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What City Hall Will Do For Retail

Every day, week after week, month after month, city governments throughout the United States are making deals with developers and retailers to encourage them to locate in their towns. Sometimes the deals involve direct subsidies. More commonly, tax breaks and infrastructure improvements are the coin of exchange. Sometimes, it is simply a matter of a city's economic development department putting pressure on other city agencies and the city council to overlook zoning conflicts or to act quickly to get the project approved.

The reasons are not difficult to discern. Retail development creates jobs, particularly for entry-level workers and those without college degrees, and, most importantly, it generates sales tax revenues. With many states having reduced property tax rates, sales tax has become the biggest single source of revenue for many cities.

While economists debate whether it makes sense for municipal governments to grant concessions in order to attract retailers, cities continue doing it. And it's easy to see why.

"I can't imagine cities have any choice but to encourage competitive retail," says Bob Bartlett, a principal with Bartlett Joseph Associates, a retail consulting firm in San Rafael, Calif. "The issue is, if you don't have them come in, the city next door will, and they'll get the money from the sales taxes. You have to get them, even if you have to give away the store to get the store, so to speak."

Not everyone puts it so bluntly, but in interviews with officials from various communities, it seems clear that the city not willing to give up something to land retail development is very rare. On the other hand, few appear willing simply to roll over and play dead, allowing retail developers a free hand in the city's growth.

"There's almost always a gap between what it costs to develop a retail project in the city and what cost makes sense," says Susan Powers, executive director of the Denver Redevelopment Agency. "When a developer comes in, he always says the gap is 100 percent. Our job is to sit down and come up with a more reasonable number."

Big projects get big bucks The most obvious assistance cities offer retail is the joint development of major retail projects. The assistance can take various forms, from using its powers of eminent domain to gain control of a site to deferment of taxes to construction of parking garages.

Bart Bush, executive director of Lakefront Development Corp., a quasi public corporation with responsibility for development of an 800-acre former industrial zone in Syracuse, N.Y., says the city was instrumental in the Syracuse-based Pyramid Cos.' development of the 1.5 million sq. ft. Carousel Center in the Lakefront area. It also is playing a major role in the current expansion of the project to 3.2 million sq. ft.

Among the tactics used by the city's Industrial Redevelopment Agency to reduce the developer's costs on one or both phases was the acceptance of payments in lieu of taxes. The money was used to fund improvements to the site and its surroundings, including creation of parks, paths and roadways.

Probably the most common form of payments in lieu of taxes, says Pamela Duffy, an attorney with Coblentz, Patch, Duffy & Bass in San Francisco, is tax increment financing. In this arrangement, a developer pays property taxes only on the value of the unimproved site, even after a project is completed. The additional amount that would ordinarily be paid in taxes due to the property's increased value from development, redevelopment or renovation is instead used to pay for infrastructure and public improvements that, theoretically at least, increase the property's value even more.

For example, the new parks and roads around Carousel Center presumably attract more customers to the project than if the surroundings were left as derelict land. In San Francisco, incremental financing from the upcoming Sony Metreon entertainment complex will go toward paying off the cost of performing and visual arts centers, a children's play and educational complex, a public park, and other amenities designed to attract people to the area around the project site.

In Syracuse, says Bush, the redevelopment agency also excused Pyramid from having to pay a mortgage recording fee, which would have been equivalent to 1 percent of the project's total mortgage value, and the city gave the developer a sales-tax rebate on construction materials purchased for the project. In addition, the city exercised its power of eminent domain to condemn 56 acres of oil tanks, enabling Pyramid to acquire the land.

The city of Portland, Ore., working through the Portland Development Commission, also used the power of eminent domain to gain control of three and three-fourths blocks in downtown Portland for development of a mixed office and retail project. PDC then bought the land and, after an initial proposal by Cadillac-Fairview was rejected by the City Council, issued a request for proposals.

Ultimately, it selected The Rouse Co., Columbia, Md., to develop the site. Rouse completed the first phase of Pioneer Place, a three-level retail complex anchored by Saks Fifth Avenue and a separate office tower, in the late 1980s. It is scheduled to begin building the second phase, a five-level entertainment and retail complex, this spring.

According to former PDC development director Larry Dully, now a private developer with his own firm, the Dully Co., the city of Portland bought the land based on its original zoning for high-rise office use. It then sold the property to Rouse at a significantly discounted rate appropriate to the use of one block for retail. The city also paid to demolish all existing structures, saving the developer more money.

The gift of parking In addition to writing down the cost of the land, PDC funded development of a city-owned parking garage on the remaining three-fourths of a block. The city earlier had built three parking garages in other downtown locations specifically to serve retail. One, Dully reports, was built as part of an effort to persuade Nordstrom to build a downtown department store. The tactic worked, he adds.

Many cities have found development of parking garages an important factor in attracting new retail. "Downtown retail has a competitive disadvantage because it does not have adjacent free parking," explains Cheryl Twete, development manager for PDC. "Cities usually can't provide free parking, but at least we can make sure it's available."

In Portland, as in many other cities, merchants underwrite customer parking through a validation program. The cost to merchants, says Twete, is no greater than the portion of CAM charges and rent they would pay toward parking at an enclosed mall.

A city does not necessarily have to build a full parking structure to attract retailers. To land the upscale Draeger's Marketplace for its downtown, the city of San Mateo, Calif., turned a two-way street into a one-way street and used the extra lane in combination with the original parking lane to create diagonal parking. According to Barbara Kautz, director of community development, the strategy produced nearly three times as many parking spaces as before.

Richard Draeger, vice president of operations for the Menlo Park, Calif.-based supermarket chain, says additional parking was crucial to making the location work. The store has underground parking for customers, but the site was too small to accommodate employee parking. The city allows Draeger's to reserve street spaces for its own use.

In Denver, reports Powers of the Denver Redevelopment Agency, the city is building a parking garage as part of the Pavilions project now in construction downtown. Overall, she says, the city will contribute $24 million toward the development, including paying for the garage, public art, offsite improvements and a partial land write-down.

Unlike Portland, Denver will not own the parking facility. Instead, says Powers, the city will get a 20 percent equity position in the overall development. Although the city's investment represents only 12 percent of project cost, she says the higher level of equity is justified by additional benefits the developer receives from public participation.

These include tax benefits on investment that the city is not entitled to and lower lending costs due to the issuance of tax-exempt public bonds for construction of the parking garage. In addition, she says, the lender rather than the city has the first lien against the property, putting the city at greater risk of loss should the project fail.

Beyond individual projects City contributions need not be project-specific to attract retailers. Sue Atkins, the city liaison for Lebanon, Tenn., says the city has paved the way, literally, for new retailers to come into town by building infrastructure in advance of development.

"We have everything in place along Interstate 40 to accommodate contemporary retailers. They can come in and just start building," she says, noting that Prime Retail is just completing an outlet mall in the new development area.

Dully notes that Portland spent vast amounts of money to upgrade the downtown in general, building a light rail system, creating a public square in the heart of the retail district, converting a riverfront highway to a park running the entire length of downtown, installing public art and adding attractive street furniture. In addition, the city took steps to create a solid customer base by encouraging development of downtown office and residential projects and adding a variety of cultural and entertainment facilities.

Both Atkins and Dully point out the importance of planning in general in attracting retail. Neither Lebanon nor Portland waited for developers to step forward. They took the initiative. And a major part of that initiative entailed forming a clear vision of what the city wanted to accomplish.

Portland, for example, started working in the early 1970s to create the kind of downtown its residents wanted. According to Twete, everything that has happened can be traced back to the General Plan of 1972, which clearly identified both short-term and long-term goals. One of the major goals was to retain downtown's role as the employment, cultural and retail center of the entire metropolitan area.

In line with that, says Twete, was the concept of an area that was as lively at night and on weekends as during the business day. "One of the reasons downtown Portland works so well for retail is that it's a 24-hour environment. Retailers aren't confined to 9-to-5 to make money," she says.

Helping retailers and developers wend their way through a city's planning and approval process is another way of offering help, notes San Mateo's Kautz. "We work closely with the Chamber of Commerce and Downtown Association to help projects get going with a minimum of red tape," she says. "We explain the city's process, we help them communicate with neighborhood groups, we try to prevent roadblocks."

One thing San Mateo will not do, she adds, is give sales-tax breaks to land new retailers because it raises the hackles of existing retailers. "They would want to know why we were giving breaks to a store that was going to open up and take business away from them," she says.

Little things mean a lot Some of the most effective ways to help retailers, according to several commentators, are also some of the simplest and least expensive.

"I think [New York] Mayor Giuliani's crackdown on incivility will do more for retailing than any kind of subsidy," declares Nina Gruen, a principal with Gruen & Gruen, an economic consulting firm in San Francisco. "Clean streets, a sense of safety, polite behavior - that kind of activity can be every bit as important, even more important, in supporting retailers and retail developers."

Many communities have developed facade-improvement programs, in which the city encourages merchants to upgrade their store fronts. Often funded with federal Community Development Block Grants, programs achieve a general sprucing-up of a retail district at minimal cost. Kautz reports San Mateo offers either landlords or tenants dollar-for-dollar matching grants toward store-front improvement, with a maximum donation from the city of $35,000.

Since the program began in 1988, the city has disbursed $1.4 million for 141 projects affecting 256 businesses, according to program manager Rob Kalkbrenner, who says the city also offers free design services covering architecture, signage and graphics. He reports recipients have gone beyond the matching grant total and spent $7.1 million of their own money.

Jim Harrigan, a partner in Los Angeles-based Economic Development Systems, notes that cities often overlook the value of simply pointing out a market's potential to retailers. A former real estate broker, Harrigan and partner Pat Hurst have developed retail recruitment programs for 22 California communities, including Pasadena, Long Beach and Culver City.

Harrigan describes his firm as "a dating service" for cities and retailers. "Retailers are looking for sites. Cities are looking for revitalization. We bring them together," he says.

Good demographics are the best gift a city can offer a retailer and are of far greater value than infrastructure improvements, he asserts. "People don't come downtown for streetscape. They come for entertainment, dining or shopping. Streetscape improvement is almost superfluous," he says.

Ann Draper, director of economic development for Fremont, Calif., reports her department retained a team of retail brokers from the Oakland office of Chicago-based Grubb & Ellis Co. to recruit both chain and independent restaurateurs to meet the needs of a changing populace.

"People still see Fremont as a small, lower-middle-class town. We're actually the fourth largest city in the [San Francisco] Bay Area. Our median income is above $60,000 and we have a very large base of high-tech employees, but we get overlooked because people don't recognize our market's potential," she says.

Draper's department created a program known as "Opportunity Fremont," which is essentially a multiple-listing service mailed out to about 300 local retail brokers. "We list every space, large and small, that is available in the city along with size, asking rents, contact person and information on neighboring tenants," she says.

Her department also holds monthly meetings with retail property owners, managers and leasing agents to educate them on city regulations and procedures that affect the running of their facilities. Topics include everything from zoning laws to sign-posting regulations to rules on setting up a lighted Christmas tree.

"It's easy to violate the law if you don't know what the regulations are. This helps everything run smoothly," Draper says, adding that it also acquaints private sector representatives with city officials and demonstrates the city and the property owner share the same goals. "The better a business does, the better off the city is."

Retailers, of course, also are helped by the presence of other retailers, and having the right mix creates the synergy necessary to produce good sales. In cities as opposed to malls, says Harrigan, the right mix consists of approximately 25 percent national chains, 25 percent regional chains and 50 percent independents.

"People always look at the name anchor as the key factor in a successful retail area, but if you don't have a sizable number of unique stores and restaurants, you're not going to have the same kind of draw and both the chains and mom-and-pops are going to suffer," he says.

Gruen says the biggest draws are not necessarily the most obvious. In a study her firm did for Lodi, Calif., analysts discovered that the retailers that drew the most people and drew from the widest market were a Christian bookstore and an independent nutrition store. Most cities, she says, overlook the strength of these types of tenants, yet taking simple steps to help them remain in business can bolster the retail market in general.

Through extensive public input, council support and a will by the citizens of Reno, Nev., to see positive change take place that focuses on the needs of the community first, the momentum toward realizing a "sense of city" for Reno has begun ... at last.

* 1983. The city of Reno approves a redevelopment plan for the downtown core designed to improve outdoor pedestrian environment activities, diversify commercial and recreation opportunities, provide access to the Truckee River, and make the general area more exciting and attractive.

* 1990. The original plan is amended to allow for new and innovative "market-driven action plans."

* 1992. The 1992 Redevelopment Blueprint outlines the goals to beautify and improve the usefulness of the river, create more retail and restaurant opportunities, and create a vigorous civic center encompassing the Post Office, Pioneer Center for the Performing Arts, the Raymond I. Smith Truckee River Walk and the Wingfield Park Amphitheater.

* March 1995. A Downtown River Corridor Plan is adopted. It recommends: the encouragement of development incentives, public/private partnership agreements, street vendors and performers, and bridge rehabilitation and replacements crossing the Truckee River.

* 1996. A panel of redevelopment experts from California convene to study the Truckee River corridor in downtown Reno. The group's Action Plan includes: reauthorizing eminent domain, focusing initial efforts on the three blocks between Center Street and West Street north of the river (the target area), demolishing buildings in that area, sending RFQs to major developers and selecting a single master developer for the target area.

* September 1997. The Reno Redevelopment Agency board directs the City Staff to hire OliverMcMillan of San Diego as the master developer of the proposed entertainment-retail complex named The Riverside.

Heavy use of brick, wrought iron and other materials found in older buildings in the vicinity will help restore some of the lost character of downtown. The development team plans to break ground on the first-phase theater complex this spring. The rest of the project, to be built in three phases over the next two years, includes renovation of the historic Riverside Casino into artists' live work spaces along the river.

A master parking agreement is being finalized to provide 1,100 spaces within a two-block radius of the project, and the Reno Redevelopment Agency further commits nearly $350,000 for "plaza" improvements along the riverfront promenade to enhance the public-private space.

* December 1997. OliverMcMillan signs a lease with Regal Cinemas for a 12-screen, 50,000 sq. ft. theater complex in downtown Reno. The signed lease is a major milestone of the overall project.

To handle quality-of-life and marketing issues, an increasing number of cities, both large and small, have begun implementing business improvement districts, or BIDs, as a means of boosting retail development and sales. The functions of a BID vary from city to city - and from one district to another within a city - but the basic intent is almost always to create an entity similar to the general management team of a private shopping center.

A typical BID takes the form of a nonprofit organization with authority to levy assessments on all properties within a specified area. The revenue raised is then used to fund projects and programs designed to improve retail sales within that area. Most BIDs levy only landlords, although some levy retailers as well and a few levy only retailers.

Dan Pisark is director of the nonprofit organization that runs two BIDs in New York: the 34th Street Partnership, which governs the Herald Square area, including the Macy's flagship store and the Empire State Building; and the Grand Central Partnership, which governs the area around Grand Central Station. The organization also manages Bryant Park on 42nd Street.

According to Pisark, his organization has an annual budget of approximately $22 million. The money comes from a combination of property assessments, special events and private grants. None comes from the city.

BIDs use the money for a variety of endeavors, including security and sanitation services that supplement, but do not supplant, the existing city services.

"The city used to employ street sweepers to pick up litter and clear gutters, but they cut that service out for budgetary reasons. So we've picked up the slack," Pisark says, adding that BIDs also have planted trees, replaced city trash cans and streetlights with more distinctive fixtures, provided floodlighting for key buildings, and installed flower tubs, benches and bicycle racks.

Marketing the district to retailers and developers is a major function of Pisark's organization.

"We're members of ICSC and the National Retail Federation and go to their conferences. We also provide maps, demographics and other information to retailers who might be interested in locating here," he says.

Paul Levy, executive director of Center City District, a BID that encompasses downtown Philadelphia and surrounding neighborhoods, says his organization sets up booths at ICSC events but does not do direct recruitment.

"As a downtown business organization that does not own real estate, it's nonproductive for us to solicit retailers," he explains. What it does do is provide retailers and brokers with virtually anything it could possibly want to know about downtown Philadelphia.

"We recently had a major national entertainment retailer come in," he recounts. "We put a package in front of him and he looked at it in amazement and said, 'You've just saved me two weeks of work.'"

Center City District also maintains a regional advertising program and runs a retail security program for retailers that includes seminars on preventing shoplifting, credit card fraud and employee theft. The program includes security audits of individual stores to uncover and correct areas of vulnerability.

Cities' role in BIDs Strictly speaking, BIDs are private rather than public entities. But they generally operate at the behest of local governments and work in cooperation with municipal agencies. Although few cities provide direct funding to these organizations, they frequently provide services, information and assistance that are critical to a district's success.

According to Pisark, city government participates indirectly in virtually all his organization's activities. "None of this can be done without the cooperation of the city of New York and various city agencies," he says. "We need their approval for every physical change we make, and we have to work with them to set clear boundaries between our services and theirs."

In both New York and Philadelphia, the city collects the BID assessments from the property owners, using its authority to assure compliance. It then returns the money to the BIDs. Levy says that in Philadelphia, property owners within the BID pay a 5 percent surcharge on property taxes. He mentions that the city made a one-time contribution of $5 million for street lighting improvements.

Perhaps most importantly, cities must pass the legislation necessary for property and business owners to set up BIDs in the first place. Although the impetus for forming a district often comes from merchants or landlords, many cities have taken a proactive stance, with the local planning department, redevelopment agency or city council bearing the onus of initial organization and lining up the private sector behind the idea.

Occasionally, a city actually operates the district. This seems to happen more often with BIDs that assess retailers only. In Hayward, Calif., for example, the city's redevelopment agency both collects and disburses the assessments, according to Robert Del Gadillo, president of Newsmakers, an Oakland, Calif.-based marketing and public relations firm retained by the city to help revive downtown retail.

Newsmakers has designed a retail marketing program, using proceeds from a $100 annual fee imposed on every downtown merchant. Del Gadillo says the program has three components: a newsletter, with low-cost advertising space, to be distributed in the local daily newspaper; a regional advertising campaign to promote the downtown; and a special event intended to draw visitors from throughout the San Francisco Bay Area.

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