News

Editorial: Council should endorse JDEDZ roadwork financing deal with Costco

Special council meeting on agreement set for Monday evening

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.

Comments

4 people like this
Posted by Ndna Jnz
a resident of Mohr Park
on Sep 15, 2017 at 12:00 pm

While I realize this is an editorial, I am appalled at this newspaper's, "We urge the council to approve the proposed term sheet." The current proposal on paper for this whole finance project is not even close to being complete. There are still several "red flags" that stick out, and the financing plan for future tenants is not complete. Working out the details for those future business tenants' fee structure "later in the year" leaves a wide gap of an incomplete proposal. Urging the Council to vote "yes" and move forward on an incomplete proposal is downright premature.

Also, the results of the ballot measure for the Costco deal were greatly influenced by many misleading and downright incorrect statements from "both sides" (if I dare to even use that term.) The fact is, many Pleasanton residents just look at the project as allowing them to travel less to do their weekly or monthly Costco shopping. Understandable - if I can drive only a mile or two rather than five to Livermore, why not? Well, the "Why not" is a big piece of the puzzle here. For those that just want an easier and more convenient trip to Costco, I "urge" them to take a deeper look at how this financing deal is - at the moment - not fair to Pleasanton residents. Also, do we really expect - no matter what minor improvements are made to the 680/Stoneridge interchange - that having a Costco right at that spot will not increase traffic congestion there and further down on Stoneridge Drive? Get real.

One last point, by keeping future business tenants on the hook for paying their share of the road improvements likely means the majority - if not all - of those new businesses will be "chain" stores, as the privately owned mom and pop stores that we so much treasure in our downtown will not be able to afford those fees. Is that really what we want for Pleasanton? I have lived here for 28 years and it is definitely not what I want to see.

I have nothing against Costco. But, this twisted financial deal lasting up to 25 years for this city is a ridiculous consideration when the deal is between Costco, a large developer, and a city that really can't afford to be footing this road improvement bill.


2 people like this
Posted by Overages
a resident of Another Pleasanton neighborhood
on Sep 15, 2017 at 12:42 pm

One question, I thought I read somewhere that Costco would not be responsible for any cost overages. If that is true, would those costs be passed on to the taxpayers?
For example, if the total costs are 25mil vs 19.7, will the full 5.3 mil costs be passed on to the Pleasanton residents?



2 people like this
Posted by Sammy
a resident of Del Prado
on Sep 16, 2017 at 11:27 am

I am for Costco near by. But remember that past is not necessarily barometer of future. With online shopping getting stronger and stronger, there is a chance that sales tax collection may not be as big as it is now. Hope city strikes the deal keeping future in mind and not present.


17 people like this
Posted by Dtc
a resident of Pheasant Ridge
on Sep 16, 2017 at 12:43 pm

The way the deal is structured citizens are actually protected if Costco doesn't do well. Costco fronts the money. If revenues are below expectations or Costco leaves or folds, the balance is forgiven and we get infrastructure improvements for pennies on the dollar. To me this seems like an amazing deal. Instead of having to access municipal debt markets, which would have higher than 1.5% interest, have recourse to assets or force tax increases if unpaid, and potentially impact the city's credit rating, we have almost free financing, with no recourse against the general budget and no downside risk if things don't pan out.

And my understanding is that cost overruns would be shared 50/50 with Costco excluding the TIF-related project (which is about 1/3 of the infrastructure improvement). Again someone sharing risk with us rather than having to foot it ourselves.


2 people like this
Posted by Matt Sullivan
a resident of Stoneridge
on Sep 18, 2017 at 9:10 am

Matt Sullivan is a registered user.

Pleasanton Citizens for Responsible Growth retained Civic Economics, an expert firm in municipal and economic financial planning, to provide an independent review of various aspects of the proposed Johnson Drive Economic Development Zone. The analysis involved a review of existing documents prepared by or for the City of Pleasanton analyzing the likely economic activity and impact associated with the JDEDZ. The results of the review indicate that the proposed JDEZ financing plan presented by the city at the August 29, 2017 City Council meeting is both flawed and misleading.

Key findings of the analysis are as follows:

Costco Sales Forecasts
Both city consultants, Century Urban (conducted in 2015) and ALH (2016), overestimate likely Costco sales based on a mix of outdated data and optimistic forecasting.

Sales Tax Revenue Sharing Repayment
As a result, the city’s anticipated ability to make Sales Tax Sharing payments is in doubt, and its expectation of surplus sales tax revenues is inflated.

Other Funding Sources for JDEDZ
Of the other public funding sources for JDEDZ development, as much as $10.1 million in TIF funding is diverted from other pressing city transportation needs.

Impact on Pleasanton Retail Market
ALH understates the impact of the JDEDZ on the Pleasanton retail market by (a) overestimating the size and growth of that retail market and (b) ignoring ongoing trends in the retail industry.

The full Civic Economics report with the detailed analysis can be downloaded here:

Web Link

Daniel Houston, a Partner with Civic Economics and lead author of the study, will be presenting the findings of the report to the City Council at its meeting on September 18th.

In sum, the current JDEDZ proposal asks the City of Pleasanton to invest substantial public funds in a costly, long-term, speculative venture in a rapidly changing industry, and to do so based on erroneously optimistic forecasts of costs and benefits. The City Council and the citizens of Pleasanton must demand better information before making such a momentous investment and developing this key tract of land. The city should put this project on immediate hold until a full public review is conducted of the independent analysis to insure proper investment of public funds.

If you are concerned about this proposal, please attend the City Council meeting tonight, September 18th at 6:30 pm or send an email to the Council at citycouncil@cityofpleasantonca.gov to express your opposition.


7 people like this
Posted by Scott Hale
a resident of San Ramon
on Sep 18, 2017 at 9:28 am

Scott Hale is a registered user.

Public funds? Matt do you consider the TIF funds to be public when they public didn't pay a cent (directly) into that fund? If so, explain. Please also list, in detail, all the 'projects' the TIF fund was slated for prior to the costco/nearon 'deal'. Please also include where it was approved, and then removed, to use the TIF funds for these 'other' projects you keep referring to.

Finally, if Costco decides not to pay a cent, who will? Please explain in detail your idea that can NOT include office building space since that is exactly what was demolished and removed.

Otherwise, if built, they will come and this new Costco will be a clear success at the expense of the other 2 local Costco's; something I'm sure they are aware of and discarded.


3 people like this
Posted by Rider
a resident of Another Pleasanton neighborhood
on Sep 18, 2017 at 9:49 am

Rider is a registered user.

@Matt Sullivan

The report indicates that a more realistic 40%/60% tax sharing repayment of the $6.8M loan would leave the city with, "an unreimbursed balance of $1.1 million after 25 years." However, my understanding of the terms of the loan is Costco would forgive that balance if it was not fully repaid in 25 years with the 40%/60% tax sharing arrangement, correct?


7 people like this
Posted by justwondering
a resident of Another Pleasanton neighborhood
on Sep 18, 2017 at 10:25 am

Page 1 of the staff report, under summary, should Costco cease to operate within the City the loan terminates and at the end of 25 years the loan terminates regardless of any outstanding balance.

So even if the sales tax is 20% less than the projections, Costco still contributes a substantial amount of revenue to the general fund. (The city still gets 60% of it and Costco 40%. And nobody is talking about the increase in property taxes for the city once the land is improved.

Where's the risk to the City? I only see benefits.

BTW, in the interest of transparency, PCFSG should disclose who is funding the study. Matt Sullivan should hold himself to the same standards he asks of the city


Like this comment
Posted by Rider
a resident of Another Pleasanton neighborhood
on Sep 18, 2017 at 10:44 am

Rider is a registered user.

@justwondering

"at the end of 25 years, the loan terminates regardless of any outstanding balance" does not mean the remaining balance is forgiven. Does the city report clearly state anywhere that when the loan terminates, any remaining balance is forgiven i.e. the city does not have to repay it?

FYI: I'm not trying to defend Matt Sullivan's position. However, the city report should state the terms of the loan as unambiguously as possible so there is no misunderstanding.


10 people like this
Posted by Perry Mason
a resident of Castlewood
on Sep 18, 2017 at 10:59 am

@Rider: in real estate, the term "terminates" means exactly what it says; the agreement is extinguished, period, end of story. There is no after life when it comes to these types of agreements...unless of course your are one of the three well-known posters on this subject who like to take things out of context and fear monger.


It sure seems as if some of those who oppose this project so strongly, and feel the need to mislead people must be in for a lot of free limo rides and free gas. Doesn't make much sense otherwise.

I agree with @justwondering about injecting some transparency with this PCSFG group. By the way PCSFG is it truly growth that you oppose or the structure if the reimbursement deal? Can't have it both ways - sorry.


Sorry, but further commenting on this topic has been closed.

Couples: Drop Your Keyboard!
By Chandrama Anderson | 0 comments | 7,358 views

Scott Raty bows out as CEO of Pleasanton Chamber
By Jeb Bing | 0 comments | 235 views

 

Nominations due by Sept. 17

Pleasanton Weekly and DanvilleSanRamon.com are once again putting out a call for nominations and sponsorships for the annual Tri-Valley Heroes awards - our salute to the community members dedicated to bettering the Tri-Valley and the lives of its residents.

Nomination form