GILROY
– No one denies it: $10 million is a lot of dough.
In the course of the last year, the city of Gilroy has approved
that much in financial incentives for two new major east-side
shopping centers.
GILROY – No one denies it: $10 million is a lot of dough.
In the course of the last year, the city of Gilroy has approved that much in financial incentives for two new major east-side shopping centers.
The incentive deals for the two developments at U.S. 101 and state Highway 152 – Regency Centers’ Gilroy Crossing center and Newman Development Group’s Pacheco Pass center – are the city’s largest ever.
In fact, when combined, they account for roughly twice as much as the sum total of the nearly 20 incentives distributed over the previous decade since the city’s incentive program first started.
And while large, the two deals are also different from past city practice in that they don’t involve guarantees in writing that the city will get the return money it needs to pay off the incentives.
That fact has already caused dissension from City Councilmembers Charles Morales and Peter Arellano. And the potential presence of an expanded Wal-Mart in one center has upped the ante by drawing intense interest – and scalding criticism – from worker unions opposed to the big-box giant’s potential foray into the grocery business here.
Are the Regency and Newman incentives really necessary – and are they good public policy?
The answers are “yes” on both counts, according to proponents like Mayor Tom Springer and Bill Lindsteadt, who heads the city’s Economic Development Corporation. Both men have worked intimately on the shopping center deals and say the incentives are a cost of doing business that bring amenities, revenues for services and new infrastructure for the city with little real risk.
But to other observers, such as Arellano and former Councilwoman Connie Rogers, the incentives are questionable deals that do little to help areas like downtown – while potentially slowing improvements there even more.
Give A Little, Get A Lot
Ironically, Wal-Mart was the first business to receive a financial incentive from the city back in the early 1990s, when city officials, the Chamber of Commerce and business community began exploring an economic development partnership to help boost Gilroy out of the economic doldrums.
City officials said the incentives came about because the city lacked a redevelopment agency, a legal tool found in many cities that provides funding to help attract businesses through methods such as building infrastructure for their projects.
“Since the city did not have a redevelopment agency, one of the tools that came with (the effort) was the city should initiate some sort of incentive program so we would at least have some way of leveling the playing field when it went out trying to entice business or industry coming to town,” said City Administrator Jay Baksa.
The policy that resulted allows certain commercial businesses to avoid directly paying up to millions in development fees they’d otherwise pay for impacts to city streets, sewers and water systems. Instead, the city waives the fees, reimbursing itself for them with sales taxes the new businesses generate over the first three years of their existence. After the fees are paid off, additional sales tax money generated by the business goes to the city’s General Fund for services or other items at the City Council’s discretion.
Hotels can get a similar deal involving the taxes levied on overnight stays, while industrial businesses can get incentives for producing a certain amount of new jobs.
Gilroy does not use existing money for the incentives, Lindsteadt said. Since the sales tax money used to repay incentive credits comes entirely from new projects – landed with the help of the incentives – the money would not otherwise be here to be spent anyway.
“The city has never written a check” for the incentives, he said.
There have been 20 incentives issued since 1992 to businesses ranging from Home Depot to the Radiation Detection Company to the Hilton Garden Inn. So far, only one company has failed to pay back its incentive, officials say.
There aren’t specifics about how much sales tax the incentives have generated collectively, but Baksa said there’s no question the economic development and incentives have helped the city’s pocketbook.
“From a budgetary point of view, had it not been for an economic development cooperative effort with the incentive as a tool, we would not be even close to the financial stability we’re at today,” he said. “There’s just no question.”
And without the incentives, Springer and Lindsteadt say Gilroy wouldn’t have the accompanying amenities and jobs whose positive effects ripple through the community.
“You have to give a little to get a lot,” Lindsteadt said.
In the case of Regency and Newman – along with Cosco and Lowe’s stores that received their own incentives – that’s roughly $4 million in projected sales tax revenue a year for the city, hundreds of jobs and enough stores to avoid having to leave town for much of anything, Springer and Lindsteadt say.
And they say Newman and Regency are also bringing important infrastructure to the city. Each center is estimated to install at least $6 million in off-site improvements, mainly extensions of roads such as Camino Arroyo that front their developments, traffic signals and underground utilities. Both are also contributing to a $5 million pool that’s helping to cover cost of improvements to state Highway 152.
While the extended roads are necessary to serve the shopping centers because they’re being built on “virgin” land, Springer and Lindsteadt also argue they serve as important pieces of the puzzle leading toward future industrial developments such as the McCarthy business industrial park to the south.
But not everyone has been enthralled with incentives for large businesses.
Ernie Filice, who co-developed the shopping center at 10th and Chestnut that holds the PW Super grocery store – which many speculate will be hit hard by an expanded Wal-Mart – said he never got such help from the city for improvements on his project.
If a developer does make such demands – or threaten to go elsewhere – to him it’s akin to “blackmail,” he said.
“I feel if a store or entity or retailer comes to town, they should support their own business,” he said. “The community will repay them by patronizing them.
“If they want to come to town, they have to support their own costs.”
Many small businesses have “taken the risk to build … without incentives or handouts,” Arellano said at a City Council hearing.
A whole new ballgame
Without the incentives, Springer and Lindsteadt insist that the centers probably wouldn’t have come here. Both developers said they couldn’t get costs to pencil out if they had to pay development fees and infrastructure.
“What it comes down to is from a purely financial standpoint: Sooner or later it becomes infeasible for retailers to locate there given the cost of doing business,” without incentives, said Newman’s George Akel. To provide the incentives to Newman and Regency, the city had to deviate from its standard policy.
Usually, Gilroy’s incentives go to specific stores or businesses, which promise to reimburse the city for the waived fees. But in Newman and Regency’s cases, the incentives go to the overall shopping center developer and there are no guarantees the developer will be able to cover the waived impact fees.
Instead, safeguards include provisions that allow the developers to receive the credits only when they land “significant” tax-generating businesses within certain timeframes.
The lack of guarantees is a consequence of the style of project, according to Lindsteadt. Center developers can’t provide the guarantees because corporate higher-ups and investors don’t want any part of trying to control the destiny of other businesses.
He and Springer are confident that the centers will produce even more revenues than projected.
City staffers said there are no specific provisions in the agreement that force the developers to actually pass the savings and affordability gained through the incentives on to their tenants.
But Akel said his company “absolutely” passes on the savings. And to argue otherwise is bunk, Springer said.
“They can’t get tenants in here unless they can provide reasonable rates,” he said.
But the lack of tax guarantees is worrisome to others like Rogers – especially during such hard economic times. She notes the recent struggles of agencies that rely heavily on potentially volatile sales-tax revenues, such as the Valley Transportation Authority, the county’s bus and light-rail provider.
If the sales tax doesn’t pour in as expected, she and others like Councilmen Charlie Morales and Peter Arellano worry the city will be left on the hook for reimbursing its traffic impact fees – with resulting complications for needed projects in other parts of town.
“Sales tax is really in trouble right now, so the city might be putting itself in a position where it may be many years before they recoup $10 million worth,” Rogers said. “I think it will be a very long payout period.”
And not all are as confident in the ability of the surrounding cities in the local market area – mainly Hollister, Morgan Hill and Los Banos – to support two huge centers. For example, San Jose shopping can be just as close for Morgan Hill residents, Rogers noted.
“It’s hard to think we could support all these big stores,” she said. “It seems like an awful big leap all at once. Maybe we should have one center and see how they do before we build another one.”
