GILROY
– The city is asking developers of the two largest big-box
retail complexes in Gilroy to guarantee that their stores will
generate enough sales tax to offset incentive packages worth $10.5
million.
If developers of the retail centers at U.S. 101 and Highway 152
do not guarantee the windfall, the city will refuse permits for the
stores. The city’s approach is bold given its tenuous grasp on the
retail developers who, before getting their projects approved,
never signed on the dotted line to guarantee that their retail
centers would generate a certain level of sales tax revenue.
GILROY – The city is asking developers of the two largest big-box retail complexes in Gilroy to guarantee that their stores will generate enough sales tax to offset incentive packages worth $10.5 million.
If developers of the retail centers at U.S. 101 and Highway 152 do not guarantee the windfall, the city will refuse permits for the stores. The city’s approach is bold given its tenuous grasp on the retail developers who, before getting their projects approved, never signed on the dotted line to guarantee that their retail centers would generate a certain level of sales tax revenue.
“The developers know we have a fiduciary responsibility to the citizens of Gilroy,” said John Greenhut, a Community Development director for the city. “We’ve been in touch (with the developers) regularly. We’ve discussed the issue.”
However, Newman Development Group Managing Partner George Akel said he had not seen – until it was faxed to him by a Dispatch reporter – the city’s latest draft document outlining four methods of determining how much sales tax each store must generate. Newman Development Group is building the retail center where Best Buy, Costco and Lowe’s stand now.
Akel reacted cautiously to the city’s plan and declined to respond to questions about whether or not he felt the plan contradicted anything the two parties signed on to within their original contract.
“We plan to adhere to the language of the original contract, and my hope is that’s what the city plans to do, too,” Akel said.
Regency Realty Group, which is developing the retail center where Target is now, could not be reached before deadline.
Before the city approved the Newman and Regency developments, City Council made the firms sign a document stating, among other things, that retail space would only be leased on five-year terms.
The five-year time frame ensured that the developers would lease space to successful retail outfits. This was important because with more retail success would come more sales tax, a crucial revenue source for the city since it is used to fund programs such as the new paramedic service. Roughly half of the city’s general fund is comprised of sales tax revenue.
For the city, the approach is the next best thing to the more politically popular sales tax deals it made with stores like The Home Depot, Costco and Lowe’s.
In those deals, known as economic incentive packages, the city waived costly development impact fees as long as stores guaranteed a certain amount of sales tax revenue over a three-year period.
“We feel the contracts (with individual stores) give us a clear and easy way to deal with companies. We track their sales tax revenue for three years, and they are either over or under,” City Administrator Jay Baksa said.
If stores do not generate their required amount of sales tax, they must pay the city the difference.
In the case of the big-box projects, developers would not enter into such agreements since estimating revenue for an entire retail center is more complex than estimating revenue for one store. Essentially, the developers could not guarantee that every store within a large complex could generate a certain amount of revenue.
“We’ve got a very complex problem with the implementation of the type of agreements we have now. We’re trying to find mechanisms that will help us judge whether the developers are meeting the intent of the agreement we have with them.”
The city has outlined four methods it will choose from to determine if stores are meeting their sales tax revenue goals. Which method is used for a particular store will have to be agreed upon by city staff and the developer.
The methods are:
• Setting a requirement that the business generate $5 million in sales ($50,000 in city sales tax revenue) annually
• Setting a requirement that enough sales tax be generated in three years to pay back a portion of the waived impact fees
• Setting a uniform sales tax quota per square foot, based on the impact fee credit for the overall project
• Setting a uniform sales tax quota per square foot, based on the estimated annual sales tax
In the event the two parties cannot reach accord on which method should be used for a particular store, the matter must be appealed to City Council for a final decision.
On Monday, Baksa brought the four different methods to City Council so they could become more familiar with them. He says the methods keep the intent of the original developer’s agreements, but Baksa told Council to expect that they would be hearing at least a few appeals over the course of the next six to 12 months.
“The whole idea is we’re not going to give an incentive if it’s not warranted,” Mayor Al Pinheiro said. “Before a developer goes and signs a lease with a company, they better have a good idea if that company will generate enough sales tax.”
Akel said he was not familiar enough with the four methods to comment in detail. However, he said he did not agree with the $5.1 million figure the city says it has credited the Newman development for impact fees.
The figure is based on the overall project’s impact fees, but does not take into account the relocation of Wal-Mart. If Wal-Mart moves from its existing Arroyo Circle location so it can open a super-sized version in the Newman Development, then the city will make the retail giant pay its impact fees outright.
In other words, the Newman impact fee credit would be $5.1 million minus whatever Wal-Mart pays.
“The city can’t base its agreement a theoretical maximum,” Akel said.
