Pleasanton council offers early support to roadwork financing deal with Costco

A majority of the Pleasanton City Council gave initial support to a financing deal with Costco to fund $21.47 million in road improvements around Johnson Drive on Tuesday, though most members asked city staff to fine-tune the proposal before returning for further consideration next month.

The proposed term sheet calls for just under one-third to be paid by city traffic impact fee reserves, just over one-third by a cash payment from Costco and just over one-third by a separate payment by Costco that will be reimbursed to the company by the city through a 60-40 sales tax sharing agreement.

City officials want to have the infrastructure financing in place before moving forward with finalizing the Johnson Drive Economic Development Zone (JDEDZ), a plan that would outline rules for redeveloping 40 acres near the intersections of interstates 580 and 680, including vacant property eyed by Costco for its third Tri-Valley warehouse store.

“We’ve been at this for several years now. It’s time to move on … I think the sales tax sharing agreement is the way to go,” Councilman Arne Olson said in offering the strongest support for the proposal presented to the council at a public workshop Tuesday night.

The meeting was designed to give the council and residents an early look at the proposed term sheet and provide feedback publicly before city staff returns seeking final council direction Sept. 18.

“Just think about that 60% that comes in to the city’s General Fund,” Olson added. “It’s accretive. We’re not losing any money on that deal.”

Vice Mayor Jerry Pentin and Councilwoman Kathy Narum also voiced early support for the financing concept.

“I would like to see us move forward with this sales tax sharing agreement,” Narum said. “I’m not really seeing the risk to the city as long as there’s conditions that say if Costco closes the door — other than for an act of God — the loan terminates, it’s forgiven. Or at the end of 25 years, the loan terminates, so that we don’t have exposure.”

“We did have an election, and the election — whether it said it was MM for 50,000 square feet or less — it was about Costco, and we had a 63% vote that said we want to see a Costco in Pleasanton,” Pentin said, later calling the tax sharing plan the best available option to fund the needed roadwork.

Councilwoman Karla Brown said she was concerned with the precedent the agreement might set.

“What this program is doing is it’s saying 40% of what should be coming to the city is now going back to Costco to repay what they have put as money up front,” she said. “When you make a policy decision that pretty much hasn’t been done before in this town, you really have to look at going forward and how that’s going to affect the next business that comes to town.”

Brown, like Narum, urged city staff to talk with Nearon representatives to see if the firm would provide money for infrastructure costs upfront.

“This is a large, successful development company. Normally developers help pave the roads, literally and financially, so that their businesses can come in,” Brown added, saying a Nearon contribution could make the deal “more palatable for me.”

Mayor Jerry Thorne did not participate in the two-hour discussion at the Pleasanton Civic Center, continuing to recuse himself after previously owning Costco stock in a retirement managed portfolio earlier in the JDEDZ consideration process.

More than 90 people attended Tuesday’s meeting, plus about a dozen city staff and consultants, leaving most seats filled in the council chamber.

City officials opened with a half-hour presentation detailing the JDEDZ history and roadwork financing proposal.

The JDEDZ, first endorsed conceptually by the council in April 2014, was on hold for months last year after a citizens group successfully put an initiative measure on the ballot seeking to prohibit retail uses of 50,000 square feet or more from operating in the JDEDZ.

Measure MM, seen by many as an effort to ban Costco from the site, failed at the polls last November with about 63% of Pleasanton voters opposing it.

In the months after the election, city staff resumed JDEDZ activities, including talking with Costco and Nearon about a strategy to finance road improvements necessary to support new commercial uses in the area. Officials estimate those costs consist of $19.97 million in design and construction costs and $1.5 million for right-of-way acquisitions.

Projects include Stoneridge Drive and I-680 northbound onramp improvements, Johnson Drive widening, improvements at the Johnson-Stoneridge intersection and new traffic signals at Johnson and Commerce and Johnson and Owens Drive (north).

The city announced a staff-level agreement with Costco on a proposed term sheet earlier this month.

Under the proposal, about 30% of the design and construction costs — $6.4 million — will be paid by the city from its traffic impact fee (TIF) reserves, money collected from developers over the years to offset their impacts on the city’s transportation system. The reserve funds, which can only be spent on projects identified in the General Plan, will go toward the freeway onramp.

The next portion — almost $6.8 million — will be paid for by Costco, a total that includes the company’s required TIF contribution of $3.7 million but is otherwise on top of its development fee package.

The final part, again just under $6.8 million, will also be covered by Costco, money the city will need to repay via a 60-40 sales tax sharing agreement. That means 60% of the sales tax generated by the new Costco would go to the city’s general fund and 40% will be paid by the city to Costco to repay the infrastructure advance.

City officials also considered borrowing internally from city-controlled funds or taking out a conventional bank loan to cover that remaining $6.8 million.

The balance due to Costco will be subject to 1.5% annual interest, and the sales tax sharing agreement would remain in place until the balance is paid off with a maximum period of 25 years, under the proposal.

Any other developer who builds on the JDEDZ in the future will need to pay their proportional share of these infrastructure costs back to the city, and the city plans to use those funds — estimated at $8.4 million — to pay down their debt to Costco.

That would include anyone who develops other Nearon land in the JDEDZ, currently envisioned for one or more hotels and general retail uses, or redevelops other sites in the zone. Existing land-uses in the zone would be permitted to continue as is and would not be charged the JDEDZ traffic fee.

Any cost overruns for the freeway project would be paid by the city, while overruns for all other JDEDZ road projects would be split evenly between the city and Costco, City Manager Nelson Fialho said.

As for the estimated $1.5 million in right-of-way costs, Costco will donate any of its required right-of-way, the city will seek other property owners to donate theirs too, and then any leftover acquisition costs will be split between the city and Costco, with Costco’s portion paid back to the company by increasing the city’s tax-share payback amount — though that portion wouldn’t be charged interest.

If paid out over the full 25-year period, the city would expect to pay Costco about $8.2 million in sales tax allocations under the agreement.

However, the city anticipates being able to repay the loan in the new Costco’s 17th year, which would see Costco receive about $7.8 million to cover principal and interest, assuming 3% annual revenue growth — a standard projection methodology, according to city finance director Tina Olson.

The 3% growth estimate is more conservative than typical growth for new Costco stores, Olson said. Under those figures, the city could repay the loan in 15 years based on sales tax sharing alone — without adding in JDEDZ transportation fees paid by future developers.

If the city’s tax revenue projections prove off the mark and debt to Costco remains after the 25-year repayment term, the remaining debt would be forgiven, under the proposal.

Narum asked city staff to look at adding a provision to have the debt balance also forgiven if the Costco store closes during the payback period.

But the wholesale retail giant plans on thriving in Pleasanton for the foreseeable future if its plans are ultimately approved, according to Jenifer Murillo, director of real estate development for Costco.

“This project would bring an anchor retailer to create 250 new jobs that provide excellent benefits and wages, generate millions in new sales tax revenue yearly to the city, provide funding for regional traffic improvements, repurpose and redevelop an industrial site encouraging economic revitalization along a key corridor adjacent to 680 and reduce miles traveled to allow residents to shop locally,” she said.

“Why does Costco want to be here in Pleasanton? 23,163 members. It’s that simple,” she added. “We’re investing heavily in this site and in this community. And it’s an investment none of us take lightly. We’re looking to purchase the site from Nearon, invest in the infrastructure and operate for many more years.”

Murillo also alluded to the company’s plan to retain its stores in nearby Livermore and Danville, two of Costco’s top-performing stores in the Bay Area.

“This site will allow Pleasanton members to shop closer to home and relieve some of the pressure on these two incredibly successful warehouses,” she said.

Of the nearly 100 residents in attendance, only seven spoke to the council Tuesday night, with comments ranging across the spectrum.

“I am a little disappointed hearing we voted upon this and yes we want it, and it’s getting delayed and delayed and delayed for these other reasons,” resident Michelle Flanagin. “It would be great to have the Costco here so we don’t have to drive all the way to these other Costcos, and it would be a benefit for families that are trying to survive in this Pleasanton area.”

“We need to come up with a better, more equitable agreement,” resident Sandy Yamaoda said. “This is a major risk to the stability of our city based on a litany of assumptions.”

“We have a lot to offer Costco, and they should pay for it,” she added.

“It seems like we have a greater liability with this agreement,” resident Julie Testa said. “This level of developer subsidy is unique for Pleasanton. There’s a lot of risk that’s not normally absorbed … This doesn’t seem like the best value for Pleasanton.”

“I want you to go forward with this. It’s been a long, long time coming,” former planning commissioner Mary Roberts said. “This is a development area. We need to boost it up to make it the thriving commercial development that it is supposed to be and we need to widen the range of commercial establishments.”

The financing proposal is scheduled to return to the council at a special meeting Sept. 18, at which time city staff will ask for final direction on the matter. If endorsed then, the term sheet would be finalized and incorporated into the final JDEDZ proposal. The council could opt to alter it at that time, too.

The JDEDZ package would then head to the Pleasanton Planning Commission and Pleasanton Economic Vitality Committee for review in the coming months, with the goal of presenting it to the City Council by the end of the year, according to Fialho.

Most of the council said Tuesday they supported a condition stating Costco could not open until all transportation mitigation projects are completed. Some said they needed more information before deciding whether hotels proposed for the site — up to 231 rooms — could open earlier.

But Olson said he could see a scenario to support letting Costco open if the freeway ramp project becomes delayed, adding, “I’m concerned that we’re dealing with Caltrans here on some of this.”