Sunday, August 29, 2021

Developer Will Lease Property From Oconee Development Authority At No Cost and Sublease It To Costco To Recover Site Improvement Costs

***Costco Requires Site Upgrade As Part Of Contract***

Oconee Chamber of Commerce President Courtney Bernardi touted Costco’s aura, its personnel policies, and its strong sales record on Tuesday when she made the case to Oconee County leaders for the deal to bring the company to the county.

Oconee County Board of Commissioners Chair John Daniells focused more on the county than Costco in comments he has made about the deal.

Daniell said the county did not seek out Costco and the reason he brought the proposal to the Board of Commissioners on Tuesday was because it was financially sound, met county objectives, and was consistent with the county’s Comprehensive Plan.

The county is offering a complex set of incentives that County Attorney Daniel Haygood described as possibly the “most complicated thing” he has dealt with in his legal career.

Haygood said he can simplify by saying the county is spending $1 million in Local Option Sales Tax revenue annually for 15 years to obtain $1 million in Special Purpose Local Option Sales Tax revenue each year from Costco’s sales as well as $1 million in Education Local Option Sales Tax revenue.

The centerpiece of the deal is a $10.1 million purchase by the county’s Industrial Development Authority of 23 acres from Epps Bridge Centre developer Frank Bishop.

Bishop will then lease the property from the Authority at no cost and sublease it to Costco for $4.9 million to cover costs of additional site improvements Costco is requiring.

To finance this incentive package the county will issue $16 million in bonds, only the second time Oconee County has ever sold bonds to bring a company to the county. It issued $10.4 in bonds in 2012 to lure Caterpillar.

Owner Of Property

The 23 acres on the Oconee Connector at the intersection with Plaza Parkway has been identified as a potential site for Costco since the property was rezoned in 2016 for Epps Bridge Centre II.

Haygood At IDA 8/24/2021

Costo will have entrances on Plaza Parkway as well as on Parkway Boulevard, but not on the Connector itself.

Site plans show the roadway off Parkway Boulevard that now provides an entrance to the Hobby Lobby parking lot being extended to the site of the Costco.

The entrance off Plaza Parkway is a short distance from the Connector.

The property currently is owned by Bishop’s Epps Bridge Centre II LLC and has an assessed value of $3.8 million on county tax records.

Under the agreement worked out with Bishop and Costco, the Oconee County Industrial Development Authority (IDA), a legal entity separate from but linked to the county, will purchase that land from Bishop for the $10.1 million.

Included is $9.4 million for the value of the land and another $0.7 million for site improvements.

The estimated total amount needed for those site improvements is $5.6 million.

Further Improvements

On Wednesday I asked County Attorney Haygood, via email, for clarification of the purchase arrangements with Bishop and for other details of the agreement. 

My story on Tuesday was based on what was said at the Tuesday meetings of the Industrial Development Authority and of the Board of Commissioners and a reading of the agreements approved by those bodies at those meetings.

Haygood responded by email on Thursday and we spoke by telephone on Thursday and Friday.

Haygood said Bishop will spend the $5.6 million, including the county’s $0.7 million contribution, prior to the opening of the Costco.

Included are the entrances, lighting, and paving of the parking lot.

Bishop then will sublet the property to Costco, allowing Bishop to recover through the lease fees his $4.9 million investment in those improvements over the next 15 years.

Costco will build and pay for the building on the land owned by the IDA. That building essentially becomes an improvement on the land, so the IDA will own the land and the building.

After 15 years, the IDA will transfer the property with the building to Costco for a nominal fee.

If Costco were to leave before 15 years, the building and land would belong to the IDA.

Property Value And Payment

According to Haygood, the assessed value of $3.8 million on county tax records for the 23 acres owned by Bishop does not reflect the improvements already made to the property.

Haygood said Bishop documented for the county the costs of the property improvements he already has made in the hopes of landing Costco. 

The site is graded and pad ready.

Haygood said, based on those documents, the site work alone is worth $8.2 million.

In the end, the county agreed to pay $9.4 for the property and to add the $0.7 million toward the additional investment Bishop will need to make, bringing the total payment to Bishop to $10.1 million.

Benefits

The county is giving Bishop and Costco the site and the improvements free of charge and free of taxes.

Bishop At IDA 8/24/21

Because these are a benefit to Bishop, and indirectly to Costco, they would be taxed under normal circumstances, Haygood said. The tax would be levied against Bishop as the lessor.

Haygood said the Internal Revenue Services has approved an arrangement where the IDA acts as if it were loaning money to Bishop rather than that he is the recipient of a benefit.

To create that arrangement, the IDA will put $2.7 million of the borrowed money into an account for the county at J.P. Morgan Trust in Delaware.

At the point the investment has earned enough income to pay back the amount of the incentives to the county, that amount will be paid to the county.

The expectation is that the county will not get the $16 million back for 40 years or longer, Haygood said, when $16 million will be worth less than it is today because of inflation.

Bond Components

The county also will put $1.25 from the bond sales into a reserve to cover the final bond payment.

Another $1 million will be needed for capitalized interest, that is interest payments before the county begins collecting Local Option Sales Tax (LOST) on Costco sales.

An additional $400,000 will be needed for underwriter charges and $450,000 will be need to cover issuance costs.

That brings the total needed for the bond sales based on current estimates to $15,850,000.

The IDA and the Board of Commissioners approved bond sales of not to exceed $16 million.

Final maturity on the bonds will be not later than Dec. 31, 2048, but Haygood said the expectation is that they will be retired by paying off the principal and the interest in 16 years.

Revenue To Pay Bonds

The county cannot commit LOST revenue to retire the bonds, but it can and did peg its payments to LOST revenue earned from sales at Costco.

Costco has agreed to provide to the county the records it submits to the Georgia Department of Revenue documenting the taxes it pays, Haygood said.

LOST revenues go into the county’s General Fund, along with property tax revenue. The bonds payments will come from the General Fund.

Bernardi and Haygood told the IDA and the Board of Commissioners that they had invested considerable effort in independently documenting the likely sales revenue by Costco.

Bernardi is in charge of development work for the county under an agreement between the county and the Chamber of Commerce.

Sales Projections

In the first year of operation, the expectation is that the Oconee County Costco store will generate $94 million in total sales and that this figure will increase to $150 million by 2030, Haygood and Bernardi said.

Haygood used the $100 million figure in his tax revenue projections.

At the IDA meeting, Haygood said, with the current sales LOST, Special Purpose Local Option Sales Tax (SPLOST) and Education Local Option Sales Tax (ELOST), each at 1 percent, $3 million will come to the county each year.

“We commit $1 million of that to pay back the bonds,” he said. “Roughly speaking we’d be looking at 16 years.

“And the county gets $1 million in SPLOST, the Board of Education gets $1 million in ELOST. If the proposed TSPLOST passes, that’s another $1 million.”

A 1 percent Transportation Local Option Sales Tax referendum is on the November ballot.

Limits On Payments

The IDA does not have taxing authority, so the Board of Commissioners on Tuesday approved an agreement with the IDA to cover the costs of the bonds.

Bernardi At Board Of Commissioners 8/24/2021

According to state law, Haygood said in his correspondence with me, the county cannot “legally pledge LOST” revenue to cover the bonds.

“But we can limit our payment commitments to the amount raised by LOST,” he added.

“The county’s legal limitation on what it owes on these bonds will be an amount equal to the revenue generated by the Local Option Sales Tax” by Costco, Haygood said at the IDA meeting on Tuesday.

The legal documents clearly state that “we do not have to pay more than the amount generated by LOST,” he said.

In addition, Haygood said on Tuesday, the agreement on the bonds states that “if Costco moves, the county has no further obligation to make bond payments.”

The risk if Costco leaves is to the bond holders, not the county, Haygood said at Tuesday’s meetings.

Breadbox

Haygood referred to the financial arrangement that allows the county to treat the transfer of benefit to Bishop as a “breadbox loan.”

He said he does not know where the term comes from, and I have not been able to find any explanation in my searches on the web.

The web site of UTW Capital, LLC, a St. Louis company that features breadbox loans on its web site, defines the loans in the following way.

“Breadbox is a turnkey lending program that provides a long-term, nonrecourse, non-interest bearing loan to private real estate developers in lieu of a taxable grant,” the site states.

“Since Breadbox is a loan, the funds from public entities are not taxed as ordinary income,” the statement continues.

“Breadbox manages repayment of the economic development loan through a long-term trust fund. After funding, there are no further obligations for the developer or the community,” according to the statement.

Question From Thomas

Commissioner Mark Thomas asked Haygood at the Board of Commissioners meeting on Tuesday if the IRS had approved the loan arrangement.

“The IRS legal fiction on this is because the county gets paid back the money, it really wasn’t incentive, it was a loan,” Haygood said.

“The IRS has given a letter of opinion that that is valid,” he added.

UTW Capital web site says the breadbox loan is a response to the 2017 Tax Act, which otherwise would have made these transactions taxable.

“This has only been done for about a year or two,” Haygood said at the meeting on Tuesday.

Requirements Of Georgia Law

“A lot of what we’re doing is driven by the peculiarities of Georgia law that just force us into some really awkward ways of handling this,” Haygood said in our telephone conversation.

“In order for Costco to come, their position was they will not spend the full amount they need to spend to acquire property and locate here because we are not a big enough market,” Haygood said.

“We’ll spend enough to build the building,” Haygood said Costco told the county. “Everything else is on y’all.”

A necessary part of the deal was that someone has to spend $5.6 million for the property improvements.

“So that Frank can recoup that $4.9 million he is putting in,” Haygood said. “We’re simply saying there will be no payment in lieu of taxes on this for 15 years.”

That is the benefit given by the county to Bishop.

Property Tax Loss

The tax bill for 2021 sent to Bishop for the 23 acres is $34,841.88, according to county tax records, with $10,047 for county taxes, and 24,794 is for school taxes.

Clerk Holly Stephenson, Daniell, Thomas 8/24/2021

If the property were improved and owned by either Bishop or Costco, rather than by the IDA, the owner would have to pay property taxes. As a government entity, the IDA does not pay taxes.

“It is not possible to give anything more than an estimate of what property taxes are being foregone,” Haygood wrote in our email exchange.

The building and site have not yet been constructed, he said, and the county does not know what personal property will be in the building and subject to tax.

“Nonetheless, based on similar facilities in other counties,” he said. “Our best guess is that the tax amount would start out at around $300,000 to $350,000 per year and drop some amount after that.”

Both the building and the personal property would depreciate, he said, though the land likely would appreciate.

“All that to say that our best guess about future valuations is that the taxes which would have been collected over the 15 year abatement would be between $3.5 million and $4 million,” he said.

Daniell On Standards

I asked Commission Chair Daniell in an email message on Thursday why the county did the deal for Costco.

“We look at each economic development deal independently,” Daniell said in an email on Saturday morning.

“We get many opportunities, and most do not meet our objectives, or is not fiscally sound or is not supported by the Comprehensive Plan,” he continued.

“After many attempts, the Costco deal was presented so the BOC would support moving forward,” he continued.

In a telephone conversation that followed that email, Daniell said the deal that came to the county was one that met the standards and that’s why he put it before the Commission.

This was “after many, many attempts,” he said. “They’ve been nibbling at the door for many years.” He had said at the Industrial Development Authority that talks go back to 2009.

“So what I hear you saying is that it wasn’t Costco, it was the deal,” I responded to Daniell.

“Exactly,” Daniell replied.

Future Use Of Incentives

I asked Daniell in my email if the county would use incentives for another retail company in the future.

“We will continue to evaluate opportunities, and we do not know exactly what those opportunities will look like,” Daniell said.

“If the deal meets our objectives, is fiscally sound, and is supported by the Comprehensive Plan there is a possibility to use incentives in the future,” he said.

The county still owes $8.3 million on the $10.4 million it borrowed in 2012 to provide enticements for Caterpillar to locate on the Clarke County line just outside Bogart. 

Clarke County also contributed incentives, which combined with those provided by Oconee County, were $19.7 million.

Caterpillar makes set payments to both counties in lieu of taxes.

At the end of the Industrial Development Authority meeting on Tuesday, Daniell said that “Costco is a good employer, so we are really excited.

“That is probably is one of the major things in my mind,” he continued. “How they treat their employees and what this is going to do for some good jobs here.”

Bernardi Comments

Bernardi, in her comments to the IDA, said in terms of personnel policy Costco “is above average. It is far and beyond what most retailers do.”

The store is expected to have between 250 and 275 employees, she said, with an average hourly salary of $23. The typical starting salary is $16.50 per hour, she said, with the average annual salary of $58,000.

Costco offers bonuses and pays time-and-a-half on Sundays, she said. And it provides full medical benefits for all employees as well as education support for the employee and dependents.

“Retail looks different than maybe it did five years ago, even, certainly with 10 to 15 years ago,” Bernardi said. “But Costco has never closed a store in the history of their organization.”

“A community of our size has never seen a Costco,” she said at the Commission meeting, “so this would be--this is a huge win for our community.”

The regional draw, she said, will be about 450,000 to 500,000 people.

The store is expected to open in the middle of 2022, Bernardi said.

Competition

Haygood said that Costco has considered other sites in the region, including in Clarke County.

The extension of Parkway Boulevard in 2016 to provide a connection to the site from Epps Bridge Parkway was undertaken, Haygood said, to make the Epps Bridge Centre II site more attractive to Costco.

Haygood said he understands the argument that government should not be involved in the market, interjecting itself in businesses activities, and playing a role in real estate investments.

“After this transaction is done, we’ll get $1 million, Watkinsville and Bogart will get their LOST payments, and the School Board will get $1 million,” he said. “To me, in a financial sense, it is kind of a no-brainer.”

“If we don’t do this here, what happens if it goes in at Bethlehem?” Haygood asked, referring to the Barrow County commercial development. “All of a sudden, all of those tax dollars start drifting up that way.

“In all likelihood, this brings other retail with it,” he added.

Haygood said Costco is in a special category of retailer. (The company calls itself a wholesale club.)

It is one of the few retailers in the country that can generate $100 million in annual sales, Haygood said.

Video

I attended both of the meetings on Tuesday remotely, but Philip Asford attended them in person and recorded the video below.

In the Zoom sessions, it often was hard and sometimes impossible to hear comments made by people, particularly when they did not come to the podium.

The audio in Ashford’s record is good throughout.


3 comments:

Unknown said...

I am confused here. Are the county bonds tied to Costco's sales tax revenue to the county? Where is the money going? Are we trading money for Costco for jobs like Caterpillar? Is Bishop getting $16 million? what's the breakdown of how/where the money is going? Can you reach out to Bishop or Daniel for a clarification? If Haygood is working on it will the deal structure become public?

The simplification of spending $1 million to get $2 million makes a lot of sense, but where is the rest of the money coming from? If the county is getting the money back at the end of the structure, then isn't it actually a loan and not a legal fiction?

Bernadette Haumschild

Lee Becker said...

Bernadette.
Thank you for your comment.
The Board of Commissioners has scheduled a Town Hall meeting for 6 p.m. on Sept. 14 at the Civic Center. This is a complex arrangement. That is an opportunity for citizens to pose questions.
Here is what I learned that answers some of your questions.
1. The bonds are not officially tied to the sales tax. The required payments are pegged to the sales tax. The bonds will be retired by payments from the General Fund, into which the LOST tax revenue is placed.
2. I spelled out the pieces of the $15.8 in bonds in the story. See the section called Bond Components.
3. Caterpillar was promoted as a job creator. The estimated employment is 1,400. Costco is not being promoted as a job creator so much as a revenue generator, though the jobs are being promoted as good ones.
4. Bishop is getting $10.1 million. Again, see the section Bond Components.
5. The information in the post comes from Haygood and Daniell.
6. The deal structure is public.
7. The money to repay the loans comes from that $1 million per year over the years until the bonds are repaid. (The actual amount to be paid on the loan is pegged to the amount received from LOST on Costco sales, so it will increase as sales increase.)
8. The county is putting money into a trust account that will build over time. There is no actual loan to Bishop. He is not paying it back. The IRS is allowing the county to treat this as a loan so that Bishop does not have to pay taxes on the benefit he is receiving.
I hope this helps.
Lee

B Rodgers said...

Lee,

Thank you for so diligently working to explain this complex "breadbox" and the bond deal.

Beverly Rodgers