REPORT TO THE CITY COUNCIL
December 17, 2015
FROM: BRUCE RUDD, City Manager
BY: LARRY WESTERLUND, Director of Economic Development
SUBJECT
Title
Actions pertaining to a fulfillment center for Nordstrom, Inc.
1. Adopt an Addendum to a Mitigated Negative Declaration prepared for Environmental Assessment No. TPM-2012-06 in accordance with Section 15162 of the CEQA Guidelines;
2. Approve Economic Development Incentive Agreement between the City of Fresno and Nordstrom, Inc.;
3. Authorize the City Manager to negotiate and sign the final Economic Incentive Agreement with Nordstrom, Inc., consistent with the material terms approved by Council, prior to December 31, 2015.
SPONSOR: Economic Development Department
Body
RECOMMENDATION
The Administration recommends that the Council approve the attached Addendum to a Mitigated Negative Declaration prepared for Environmental Assessment No. TMP-2012-06 and Economic Incentive Agreement between the City and Nordstrom, Inc. (Nordstrom), and approve the draft Economic Incentive Agreement. Additionally, the Administration recommends the Council authorize the City Manager to sign the final Economic Incentive Agreement consistent with the material terms of the draft agreement prior to December 31, 2015. The agreement will provide performance-based financial incentives, via the creation of up to 1,875 jobs at an Internet Fulfillment Center (i.e. Business Activity Center/s) to be located in Fresno.
EXECUTIVE SUMMARY
Nordstrom, founded in 1901, is a publicly traded company listed on the New York Stock Exchange. They have been a member of the Fortune 500 for the last 21 years. Recognized as one of the “World’s Most Admired Companies,” Nordstrom’s market capitalization is $10.1 billion. The Company needs to expand its e-commerce capacity to the West Coast of the United States, and California in particular.
In June 2015, the City of Fresno was contacted by consultants working on behalf of the Company indicating their West Coast facilities search in California had been narrowed to the Central Valley. The City’s Economic Development Director worked with the site selector to identify land options that would meet the client’s needs. Ultimately, North Pointe Business Park was selected by the Company to be the subject of their full due diligence. The Administration has led a coordinated effort involving virtually every department in the City of Fresno, the North Pointe Business Park developer, private utility providers (i.e. power and telecommunications), and other partner agencies (i.e. Fresno Metropolitan Flood Control District, the San Joaquin Valley Air Pollution Control District, and the Economic Development Corporation Serving Fresno County) to ensure Fresno is a finalist for this major investment.
Nordstrom has now confirmed that the City of Fresno is one of two locations being considered for their West Coast E-Commerce Fulfillment Center in California, and has requested that an incentive agreement be approved so that they can complete their analysis and make a final decision on the location.
The proposed Nordstrom facility would include a $110 million, one million square foot e-commerce fulfillment center on 55 acres in the North Pointe Business Park. The Company projects that their initial workforce would consist of 800 full time equivalent (FTE) employees with 200 to 450 part time employees at peak times of the year, and would eventually grow to 1,000 FTE. The Company is planning a second phase of the project that could include traditional distribution facilities once the first center is opened, which could add another 875 FTE.
The Company conservatively projects retail sales of $100 million in the first year at the Fresno site and expects e-commerce sales to continue to grow each year by 10%. Last year, Nordstrom reported $2.4 billion in Internet sales from their four existing distribution sites.
The Administration and Nordstrom are requesting that Council approve a sales tax sharing agreement based on job-creation performance at the Center to incentivize the Company in locating up to 1,875 jobs in Fresno.
For “Business Activity Center #1” (i.e. the e-commerce fulfillment center and the initial 1,000 jobs), the sales tax sharing agreement would not exceed $10 million and would be based entirely on the number of FTE jobs created at the Fresno site.
Should Nordstrom move forward with Business Activity Center #2 (the distribution facility and the additional 875 jobs), additional sales tax sharing, not to exceed $8.75 million and based entirely on the number of FTE jobs created at the Fresno site, would be provided.
In order to determine the economic benefits associated with the project, the Economic Development Department engaged an outside firm, Impact DataSource, to analyze the public investment in this project and the potential return on that investment. Based on this analysis, Impact DataSource determined that the City would receive more than $34 million in additional sales tax over the next 20 years.
BACKGROUND
Nordstrom, Inc., is a leading fashion specialty retailer offering clothing, shoes and accessories for women, men and children. They are known for their outstanding customer service and operate 323 stores in 39 states and Canada. Customers are served at 121 full-line stores, 194 Nordstrom Rack locations, five Trunk Club clubhouses, two Jeffrey boutiques and one clearance store. In addition, the Company serves customers online in 96 countries through Nordstrom.com and in partnership with their private sale site, HauteLook.
During summer 2015, Nordstrom opened their third fulfillment center in Elizabethtown, Pennsylvania. The Pennsylvania center is 673,000 square feet, employs 400 full-time employees, and will grow to 700 FTEs, in addition to more part-time and seasonal employees. The reported investment in the Pennsylvania facility was $90 million.
Since June 2015, the City has worked with the Company and the owners of the North Pointe Business Park to conduct the Company’s due diligence on the site. As mentioned above, the Fresno site has been selected as one of two finalists in California for Nordstrom’s fourth e-Commerce Fulfillment Center. The second site in consideration is located in the Southern San Joaquin Valley.
Both sites have been evaluated by the Company’s design/build team and their labor specialist for, among other things, the cost of development, land price, logistics and the quality and quantity of the local workforce. According to the Company’s representatives, both Central Valley sites are very similar in their attributes. At this point in time, there has not been a determination of which site is considered the top choice.
Last Thursday, the Company’s tax incentive consultant asked the Administration to consider a performance-based, sales tax incentive agreement. Since last week, the Administration has been working with the Company’s consultant to draft a mutually acceptable agreement to submit to the City Council for approval.
For any incentive agreement to be legally binding, the City and Nordstrom must execute the agreement by December 31, 2015. Effective January 1, 2016, the State of California no longer allows a city to enter into an agreement that results in the “…payment, transfer, diversion, or rebate of Bradley-Burns local tax proceeds to a retailer if the agreement results in a reduction of revenue that is received by another local agency” (SB 533). In this case, Nordstrom has indicated that Internet sales and fulfillment are now conducted outside of California and that there should be no appreciable transfer of sales tax from any California local agency. Therefore, it’s possible that the sales tax incentive agreement between the City and Nordstrom is not subject to SB 533. However, given the uncertainty created by changes in the law and the short time frame in which to act, the Administration believes it is best to be prudent in adopting the sales tax sharing agreement before December 31, 2015, in case the State later determines SB 533 would apply to this incentive agreement.
The Economic Development Department has been working with Nordstrom to attract its e-Commerce Fulfillment Center (“Business Activity Center #1”), as well as its later distribution facility (“Business Activity Center #2”). The e-Commerce Fulfillment Center would include a $110 million of investment in a one million square foot facility. The initial workforce would include 700 to 800 new FTE over several years, with an additional 200 to 450 part-time, seasonal jobs. Eventually, the e-Commerce Fulfillment Center would employ in excess of 1000 FTEs at full build out.
Additionally, it is contemplated that Nordstrom will open an additional distribution facility in the coming years. This facility could be an addition to the current facility or a separate facility at another local site. The agreement anticipates both Business Activity Centers and would offer a similar sales tax sharing incentive to Nordstrom should they move forward with their second facility. The incentive for the additional activity center would be no more than $8.75 million dollars under the same terms and conditions as outlined below.
The Administration has negotiated a Job Creation/Performance-Based Economic Incentive Agreement. The deal points are as follows:
E-Commerce Fulfillment Center (“Business Activity Center #1”) - based on Nordstrom’s anticipated employment of 1,000 FTE at $10,000 per job:
1. Once the annual average FTE count reaches 700 FTE, the City would rebate sales tax to Nordstrom over a period of time not to exceed $10,000,000.
2. The City Sales Tax Rebate would be 75% of the sales tax revenue received from the Business Activity Center #1 for the first three years of the incentive program, after achieving 700 FTE average.
3. In years four and following, until the $10,000,000 total incentive is provided, the City sales tax rebate would be 50% of the annual sales tax revenue received from Business Activity Center #1.
4. As soon as the sales tax rebate achieves the total cap of $10,000,000, or 30 years, whichever occurs first, the provision in this agreement related to Business Activity Center #1 will terminate.
5. No other revenue streams will be dedicated to the project, including property tax and/or business license tax, etc.
Potential Business Activity Center #2 - based on Nordstrom’s anticipated employment of 875 FTE at $10,000 per job:
1. Nordstrom could elect at their sole discretion to expand their existing facility or build a new facility within the City of Fresno boundaries in the future for a second business activity center.
2. The new expansion or building could employ up to an additional 875 full time employees.
3. The City would rebate sales tax to Nordstrom up to $8.75 million (based on $10,000 per FTE).
4. The City sales tax rebate would be 50% of the sales tax revenue received from Nordstrom until the Incentives Cap of $10,000 per annual average FTE up to a maximum of $8,750,000 total incentive.
5. As soon as the sales tax rebate achieves the total cap of $8,750,000 or 30 years, whichever occurs first, the provision in this agreement related to Business Activity Center #2 will terminate.
6. No other revenue streams will be dedicated to the project, including property tax and/or business license tax, etc.
Total City incentive cost would not exceed $18,750,000 and would not be triggered until the annual average FTE count on Business Activity Center #1 is 700 or greater.
The Economic Development Department engaged an outside firm, Impact DataSource, to analyze the public investment in this project and the potential return on that public investment. A copy of their report and full analysis is attached.
Impact DataSource reviewed the dollars to be invested and estimated the minimum impact the project would have in the local economy. The firm also estimated the costs and benefits for local taxing agencies over a 20-year period. They concluded that overall, the City will receive approximately $34,173,981 in net benefits over the 20-year period from additional local tax revenue alone. Additionally, they concluded that the initial 880 jobs will result in an additional 187 indirect and induced jobs over the next twenty years.
In addition to the foregoing Economic Impact Report, and as part of the City’s due diligence, the City Controller and the Director of Economic Development have reviewed Nordstrom’s Third Quarter 2015 Earnings Report with consolidated financial statements to complete the due diligence required by the Better Business Act. A copy is attached, and the Better Business Act is fulfilled with the information disclosed in the Company’s public filing.
ENVIRONMENTAL FINDINGS
The City of Fresno has conducted an initial study and proposes to adopt an Addendum to a Mitigated Negative Declaration adopted for Environmental Assessment No. TPM-2012-06. The environmental analysis contained in the Initial Study and this Addendum to the Mitigated Negative Declaration tiers off of Master Environmental Impact Report SCH No. 2012111015 prepared for the Fresno General Plan (“MEIR”). A copy of the MEIR and the Mitigated Negative Declaration may be reviewed in the City of Fresno, Development and Resource Management Department. The proposed project has been determined to be a subsequent project that is fully within the scope of the MEIR for the Fresno General Plan and the aforementioned Mitigated Negative Declaration. No further assessment of the project is required.
CITY ATTORNEY ANALYSIS
The Better Business Act requires a City Attorney analysis concerning legal risk. The financial risk to the City is minimal. The City is only obligated to pay the Company the agreed upon portion of sales and use tax actually paid by the Company and received by the City, and only to the extent that at least 700 FTE jobs are created and maintained by the Company. There is no other out of pocket expense to the City pursuant to the Economic Development Incentive Agreement. It is recommended the agreement also contain standard provisions for indemnification for challenge to the agreement, third party liability, prevailing wage claims, and reimbursement for sales tax rebated by the City to the Company, should the City be required to refund to the State the sales tax received. The agreement should also provide for mechanisms for the City to verify sales tax payments and job creation. Finally, the Company appears to have the financial wherewithal to fund any indemnification claim.
LOCAL PREFERENCE
Local preference was not considered because this is not a competitive bid.
FISCAL IMPACT
The Agreement is based upon a “Job Creation/Performance Based” strategy through rebating sales tax increment the City would not otherwise realize without this development. The Agreement does not attach any sort of liability to the General Fund or any other City account. It is estimated that this project will provide an overall net benefit to the City of approximately $34.2 million over a twenty year period.
Attachments:
Attachment A - Addendum to a Mitigated Negative Declaration prepared for environmental Assessment No. TPM-2012-06
Attachment B - Economic Incentive Agreement with attachments
Attachment C - A Report of the Economic Impact of a Nordstrom E-Commerce Fulfillment Center in Fresno, CA. prepared by Impact DataSource dated December 15, 2015
Attachment D - Nordstrom’s Third Quarter 2015 Earnings Report with consolidated financial statements
Attachment E - City Controller’s Fiscal Schedule