It's the right deal at the right time.
The Pleasanton City Council will be asked Monday evening to give a formal endorsement directing city staff to move forward with finalizing a proposed term sheet with Costco that lays out how both parties will pay for road infrastructure improvements necessary for the Johnson Drive Economic Development Zone (JDEDZ).
Still in the planning and review phase, the JDEDZ plan will outline how redevelopment can occur on 40 acres of land mostly along Johnson Drive near the I-580/I-680 interchange. Costco is eyeing a portion of vacant, Nearon Enterprises-owned land there -- which used to house Clorox's since-demolished technical center -- for its newest membership store in the East Bay.
Costco wants to be in Pleasanton, as its real estate development director told the council during a workshop on the road financing deal Aug. 29.
And many Pleasanton residents want Costco here. In addition to support offered at the recent workshop and other public and online venues, voters let their wishes be known last November by resoundingly defeating (63%) an initiative measure that sought to ban large retail stores like Costco from the JDEDZ.
Further public consideration of the JDEDZ and Costco has been essentially on hold since the election, with city administrators not wanting to move forward until solidifying how the required roadwork would be funded.
What resulted from negotiations with Costco is the best possible option available to the city once it became clear majority-landowner Nearon would not foot the bill and Costco wouldn't pay for everything when it's only part of the JDEDZ -- and no other future developer yet identified.
We urge the council to approve the proposed term sheet.
To fund the $19.97 million in estimated design and construction costs, the deal has three components.
About 30% -- $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.
No-brainer. TIF funds can only be used on projects specifically identified in the General Plan, and enhancing the northbound freeway onramp at Stoneridge Drive, a major piece of the JDEDZ roadwork, is on that list.
The second component will see Costco pay $6,785,000 in cash to the city for JDEDZ roadwork, a total that includes $3.7 million to satisfy the company's TIF requirement.
Not having the $3.7 million added to the city's TIF pot would affect funding for other future traffic projects, but investing that sum in the JDEDZ roadwork makes sense. This corridor is where Costco's impact will be felt the most, and that money is needed to complete the work.
The final component, to fund the remaining $6,785,000, is a new concept for Pleasanton but has been used by cities in California: a sales tax sharing agreement.
In the JDEDZ's case, Costco will front that money and the city will need to repay it via a 60-40 sales tax sharing agreement with 1.5% annual interest. 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.
Tax sharing here is a safe strategy for the city, and it's certainly better than the other options the city considered: borrowing internally from city-controlled funds, taking out a bank loan, or doing nothing to fulfill the funding and essentially abandon the JDEDZ at this time.
If the new Costco store experiences 3% annual sales growth, the city would expect to repay its debt to Costco in the 17th year of the agreement.
But that's far more conservative growth than a new Costco store normally experiences, according to city staff. Using those figures instead, the debt would be paid off in 15 years.
Costco is a strong retail presence and should remain so for the foreseeable future despite impact from online retailers, so somewhere in between these two timelines should be a fair estimate.
Smartly, the agreement says that if the store closes or Costco goes out of business before the city's debt is paid, the balance is forgiven. That's also the case if Costco sales under-perform in Pleasanton, with any balance remaining after 25 years being forgiven.
In reality though, the city's debt to Costco should be paid off sooner because any developer who builds in the JDEDZ (whether Nearon or other companies) would need to pay a yet-undermined fee to the city for their proportional share of the roadwork costs.
City officials have committed to using those fee payments to pay down the city's debt to Costco, so in the end, the sales tax revenue transferred to Costco in the sharing agreement should ultimately be recouped via the fee if the JDEDZ is developed as expected.
We'd like to see new developers pay their JDEDZ transportation fee as soon as possible, so the city can pay off its debt to Costco faster. Perhaps that means the fee should be due one month after application approval or before a shovel hits the ground for their project -- and not delayed until final inspection right before occupancy.
The council will discuss that fee structure later in the year. But in the short-term, the time is now to endorse the roadwork financing agreement.
With it in place, city officials will be able to advance with public vetting of the full JDEDZ plan and the Costco project. And like the many residents in town, we look forward to analyzing those plans to make sure they fulfill city guidelines and are in line with the character and vision of Pleasanton.