikely to offset the required higher taxes — another financial burden on businesses struggling with the steady increasing rent.

Tax-increment financing, on the other hand, directly financially supports fledgling operations but does this by awarding businesses that the city expects to succeed. (We have previously inveighed against the use of TIF districts for funding a Vito’s renovation helmed by Marc Moen.)

TIF, which offers a grant drawn from property taxes to development projects, borrows against predicted property value increases — and subsequently higher taxes, ostensibly. A 2002 report from Iowa State University’s Economics Department found that “overall expected benefits [from TIF] do not exceed the public’s costs.”

To make matters worse, TIF money comes directly from the funds. In the relatively prosperous time of 2002, the report saw no adverse effect on education; however, the report also warned (somewhat presciently) that if the state was in a worse fiscal condition, cities may not be able to rely Iowa to compensate for lost money from the general fund. With Gov. Terry Branstad and the House Republicans slashing education funding, now is not the time to further jeopardize Iowa City’s public schools.

In short, there’s no easy way out of this. The “invisible hand” of the market may well lower rent prices in response to a sudden influx of space as a result of the 21-ordinance. But this may also take a while and a few long years of slow exodus. Until it rights itself, there’s little city councilors can do about the downtown property market.

Without making it worse, that is. By all accounts, the current downtown is a great place for business, even as the high rent prompts some turnover. “It’s not necessarily disruptive just because there’s turnover,” Markus said.

No matter how tempting it may be to intervene during a rocky transition, if Iowa City is to be vibrant and diverse in the future, the City Council should resist the temptation to direct the changes in downtown business. Through the limiting of bar locations and clientele, the council has set the parameters; it’s time to let chips fall where they may.


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