Incentives for Retail Development:
FAQ’s for funding Public-Private Partnerships
Working with communities throughout the country, we’re often asked questions about providing incentives to developers or retailers to facilitate new projects in the community. In this article our president, Lacy Beasley, walks through questions she has heard from City Leaders and things to consider when it comes to providing incentives for retail development.
Frequently Asked Questions
- Public Private Partnerships: Why should the city support the developer?
- Slippery Slope: If we do one time, do we have to do it every time?
- New Normal: Are other cities doing this?
- Closing the Gap: Will this happen anyway if we do nothing?
- New Money: Are we taking money from our teachers and police?
- Cost of Doing Nothing: Won’t retailers come here anyway?
- Existing Business Benefit: Will helping new businesses hurt existing businesses?
- How to TIF: How should the TIF be structured?
Why should the City support the developer?
Can the City facilitate the new retail development without the developer?
The risk is on the developer. The developer is taking a large risk when developing a project of size and scale. He or she believes in the community and is making an investment in the City. They would prefer the retailers pay more rent so they would not have to ask for the incentive. The bottom line is the City cannot create a development like this without the developer.
If we incentivize one development, are we opening the door to incentivize all businesses and developments?
The City should consider establishing a Retail Incentives Policy that states they are “Open for Business” and open to incentive requests. Adding guidelines and parameters will protect the City from backlash from less experienced and less qualified companies requesting an incentive:
Any project requesting assistance must meet these goals
- Follows City Strategic Plan for growth
- Increases sales tax revenue
- Increases employment and jobs
- Increases property tax revenue
Any project requesting assistance must meet one or more of these goals
- First to market retailers
- If the retailer is relocating a store within the City, the store size (square footage) must increase by 25%
- Fills retail spending gap in market in an effort to improve quality of life, keeps retail dollars in the market, and increases and retains City tax revenue
- Achieves creative and adaptive re-use of vacant or underutilized properties and projects
Why haven’t we done this before?
Is this happening in other places?
This is the new normal of retail development involves public-private partnerships.
Retailers are basically paying the same rent today as they have over the past decade. However, the cost of development (construction, land, financing) has inflated at a rapid rate. The proforma doesn’t work with skyrocketing development prices.
Therefore, the public sector has stepped in to close the “gap”. The majority of shopping centers over 100,000 SF in municipalities with less than 50,000 are only possible if the public sector participates with an incentive agreement.
Will the development or project happen anyway without the incentive?
What difference will this incentive make in the final outcome of the project?
It’s a competitive market and retailers will only open a certain number of stores at a given rent rate across the country.
What a retailer is willing to pay is not enough to cover the expense of the development without the retail incentive. The retailer won’t pay more rent and the development costs cannot be reduced. Therefore, there is a financial “gap” in the proforma that requires public participation in order for the numbers to work.
The bottom line, the incentive will improve the tenant mix of the shopping center.
Why take taxpayer dollars away from the school system, law enforcement, infrastructure, etc. to support a retail shopping center and private businesses?
The City is not taking funds away from an existing pot of money (e.g. teacher salaries, law enforcement, fire, etc.) and giving it to a developer.
This is not taking away from any existing revenue to pad a developer’s pockets.
Think in terms of new revenue created “by the project for the project.” The incentive is capturing a portion of new tax revenue generated by the project and putting it back into the project for a period of time.
Once the incentive is complete, all the new tax revenue is captured by the City.
Will the retailers come anyway without Incentive?
Remember your city is competing with other communities throughout the rest of the Country. A retailer is only going to open a certain number of stores each year and will only open in locations where they can be profitable. They only accept a small fraction of the sites presented to them.
Criteria such as location, traffic, rent, co-tenancy, and timing can kill the deal.
It is very competitive and if one location can’t offer what they need, there are several others that will. They will walk away from the development if they do not have all the demands met in a timely manner.
Will incentivizing new businesses hurt existing business in the community that did not receive an incentive?
When a new retail center opens, there is a net gain of new tax revenue generated. Although a few individual stores may experience displacement of the consumer expenditure dollar for a short period, that will stabilize. The result is not all the same dollars being displaced taking away from one retailer and giving to the new retailers.
Rather what happens is more the retail synergy created, the larger trade area which means the pie grows – the trade area grows.
In addition, there is a reduction of retail leakage which is also capturing new consumer dollars.
Retail shopping centers are different than industrial businesses because there are multiple separate businesses.
How should an incentive be structured and what is a reasonable cap on the amount that protects the City?
Use the Economic Impact Analysis as a Guide:
Typically, incentives range from 10-30% of the capital investment.
The property and/or sales tax generated by the development over a 10-year span is applied to the project during the initial development phase and paid back over 10 years. Traditionally this done through a Tax Increment Finance (TIF) district.
Download this Public-Private Partnerships in Retail Development report.
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About the Author
President, Retail Strategies