This summer, The Outlet Shoppes at Oklahoma City will open, bringing a new offering to the local shopping scene. Developed by Horizon Group Properties Inc. and CBL & Associates Properties Inc., the 350,000-square-foot project is the first outlet center in the state and the only one within a 145-mile radius.
Situated on 65 acres just eight miles from downtown Oklahoma City, the center will create more than 1,000 new jobs for the community and generate more than $110 million in annual sales. It also will provide approximately $4 million of incremental local sales tax revenue to Oklahoma City, according to Horizon.
However, the center (and its sales tax revenue) could easily have ended up in Yukon, a western suburb, if Oklahoma City hadn’t offered several incentives, according to Brent Bryant, economic development program manager for the city of Oklahoma City.
“Historically, we’ve been very limited in what we do for retail incentives,” Bryant says. “Our city council is conservative and reluctant to get into the retail incentive game. Our decision to offer incentives for the outlet center was more of a defensive posture rather than offensive posture.”
Indeed, the city found itself between the proverbial rock and a hard place. “The lifeblood for our operating budget is sales tax, and it would have really hurt us for those tax dollars to go to Yukon,” Bryant explains. “Plus, we were worried about the outlet center cannibalizing an existing mall nearby. We absolutely didn’t want it to go to Yukon, which has been very aggressive in pursuing retail projects by offering incentives. That’s why we were so aggressive with our own incentives.”
The incentive package included both infrastructure improvements and a sales tax rebate, which refunds a portion of the center’s sales tax to retailers. The city allocated $3.9 million in general obligation bonds to fund the installation of new traffic signals, the construction of a new street and turn lane and the creation of drainage improvements. The sales tax rebate could be worth up to $5.5 million over five years, if the development meets certain requirements.
Michael Lebovitz, executive vice president of development and administration for CBL & Associates, says the city “really stepped up and provided incentives that made it the best place for the center to be built.”
Oklahoma City is not unique. It is one of hundreds—if not thousands—of cash-strapped municipalities across the United States that are trying to manage through difficult fiscal situations. Many cities and counties face shortfalls in revenues at the same time that expenditures are rising. Politicians across the country are juggling how to cut costs and raise revenues.
For retail developers, that means that incentives are available. Malls and shopping centers can deliver sales and property tax revenues for years. As a result, municipalities may provide incentives in the short term to make new developments a reality.
Declining revenues
While the fiscal condition of individual cities varies greatly depending on differences in local tax structure, an overwhelming majority of cities rely on local sales taxes for the lion’s share of revenue.
In Oklahoma City, for example, sales taxes create 50 percent of the funding for its operating budget. And 60 percent of those sales tax revenues come straight from retail sales.
During the recession, heavy reliance on sales taxes took a big bite out of Oklahoma City’s balance sheet. And it wasn’t alone. The National League of Cities’ latest annual survey, conducted in October 2010, found that nearly nine in 10 cities were less able to meet fiscal needs in 2010 than in the previous year as a result of declining revenues and spending cutbacks.
“If your city had a huge retail boom—you were the hot spot six years ago—you’re probably going through a painful divorce today with dark centers and a decrease in sales tax revenue,” says Eric Stavriotis, senior vice president with Atlanta-based Jones Lang LaSalle.
Cities ended fiscal year 2009 with year-to-year general fund expenditures outpacing general fund revenues. In constant dollars city finance officers projected that general fund revenues for 2010 would decline by 3.2 percent and expenditures would decline by 2.3 percent. The declines in 2010 represent the largest downturn in revenues and cutbacks in spending in the history of NLC’s survey, with revenues declining for the fourth year in row (since 2007). That came on the heels of general fund revenues declining in 2009 by 2.5 percent over 2008 revenues, while expenditures increased marginally by 0.7 percent.
A large portion of the revenue declines can be blamed on decreased city sales tax collections, according to NLC. City sales tax receipts declined in 2009 over previous year receipts by 6.6 percent in constant dollars, and city finance officers projected a further decline in 2010 by nearly 5 percent.
As a result of all of this, many municipalities have been forced to cut services to their residents—such as closing libraries and parks and reducing police and fire department staffs. NLC’s annual survey found that 79 percent of cities cut personnel in 2010, 69 percent canceled or delayed infrastructure projects, 44 percent made cuts in services other than public safety and 25 percent cut public safety or made across the board service cuts.
Even worse, NLC says city budgets tend to lag economic conditions by 18 months to several years, which suggests that 2011 will likely bring further revenue declines and cuts in city spending.
Dashing for dollars
What this all adds up to is that municipalities are becoming even more aggressive about courting retail than they were before the recession.
“For the municipalities that are highly dependent on sales tax revenue, they are doing everything they can to keep the retailers they have and to bring in new retailers,” Stavriotis says.
In fact, CBL’s Lebovitz says there are more retail incentives available today than there were prior to the recession.
In Omaha, Neb., for example, the city put a high-level mandate outlined several years ago in an effort to attract marquee retailers, improve quality of life and drive revitalization throughout the city, says Rodney Moseman, vice president of economic development at the Greater Omaha Chamber of Commerce.
Some of the retailers that have opened in the city in recent years include The Cheesecake Factory, Trader Joe’s and Urban Outfitters, among others.
It has used tax-increment financing (TIF) districts to ignite retail activity in a number of older areas. Moseman points to Midtown Crossing at Turner Park, a $325 million, mixed-use project developed by the Mutual of Omaha. Part of a masterplanned area with a TIF district overlay, the project includes 225,000 square feet of retail and 600 residential units.
“That project would not exist today without the TIF incentive,” Moseman contends. In fact, the success of the traditional TIF incentives encouraged Omaha to roll out a sales tax TIF that applies specifically to projects with an entertainment or destination element.
While traditional TIFs capture an incremental increase in real property taxes and earmark those funds for development, a sales tax TIF captures the sales tax revenue stream and uses those funds to pay off bonds that are issued upfront for the development of the projects.
Similarly, in Overland Park, Kan., CBL & Associates has benefitted from a Transportation Development District (TDD), which helped fund a number of exterior site improvements at the 1.6-million-square-foot Oak Park Mall.
Within the TDD, a portion of the sales tax collected at the mall goes to service and repay bonds used to fund the improvements, which include parking lot paving, site lighting, mall signage, new landscaping, a new park-and-ride parking lot and shelter and an electric vehicle charging station.
Since incentives play such a key role in convincing retailers and retail developers to participate in neighborhood revitalization, cities have to figure out a way to bring them to the table, says John Fischer, assistant director at Louisville Economic Development Dept. (Interestingly, the city is willing to incentivize retail even though retail sales have no impact on the local budget because all sales tax revenue goes directly to state coffers.)
For example, the city of Louisville has combined local incentives with federal Community Development Block Grants (CDBG) to spark retail interest in Park Duvalle, Fischer says, pointing to a new grocery-anchored project that recently broke ground in the formerly blighted neighborhood.
Fischer acted as a matchmaker between Milwaukee, Wis.-based Endeavour Corp. and a local developer to get the grocery-anchored project off the ground. Along with New Market Tax Credits, the project received $1.3 million in “forgivable” loans from the city of Louisville. They will help finance the project and will burn off over time, Fischer explains.
“Louisville has been working to revitalize this neighborhood for 20 years, but the commercial center never developed until we put together these incentives,” Fischer notes. “Now, residents of this neighborhood will finally have a place to shop, and as an added benefit, the center will create jobs.”
But all of that doesn’t mean that economic development officials are tossing money around with reckless abandon. Lebovitz says that there is also a heightened level of scrutiny today.
“Cities continue to be receptive to supporting new retail development, but because every dime of revenue coming into the city is that much more precious, they’re being careful to make sure that those developments deliver the jobs and the economic impact that are promised,” he says.
In the case of the Outlet Shoppes of Oklahoma City, for example, in order to get the sales tax rebate, the development team must meet specific requirements. “We don’t want to cannibalize our tax base, so we put some controls on the sales tax rebate,” Bryant says. The CBL/Horizon JV must spend at least $550,000 on regional marketing to attract shoppers from outside the Oklahoma City metro area. Moreover, the retailers and/or center must be able to document how much sales tax revenue the project generates in order to trigger the rebate.
Conquering competition
As Louisville, Omaha and Oklahoma City have experienced firsthand, incentives make municipalities more attractive to both retailers and retail developers. Cities that lack the ability to incentivize retail have a difficult time competing, even if they have the demographics to support new projects, says John Melaniphy, business and development coordinator for the Village of Arlington Heights in Arlington Heights, Ill.
As one of the top 20 communities in Chicago metro area for retail sales, the Village of Arlington Heights routinely competes with surrounding cities for new retail and isn’t shy about using incentives, Melaniphy says, especially when it comes to protecting its current retail base.
The Village primarily uses TIF districts to attract retail development and redevelopment. While it also is willing to fund infrastructure improvements and assist with renovation expenses, it has employed sales tax rebates sparingly.
Most recently, Melaniphy has relied on incentives to retain existing stores and to backfill vacant space. “Previously, we had a regional mall to our east, Randhurst, which went through a decline, and we were a beneficiary of that decline because we gained some retail,” he explains.
However, Columbus, Ohio-based Casto has redeveloped that property into Randhurst Village and persuaded The Sports Authority to relocate from the Village at Arlington Heights. “As a result, we have taken a proactive approach to protect our retail base,” Melaniphy says.
Using every incentive at his disposal, Melaniphy and the Village have managed to attract a number of new retailers including: Ross Dress for Less, hhgregg, True Value Hardware, SmashBurger and Caribou Coffee. In total, the efforts have generated $600,000 annually in new sale tax revenues.
Melaniphy admits that the Village of Arlington Heights has had to cut back on its expenses, but has maintained its commitment to incentives. “Those economic development organizations without incentives—they don’t have any tools in their toolbox,” he says.
Oklahoma City’s Bryant agrees. “I have no doubt that without the incentives we offered, the outlet center project would have gone to Yukon,” he says. “It’s really about how much money we can put on the table.”
Even so, Bryant admits that he’s unsure how aggressive the city will be in the future when it comes to incentivizing retail projects. “It’s something that we’re looking at because we know we are competing with other cities,” he says. “The paradigm is changing, but who knows how fast or how far?”