Cities are rolling out the red carpet, not to mention a few financial incentives, in their efforts to court new retail business.

Traditionally, the industrial sector is known for receiving the lion's share of economic development resources. But retail is emerging as an equally important priority among several communities.

"We know that we can no longer ignore the retail sector because it plays hand in hand with the other business sectors," says Jerry Good, vice president of development services for the Allen County Economic Development Group in Lima, Ohio. Site selection specialists for other industries are certainly paying close attention to a community's retail stock. Retail is a good indicator of an area's overall economic vitality, Good says.

A strong retail base can complement other business types and have a direct and indirect impact on fueling additional industrial and commercial projects.

"We've been able to leverage retail sales tax dollars to do other economic development projects, such as purchase land for a new industrial park," Good says. "Retail and industrial can be very interrelated because one can lead to another."

In addition, businesses discover that a strong retail sector can serve as an incentive in attracting and retaining employees, a factor that is particularly important in today's tight labor market.

Sales tax bonanza "Retail has become one of those sectors that is in the top tier of targets for economic development activities," agrees Michael LaRue, principal of Litvin/LaRue/Greenfield, a real estate consulting firm based in Itasca, Ill.

Cities frequently have their own interests at heart when it comes to strengthening the retail sector. Retail can add to a city's bottom line by bringing in additional sales tax revenue and boosting real estate taxes. New retail business also helps to revitalize underutilized areas, create new jobs, and provide a wider range of goods and services for residents.

Generating more retail sales tax dollars is one of the biggest perks. "Retail is a very important part of our economic development efforts," says Anatalio Ubalde, a community development analyst for the city of Vallejo in California. Typically, cities claim a portion of the state sales generated within their community. Vallejo sees 21% of its General Fund revenue, or about $8 million per year, come from its share of California's 7 3/8% sales tax.

Generating more sales tax dollars is one of the few options a city has to increase revenues. "Retail is one of the big ways that the city can enhance tax generation. So we're sensitive to being business friendly to retail, and we recognize that it's a big part of our local economy," Ubalde says.

A desire to increase sales tax dollars is the primary reason behind the city of Chandler's top three priorities -- retail, retail and retail. About three years ago, the Arizona community decided to improve its retail inventory and position itself as a regional destination.

Up to that point, the city of 165,000 residents had seen very little regional retail business, and property taxes just weren't doing enough to fill the city coffers. "Retail sales is what really drives the city budget, and it's crucial to lure in those outside sales tax dollars," says Garrett Newland, Chandler's economic development director.

Aggressive tactics Cities that discover the advantages of boosting their retail business are all taking a similar first step -- expanding marketing efforts. Economic development groups are doing their homework on local demographics and shopping habits, as well as assessing their own retail needs before pursuing developers. But once they have that information in hand, municipalities are being more aggressive in getting in front of retailers and developers. "They have learned that people are not rushing to cities, so instead they are going to them," LaRue says.

The Allen County Economic Development Group is one of several economic development organizations now popping up at industry trade shows such as the ICSC Spring Convention. When the Ohio agency recently decided to target new retail business, it started gathering data. In the process, it discovered that Allen County ranks second in the state with respect to retail sales per household. "We didn't realize how high it was until we ran those numbers," Good says. The demographics, household income and spending in Allen County combine to create an attractive customer profile, and now the Economic Development Group is focusing on getting those numbers out to retailers.

Cities are discovering that it pays to be aggressive. The city of Chicago launched its Retail Chicago Program in 1994 after realizing that it needed to "stop the bleed" of retail sales dollars flowing out of the city, says Frances Spencer, SCSM/SCMD, director of the Retail Chicago Program.

One of the program's first projects was to create a marketing map that identified 51 retail areas within the city. Along with the map came a list of available locations, existing retailers, description of local demographics and any incentives available within each district. "These thumbnail descriptions got a lot of attention," Spencer says. That simple map has since grown into a book of extensive marketing information.

Today, Retail Chicago's emphasis is on recapturing those sales tax dollars that had previously been spent in the suburbs. "We do not wait for retailers to come and talk to us; we go out and talk to them," Spencer says. Retail Chicago works with retailers across the board, from mom-and-pop restaurants to major national retail chains. "Just about every retailer that you can think of we've worked with in some way or other." For example, the group is currently helping Target locate additional sites within the city's boundaries.

Some cities have learned the importance of aggressive marketing as a result of previous lost business. The northwest suburb of St. Charles, for example, is a desirable community in Chicagoland. However, the former political leadership did not believe it was necessary to offer incentives to win new business, LaRue says.

Meanwhile, neighboring cities such as Batavia and Geneva took advantage of their own economic development resources, and over the past five years those incentives tipped the scales for retailers such as Target, Dominick's, Wal-Mart, Home Depot and others. "So now St. Charles is willing to put forward incentives and court retailers to tip those scales back," LaRue says.

Richmond, Va., recently watched as a wave of new retail activity descended on the county. The city's response was to step up its own economic development efforts with respect to retail. "When you're in a region, you're always competing for retail business with other localities. Competition is the name of the game for economic development," says Ed Miller, Richmond's director of economic development.

Bargaining tools Cities are drawing from a large bag of economic development tools to entice developers to their doorstep. Municipalities are doing everything from helping developers cut through bureaucratic red tape to using financial incentives to improve a project's economic viability. New York City has been pro-retail ever since Major Rudolph Giuliani took office in 1994. "Two of the mayor's biggest initiatives relate to increasing retail in New York City,' says Charles Millard, president of the New York City Economic Development Corp. Those efforts include eliminating the sales tax on apparel and footwear entirely, as well as working to change city zoning to allow for more retail development.

"The fact is, New York City is under-retailed," Millard says. New York City has targeted retail to better serve the city's borough residents, as well as to provide much needed jobs. "The No. 1 issue is jobs. Retail jobs are tremendously important to New York City's economy. We believe that there is room in New York City for thousands of more retail jobs."

The city's Economic Development Corp. is working to make those goals a reality by removing some of the roadblocks involved in putting that land in the hands of retail developers.

One effort has been to assist in negotiating land sale prices that can lead to viable projects, such as the new Harlem USA project. The $65 million, 275,000 sq. ft. retail and entertainment complex broke ground last summer. Tenants slated for the center include Old Navy, HMV Record Stores and a Disney Store. The Upper Manhattan Empowerment Zone Development Corp. also provided an $11.2 million loan for the project, making it the group's largest single investment to date.

In neighboring New Jersey, Clifton city officials have targeted several retail areas where they would like to bring in new retailers. One of those areas is a 1.5-mile stretch of Main Avenue that runs through Clifton from Patterson to Passaic. "Those two cities have the highest unemployment rates in the county, which had taken its effect on local businesses," says Robert Rizzotti, Clifton's director of economic development. Following a 1998 declaration of the strip as a state Redevelopment Zone, the city conducted an in-depth study of the area. The study uncovered a large number of vacant small store spaces and identified two significantly underutilized sites.

Using the condemnation power provided under the Redevelopment Zone, the city of Clifton went to work assembling the parcels of land for the two sites -- a 2.2-acre and a 7.5-acre site. So far, the city has received inquiries from 22 interested developers, and it is currently in the process of putting out an RFP on the two sites. Clifton also has access to city and state funds that could aid in the redevelopment.

The city is hoping that the larger redevelopment projects will act as a magnet for drawing new customers, and in turn draw new retailers to the area. "We're doing it because we want to attract new business to the smaller sites that are available," Rizzotti says.

Whatever the motivation, cities are working behind the scenes in a variety of capacities to help projects along. "The biggest change I've seen is the willingness of cities to finance certain aspects of the projects themselves, when it's important enough to them," says Mark Ruff, a vice president with Ehlers & Associates Inc., a public financing consulting firm in St. Paul, Minn.

For example, a city might take advantage of its ability to borrow money at a cheaper rate, and decide to provide more affordable construction financing for a developer. "They're willing to take on short-term risk to make sure a project will succeed," Ruff says.

Some cities are upping the ante on their involvement to assume a partnership role. The city of Vallejo recently entered into a joint venture with a private developer to build the 200,000 sq. ft. Meadows Plaza shopping center. The city sold land to the developer, and capped the developer's financial obligation for off-site infrastructure improvements.

In return, the city received a 5% partnership interest in the project, and a guarantee that a much sought-after Wal-Mart would be the anchor tenant. In addition, Vallejo frequently supports retail projects by financing a portion of the public infrastructure costs.

The city recently agreed to contribute up to $500,000 in public infrastructure for a new Costco, and $225,000 for a Toys 'R' Us at the Gateway Center. In return, the stores guaranteed to generate a certain level of sales dollars, as well as hire employees from the local labor pool.

Financial incentives Financial incentives were a key factor in landing a new, 1 million sq. ft. regional power center development in Chandler. "Regional commercial projects tend to need some incentive," Newland says. The new Chandler Pavilions is under construction and expected to open in fall 2000. The project's first phase includes a Home Depot, Sam's Club, Borders Bookstore, Bed Bath & Beyond, and Toys 'R' Us.

A second phase features a specialty open-air plaza, Casa Paloma, which will be anchored by tenants such as AJ's Market. The city worked with a local developer, Ray-10 Development Co., to negotiate an incentive arrangement that involves sharing sales tax dollars with the developer to pay for infrastructure improvements.

Chandler created a phased sales tax-sharing arrangement with the developer to help support public improvements related to the project. "The idea is that the city would share sales tax with the developer to pay for off-site improvements," Newland says. Those improvements would include only public improvements to areas such as water, sewer and public right of way.

The city of Chandler receives 1.5% of the state's approximately 7% sales tax. The city agreed to share half of its sales tax cut with the developer for up to 10 years at a maximum contribution of $5.9 million. The public financing was critical in attracting the developer. "I don't believe the project would have happened without the city assisting the project," Newland says.

In a TIF Tax-increment financing (TIF) has long been another popular tool used to spark redevelopment. TIF is often essential to the viability of redevelopment projects, where costs are high due to expenses associated with relocating existing tenants, acquiring the land and demolishing existing structures. TIF districts allow for future tax-revenue increases to pay for infrastructure and development assistance with a designated district.

However, TIF has become controversial in some regions due to overuse or a perceived misuse of TIF funds. School districts frequently argue that their revenues are reduced by TIF projects to a much greater extent than other taxing authorities.

"We always have had cities that have been proactive in using TIF, while others petition legislators to get rid of incentives such as TIF," says Bill McHale, a vice president of retail development for Ryan Cos. U.S. Inc., Minneapolis.

TIF was a key element in Ryan's efforts to transform a contaminated Minneapolis site into a 405,000 sq. ft. retail center. The Quarry shopping center required a herculean effort to clean up the contaminated soil and contend with issues such as soil instability and venting of underground gasses.

The project qualified as the largest inner-city neighborhood retail center development in Minneapolis' history. TIF also plays an integral part in another of Ryan's redevelopment projects proposed in downtown Minneapolis.

The city is putting up $40 million in TIF to help offset costs associated with building a new Target-anchored retail project. Although TIF has helped some redevelopment projects materialize, the outlook on TIF in some areas is not so rosy. "You're seeing, in the whole area of incentives, a backlash on corporate welfare," Ruff says.

The city of Lyle, Ill., for example, had been offering significant incentives to bring in a new retail development. However, the site adjoined a residential area. Neighbors used the financial incentives as a weapon to fight against the development.

"The use of TIF is being called into question in the state of Illinois because it appears to have been over-used, maybe abused in some cases," LaRue says. TIF was created to help projects that would not normally get developed d ue to some costly roadblock.

"That was what TIF was originally created for -- extraordinary circumstances," LaRue explains. "However, the definition of what's appropriate to use TIF for has been stretched, sometimes almost to the breaking point." Illinois is expected to introduce reforms in the way TIF laws are written, and the way TIF is used.

City of Vallejo plugs in high-tech marketing Launching an Internet site is an innovative move for many cities, but for California's city of Vallejo, that wasn't good enough.

Cyberspace can be an efficient way of distributing information, and Vallejo's site does that and more. The website offers city information on everything from population and transportation to site availability and consumer buying power. However, Vallejo went beyond providing regurgitated information from marketing materials.

Customized approach Vallejo's Economic Development Division created an interactive system that has the capability of producing reports to meet a retailer's site-specific criteria. "This application is cutting edge in terms of being aggressive in using technology to show where opportunities are," says Anatalio Ubalde, Vallejo's community development analyst.

The website, which went online last July, was the first of its kind in the U.S. The Economic Development Division used Internet Geographic Information System (GIS) technology to expand the level of information it offered. The website, www.ci.vallejo.ca.us/ed.html, features an interactive site-selector tool, as well as the ability to analyze demographic and economic data for individual locations. The biggest distinction is that retailers and developers can set their own parameters for calculating reports for specific trade areas, such as a two-mile radius from a selected address.

The software uses Census data to provide information on population and traffic counts, as well as customer-profile information such as household income, race, age and sex. The system also uses a third-party source to provide data on consumer spending.

"It allows the retailer to know what the purchasing power is in the area," Ubalde says. The program generates a list of other businesses located in the area, which are categorized by retail, office and manufacturing industries. "That list comes from our business licenses department, so it's very current."

In addition, real estate brokers, leasing agents and owners can create, delete or modify listing information online to help maintain an accurate list of available properties and building sites.

Testimonial lends credence The real estate community is certainly enjoying the free marketing. Bill Papke, a realtor with Prudential California Realty in Vallejo, has five properties listed on Vallejo's website. "It's fantastic. It's another positive way of marketing properties," he says.

Papke received responses from interested buyers as far away as Hawaii, and he is in the process of closing his first sale from an online lead. "It's great for Vallejo to market the city and start building our economic base back up," he adds.

'Good facts' land tenant The extensive information is making it easier for retailers to identify new locations. Sandie Lynne was scouting new sites to relocate her bookstore and cafe, Book Lovers Haven, when a friend told her about a vacant space in Vallejo. "I said, 'I don't want to go to Vallejo,' ' Lynne recalls.

Lynne looked at the location, but she still wasn't convinced that Vallejo was the right place for her store. She then met with Ubalde, who at the time was in the process of setting up the new website.

Although the program wasn't yet online, Ubalde was armed with all of the interactive software and information it provided. He loaded Lynne up with printouts on possible store locations, demographics, a list of other booksellers and estimates on consumer spending.

"It was a lot of really, really good facts," Lynne says. "That probably was a major decider, because I had a totally different image of whatVallejo was all about. Without that information, I would not have located in Vallejo." Nearly a year later, Lynne is satisfied that she made the right choice.

"Business is growing every day, and I think the downtown area of Vallejo is going to prosper over time," she says.

The city of Vallejo is equally pleased with its new tenant. The sales tax Book Lovers Haven is generating is 338% higher than what the previous tenant had produced.

Vallejo also is using its software to identify retail needs and solicit new business. Some areas that Vallejo has targeted include electronics and sporting goods. "We're a very under-retailed city," Ubalde says, "even though we have a lot of consumer dollars in the city."