CITY MANAGER' S REPORT
NOVEMBER 18, 2024 CITY COUNCIL SPECIAL MEETING
ITEM:
ITEM 5. 1
DISCUSSION OF POSSIBLE FINANCIAL INCENTIVE
PROGRAM( S) TO ATTRACT ENTERTAINMENT RETAIL
BUSINESSES TO LATHROP
RECOMMENDATION: Council to Consider Incentive Options Presented, Discuss, and Provide Staff Direction to Establish an
Entertainment Incentive Program Based on Use of
Measure D Funding
SUMMARY:
On October 14, 2024, Lathrop City Council directed staff to explore possible financial incentive programs to assist in the attraction of entertainment establishments with the use of Measure D' s Citywide Economic Development Fee as the source of program funding. The Council asked staff to explore potential incentives including partial reimbursement or a grant based on city capital facilities fees related to new development, opportunities for the City to lease or offset lease expenses on behalf of a third - party entertainment entity, and/ or provide financial assistance through a loan program.
In evaluating the three potential programs, a partial reimbursement or grant based on the city capital facility fees for new development appears to have the greatest impact, thereby allowing the business to realize an upfront reduction in capital costs.
After discussions with real estate professionals and landlords regarding the possibility of the City leasing existing space or offsetting lease expenses on behalf of a third -party user, there was unified concern over the financial credit with entertainment users, expensive tenant improvements, and a history of business failure before leases expire. Due to these general concerns regarding entertainment uses, the potential for extended costs and risk of liability, a City incentive to lease or offset lease expenses is not recommended.
Loan programs and funding opportunities are abundant in San Joaquin County, but business financing often depends on the credit history of the borrower. In addition to staff time and expenses, a City funded loan program would require contracting with an outside lending agency for administration. Due to the additional costs related to administration and the potential of financial loss due to loan default, a City funded loan program is not recommended.
Establishing an incentive for the purpose of enticing entertainment businesses to Lathrop may provide a useful business attraction tool, but careful consideration as to the type of incentive and the impact it may have on the City are factors that should be considered.
CITY MANAGER' SREPORT
NOVEMBER 18, 2024 CITY COUNCIL SPECIAL MEETING
DISCUSSION OF POSSIBLE FINANCIAL INCENTIVE PROGRAM( S) TO
ATTRACT ENTERTAINMENT RETAIL BUSINESSES TO LATHROP
BACKGROUND:
PAGE 2
The City' s population growth has significantly increased over recent years, which has resulted in the California Department of Finance ranking Lathrop as the fastest growing city in California in the years 2023 and 2024. The City' s innovative planning and developer foresight prepared Lathrop for the current growth through new housing developments in River Islands and Stanford Crossing.
From January 2020 through January of 2024, Lathrop' s population increased from 26, 833 people to 37, 033, or by 38%. In addition to the increase in population, Lathrop has also seen an increase in average household income and education levels, which helps to attract more retail establishments. However, commercial growth has not kept pace with residential growth, and residents desire more retail and, specifically, more entertainment venues in Lathrop.
Passed by the vote of the electorate on November 7, 2000, Measure D established an Economic Development Fee ( EDF) for the purpose of stimulating business activities in the local economy. The EDF is solely funded through new homes sales in River Islands. At close of escrow for each new home sold, a $ 5, 000 EDF fee is collected with eighty percent ( 80%) deposited to a " Stewart Tract Account" and twenty percent ( 20%) deposited to a " Citywide Account". Measure D limits allocation of money from the EDF Citywide Account to the east side of Interstate 5 within Lathrop' scity limits. To date, the EDF Citywide Account has only been used during COVID as a grant to Lathrop small businesses, and the account was repaid through ARPA funding. The current balance of the EDF Citywide Account is $ 3. 9 million dollars.
Staff received direction from City Council at the October 14th meeting to research opportunities to create an incentive program for the purpose of attracting retail entertainment businesses to Lathrop by utilizing the funding of the EDF Citywide Account. Pursuant to the Council' s direction, staff explored 1) partial reimbursement or a grant based on the city capital facilities fees for new development, 2) opportunities for the City to lease existing space or offset lease expenses on behalf of a third -party entertainment entity; and/ or, 3) offer potential financial assistance through a loan program.
City Capital Facility Fee Partial Reimbursement or Grant As a new and developing city, Lathrop' svacancy rates for existing leasable building space are minimal, which creates a need for construction of new commercial buildings. With the current climate of high interest rates and increasing costs of construction, these items present challenges to new development to meet the return on investment required to sustain a business establishment. Taking these factors into consideration, a City reimbursement or grant program based on a portion of the city capital facility fees may be an enticing incentive by reducing business start- upcosts.
CITY MANAGER' S REPORT
NOVEMBER 18, 2024 CITY COUNCIL SPECIAL MEETING
DISCUSSION OF POSSIBLE FINANCIAL INCENTIVE PROGRAM( S) TO
ATTRACT ENTERTAINMENT RETAIL BUSINESSES TO LATHROP
PAGE 3
Developers are required to pay permit and development impact fees before constructing a new building. Fees may include building permit and plan check fees, city capital facility fees, levee impact fees, agricultural mitigation fees, and non -city development impact fees, which all vary by parcel, location, acreage, building square footage and use type.
Building and plan check fees are minimal ( 10-5%) in comparison to the city capital facility fees, which relate to construction and maintenance of City infrastructure such as water, sewer, storm, transportation and municipal service facilities.
Staff analyzed development fees estimated for construction of a new building using various square footage and based on two different locations east of Interstate 5.
Estimated city capital facility fees ranged from $ 197k to $ 273k for a 5, 000 square foot building on 1. 5 acres to $ 511k to $ 1m for a 40, 000 square foot building on 4 acres. The use of Measure D, EDF Citywide Account to reimburse or grant a percentage of the city capital facility fees on new development may be an impactful way to attract entertainment businesses while reducing their upfront costs. For example, an entertainment incentive may offer a 50% reimbursement or grant based on the total of City capital facility fees up to a maximum of $ 500, 00.
City Lease Existing Space or Offset Lease Expenses for Entertainment User To explore opportunities for the City to lease or offset lease expenses on existing industrial and/ or commercial space for a third - party entertainment user, staff solicited feedback from four ( 4) commercial/ industrial real estate brokers and two 2) developer/ landlords who have interest and investment in Lathrop and the surrounding communities.
Commercial lease rates, common area maintenance ( CAM) charges, insurance and taxes for a 5, 000 square foot space can cost $ 300k or more a year. Because Lathrop is a newer city, the availability of existing commercial space is extremely limited, which requires many new users to construct a building.
Industrial property owners and landlords expressed little interest in leasing warehouse space to entertainment uses for several reasons. The top three industry concerns being: 1) poor credit history causing above market lease rates; 2) liability and cost of insurance; 3) devaluation of the building as industrial tenants tend to take better care of leased space. Other issues included costly tenant improvements to convert the space to entertainment use, such as increasing the number of bathrooms, adding more entrance and emergency exits, meeting Title 24 energy code requirements to provide temperature control systems, and meeting parking requirements. Landlords and brokers shared their experience with entertainment users commenting that many of these businesses have poor credit and fail before the lease expires leaving landlords with a large expense to demolish and recondition the space back to its original use.
CITY MANAGER' S REPORT
NOVEMBER 18, 2024 CITY COUNCIL SPECIAL MEETING
DISCUSSION OF POSSIBLE FINANCIAL INCENTIVE PROGRAM( S) TO
ATTRACT ENTERTAINMENT RETAIL BUSINESSES TO LATHROP
PAGE 4
While it may be possible for the City to lease or offset payment of a lease on behalf of a third -party entertainment user, the landlord would likely require the City to put up a security deposit, agree to a guaranteed lease arrangement, or have the City be the lessee while allowing the ability to sublease the space to a user. All of which would increase the City' s potential expense and liability. For these reasons, a lease type incentive program is not recommended.
Financial Loan Program
There are several funding mechanisms in place to meet business needs for working capital, construction, equipment, and real estate to include loans from banks, credit unions, Small Business Administration 504 and SBA 7(a), San Joaquin County Revolving Loan Fund and Micro -Loan program. However, credit history is key for a business to obtain a loan or line of credit. For the city to compete with these financial institutions, it would need to hire an agency to perform the credit analysis, process the application, underwrite the loan, track payments and follow up on delinquencies. Staff oversight of the loan program would also need to be considered.
In addition to San Joaquin County, the cities of Lodi and Tracy do offer Small Business Loan programs administered through outside lending agencies. The City of Tracy leveraged city funds with a match from Grow America - National Development Council ( NDC) to offer SBA 504 and 7(a) loan programs to their small business community. NDC is the third -party lending agency for the City of Tracy' s loan program. Lodi allocated $ 340, 00 toward its loan program, plus another 130, 00 for technical assistance, fees and associated costs related to program implementation and management. Lodi hired California Capital as its third -party lending agency. However, both programs are for micro and small business loans and are not industry specific.
Due to the additional expenses related to contracting with a third -party lending agency, the risk of default, additional expenses, and existing availability of loan programs, a City -funded loan program is not recommended.
REASON FOR RECOMMENDATION:
The intent of this report is for City Council to discuss the incentive programs presented and provide staff direction on establishing an Entertainment Incentive Program utilizing Measure D' s Economic Development Fund —Citywide Account as a funding source.
FISCAL IMPACT:
Measure D - Economic Development Fund, Citywide Account would be the funding source for an Incentive Program.
CITY MANAGER' SREPORT
NOVEMBER 18, 2024 CITY COUNCIL SPECIAL MEETING
DISCUSSION OF POSSIBLE FINANCIAL INCENTIVE PROGRAMS) TO
ATTRACT ENTERTAINMENT RETAIL BUSINESSES TO LATHROP
APPROVALS:
1Hr3- 2
PAGE 5
Shelley Burc m Date
Economic Development Administrator
Cari V - s
Finance irector
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Date
Salvador Navarrete Date
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City Attorney
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Stepen 3. Salvatore Date
City Manager
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