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<\/a><\/p>\nFor Brea, however, a Costco is feasible only through such an arrangement,<\/a> officials said. It gives the developer who bought the land \u2014 and landed the Costco lease \u2014 the lion\u2019s share of sales taxes generated by the big box store over an unusually long 50-year term.<\/p>\n What\u2019s the difference? Costco paid a reported $12 million for the Lake Forest land. Developer Dwight Manley paid a reported $140 million for the Brea land, a bit more than half of which will be devoted to the Costco.<\/p>\n Whether the agreement is a good deal or a dog has been a matter of debate. Municipal finance experts are unimpressed, with one calling it a \u201cbad bet by any measure.\u201d Supporters say it will give Brea the Costco it has longed for and pump millions of sales tax dollars into city coffers.<\/p>\n Jeff Ball, CEO and President of the Orange County Business Council, called it a win. Comparing sites is difficult, he said; there are myriad factors unique to each location, from zoning to retail competition to the cost of the land itself \u2014 and all impact what makes a project work.<\/p>\n \u201cAt the end of the day, the city\u2019s getting a strong developer with a powerful tenant that is proven and is going to bring considerable benefit to the city,\u201d Ball said.<\/p>\n Mark Strom, a Brea resident who opposes the deal, heartily disagrees. The land was expensive because there were multiple interested buyers who saw a higher and better use for the property, he said.<\/p>\n \u201cThe city and Manley are trying to put a square peg in a round hole and are asking taxpayers to make up the extra cost to Manley. If he wanted to put a Costco on Balboa Island, should they give him $2 billion because his economics don\u2019t work? It\u2019s nutty,\u201d Strom said.<\/p>\n The tax sharing agreement that Brea\u2019s city council inked with Manley in December<\/a> will put the Costco on a portion of the Beckman Coulter campus on South Kraemer Street. The developer gets the overwhelming majority of sales taxes in the early decades, while the city won\u2019t see much of its slice for about 30 years.<\/p>\n The deal projects total sales tax revenue of $133.7 over the half-century. Manley\u2019s company will get 57.5%, or nearly $77 million. The city will get 42.5%, or just over $50 million.<\/p>\n One councilmember described it as \u201cthe best deal we could expect.\u201d But text messages between Manley and the city\u2019s point person<\/a> suggest Brea may not have pushed very hard for a more favorable split.<\/p>\n Critics also suggest that timing \u2014 specifically, the city\u2019s decision to accept its share of taxes later in the deal \u2014 is problematic.<\/p>\n Over the Brea Costco\u2019s first decade, the developer gets 10 times more money than the city \u2014 $23 million for the developer, and $2.3 million for the city\u2019s general fund, according to projections.<\/p>\n By year 20, it pencils out to about $41.5 million for the developer and $9.4 million for the city.<\/p>\n The deal also dedicates 5% to Brea senior programs each year. That\u2019s $6.7 million over the agreement\u2019s life, or $134,000 a year on average.<\/p>\n \u2018Bad bet by any measure\u2019 Consumer advocates have long railed against deals like this, which they call \u201ccorporate welfare.\u201d<\/p>\n There are almost 200 active tax-sharing agreements in California \u2014 22 in Orange County \u2014 though just a handful statewide involve Costcos.<\/p>\n The Southern California News Group asked several municipal finance experts to review Brea\u2019s agreement. They were not enthusiastic.<\/p>\n \u201cI\u2019m skeptical of any contract that lasts for half a century because the people taking credit for it in the short term never seem to be around for the long-term consequences,\u201d said Michael Thom, a professor at USC\u2019s Sol Price School of Public Policy.<\/p>\n \u201cThe city\u2019s memorandum lists benefits, such as additional tax revenue, but doesn\u2019t explain the methodology,\u201d he continued. \u201cWhat about the drop in sales tax revenue from stores that lose customers to Costco?\u201d<\/p>\n The agreement\u2019s half-century term was a concern for Greg LeRoy, executive director of Good Jobs First, a government watchdog group that tracks corporate subsidies. \u201cGod knows what retail will look like 10 years from now, never mind 50,\u201d he said. \u201cIt\u2019s a volatile landscape, which is another reason not to try to pick winners and losers.\u201d<\/p>\n Andrew Leahey, a professor and attorney at Drexel University\u2019s Thomas R. Klein School of Law, said that what Brea approved is more akin to a 50-year public works expenditure program than a \u201c \u2018gosh it\u2019d be nice to have a Costco on this corner\u2019 deal.\u201d<\/p>\n \u201cThe deal is exceedingly front loaded,\u201d Leahey wrote via email. \u201cIt takes until year 30 before there is anything like parity between the developer and the city. And by then the developer has banked between 65% and 100% of the benefits across three decades. So, to put it in words, Brea traded near-term complete certainty for long-term speculation. Bad bet by any measure.\u201d<\/p>\n Once you factor in the time-value of money, it gets worse, he said. \u201cThe value of a dollar in 2066 is not the same as one in 2026. So even if, somehow, the plan would completely refund the city for any lost revenue in 2066 dollars \u2014 it is still a bad deal for Brea today.\u201d<\/p>\n The argument that \u201cwe get nothing in sales tax from the site today, so anything is a win\u201d is a common, but spurious, refrain, Leahey added.<\/p>\n \u201cThe counterfactual here isn\u2019t $0 vs. something in 30 years, it\u2019s $0 as against alternative tenants, alternative development, future land use options, or hell even just demanding a better deal from Costco,\u201d he said. \u201cThe city bears all the structural risk, locks the site up for current usage patterns for the next 40 years, and bets that Costco won\u2019t downsize, relocate, fall on hard times, etc., before at least 2056, when they start getting some meaningful income.<\/p>\n \u201cSo in sum, the developer gets paid now. The city gets paid if everything is still humming along decades from now\u2026. bad deal, not a disaster, not uncommon. Text messages are a horrible look.\u201d<\/p>\n California\u2019s Legislative Analyst is no fan of tax sharing deals<\/a>, either. \u201cFrom a statewide standpoint,\u201d the office said in a September report on such agreements, \u201cthis redirection of revenues reduces funding for cities.\u201d<\/p>\n Millions for Brea<\/p>\n Manley dismissed the criticism as ivory tower musings from people who don\u2019t understand the real world.<\/p>\n The deal\u2019s structure is dictated by the land\u2019s steep price, and the city is paying zero for it, he said.<\/p>\n \u201cOf course the developer gets the most in the beginning years,\u201d he said. \u201cThey are putting up all of the money, up front. Are you saying that someone getting $5.5 million dollars income annually for a property that is worth over 100 million is too much? How much does a home mortgage cost? Seven percent? The path we are on is less lucrative than many others.\u201d<\/p>\n \u201cThe only reason there will be any future tax revenue on this site will be due to the huge up front investments myself and the business put forward,\u201d Manley said. \u201cIf for some reason things didn\u2019t work out, I and they are the big losers. The city can\u2019t lose what it never had.\u201d<\/p>\n Those who bemoan the corrosive impact of inflation on the city\u2019s delayed cut \u201cdon\u2019t understand finance or the time value of money,\u201d he said. Future inflation increases the sales tax revenue, he argued, which benefits the city as its share rises. \u201cThat is a simple fact,\u201d he said.<\/p>\n Since redevelopment agencies were phased out, agreements like this help cities get things done, Manley said. \u201cI have personally dealt with the city for nearly 25 years, seen redevelopment come and go, and invested my personal money to know how this works.\u201d<\/p>\n For its part, Brea understands that there are many different viewpoints on the agreement and declined to comment on others\u2019 opinions, said spokesperson Liz Pharis.<\/p>\n But Brea analyzed alternatives to forecast how much different projects would generate in tax revenue, including all-residential development at various densities, she said. The Costco project was superior because it will bring both property and sales taxes to Brea, while all-residential projects would only bring property tax. Under the limits of Proposition 13, residential development can provide modest revenue increases, while the city would have to shoulder the cost of services to all the new residents, she said.<\/p>\n Ball, of the Business Council, said the Costco will also create jobs and workforce opportunities.<\/p>\n<\/a>Screenshot of texts between developer Dwight Manley (black) and Brea Assistant City Manager Jason Killebrew (blue)<\/p>\n
\n<\/a>Year-by-year detail on split between the developer and the city of Brea for Costco sales tax revenue split<\/p>\n<\/a>Dwight Manley in 2019. (Photo by Jeff Gritchen, Orange County Register\/SCNG)<\/p>\n<\/a>While the length of most tax sharing agreements land in the 10, 20 and 30 year range, the 50-year term of this agreement is dictated by the land cost, Manley said. In texts between Manley and the city\u2019s point person, Assistant City Manager Jason Killebrew, Killebrew suggested it was the longest term allowed by law.<\/p>\n