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Desperate Towns

Downtown Buffalo is desperate. The city, once among the largest and most economically powerful in the nation, has been in a 50-year decline. Part of the infamous Rust Belt, Buffalo's steel mills and grain elevators have lain dormant for years. It lost its place as an agricultural distribution hub, and its plastics industry faltered. Things got so bad this spring, Buffalo made headlines when municipal employees were forced to bring their own toilet paper to work as the city wrestled with a $100 million budget gap.

In years past, cities such as Buffalo scoured the globe looking for new plants — hoping to attract foreign investors with a smorgasbord of tax breaks and financial enticements. But no amount of incentives could reverse the course of manufacturing jobs to low-wage regions of the U.S. and, lately, to developing economies of Asia.

Now, increasingly, economically stressed cities and towns, such as Buffalo, are looking to retail and mixed-use developments to rebuild decimated downtown areas and provide desperately needed employment, even at wages that are a fraction of those paid by the lost manufacturers.

How desperate is Buffalo? When economic development officials heard Bass Pro Shops was expanding, they mounted a three-year campaign, and even enlisted the aid of New York Governor George Pataki, to land the deal for a 250,000-square-foot store. Buffalo assembled $66 million in state and federal money in loans and grants to help fund a $123 million project that will anchor a brownfields redevelopment known as the Inner Harbor project. The venture also will feature a hotel with more than 100 rooms, a restaurant and a Great Lakes museum — all on the site where the Erie Canal opened in 1825.

“We need to bring new people, new money and new ideas from outside our region, and nobody can do it better than Bass Pro,” gushed Mayor Anthony Masiello at a November celebration announcing that the city had reeled in Bass Pro. Pataki said he was proud to be a part of the group that made this “major catch” a reality.

A Big Fish

Overall, Buffalo put together a package including $31 million in federal funds for infrastructure support, $21 million from the state in the form of tax credits and another $14 million in tax increment financing from the city and Erie County to pay for demolition of the Memorial Auditorium and site preparation. In return, Bass Pro is expected to create 400 jobs. When up and running in 2007, the store, restaurant and hotel are expected to generate a total of $16.6 million in tax revenue per year between sales, property and payroll taxes.

Buffalo's largess — funding half of a private development — may be extreme, but across the nation, cities and towns that are desperate for any economic activity are targeting retail developers. That's a change from the late 1990s when cities focused on trying to get new residential projects built. Officials have realized expanding housing isn't effective unless you have services nearby.

“Cities are realizing that retail is not the last piece of the puzzle,” says Michael Beyard, senior resident fellow for retail and entertainment at the Urban Land Institute. “It's hard to convince people to come into your neighborhood if they don't have that.” The added benefit for cities is that retail provides sales and property tax revenue and requires fewer services. It also helps in wooing office jobs.

“If you have a good strong retail base, it's easier to attract other businesses,” says Bill Shelton, principal at The Buxton Co., a consulting firm that has worked with 130 communities in 28 states to help develop incentive packages.

For example, the Easton Town Center in Columbus, Ohio, spurred development of another 2.5 million square feet of other retail and three hotels nearby. Easton and the 1,200 acres of surrounding growth now generate $80 million in property taxes, up from just $5 million 10 years ago.

Cities have stopped viewing incentives as corporate handouts and are instead viewing them as investments.

“TIFs and abatements are for a finite amount of time,” Beyard says. “The assumption is that the project is going to be sustainable beyond the life of the incentives. There is also the assumption that there is going to be spin-off development around it; that these are anchors which will bring in other tax generators that would not have come otherwise.”

Budget Blues

That should be welcome news for struggling cities across the country. Two-thirds of all city finance directors say their communities will be unable to meet financial needs this year, according to a report by the National League of Cities.

“A lot of cities and counties are facing economically tough times,” says Martin Harris, director of the Center for Sustainable Communities. “There has been small-to-moderate relief at the peak of the budget crisis, but many towns are still affected.”

The recession and drastic cuts to state funding in President Bush's budgets have left municipalities with a choice: Either find new tax revenue to fill the budget gap, or cut services. A number of cities will stop at nothing to get deals done. Some even offer forgivable and interest-free loans. Others erect highways and sewer lines or otherwise improve infrastructure. Still others cite eminent domain in grabbing property from residents or older businesses and giving it to retail developers (see sidebar on page 31).

“We are willing to go ahead and support a developer who's going to bring jobs that will contribute to city coffers,” says James Schimmer, economic development administrator for Columbus, Ohio. “That's why we would be an investment partner in a private sector deal.”

The investments seem to be paying off. According to a 2004 report from the National League of Cities, 83 percent of financial officers in cities that predominantly relied on income tax as a revenue generator had a negative assessment of their city's financial conditions compared with just 52 percent of financial officers in cities that rely on sales taxes.

Free Money

Towns that really want to get deals done are going much further. Detroit is so desperate that it is prepared to hand out free money through “forgivable” loans. But even that's not enough. So far, it's only been able to lure a 10,000-square-foot Athlete's Foot store downtown through a $200,000 loan. It wants to snag bigger fish.

“We are very aggressive as far as making deals, but we haven't had any other luck with national retailers,” says Brian Holdwick, vice president of the Detroit Business Development.

Ultimately, no amount of incentives will bring retailers to locations where the demographics don't justify development. Often, a city has to show a commitment to an area it wants to develop commercially. “One way cities can subsidize retail is by attaching development to large civic projects,” says Beyard.

It took a sports arena and a $600 million convention center to turn around Washington, D.C.'s 7th Avenue. That commitment transformed the area from blight to a thriving neighborhood with an urban mixed-use vertical mall known as Gallery Place. In addition, the city passed ordinances allowing developers to rebuild old buildings as long as they retain the historic facades.

“About 10 years ago, you would have been afraid to walk those streets at 10 p.m., but nowadays they're packed,” says Beyard. “It's due almost exclusively to the development policies of the city.”

Perhaps one reason Detroit has been less successful is that it doesn't have such deep pockets. Destination retailers like Bass Pro or Cabela's routinely expect $30 million in incentives to bring a store to town, says Buxton's Shelton.

The Old South

Birmingham, Ala., once stood as the industrial capital of the South. It produced the bulk of the Confederate army's metal and had a rich steel industry well into the 20th century. But now those plants sit dormant and the city is a shell of its former self. In an attempt to reverse its fortunes, the town offered Wal-Mart $10 million to get a 230,000-square-foot Supercenter built at a dark Kmart site. It also used its power of condemnation to snatch 30 more needed parcels to make way for the Supercenter.

The project worked. Land prices in the area quadrupled and new stores are popping up in the surrounding areas. Birmingham is now prepared to pay another $10 million to bring in another Supercenter and Sam's Club on the site of the Eastwood Mall — the first enclosed mall in the South, which now sits nearly empty.

Wal-Mart has preyed on the desires of some towns to bring in new retail to the tune of $1 billion in local and state subsidies, according to union advocacy group Good Jobs First, which opposes financial assistance to the retail giant. The average subsidy is $4 million.

The City of Long Beach, Calif. — yearning to replace the shuttered Long Beach Mall — dangled $17 million in incentives to lure Developers Diversified Realty Corp. to redevelop the site as City Place, covering nearly one-fourth of the project's $75 million cost. But perhaps more importantly, Long Beach essentially gave DDR free land — and helped pave way for the project by reestablishing the city's street grid through the old enclosed mall site.

The free land deal works this way: Long Beach sold an adjacent site to DDR for $5 million, but then turned around and reinvested the money right back into City Place to cover infrastructure improvements. The agency reconfigured and repaired an old municipal garage into a parking deck for the project through bonds. The bonds are paid back through parking garage revenues, with any shortfall coming from the city's general fund. The shortfall amounts to about $1 million a year, says Long Beach redevelopment administrator Otis Ginoza.

An additional $5 million was taken from the city's street improvement funds for larger sidewalks and to reconstruct the old street grid for a six-block area before it was displaced by the enclosed mall. “The slow-moving traffic and big sidewalks give it a feel of an old downtown,” says Ginoza. “It's not a real downtown, but a modern shopping plaza.” City Place, stretches six city blocks with a Wal-Mart, 341 residential units and 450,000 square feet of retail.

On a smaller scale, Sarasota, Fla., gave developer Casto Lifestyle Properties $3 million in incentives to build 95 condominiums and a Whole Foods supermarket downtown

Sarasota donated land originally intended for parking. In exchange, Casto donated the project's air rights for 300 parking spaces above the retail development. The city also paid for the project's impact and building fees, and helped pay for a $250,000 retention vault through TIF financing.

“The incentives enabled that project to happen,” says Hutchens. “We could not afford to lease to Whole Foods at the rate they agreed to pay.”

The incentives will get greater over time. The result of this trend will not only be the remaking of downtowns. But it will change the retail landscape as well, steering business away from suburbs and back toward cities.

“The big change among cities has been attitude,” Beyard says. “I think this is almost as important as the introduction of the super regional mall. We are going to see some big changes in the way cities and retailers work together in the next 50 years.”

Seize and Destroy

Eminent domain laws being tested in the Supreme Court could set a precedent for future retail projects.

The most contentious tool available to municipalities is the use of eminent domain laws to seize property for private development. With few greenfield sites available, this technique has gained ground.

New York City, for example, wants to tear down apartments housing more than 1,000 residents in Brooklyn to make way for Forest City Ratner's Atlantic Yards mixed-use retail, arena and residential project.

That's far from the only example. The village of Port Chester, N.Y., leveled a marina and lobster shop, other small businesses and two apartment buildings to build a Costco-anchored shopping center. And Hurst, Texas, property owners were forced to give up their homes so NorthEast Mall could expand to accommodate the addition of a Nordstrom department store.

The problem for cities and developers is that eminent domain actions usually ends up in court. In March, the Supreme Court heard arguments for and against a potentially precedent-setting case.

In Kelo v. City of New London, a group of private landowners in Connecticut are suing the city for using eminent domain to take their property and give it to another private owner for redevelopment. The city hopes a luxury hotel, condominiums, retail and a riverside park will revive a decaying neighborhood.

Depending on what the court decides — probably by summer — developers and municipalities may or may not be able to continue to use eminent domain for urban development.

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