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Incentives lure retailers, but at what cost?
[October 20, 2008]

Incentives lure retailers, but at what cost?

(Montgomery Advertiser (AL) Via Acquire Media NewsEdge) Oct. 19--PRATTVILLE -- The explosion in retail growth here that has added 1.3 million square feet of shopping space over the past three years hasn't come without a cost.

The city used tens of millions of public dollars in bonds and sales tax rebates to lure the acres of new shopping centers.

Prattville is one of several towns in Alabama that have ponied up incentives to attract retail stores -- and the coveted sales tax revenues they bring. A 2004 law passed by Alabama voters made it legal for counties and municipalities to grant public funds and credit to individuals, businesses or entities to promote economic growth.

Proponents of the incentives believe the money is part of the price of doing business in today's market. Opponents believe the pay-outs in Prattville were unnecessary -- the stores would have ended up here sooner or later just because of the growth of the city.

Mayor Jim Byard said offering incentives to attract business is a necessary evil.

"Offering incentives for retail growth is horrible public policy," he said. "But that is the world we live in. Other cities are trying to land these same stores, and we compete against one another. I had one person tell me its just jealousy, that Prattville wants to be like Montgomery.

"It's not jealousy, it's survival. Half of our budget is made up of sales tax collections. For any city to prosper, it has to maintain and grow its sales tax collections."

It began with a bond Three years ago the City Council approved a $43.7 million bond issue to get the ball rolling on retail growth.

Of the total amount, which will be repaid with interest over 20 years, about $4 million went to the Retirement Systems of Alabama to build a civic center at the Legends complex on the Capitol Hill Golf Course. The hotel and course are owned by RSA. The rest of the money -- $39.7 million -- went to land Prattville Town Center, a 400,000-square-foot development, and High Point Town Center, a 900,000-square-foot shopping center.

The money helped purchase land and paid for improvements like expanding the network of roads around the area and extending city services to the sites.

Bass Pro Shops, an anchor of Prattville Town Center, cut a separate deal with the city. The sales tax for the Bass Pro location only was raised from 8.5 percent to 10 percent. The majority of the city's portion of the sales tax collections, up to $23.37 million, is being rebated to the company to help pay for the construction of the store.

The council is expected to act on a new incentives package during its Tuesday night meeting.

ALLSOUTH, a Prattville development company, is proposing a 266,000-square-foot shopping center in the east part of town that will include Academy Sports and Outdoors, Hobby Lobby and Kohls as anchors.

The deal is to offer a sales tax rebate to the developer to retire the debt -- half the city's sales tax collections at the center, up to $9 million, will be paid through an intermediary to help offset the construction costs of the $50 million-plus project.

It's nothing unusual Prattville, with a population of 32,034 according to U.S. Census Bureau estimates, isn't the only city in Alabama to offer incentives for retail interests as a roll of the dice to boost municipal revenues.

--Wetumpka, with a 2007 population of about 7,500, is rebating a portion of the city's sales tax collections at Lowe's Home Improvement Center, up to $1 million. When the Wal-Mart Supercenter was built, the city offered $238,000 in infrastructure improvements.

--Millbrook, with about 16,500 people, rebated sales taxes up to $5 million to Wal-Mart to get the supercenter that was built in that city.

--Leeds, a city of 11,203 near Birmingham, passed bonds totaling $6.4 million to build a nature park and an additional $27 million to help build the development with Bass Pro Shops as an anchor, according to published reports in The Birmingham News. That Bass Pro location is expected to open in November.

--Northport, a town of almost 23,000 next to Tuscaloosa, offered $1.6 million over 10 years to lure a Lowe's to the city. According to The Tuscaloosa News, Lowe's didn't act on the incentives package and built the store anyway.

--Decatur, with 55,741, has proposed a $53.75 million package that would go to the Sweetwater Project, which will have a Bass Pro Shops, hotel and other retail development, according to Barney Loveless, an attorney working on the project.

The deal includes $32 million in sales tax rebates for the Bass Pro store, with the remainder of the money going to infrastructure improvements around the center. The infrastructure work will be paid for with bond money. Bass Pro announced last month that the construction of the store has been delayed until 2009. The company expressed concerns about the economy.

Larry Whiteley, manager of corporate public relations and outdoor education for the Springfield, Mo.-based company, said Bass Pro is committed to the Decatur project and expects work to begin next year.

--Gardendale, population 13,419, offered rebates of half of the city's portion of sales tax, up to $2.5 million, and $433,000 in street improvements for the Caufield Square project, according to the city's Web site. The city will also pay $43,000 to buy land to put in storm water retention ponds for the project. The 300,000-square-foot development will have mixed retail and residential use, including a movie theater and bowling alley.

How did we get here?

On Nov. 2, 2004, Alabama voters approved amendment 772.

A 44-word section of the legislation started the firestorm, changing the way economic development is handled in the state.

A county commission or municipality was allowed to "lend its credit or to grant public funds and things of value in aid of or to any individual, firm, corporation or other business entity, public or private, for the purpose of promoting the economic and industrial development of the county or municipality."

Suddenly, local governments were able to use the sort of incentives usually reserved to lure major industrial projects like Mercedes, Hyundai and Thyssen-Krupp. The smaller towns could sweeten the pot to attract shopping centers with big anchors.

The law created a seller's market for developers and retailers, said Dr. Bob Robicheaux, a retail expert with the University of Alabama in Birmingham's School of Business.

"Retailers have certainly used incentives, and some of those incentives have been pretty substantial," he said. "Each city is now in competition with each other. A retailer can go to a city and say 'I can go to 20 different towns to build my store. What are you going to do to convince me that I need to build here?' "It puts the retailers in the driver's seat."

Everyone is after the big names, said Loveless, the attorney working on Decatur's incentives package.

"Prattville is really blowing and going with all they have been able to land," he said. "The competition for retail growth has become fierce. Sometimes people don't understand that incentives are an investment. You have to get those retail clients to pick your city. The result is the creation of jobs and increased tax collections."

Prattville officials offer "conservative" estimates that when the two new shopping centers are fully online, the city will see an increase of about $10 million a year in sales tax collections along with business license fees and other revenue. The bond payment is about $3.6 million a year. The plan is to take the bond payment off the top of the $10 million, then move the rest to the city's general fund.

The proposed shopping center, The Exchange at HomePlace, will only add to that new revenue stream, Byard said.

One Prattville city councilman isn't so sure: "I don't think the customers are there to support the retail space we have now, much less these new stores," said District 1 Councilman Bill Gillespie. "The economy is soft, and there's a lot of empty stores up at High Point. I think we need to fill up what we have now, not add space. It's a poor use of public dollars."

The time to act is now, said Joe Turner of ALLSOUTH, the development company putting together the Exchange project. The economy is sluggish, but it will turn around, he said.

"Some retailers are pulling back," he said of expansion projects in the face of slowing economic growth. "But the retailers that are financially stable are going forward. Building now means the stores will be completed in a year to a year and a half.

"Most analysts say the economy will rebound by mid- to late 2009. These new stores will be completed in time to take advantage of the strengthening economy."

Competition between retail centers in the same neighborhoods is good for business, Robicheaux said.

"Most people think new stores take away business from existing stores," he said. "That's not true. Just look at the Galleria in Birmingham. When the Summit was built five miles down the road, everybody said the Galleria was finished.

"That hasn't been the case. Both developments are stronger because traffic has increased at both locations. Having two major shopping centers within a few miles of each other has only made that section of I-459 even more attractive to future development. It has made it hotter real estate."

Prattville's future Prattville officials want the city to become the shopping hub of central Alabama, a service area that includes Clanton, Selma, Montgomery and Greenville.

The city has laid a good foundation, said Jeff Bates, an economics instructor at Auburn Montgomery's School of Business.

"The economy of Prattville itself is pretty strong," he said, pointing to the high number of residents who live in Prattville and work in the federal and state government agencies in Montgomery. "What would really impact other cities economically won't affect Prattville as much because of that stable base of employment.

"Prattville doesn't have the population to support this retail growth. But if you draw a circle, 40, 50 or even 60 miles around Prattville, that's the customers they want. The economy will get better, and when it does, Prattville is just sitting up there waiting to take advantage of it."

The plan to become a shopping hub means incentives are no longer needed for retail growth, said Pat Owens, who owns an insurance agency in town.

"The stores in this proposed center will come on their own," he told Byard before a recent City Council work session to discuss the package for the Exchange. "We have the numbers, we have the stores now, the traffic will be there. It may not be this year, but they will come because of our growth."

Byard told Owens they would just have to agree to disagree.

But that brings up the question: Will there come a time in Prattville when incentives are taken off the table?

The first round of incentives, the bond issue, obligated Prattville to make payments for 20 years. The Exchange incentives are a better deal, simply rebating half the sales tax collected at the center.

Prattville isn't on the hook for making a bond payment, and isn't out any money up front. The Exchange proposal won't affect the city's credit rating or what it can borrow for future infrastructure projects, said Rod Morgan, the city finance director.

"Our retail growth means we can get a better deal with future incentives," said Morgan, who wasn't working for the city when the first round of incentives was put together. "We had to have that first round of incentives to get to where we are now."

The city now counts Bass Pro Shops, J.C. Penney, Belk, Best Buy, Publix, Target, Home Depot, Circuit City and Books-a-Million as calling Prattville home, along with about a half-dozen new restaurants.

The new megastores join Lowe's and the Wal-Mart Supercenter as options for local shoppers. The city's Big Kmart, severely damaged during the Feb. 17 tornado, will open its newly renovated store Nov. 1.

With the wish list of even the most ardent shopper almost complete, will the city do away with offering incentives?

"That time may be coming," Byard said. "I think if there is a chance to land a Dillard's, Sam's Club or Costco, yes we will look at incentives. But they won't be as generous as what we have done in the past.

"If a developer wants to renovate an existing shopping center, we would certainly consider working with them on the project."

Robicheaux doesn't see Prattville's surge slowing down any time soon.

"Choosing what nationally known retailers you want to come to your city is quite frankly a wonderful problem to have," he said. "I'm sure there are plenty of cities in Alabama that would love to have Prattville's problems."

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