Pleasanton city staff and Costco officials have agreed to terms on a tentative proposal for how to fund roadway improvements around the Johnson Drive site eyed for the warehouse membership store, a deal that is scheduled to head the City Council for review next week and final consideration at a separate meeting next month.

The proposed term sheet calls for just under one-third of the estimated $21.47 million public infrastructure pricetag to be paid for by city traffic impact fee reserves, just over one-third by a cash payment from Costco and just over one-third by a separate payment by Costco that will be reimbursed to the company by the city through a sales tax sharing agreement, according to the staff report posted on the city website Tuesday morning.

The financing proposal will be presented to the City Council and the public for initial review and discussion during a special meeting next Tuesday evening (Aug. 29) at the Pleasanton Civic Center. City staff will then look for the council to give final direction on the term sheet during a special meeting Sept. 18.

The two-step process, with a nearly three-week gap for further public review, reinforces the city's goal of "trying to provide ample opportunity to weigh in on the details," City Manager Nelson Fialho said in an interview this week.

"Staff is recommending using a sales tax sharing agreement since it does not reduce the amount of other funds available for city projects and obligations, does not require a pledge of the city's General Fund to debt service payments, and would cost approximately the same as it would for the city to provide an inter-fund loan," city finance director Tina Olson wrote in the staff report.

Some critics argue the financing proposal would provide unnecessary local government subsidies to a multi-billion-dollar corporation to pay for roadway improvements to offset negative traffic impacts the Costco store would cause.

“Even if you subscribe to the idea that the city should subsidize development (which I don’t), the risk/reward structure of this deal is way out of whack,” former Pleasanton City Councilman Matt Sullivan said Tuesday, adding that the city bears “most of the risk” while “by far the biggest rewards go to Costco.”

If endorsed by the council next month, the infrastructure financing agreement would be incorporated into the overall Johnson Drive Economic Development Zone (EDZ) proposal that is expected to go through public hearings this fall.

Johnson Drive EDZ

The EDZ plan will detail rules for how redevelopment would occur at the 40-acre site primarily along Johnson Drive just north of the Stoneridge Drive exit to Interstate 680.

It consists of 12 parcels at 7106 to 7315 Johnson Drive and 7035 and 7080 Commerce Circle with a mix of land-uses. A key segment is a 20-acre-plus vacant plot that once housed the now-demolished Clorox research center. Other areas still in use include sites for AT&T and FedEx.

The EDZ concept in part aims to transform the area "into a thriving commercial corridor that capitalizes on its location at the intersection of the I-580 and I-680 freeways," community development director Gerry Beaudin wrote in the staff report.

Other key goals, Beaudin said, include "creating opportunities for new land-uses and services in the community to broaden the city's economic base, thereby generating new tax revenue to support city services and programs, and streamlining the development review process for new land-uses through completed California Environmental Quality Act (CEQA) documentation and in most cases staff-level review processes."

Costco has been in talks with Nearon Enterprises, the primary landowner in the EDZ area, and the wholesale retail giant is expected to purchase a parcel along Johnson Drive though that hasn't been finalized, according to Beaudin. Hotels and other retail spaces of various sizes have also been proposed for the area.

The council endorsed the EDZ concept in April 2014 with environmental analysis and public vetting of the final proposal to follow, but efforts slowed last year after a citizens group successfully put an initiative measure on the ballot seeking to prohibit retail uses of 50,000 square feet or more from operating in the EDZ.

The initiative measure, which came about soon after Costco became linked to the Johnson Drive site, failed at the polls last November with about 63% of Pleasanton voters opposing it -- clearing the way for EDZ consideration to proceed.

City officials wanted to have the infrastructure financing component settled before moving forward with EDZ consideration, and they've been negotiating with Costco for months on a proposal to bring to the council, ultimately confirming the tentative term sheet last week, Fialho said.

Paying for road improvements

City staff estimates the EDZ would require key transportation improvements in the corridor, comprised of $19.97 million in design and construction costs and $1.5 million for right-of-way acquisitions.

The roadwork is needed "to ensure levels of service, vehicle queue spillback and freeway ramp operations would continue to operate at acceptable levels with implementation of the JDEDZ," Beaudin said.

Under the financing proposal, about 30% of the design and construction costs -- $6.4 million -- will be paid by the city from its traffic impact fee (TIF) reserves, money collected from developers over the years to offset their impacts on the city's transportation system.

Those reserve funds, which can only be spent on projects identified in the General Plan, will go toward the Stoneridge Drive and I-680 northbound onramp improvements.

In addition to the freeway onramp, the other roadway projects include Johnson Drive widening, improvements at the Johnson-Stoneridge intersection and new traffic signals at Johnson and Commerce and Johnson and Owens Drive (north).

To help fund those other projects, half the cost -- almost $6.8 million -- will be paid for by Costco, a total that includes the company's required TIF contribution of $3.7 million but is otherwise on top of its development fee package.

Other development fees would include categories such as housing, school impacts, park dedication, regional transportation, building and processing, and other local agencies, Fialho said.

In opposing the proposal, Sullivan argued, “TIF are paid by project developers to mitigate offsite impacts to traffic resulting from their project. Onsite infrastructure is always paid by the developer with a cash contribution. Using the TIF as proposed is in essence stealing from the taxpayers to fund the project.”

The final funding portion, again just under $6.8 million, will also be covered by Costco, money the city will need to repay via a 60-40 sales tax sharing agreement. That means 60% of the sales tax generated by the new Costco would go to the city's general fund and 40% will be paid by the city to Costco to repay the infrastructure advance.

The balance due to Costco will be subject to 1.5% annual interest, and the sales tax sharing agreement will remain in place until the balance is paid off with a maximum period of 25 years, under the proposal.

The tax-sharing agreement is recommended by city staff for approval, but the City Council will have the final say. The other financing options reviewed by the city to cover that final $6.8 million portion were borrowing internally from city-controlled funds or taking out a conventional bank loan.

Any other developer who builds on the Johnson Drive EDZ in the future will need to pay their proportional share of these infrastructure costs back to the city, and the city plans to use those funds to pay down their debt to Costco.

The city currently estimates $8.4 million in costs to recover for other developers' pro-rata share, and Olson said he anticipates staff asking the council to set that future EDZ transportation fee later this year.

As for the estimated $1.5 million in right-of-way costs, Costco will donate any of its required right-of-way, the city will seek other property owners to donate theirs too, and then any leftover acquisition costs will be split between the city and Costco, with Costco's portion paid back to the company by increasing the city's tax-share payback amount -- though that portion wouldn't be charged interest.

Tax-sharing agreement

The financing proposal would be a new strategy for Pleasanton but has been used elsewhere in California, according to Olson.

"While the city of Pleasanton has not used tax revenues generated by a development to help fund transportation improvements required for that development, this practice has been utilized in other cities," she said.

She cited projects by Livermore, Ukiah, Manteca and former redevelopment agencies. Tax-sharing agreements are also common strategies for cities to entice large tax-generating businesses, including by Dublin, Mountain View and Manteca, according to Olson.

As for the proposed tax-sharing agreement, if paid out over the full 25-year period, the city would expect to pay Costco about $8.2 million in sales tax allocations. However, the city anticipates being able to repay the loan by 2035-36, which would see Costco receive about $7.8 million to cover principal and interest over the 17 years, assuming Costco opens in the 2019-20 fiscal year.

In all, according to Olson, the Costco is currently estimated to generate approximately $33.7 million in new sales tax revenue for the city over its first 25 years -- before the tax-sharing agreement repayment.

The city estimates the entire EDZ area at full build-out would generate $84.2 million in new tax revenues for the city, representing 2.1-2.3% of the city's general fund expenditures, according to Olson.

Council policy decisions

Fialho and city staff will present the tentative financing terms to the council during a special public meeting at 6:30 p.m. next Tuesday in the council chamber. City officials don't plan to ask for final approval at that meeting and will solicit public feedback for nearly three more weeks after.

And when the council convenes next week, it will do so without Mayor Jerry Thorne, who recused himself from all EDZ and Costco related decisions starting last year after revelations his retirement managed stock funds included Costco stock in its portfolio.

Thorne said Tuesday he would maintain that position despite no longer owning Costco stock and advice from the city attorney and Fair Political Practices Commission that he could legally participate.

He added, “63% of voters indicated they want the conversation about the Johnson Drive Economic Development Zone to continue, and it’s important that the merits of the project be evaluated objectively and independent of any perceived conflicts. And so, I stand recused.”

The financing proposal is scheduled to return to the council Sept. 18, at which time city staff will ask for final policy direction from council members about whether to finalize the terms and incorporate the deal into the final Johnson Drive EDZ proposal.

The Johnson Drive EDZ package will then head to the Pleasanton Planning Commission and Pleasanton Economic Vitality Committee for review in the coming months, with the goal of presenting it to the City Council by the end of the year, according to Fialho.

Costco, estimated to account for 78% of new daily vehicle trips generated by the first phase of EDZ development and 44% of the traffic at full build-out at the site, would not be able to open until all transportation mitigation projects are completed.

However, city staff will also ask the council for policy direction next Tuesday about whether hotels proposed for the site -- up to 231 rooms -- could begin operating before the traffic improvements are finished. Officials estimate those hotel rooms would account for roughly 12% of the daily vehicle trips.

The remaining vacant land is anticipated to house yet-unidentified retail uses, while existing land-uses in the EDZ area would be permitted to continue as is and protected by grandfathering provisions.

Editor's note: This story has been updated to delineate comments from the two city officials cited as authors of the joint staff report, Olson and Beaudin. The Weekly regrets the confusion.