University of Iowa pays Coralville $1M for tax-exempt clinic; city keeps it all

“In contrast to Von Maur, the university did not get a good deal”

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April 1, 2014 | 9:40 am

CORALVILLE – The University of Iowa pays the city of Coralville more than $1 million a year in place of property taxes for a medical clinic that is tax exempt in a deal that is unusual in Iowa and nationwide.

The city in turn keeps all that money even though the agreement is based on a tax rate that includes the tax levies of Johnson County and the Iowa City Community School District.

The "payment in lieu of taxes," as it is known, is for the UI Health Care clinic in Coralville’s Iowa River Landing district off Interstate 80 and First Avenue.

At a little more than $1 million a year for the 150,000-square-foot property, it’s an agreement many cities in the United States would love to have, said Daphne Kenyon, an economist who co-authored a leading report on payments in lieu of taxes, or PILOTs.

“I have not before heard of a specific case where the actual dollar amount of a PILOT for one individual development was so high,” said Kenyon, a fellow at the Lincoln Institute of Land Policy, a Massachusetts-based think tank.

The $73 million outpatient clinic in Iowa River Landing opened in fall 2012 and had 27,382 patient visits in its first year. It is home to a dozen medical specialties and other services, freeing up space at the main hospital in Iowa City.

Another Coralville land deal in Iowa River Landing – the use of tax breaks in 2011 to attract a Von Maur department store – has received intense scrutiny.

But the PILOT agreement mostly has gone unnoticed, although it was approved by the Iowa Board of Regents, which oversees the state’s public universities and the University Iowa Hospitals and Clinics, and the Coralville City Council in public meetings in 2010.

Coralville received its first payment last year at $1,026,774. This year’s amount is $1,013,011.

The payment is adjusted annually based on the tax rate. The agreement has no end date.

Rep. Tom Sands, a Republican from Wapello and chairman of the Iowa House of Representatives Ways and Means Committee, said he had been unaware of the agreement but questioned Coralville’s rationale for keeping the full amount when county and school district taxes are part of the equation, and noted the UI and its hospital are part of the state government.

“You’ve got one entity of government paying another entity of government and, without knowing the full scope of the agreements, you just question whether that’s in the best interest of the taxpayers that are all involved,” he said.

UI and Coralville officials, however, defended the agreement as reasonable.

Iowa River Landing is a 180-acre former blighted area that the city owns and is redeveloping with hotels, stores, office space and residential units. City Administrator Kelly Hayworth said one of the project’s goals is to generate more tax revenue for Coralville, and the clinic — at the entrance and visible from I-80 — is on one of the most valuable sites in the district.

“And so one of the things we said (to university officials) is that, ‘We’d be glad to sell you the lot and all of that, but that’s one of the conditions, that we have a PILOT,’ ” Hayworth recalled. “Because that was so important, that was a major part of what we were doing there.”

UI Senior Vice President and Treasurer Doug True said hospital officials wanted that specific location for its prominence and its convenience for patients and staff. He also said the hospital has a history of paying property taxes for its clinics.

“UI Health Care very much wanted that site for its patients,” he said. “That (PILOT) was the tax consequence of it.”

There seems to be more interest in PILOTs in recent years as municipalities look to not-for-profit organizations and colleges that don’t pay property taxes but receive city services, Kenyon said.

The agreements are voluntary but have been the source of friction in communities.

Hundreds of PILOT payments found in studies, media reports or researched by The Gazette failed to turn up one comparable to the UI-Coralville deal when it came to the amount paid, $1 million, for the size of the property, 150,000 square feet.

The most lucrative agreements usually involve large hospitals or the entire campus of a college or university.

The city of Iowa City, where the bulk of the UI campus and the UI Hospitals and Clinics are located, received $1.76 million in fiscal 2013 for providing fire service to 16.8 million square feet of campus.

The payment is determined by a formula that includes the square footage of UI buildings, the Fire Department’s expenses and a couple of other variables.

City Manager Tom Markus said he found the agreement fair when he started with the city, and that has not changed upon learning of the UI-Coralville PILOT.

“I wouldn’t try to make the argument that our agreement is unfair because another seems most generous,” he said.

He also said that asking for more in light of what Coralville receives for one property “doesn’t seem like the ethical thing to do."

In addition to the Iowa River Landing clinic, Coralville is to get $150,984 in lieu of taxes this year for three properties in the UI Research Park.

The Lincoln Institute of Land Policy has a database from a 2011 survey of 288 not-for-profit organizations that made payments in lieu of taxes. Only 17 paid more than $1 million, and all but one of those were either elite private schools – Harvard, Yale and Stanford topped the list – or hospitals.

The Lincoln Institute did not survey public universities because most, like the UI, are part of state governments and are not nonprofits, Kenyon said.

Other examples The Gazette found included:

  • Only four of the 13 medical institutions that participated last year in Boston’s PILOT program, arguably the most successful in the nation, paid more than $1 million. All 13 had property values nearly double to 64 times higher than the $28 million value placed on the Iowa River Landing clinic for the UI-Coralville PILOT.
  • Syracuse University pays the city of Syracuse, N.Y., about $1 million a year in acknowledgement of city services it receives on its 680-acre campus.
  • Aside from Iowa, two of eight Big Ten schools that responded to an inquiry have PILOT agreements. The University of Minnesota, Twin Cities pays about $50,000 a year. Penn State University paid nearly $2.4 million in 2012 for several services.
  • Iowa State University paid Ames $1.47 million for fire service last fiscal year. ISU also has paid $935,220 in property taxes this fiscal year for seven buildings it owns and operates in its research park.
  • Cedar Falls is budgeted to receive $587,450 from the University of Northern Iowa this year for providing fire service to nearly 4.8 million square feet of building space.

With the Iowa River Landing medical clinic in a tax increment financing, or TIF, district, Coralville’s controversial use of that economic development tool also has come into play with the UI-Coralville PILOT.

To determine the $1 million payment, the UI and the city set the value of the exterior of the clinic at $28 million. The interior is not subject to the PILOT.

The taxes are calculated using the full rate for the tax district. That includes not just the city’s tax rate, but also those from several other bodies, the biggest being Johnson County and the Iowa City Community School District.

Hayworth, the city manager, said Coralville keeps the full payment because the property is in a TIF district.

In a TIF deal, the taxes resulting from the increased value of a redeveloped property go back into the TIF district and not to tax-collecting bodies.

Coralville is putting the money toward other projects and to pay back some of the expenses the city incurred buying the Iowa River Landing properties and cleaning them up, Hayworth said.

If the payment  from the medial clinic was an even $1 million this year and was distributed as a regular property tax collection not in a TIF district, approximately $190,500 would go to Johnson County, $387,000 to the Iowa City school district and $382,500 to Coralville.

Johnson County Supervisor Rod Sullivan, a vocal opponent of what he sees as TIF abuses by cities, said it’s inappropriate for county and school taxes to be part of the equation in determining the tax rate when Coralville gets all the money.

“It doesn’t necessarily make sense,” he said. “It’s hard to justify for me.”

Hayworth said if the TIF district were to end, either the other tax-collecting bodies would get their shares, or the UI would only pay the equivalent of the city's taxes. He was not immediately sure. The agreement does not spell out that scenario.

The TIF district has no expiration date.

Johnson County resident Douglas Paul, a member of a citizens group critical of how Coralville does business, said the use of the full tax rate was unfair to taxpayers in the county, school district and state. The state backfills some of the revenue school districts lose to tax increment financing.

Paul was part of a lawsuit that unsuccessfully tried to stop the Von Maur deal.

Von Maur received $9.5 million from Coralville to build its store, paid $10 for the property and has its property tax payments capped at $150,000 a year plus inflationary adjustments, with Coralville paying anything over. A recent assessment of the store’s value could put its tax bill at more than double that.

The UI paid the city $2 million for the clinic property and each year pays the $1 million PILOT and its share for a city-built parking ramp, which last year was $1.1 million.

“In contrast to Von Maur, the university did not get a good deal,” Paul said.

Hayworth disagreed.

“The site that the university hospitals wanted was the prime site of any of the locations in Iowa River Landing … and so we were very clear up front that if they wanted that site, the whole purpose of this was to generate tax dollars for the redevelopment of the area," he said.

The PILOT agreement says “the city will provide police, fire and other services to the Property and construct and maintain streets, sidewalks, storm water drainage and other improvements and facilities serving or benefiting the Property.”

The Coralville Police Department responded to 90 calls for service at the clinic in 2013. The Fire Department responded to six incidents, all of them for malfunctioning fire alarms.

Coralville’s Fire Department budget this year is $938,435. Its Police Department budget is $4.1 million.

The UI’s True said the hospital making a payment in lieu of taxes for the clinic is not surprising.

The hospital has seven other clinics in Iowa City, Coralville and North Liberty away from the hospital's main campus.  All are in rented spaces on which the owners pay property taxes, which are passed on to the  hospital through the leases, True said.

The amount paid by those clinics last year was $117,406, according to the UI.

Of the seven clinics, five are small QuickCare sites for walk-ins and two are family medicine clinics.

The Iowa River Landing clinic has 13 specialties, counting surgery, radiology services, a pharmacy, a hearing aid center, cardiac rehabilitation services and more, according to its website.

The leadership of the hospital is committed to the clinics paying taxes just as the clinics of not-for-profit hospitals do, True said. So even if hospital officials had decided on a location other than Iowa River Landing for the outpatient clinic, a PILOT agreement would have been made, he said.

“We would have determined a method and gained our board’s approval to pay an equivalent amount of tax,” he said. “That’s sort of a principle that they operate under.”

The Board of Regents office referred all questions to the UI.

By and large, medical clinics are not considered charitable in nature and therefore must pay property taxes, even those run by tax-exempt nonprofit hospitals, said Julie Roisen, the property tax division administrator for the Iowa Department of Revenue.

The UI hospitals’ clinics, however, are exempt from property taxes because they are owned by the university, which is part of the state government, Roisen said.

The UI does not pay taxes on its sports medicine facility in Iowa City, away from the hospital campus. UI spokesman Tom Moore wrote in an email that the "Sports Medicine Clinic" has not just clinic space but also research and faculty offices.

It was built on UI land and “does not occupy private commercial space within the community.”

The UI bought the land for the Iowa River Landing clinic from the city of Coralville.

The Iowa River Landing clinic is expanding into open space on its fourth and fifth floors. The UI, through the Board of Regents, also owns property immediately to the south for a potential second facility.

True said no decision has been made on whether to build another clinic.

“Many, many factors would be involved in it,” he said. “How it’d be used, what kind of clinical services … parking, taxes.”

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