By Rodney Barstein and Lacy Beasley
Retail jobs typically have a lower wage than other industries, and, thus municipalities, until recently, overlooked those jobs as a focus for economic development. In the past decade, however, traditional thinking has changed. Many economic development agencies now embrace the importance of retail to a community’s overall vibrancy and quality of life.
All businesses, industrial and retail, choose where to locate. Profit primarily drives that decision. This profit-driven dynamic creates a competitive environment for the communities recruiting retail to their town. Municipalities with a lower population density and lack of transportation network struggle the most. Retail and restaurants are a strong viable alternative for those communities. It is a win for jobs, sales tax dollars, property tax and quality of life in rural America when even one new retailer opens in their market.
In order to motivate profit, economic incentives are offered to private businesses. The 2004 enactment of Alabama Amendment No. 772 (Alabama Act 2004-94) has allowed local government’s greater flexibility in the types of incentive packages they may offer to entice retail businesses to locate or expand in their community.
AMENDMENT 772 EXPANDS INCENTIVES TO RETAIL
Amendment No. 772 is an economic development amendment for the benefit of most Alabama counties and cities. Included is the power to use public funds to purchase, improve, develop or lease real property in favor of private businesses or to convey such property to private businesses and to lend credit or issue bonds to support economic development projects on behalf of private businesses. A common example is the rebating of sales taxes generated from the project to the developer or the retailer.
The amendment has strict guidelines. Amendment No. 772 requires public notification of the project, a certain amount of time to lapse and a subsequent public hearing by the governmental authority explaining the parameters of the project and the economic incentives involved. Once the hearing is complete, the city and/or county can then enter into the appropriate development agreement to allow for the incentives.
HOW AMENDMENT 772 BENEFITS RETAILERS
Retailers think that rents should be based on projected sales. Developers and shopping center owners think rents should be based on the cost of the land and the bricks. The rising cost of land and construction financing would suggest higher rents as the answer for new development to meet the required return by developers. However, in today’s environment, retailers are unlikely to pay such rents. Incentives can bridge the gap between those numbers.
Retailers gravitate to projects where they foresee the greatest success. As such, retailers go to projects that will accept their required deal terms. If there is a viability gap between what the tenant will pay and what the developer’s pro forma requires for the development to be profitable, then a public entity may need to help with incentives or risk losing the tenant to a neighboring community that will help bridge the gap.
An example of these incentives in action occurred in the city of Tuscaloosa and its Shoppes at Legacy Park, a 250,000-square-foot shopping center projected to create up to 500 jobs and to generate at least $37.2 million in annual sales taxes, up to $120,000 in new business-license fees, and some $160,000 in property taxes that will increase annually over the next three decades. The City Council unanimously approved a $16.57 million incentive for the new center, and the package offers no up-front cash from the city to the developer but instead relies on the success of the project through sharing of the incremental retail sales taxes generated.
Other developer-incentivized projects in Alabama since 2010 include the $14 million luxury retail project in Mountain Brook; a $10 million Target in Homewood; an $8 million Whole Foods and a $2.9 million Cabela’s in Huntsville; a $6.5 million Target in Madison; a $6 million Cullman redevelopment; a $2 million Jasper project anchored by Hobby Lobby, Petco, Shoe Carnival and T.J.Maxx.; a $1.9 million center for Dick’s Sporting Goods and Panda Express in Alabaster; and a $1.2 million project for Hobby Lobby and Big Lots in Foley.
Small projects can also utilize this incentive arrangement. Talladega recently granted incentives of $150,000, while Pell City granted incentives of $350,000. Smaller retailers, owner occupied locations and small one-tenant projects can also qualify for incentives. The problem is most retailers do not know how to ask and most cities are still unfamiliar with the process. Using experts that have been involved in incentive programs will pay big dividends down the road for the municipality, the retailer and the property owner.
ABOUT THE AUTHORS
Rodney Barstein is executive vice president of Retail Specialists, a Birmingham-based commercial real estate firm. He is also past chairman of the Alabama Retail Association and a current member of the board of directors.
Lacy Beasley is vice president of business development at Retail Strategies, a Birmingham-based consulting firm that helps municipalities attract retailers.