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HomeMy WebLinkAbout06/28/2004, SS 1 - DISCUSSION REGARDING REVIEW OF FISCAL IMPACT ANALYSES OF THE PROPOSED SAN LUIS MARKETPLACE PROJECT 1 1 I J � council ° -zQ-d j acEnda Report CITY OF SAN LUIS OBISPO FROM: Wendy George,Assistant City Administrative Officer Prepared By: Shelly Stanwyck,Economic Development Manager SUBJECT: DISCUSSION REGARDING REVIEW OF FISCAL IMPACT ANALYSES OF THE PROPOSED SAN LUIS MARKETPLACE PROJECT CAO RECOMMENDATION Receive and discuss the following reports: (1)Impact on Downtown Retailing of Proposed San Luis Marketplace prepared by Keyser Marston Associates, Inc, May 2004; and (2) Response to Keyser Marston Comments on the Impact on Downtown Retailing of the Proposed San Luis Marketplace by Allan D. Kotin and Associates,May 25, 2004. DISCUSSION Background In order to make well informed decisions, the City often hires consultants to perform services that require expertise in an area less familiar to members of the City staff. One of the most common examples of this is an Environmental Impact Report (EIR). EIRs require extensive study of the impacts and mitigations of a proposed project. It is the City's practice to require project applicants to fund the costs of an EIR, with the City managing the actual publication and public review process in order to maintain the highest standards of objectivity and independence. In the City's General Plan, Land Use Element (LUE) Section 3.1.3 requires that before approving any plans for development in the Madonna Road Retail area, "the City should consider an evaluation of how much it would transfer sales from existing retail areas on the City and whether the proposed uses could be developed in existing retail areas". The City has contracted with an economic consultant, Allan D. Kotin, on several occasions to provide this service for us. The contract has been handled like an EIR, in that the project applicant for the proposed San Luis Marketplace Project has reimbursed the City for the costs associated with the analysis, while the City has managed and maintained the study, thereby ensuring objectivity on the part of the economist and the report conclusions. The Original Kotin Study In February, 1999, in conjunction with the development review of the then proposed San Luis Marketplace Project, and consistent with LUE 3.13, Allan D. Kotin completed the Economic and Fiscal Impact of Proposed San Luis Marketplace and Implications for Downtown Retail Activity (the "Original Kotin Study"). The Original Kotin Study provided detailed analysis of retail conditions in the City, as well as regionally, and listed various strategies for the Downtown to implement in order to respond to then market conditions. The Original Kotin Study also analyzed the transfer effects the project would have on existing retail establishments and Council Agenda Report—Fi al Impact Reports Page 2 identified existing sales tax leakage occurring from the City. Finally, it identified the anticipated costs of a Prado Road Interchange and analyzed'a sales tax sharing arrangement between,the Developer and the City to fund a portion of those costs. In February 2001, the Council did not certify the San Luis Obispo Marketplace Project EIR and the project was denied due to concerns about open space protection and drainage. 2002 Kotin Study On June 27, 2002, a new development proposal for the Dalidio Property was submitted to the City for review and processing. Accordingly, Council determined that the Original Kotin Study should be updated. In the three.plus years since the Original Kotin Study was published, significant changes in the City's retail character had occurred including: the renovation of SLO Promenade, the remodel of Madonna Plaza, the construction of Home Depot at Froom Ranch and the approval of the Copelands Project. Regionally, the neighboring communities of Arroyo Grande, Atascadero, Santa Maria, and Paso Robles had added significant new retail opportunities. Last, the Downtown Association had adopted a Strategic Plan, funded by the City, which required integration into the fiscal analysis report. The Applicant reimbursed the City for the costs associated with the update of the Original Kotin Study so that the proposed project could be analyzed within the context of these changed circumstances and the changes to the project itself. Allan D. Kotin and Associates, Inc., completed the updated economic impact analysis of the proposed San Luis Marketplace Project in October 2002 and published Fiscal Impact of Proposed San Luis Marketplace and Implications for Downtown Retail Activity (the 2002 Kotin Study). The 2002 Kotin Study is comprised of six sections. The sections are as follows: Introduction, Executive Summary, Project Description and Comparison, Regional Retail Analysis, Fiscal Impact Analysis and Interaction with Downtown Retailing. The Project Description and Comparison describes the proposed project as currently designed and compares the proposed project with the 1999 proposal. The Regional Retail Analysis evaluates the impacts of the proposed project on existing retailing throughout the Central Coast Analysis Area. Both existing and projected retail conditions are analyzed. The Fiscal Impact Analysis determines the fiscal impact (public costs and revenues) that the proposed project is expected to generate. Finally, the Interaction with Downtown Retailing section provides conclusions as to the impacts of the proposed project on the Downtown and on the Downtown Association's Strategic Business Plan. With respect to the fiscal impacts of the proposed San Luis Marketplace Project on Downtown the following conclusions were made in the 2002 Kotin Study: 1. The types of stores will not provide significant competition to Downtown. 2. The design of the project encourages retailers similar to the Promenade and Madonna Plaza, so called"box"retailers, and is consistent with the Downtown Strategic Plan's goal of discouraging other"main street" type projects. 3. Provisions to be included in a development agreement will provide strong financial disincentives to discourage competition with downtown. 4. The added shoppers at the proposed San Luis Marketplace Project will be a net benefit to the City and Downtown. I /� Council Agenda Report—Fiscal Impact Reports Page 3 Keyser Marston Associates, Inc. (KMA) Comments on the 2002 Kotin Study In May 2004, KMA released a report, Impact on Downtown Retailing of Proposed San Luis Marketplace (the KMA Report), after being commissioned by several business and property owners to comment on the 2002 Kotin Study (Attachment 1). In the KMA Report, economist Jerry Keyser agrees with the 2002 Kotin Study's estimated amount of anticipated sales taxes to be generated by the proposed San Luis Marketplace Project. The KMA Report differs from the 2002 Kotin Study with respect to the estimated amount of sales taxes transferred from Downtown as a result of the proposed Project. Mr. Keyser concluded that the retail space in the proposed San Luis Marketplace Project would adversely affect all or most Downtown merchants. Mr. Keyser's impact analysis is based on a comparison of the retail square footages of Downtown to those in a defined "Madonna Road Area" with the conclusion that as retail square footages in the Madonna Road Area increase, Downtown's share of retail sales will decrease. Kotin Response On May 25, 2004, Allan D. Kotin and Associates responded to the KMA Report in its Response to Keyser Marston Comments on the impact on Downtown Retailing of the Proposed San Luis Marketplace (Attachment 2). In this response, Allan Kotin states that his original conclusions from the 2002 Kotin Study have not changed He believes that based on both the design of the proposed project (the site plan) and the tenant mix (which no longer includes specialty retailer Macy's) that there will be only a modest impact on Downtown retailing. Mr. Kotin disagrees with the KMA Report's premise that the project's addition of retail square footage automatically creates competition with Downtown. Mr. Kotin believes it is the type of tenant that is the issue, not the amount of retail square footage. Additionally,Mr. Kotin concludes that the critical role.the proposed San Luis Marketplace Project will play in enhancing the City as a regional retailing center and stemming the significant retail sales leakage we continue to experience to our neighbors to the north and south will offset the potential modest transfer from Downtown. Further Comment by Kotin Regarding KMA Report's Estimated Impact to Downtown After the Kotin Response was published, several Downtown merchants expressed continued concern with respect to the KMA Report's assertion that there would be a 13% decline to all Downtown businesses when the proposed San Luis Marketplace Project opened. Allan Kotin and Associates have responded more specifically to this particular concern in a June 10, 2004 Memorandum, Further Comments on Analysis of Downtown Impact of San Luis Marketplace Prepared by Keyser Marston Associates (Attachment 3, the "Further Kotin Comments") where they provide a re-creation of the analysis KMA undertook and conclude that it (a) does not consider the fact that some of the proposed San Luis Marketplace Project's transfer effect will be spread to stores outside of Downtown and (b) even if the KMA Report's premise were true the amount of sales tax losses on the basis of sales space in the Downtown would be much closer to 9% rather than the 13% proposed in the KMA Report. Mr. Kotin again objects to the methodology of the KMA Report based on square footages and concludes that there will not be a 13% reduction to all Downtown businesses across the board because the Marketplace is not a clear alternative to all shopping in Downtown. He asserts that the big box nature of the proposed San Luis Marketplace is a different shopping experience from Downtown, and in his opinion, is better for the City and the Downtown to have the Marketplace bring customers to the City rather than having them go elsewhere. 1 - 3 Council Agenda Report—Fiscal Impact Reports � Page 4 Summary Allan Kotin and Associates have worked for the City of San Luis Obispo for many years in a variety of capacities. The Fiscal Impact Analysis of the proposed San Luis Marketplace Project was conducted on behalf of the City and, although paid for by the project applicant, the service contract, just like an EIR, has never been under the developer's maintenance and control. The Original Kotin Study provided several strategies for the Downtown to implement in response to the then proposed San Luis Marketplace project — two of which have already been implemented: the adoption of a strategic plan and the construction of new retail space (underway at Court Street). The City has long recognized that competition is a risk factor in the retail environment. The retail environment in San Luis Obispo is dynamic. A quick review of the retail sales taxes remitted to the City over the past 13 years in the Downtown, Madonna Road Area and Los Osos Valley Road Area (Attachment 4) show changes over time to reflect both new retail space and changes in consumer habits (e.g. buying more cars more often). However, throughout all of these changes, although the rate may change, the trend line for the Downtown has been consistently upward as a result of its continuing retail strength. The key to responding to competition is to look ahead and be best positioned to confront it when it comes. The City's role in helping the Downtown in this task is not to prevent all competition, but rather to exert our influence over future planned development in a way that compliments the strategic plan. This is exactly what the City is attempting to do in its review and negotiations relative to the Marketplace project. The City also appropriately provides the Downtown with a level of support and service that far exceeds what is provided to any other area of the City, given its vital role in the economic and social life of the community. ATTACHMENTS 1. Impact on Downtown Retailing of Proposed San Luis Marketplace, Keyser Marston Associates, Inc,May 2004 2. Response to Keyser Marston Comments on the impact on Downtown Retailing of the Proposed San Luis Marketplace, Allan D. Kotin and Associates, May 25, 2004. 3. Memorandum, Further Comments on Analysis of Downtown Impact of San Luis Marketplace Prepared by Keyser Marston Associates, Allan D. Kotin and Associates,June 10, 2004. 4. City of San Luis Obispo Geographic Comparison Chart Reference Material The following reports are also available online at www.slocity.orpJeconomicdevelopment/onlinedocs.asp and in the City Clerk's Office for review. 1. Original Kotin Study 2. .2002 Kotin,Study 3. Downtown Strategic Plan ATTACHMENT i Report Impact on Downtown Retailing of Proposed San Luis Marketplace Prepared by. Keyser Marston Assodates,Inc.(MA) May 2004 i ATTACHMENT 1 Background Keyser Marston Associates, Inc. (KMA)has been asked to assess the range of impacts to downtown San Luis Obispo retailing that will likely occur if the San Luis Marketplace Project is approved in its current size, proposed configuration and reported major tenancies. Our assessment begins with a brief review of downtown retailing in the last twenty-five years in the United States and In San Luis Obispo. Discussion The fragility.of downtown retailing in the U.S. and in San Luis Obispo over the last 50 years is well recognized and well documented. Fust came the competition from the suburban regional shopping center, and the decision by the department stores to follow their customers to the suburbs. More recently, the competition has emerged from the big box retailer,who,with their need to retail on cheap land and inexpensive as possible buildings, almost always selects suburban locations. Downtown retailing has never rebounded from this competition in many downtowns in the country and in California.Examples of downtowns with little or weak retail are plentiful and Include diversecommunities throughout California and U.S. Today, by contrast, retailing in downtown San Luis Obispo is healthy. But over the years, it has not always been so. In the 1970's and 1980's, after the opening of suburban competition and the relocation of department stores to the Freeway, downtown retailing began to hurt and by the early 1990's, huge vacancy occurred and downtown retailing came dose to being lost. It was only after the opening of Downtown Center in 1993, and the reentry of national brand retailers into downtown.combined with the presence of the local, independent merchant, that downtown again emerged as.a thriving retail location. However, a pivotal moment in time for downtown retailing In San Luis Obispo could be at hand. On the positive side, the under construction Court Street and other planned retail projects will be positive. However, the need for many downtown buildings to be seismically retrofitted has been given new focus by the recent earthquake in the area. Such retrofit could both be physically disruptive and require an Increase In rent structure(to offset the cost)and disturb the economics that currently prevail This Is the fragile setting into which the Impacts of major new competition outside of downtown and along the Freeway must be assessed. Ana/vsls Proposed Shift in the Competitive Supply of Retail Space:A dramatic shift in the competitive. supply of regional retail space in the City of San Luis Obispo is now being proposed in the categories of retail space which are most pertinent to downtown.These most pertinent Kayser Marston Assodates.Inc. 112720011001-003 dor Pape 1 i � � ATTACHMENT 1 categories are: apparel, general merchandise (not including drug, liquor and food), home fumishingstappliances and specialty retail,as well as eating and drinking.These are the categories we have focused on in assessing shills in the competitive supply of retail space that is underway in San Luis Obispo and the potential impact of that space shift on downtown retailing. KMA has based its understanding of the proposed shift in pertinent, competitive regional retail space on a review of the recent site plans (2003)available for the proposed San Luis Marketplace, the 2002 Fiscal Impact of Proposed San Luis Marketplace prepared by Allan D. Kotin &Associates, its predecessor report of 1999, statistics included in the SLO Downtown Strategic Business Plan of 2001, and discussions with downtown stakeholders conducted within the past 60 days by KMA. Based on the foregoing sources, it appears to us that the following data are reasonable to use to assess the space change that is underway and proposed, and to assess current and prospective sales that are occurring in Downtown and in the Madonna area which is the location of the proposed San Luis Marketplace project. Currently, it appears that there is between 500,000 and 600,000 square feet(sf)of region serving retail in the downtown in the pertinent categories of space, including about 150,000 sf of eating and drinking space. Similar space In the Madonna area along the Freeway has been estimated at nearly 600,000 sf not including a recently added Home Depot.and under construction Costoo. To the existing 600,000 sf, San Luis Marketplace proposes to add 600,000 sf; Including Macy's (110,000 sf),Target(about 125,000 sf)and regional shop space of about 165,000 sf. This 400,000 sf must be considered as competitive space to downtown and will bring the total of competitive space in the Madonna area to about 1,000,000 sf (600,000 sf plus 400,000 sf). At the same time,the downtown now has under construction another 40,000 sf,which will bring its total to about 600,000 sf(rounded). Thus,we can see that, after the addition of San Luis Marketplace,the Madonna area will contain about 63%of the competitive regional retail space and downtown 37%.This will be a dramatic shift from the current space relationship of just over 50% In Madonna and just under 50%in downtown. Exhibit 1 illustrates this shift in retail concentration away from the downtown. As a further Indicator of how San Luis Marketplace may Impact downtown retailing,we have assessed not only the shift in competitive space that Is occurring but also reviewed current sales performance In the downtown.The basis for our assessment is sales performance data presented by the Kotin report of 1999 (page 48),sales assessment data presented by the Kotin 2002 report(exhibit A-10 in particular)and our assessment of sales changes that have likely occurred in downtown based on local interviews and our knowledge of national trends. Taking all the above into account, it appears to us that downtown probably produced about $150 million In sales in the pertinent categories in 2003. Sales performance by retail category probably Is dose to the following profile: Keyser Marston Assooietm.Inc. t1272A01wxM-000.doc page2 ` n 1 1 '1 ATTACHMENT I Apparel and General Merchandise 200,000 sf estimated @ 275/sf = $55M Specialty incl. Home Furnishings 250,000 sf estimated @ 200/sf = $50M Total Retail 450,000 sf. =$105M Eating and Drinking 150,000 sf estimated @ 290/sf =$45M Total of Pertinent Categories 600,000 sf estimated @ =$150M. Based on our estimate of current level of sales in the downtown, we have two observations. The first observation is that in 2003, it.appears that sales in downtown as a percentage of total city sales are quite dose to the distribution of space between downtown and the Madonna area. Downtown sales are about$150 million and total city sales in the pertinent categories appears to be about$350 million. Thus downtown is likely capturing slightly less than 43%of total city sales, whereas we have previously estimated that downtown space is slightly under 50%. However, downtown space is about to drop to about 37% of total space. Clearly significant sales transfer will occur as this dramatic shift in space allocation occurs. The second observation is that sales per sf in downtown are estimated at about $250 per sf including Eating and Drinking.These performance levels are reasonable by today's national standards and indicative of a healthy downtown. But these sales levels are not.outstanding. In part the sales levels probably reflect the fad that the dominant amount of space in downtown is operated by independents rather than chain operators. However at these sales levels, it is our opinion that businesses operating at these levels have a higher degree of vulnerability if sales were to decrease-by 10% or more. Businesses operating at these levels are also likely to be-vulnerable if they had to endure an increase of significance in the cost of doing business to offset the likely upcoming need to seismically retrofit. These observations set the stage for looking at the conclusions of the 2002 Kotin report in assessing the impact of San Luis Marketplace on downtown.retailing. The 2002 Kotin report concludes that the transfer of retail sales from other stores in San Luis . Obispo to San Luis Marketplace should be estimated at$37 million,which represents 25% of the total sales projected for the Marketplace of.$150 million (the same dollar volume that we estimate downtown does today). However, page 17 of the report reads as follows: "(we) recommend using a range estimate of the retail transfer effect of 250/ to 30%...'At 300/6,the transfer effect would be nearly$45 million. For the purpose of further understanding of the potential impact on downtown retailing, KMA has used the round number of$40 million, which is part way between the Kotin range of$37 million to nearly$45 million. Before assessing the potential impact of transfer on downtown retailing, recognition should be given to a few of the assumptions.that have gone Into the 2002 Kotin estimate of transfer.The Keyser Marston Assodame,Ino. 11=0011001.OwAoe Page 3 ATTACHMENT 1 estimate gives implicit if not explicit recognition that San Luis Obispo is, In retailer terms, a small_market and slow growth community,and that growth per se only provides a portion of the dollars that will flow to San Luis Marketplace,and that a portion will be transfer dollars from existing stores within the city. The report,.then states (again on page 17)that the reason that the transfer is not larger than the 25% to 30% projected is that"the Inevitable store to store effects are not given more weight in the regional analysis is the expectation that the total sales volume 'pie'will get bigger and overcome these effects." In other words,the case is made that more shopping trips with substantial sales will be retained in the region because San t_uis Marketplace will bring more and a new kind of shopping'space that does not currently exist- We accept the concept of retention but flag as a question whether the total sales dollars to be retained will be as high as projected,in part because of the amount of growth occurring in South County and the continued ease for many to shop south rather than to shop north. But, having flagged the issue that the retention may be high and therefore the transfer estimate may actually be somewhat low, KMA.has accepted the Kotin transfer estimate for the purposes.of drawing our own conclusions as to what is the likely resulting Impact on downtown retailing. KMA 2004 assessment of transfer Impact on Downtown Retaflina To formulate our opinions of transfer impact on downtown, KMA first reviewed the 2002 Kotin report conclusion which does not quantify the possible Impact on downtown retailing but instead concludes "in summary,there should be relatively modest adverse impacts on downtown retailing resulting from the proposed San Luis Marketplace project as it is currently configured.'The KMA 2004 opinion is based on the following three factors: 1. With San Luis Marketplace existent,the Madonna area retail space will have Increased from a size that was recently about the same as downtown (600,000 sf)and Will be two thirds larger than downtown (1,000,000 sf in Madonna and.600,000 sf in downtown); further, the percentage of total space between the two areas will have changed from about 50-50 to 370/6 downtown and 63% Madonna; (Exhibit 1) 2. Department stores, Macy's especially, and Target carry as primary lines of merchandise woman's, men's and children's apparel, as well as jewelry and beauty (cosmetics), all merchandise lines that are today important to the downtown;when the department stores are located in the same shopping complex,the Industry standard is that because of their attraction power,the department.store can still be a positive for adjacent stores, but when located in the Madonna area, the department stores will be competition to stores carrying similar merchandise in the downtown. 3. The latest configuration of San Luis Marketplace calls for about 165,000 sf of specialty stores in a'small'format configuration: that 165,000 sf of space is over 25% of all the space in downtown today. Keyaor Marston Am odatas,ina 11272.001W01-003AbC Pap 4 r 'ATTACHMENT I • Summary Of Frndinas There is of course no way to predict with certainty how the many variables will come together that will impact on downtown retailing of San Luis Marketplace. But given the power.of the three factors noted above, we think it prudent to assume that at least 50% of the transfer dollars will come out of downtown. In other words, we think that it is prudent to anticipate that as much as 50% of the Kotin projected transfer of$40 million may come out of downtown, or $20 million. A potential transfer in the twenty million range would have the following effects on downtown: • It would represent a decrease in sales of about 13% in categories.that make downtown important, that is in apparel and fashion and possibly to eating/drinking and entertainment ■ It would cause on average a $30 plus per-sf loss of sales if spread evenly over all 600,000 sf downtown. a It will cause the toss of°top'dollars to all the stores of downtown,which are the highest profit dollars to any store: ■ Also, it should be noted that the dollar transfer loss will probably fall most heavily on the profit margins of the Independent stores who offer so much to the character of downtown but who typically have the least resources to cope with new competition and a loss of their top dollar sales. ■ Finally, it should be noted that the transfer Impact Will occur at the same time monies will have to be spent on seismic upgrading; transfer Impact and seismic upgrade will result in revenue decrease and cost Increase. Therefore,our opinion is that there could be a dramatic negative impact and significant challenge for downtown retailing if the San Luis Marketplace proceeds at the currently proposed size,.tenant makeup and configuration. Keyw M mbn Awodates.Ina 11272A011001-003A= Page 5 ATTACHMENT I f N J J cc co rx::ix:. -•mom.`�•.....:s:rs::::«�;ira�:r::::a•::::........... �/� _..:•ss�a:a:ra�..r:_:si: .......::.rs:::.l•:.:r....... Y/ � LL LL. sri;gsu:.s::.cx:si:a .....__..... .._ ...nx.... •: cr �.fi .mTiSrii• Q w ...........w:: ..... ......... ?uae ...•.... 1a:x:e. w•x:•: L:;::'. .^Y`:•r}iS:iil�iFE=F'ir-: O Y O O ���•"�:;T• - -sir;-i'�' «tii?�: a L (f� -.-...='say:�-;:::`�.-::-:-:::.r:•�.:-::.:r::. O � 0 0 .� n'_..--•—•��.»-.c:::»::�mss-}i�?^i::mi✓5:»s:� IL r r .f.l C I.L Q. N d0 0 CL N W OJ o \ p 0 V c cc .� :••r^ iyyiayn a g 7 �tl4FCN ..SaYIE� L 0 C ii ::ra'�5�.••Siatir.i� .•ra«x...».r V . p W Ci A� :M»�zn�iai•i» ay:�ti❖'1%r�ui � o • C W 3 ao � a ca c 00 o 0 � ATTACHMENT 2 RDK&IN 310.820.0900 213.623.3841 Fax 213.623.4231 Allan D. Kotin &Associates Real Estate Consulting for Public Private joint Ventures 949 S. Hope Street,.Suite 200, Los Angeles,CA 90015 akotin@adkotin.com Memorandum TO: Ken Hampian, CAO,City of San Luis Obispo DATE: May 25,2004 CC: Shelly Stanwyck FROM: Allan D.Kotin RE: RESPONSE TO KEYSER MARSTON COMMENTS ON THE IMPACT ON DOWNTOWN RETAILING OF THE PROPOSED SAN LUIS MARKETPLACE At your request, Allan D. Kotin & Associates (ADK&A) has reviewed the document prepared by Keyser Marston Associates (KMA) entitled Impact on Downtown Retailing of Proposed San Luis Marketplace dated May 2004. Due to the need for a prompt response, this review is primarily a logical and generalized review, rather than a detailed technical one, since the KMA report itself is largely non technical and deals only with highly aggregated statistics. ADK&A would make two initial observations; (1) the analysis of economic impact is far from an exact science and there exists significant room for experts to differ within the range of professional analysis; and (2) ADK&A has had the benefit of considering the Marketplace project as it has evolved through the loss of Macy's and physical reconfiguration while the KMA report necessarily considered only the previously published description of the project. SUMMARY The central thesis of the KMA report is the large amount of new retail space to be created at the proposed San Luis Obispo Marketplace project on the Dalidio property (the Marketplace) will result in sales of all or most Downtown merchants likely being adversely affected. This thesis is based on two explicitly stated,but clearly challengeable,assumptions. One is that, with the addition of the Marketplace, the total retailing space in the generously defined "Madonna Area" (including Costco and Home Depot, for example) leans heavily in favor of this area and against Downtown. Implicit in this assumption is the contention that retailing in this amorphous Madonna Area, much of which has coexisted with Downtown for many years, competes directly and harmfully with Downtown merchants. This leads to the second explicit assumption: which is that fully 400,000 square feet of the sales area at the Marketplace is directly competitive with Downtown, an assertion clearly at odds with the stated tenant mix and physical layout of the Marketplace. The issue of possible impact of the Marketplace on Downtown was dealt with in detail in the ADK&A report of October 2002 entitled Fiscal Impact of Proposed San Luis Marketplace and ATTACHMENT 2 RDK&R Memorandum RE: RESPONSE TO KEYSER MARSTON ON THE IMPACT OF SAN LUIS MARKETPLACE Implications for Downtown Retail Activity. That report included a detailed analysis of Downtown retailing patterns and reached the following critical conclusions: The general merchandise and home improvement anchor stores [will not] provide significant competition to existing retailing in Downtown. Because of its design configuration(which is not conducive to pedestrian oriented cross shopping)and the relatively small allocation of"line retail"space, it is far more likely that retailers similar to those found in the neighboring Promenade and Madonna Plaza will occupy... retail space at the Marketplace. The design configuration of for the...Marketplace is consistent with the [Downtown] Strategic Plan's objective of discouraging competitive"main street"type projects. The generation of substantial additional shopping traffic to the Marketplace, whether it comes from new visitors, new out-0f--town shoppers, or from in-town shoppers no longer leaving town to seek these[new big box]retail offerings elsewhere will a clear benefit for the City and the Downtown. Based on the current configuration and tenant mix, which eliminates Macy's and sharply reduces space available to small retailers, ADK&A is even more confident that there will be only a very modest impact on Downtown retailing. Finally, and not at all trivially, KMA gives little consideration to the critical role the Marketplace will play in enhancing the City as a regional retailing center. KEY DIFFERENCES The balance of this memo deals sequentially with six issues on which ADK&A differs from KMA in its interpretation of the data: 1. The need to put the Marketplace.and current SLO retailing in a regional context. 2. Whether or not KMA's large "Madonna Area" really functions as a single rival to Downtown. 3. Is it correct to assume that all of the competitive effects of the Marketplace will be focused on Downtown? (Since only with that assumption can KMA conclude that Downtown merchants will suffer average losses of 13% or$30 per square foot.) 4. How much of the space in the Marketplace really does compete with Downtown merchants? 5. A failure to consider the barriers to direct competition with Downtown created by the tenant mix, physical design of the Marketplace, and disincentives set forth in the proposed Development Agreement. G:\Proiects&Pmerams\Dalidio\Memos\Kodn Response.Fina1.DOC Allan D.Kotin&Associates Page 2 May 3,2004 ATTACHMENT 2 RDIGR Memorandum RE: RESPONSE TO KEYSER MARSTON ON THE IMPACT OF SAN LUIS MARKETPLACE 6. The extent to which the barriers to making the Marketplace more competitive with Downtown are truly permanent and that the Marketplace really cannot "morph" into a "fashion center"directly competitive with Downtown. 1. The Regional Context KMA uses aggregate sales projections for the Marketplace and other Madonna Road retailers to paint a picture of allegedly massive competition to Downtown that is very misleading. It is important to put the proposed SLO Marketplace project in context of the regional retail landscape. In 2003, San Luis Obispo County retailers generated approximately $2.5 billion in sales, a $400 million increase over Year 2000 levels. With the nearby University, the Mission Plaza, the Farmer's Market, the creek, the eclectic shops; late 19th and early 20`s Century architecture,the movie theaters and night clubs, and ease of parking, Downtown San Luis Obispo provides a unique entertainment and shopping experience for the entire region and beyond. In the categories of apparel, general merchandise and specialty retail the County's 2003 annual sales were approximately $700 million or $6,600 per household. Based on average statewide household spending patterns of$9,000 per household, San Luis Obispo County residents should be spending almost $950 million in those categories. For comparison, Santa Barbara County retailers generated $1.3 billion in sales for apparel, general merchandise and specialty stores, just at the statewide average of$9,000 per household. There appears to be significant leakage of retail sales outside SLO County approaching $200 million. The proposed SLO Marketplace project total sales at stabilized occupancy in 2006 are only $150 million, just 6 percent of the total County sales in 2003. . Based on the average population growth of 1 percent per year over the past decade, the proposed Project sales could theoretically be absorbed by new residents within the next 5 to 10 years. Of course there will be some adverse impact on individual merchants in downtown San Luis Obispo as a consequence of the development of San Luis Obispo Marketplace. However, it is the even more emphatic opinion of ADK&A, that the impact on Downtown will be modest. In our judgment, the only stores likely to be hurt are those stores carrying standardized merchandise, similar to Home Depot, Sears etc. (overlapping the lines carried in the SLO Marketplace project), with relatively high margins and a limited tradition of service. 2. Inappropriate Aggregation of Diverse Retailing into a Single"Madonna Area" In arriving at the conclusion that the balance between downtown and the "Madonna Area" in retailing will be materially and adversely affected by the construction of 600,000 square feet of retail space at San Luis Obispo marketplace, KMA created a potentially inappropriate level of aggregation. Home Depot and Costco (when it is constructed) are almost as far in driving time from Madonna Plaza and The Promenade as is Downtown. G:\Proiects&Pmerams\Dalidio\Memos\Kotin Response Final.DOC Allan D.Kotin&Associates Page 3 May 3,2004 I - I � �RDIGR ATTACHMENT 2 Memorandum RE: RESPONSE TO KEYSER MARSTON ON THE IMPACT OF SAN LUIS MARKETPLACE Furthermore, KMA ignores the nature of the decision to be made by the City. This is not an example of cumulative impact analysis as required under CEQA. The decision facing the City Council is a fairly narrow one that has two parts: (1) does the City have a basis for rejecting or modifying a project based on its land use regulations? and (2) is it appropriate to provide the reimbursement agreement that would divert some of the net additional sales taxes that the City receive from this project to underwriting a major public improvement already in the Circulation Element of the City's General Plan? In this regard it is critical to note that downtown merchants continue to thrive while coexisting with the older Madonna Plaza and the more recent conversion of the prior weak regional center known as Central Coast Plaza into a strong new big box center identified as The Promenade. In fact, it is widely believed that the big box tenants in The Promenade have brought new customers to the City and may actually benefit downtown by keeping local residents here for shopping. 3. Ignoring Other Competing Retail and Ascribing Half of All Potential Losses to Downtown KMA's implied statement that downtown and non downtown retail stores should be in perfect balance is illogical, since there are numerous categories of retailers that would never locate in the Downtown. It also ignores two other factors. One is that the non downtown experience is itself diverse and does not function as a single counterweight. Secondly, the non downtown experience is not only composed of the three centers loosely and inappropriately grouped as "Madonna Area" in the KMA report. Other competing retail areas include Foothill-Chorro, Upper Monterey, Santa Barbara Street, Santa Rosa Street, the Marigold Center, South Higuera and various other outlets in the Southern quasi industrial portion of town. In the aggregate, in 1997 when the last detailed count was done, there were almost 460 retail outlets located outside of the Madonna area and downtown, representing at that time over 44% of the total taxable retail sales in the City. KMA's representation that half of the total transfer effect created by the Marketplace project will be absorbed by downtown merchants is at odds with the fact that downtown retailing represented only 30% of total sales in the City in 1997, a share that is probably lower now that The Promenade and other outlets are open. Another puzzling aspect of the KMA analysis is the total absence of any comments about the impact of the Marketplace on other directly competing merchants within the generously defined "Madonna area". For example, the impacts of Target and Lowe's are much more likely to be felt by Home Depot and Sears than by specialty retailers in Downtown. The pet store will compete with pet stores in Madonna Plaza,the Marigold Center and on Monterey Street. 4. Considering Most Marketplace Retail as Directly Competitive with Downtown The central premise of the KMA analysis is that by adding a 400,000 square foot block of retail space in the vicinity of Madonna Road, the Marketplace project will materially and adversely G:\Proiects&Proerams\Dalidio\Memos\Kotin Response Final.DOC Allan D.Kotin&Associates Page 4 May 3,2004 ATTACHMENT 2 RDKaR Memorandum RE: RESPONSE TO KEYSER MARSTON ON THE IMPACT OF SAN LUIS MARKETPLACE change the balance between Downtown and this somewhat overlarge"Madonna Area". Specifically KMA states that the Target (125,000 so, the Macy's (110,000 so and all of the "regional shop space"(165,000) all"must be considered as competitive space to downtown." This representation is at odds with the facts, even as they existed with the original Macy's-based proposal. There are, in ADK&A's opinion, two key assumptions by KMA that are not necessarily true. First of all, Target, with its limited and generally lower priced merchandise lines and heavy emphasis on non-apparel grocery and hardware type items is not directly competitive with a downtown dominated by small apparel and specialty shops and eating and drinking places. A critical element in the KMA analysis is the characterization of both Macy's and 165,000 square feet of "regional shop space" as directly competitive to Downtown. As originally proposed and outlined in the earlier ADK&A report, there was a total of 458,000 square feet of space occupied by four major anchors, Macy's, Kohl's, Lowe's and Target. Of the remaining 167,000 square feet, 41,000 square feet was taken up by two sub anchors with more than 20,000 square feet each, neither of which had an apparel orientation or could be accommodated in Downtown. This suggests, that even before the loss of the Macy's, the potentially competitive space outside the department store anchors was only about 125,0000 rather than 165,000 square feet. In the current configuration proposed for the Marketplace, there is no Macy's store, which . eliminates from the Marketplace any outlet that could be reasonably considered to be a fashion oriented store directly competitive to the apparel stores that make up much of downtown retailing. Furthermore, even considering Target and Kohl's to be in some sense"department stores", there are now only three such stores,not four as originally proposed, including the existing Gottschalk's. 5.Barriers to the Marketplace Becoming More Competitive with Downtown. Even the competitive threat posed by Macy's would have been very much blunted by the configuration of the Marketplace. Fashion based department stores are particularly threatening to smaller stores in downtowns, not merely because of what they sell, but because they are typically anchors in malls that offer a directly competitive shopping experience to the downtown. The shopping experience in virtually every mall in America includes a large number of smaller apparel and shoe stores of precisely the same type found in downtown SLO. The configuration of the SLO Marketplace project is specifically that of a"big box"or power center, with little traditional shop space. Even more important is the complete absence of a block of small shops adjoining or near the entrance to the department stores which is a critical element in creating the pedestrian "sampling" experience so specifically characteristic of both successful malls and viable downtown shopping areas. Even a casual review of the Marketplace site plan shows the absence of any area of concentration of small shops and the deliberate elimination of a pedestrian comparison shopping experience or entertainment oriented shopping space. The few restaurants are all fast food or national chains not GAProjects&Programs\Dalidio\Memos\Kotin Response Final.DOC. Allan D.Kotin&Associates Page 5 May 3,26014 1 - I O ATTACHMENT 2 Memorandum RE: RESPONSE TO KEYSER MARSTON ON THE IMPACT OF SAN LUIS MARKETPLACE desirable to tourists and residents seeking an "evening out". This is a traditional auto parking dominated center largely designed for the convenience of shoppers visiting a single store and then leaving. Over the last 18 months, the design of the Marketplace has been altered to substantially reduce both the amount of small shop space and reduce any physical area that would create a meaningful entertainment oriented shopping experience. In the currently proposed plan a substantial proportion of the"non-anchor" space is accounted for by "sub anchors", i.e. non apparel chain stores occupying upward of 8,000 square feet, which could not be accommodated in downtown and are not directly competitive with most downtown merchants. These include a major pet store, a large electronics store and a party supply store. The total amount of space available for rent in unit sizes under 6,000 square feet is less than 60,000 square feet spread out over three distinct locations in the center, substantially separated by large parking fields. Even if all these stores were to be directly competitive with downtown merchants, it would be only about ten percent of the Downtown sales area, and the lack of cohesion and proximity would clearly undermine the ability of these stores to compete effectively with the downtown shopping experience. 6.The Permanence of Barriers to Any Future Transformation of the Marketplace There are two key reasons why it is most unlikely that the Marketplace could ever be transformed into a fashion oriented center with numerous small stores directly competitive with Downtown. One is physical and the other is financial. The physical reason lies in the general "open doughnut" format of the Marketplace site plan with a ring of large store buildings, mostly well separated from each other, surrounding a large parking lot with one or two individual large buildings in the center. This is the exact opposite of a traditional mall or pedestrian oriented downtown in which numerous small stores are clustered closely together specifically to create a pedestrian shopping experience. The second and financial reason the center is unlikely "to change its spots" is that this center cannot support the cost of the required freeway interchange without some reimbursement by the City which is to be based on sales tax. The proposed reimbursement agreement penalizes the developer for either pirating existing Downtown merchants or increasing the number of stores with 5,000 square feet or less, (which is the typical size of most downtown retailers). If any these events occur, not only is the sales tax resulting from these retailers excluded from the calculation of reimbursement, but an equal amount is deducted from the remaining sales taxes otherwise considered for reimbursement. This creates a deliberate "double hit" for anything that looks like it is directly competing with Downtown. There is also a penalty for opening new branches of downtown merchants. G:\Proiects&Programs\Dalidio\Memos\Kotin Response Final DOC Allan D.Kotin&Associates Page 6 May 3,2004 ATTACHMENT 2 Memorandum RE: RESPONSE TO KEYSER MARSTON ON THE IMPACT OF SAN LUIS MARKETPLACE CONCLUSION The Marketplace is a power center designed for the convenience of regional shoppers. It is NOT a center that relies on numerous small stores for either its attraction or any significant portion of its revenue. In this regard it is not, and cannot be, directly competitive with the downtown San Luis Obispo experience. At the same time, it is true that some of the big boxes transfer sales from Downtown merchants, and other retailers in the community. That is a fact of retail life and is likely to occur whether these big box tenants are situated in the Marketplace, elsewhere in the City or, even more likely, elsewhere outside the City, in which event the City and its Downtown merchants will suffer all the same bad effects, without the offsetting benefits of increased City revenues, lowered retail leakage, increased visitation to the City, and a means of financing a public improvement long identified in the City's Circulation Plan, to wit the Prado Road Interchange. The proposed annexation of this project allows the City to continue to be involved in the design and development of the Marketplace Project. This allows the City to institute controls through negotiated development and reimbursement agreements which balance the concerns of the community with the needs of the developer. G:\Pmiects&Ptoerams\Dalidio\Mcrnos\Kotin Response Fina1.DOC Allan D.Kotin&Associates Page.7 May 3,2004 DK R &IN ATTACHMENT 3 310.820.M 213.623.51141 AUan D. Kotin&Assa dates Fax 213.623.4231 Pea!Estate Consu"for Pubric Private Taint Ventures 949 S. Hope 5treer,Suite 200, Los Angeles,!A 90015 ako6n@adkotn.eom Memorandum TO: Shelly Stanwyck,City of San.Luis Obispo DATE: June 21,2004 FROM: Allan D.Kotin RE: FURTHER COMMENTS ON ANALYSIS OF DOWNTOWN IMPACT OF SL MARKETPLACE PREPARED BY KEYSER MARSTON ASSOCIATES As yow request, Allan D. Kotin & Associates (ADK&K) has further pursued one particular aspect of the analysis of the report prepared by Keyser Marston Associates (KMA) on the impact on the proposed San Luis Marketplace on Downtown retailing. You suggested that the estimate of a 13% decline quoted in that report has been widely circulated and is a critical element in the considerations of the Downtown merchants and the Downtown association. As mentioned before and described in more general term in the prior memorandum, Response To Keyser Marston Comments On The Impact On Downtown Retailing Of The Proposed San ,Luis Marketplace, dated May 24, I do not agree with this conclusion. As requested, I have prepared these specific comments about the 13%. My comments rest on two general observations: 1. The inappropriate characterization of space in Marketplace as competive to Downtown 2. A reconstruction of KMA estimates with more accurate numbers to show that even if one accepts KMA's premises,the appropriate percentage reduction is smaller than 13%_ General Comparability Of Space The KMA report concludes that a total of 400,000 sq. fL of space in the Marketplace will be directly competitive with Downtown. The 400,000 sq. & of space is made up of 125,000 sq. ft. for Target, 110,000 for Macys, and 165,000 sq. & of"small shop space,. Through no fault of their own KM - has misstated the actual space allocations since they have changed as the project has evolved. At this point, the space allocation corresponding to KMA's initial estiate is much more like 290,000 swuare feet ( per plans of April, 2004) with a Target store of 1350,000 square feet and Kohl's of 96,000 square feet and approximately 60,00 square feet in smaller shop space. The balance of the space is accounted for primarily by subanehors occupying relativel large footprints which could not be accommodated in Downtown and for the most part do not directly compete with the Dowtown merchandising mix which is focused on apparel. The credibility of the 13%reduction alleged by KMA rests on challengable three premises: 1. That Target is directly competitive with Downtown. 2. That Kohl's is directly competitivc with Downtown. 3. That there is 165,000 sq. fL of shop space. ( " (Cl ATTACHMENT 3 RDK&A Memorandum RE: Further Comments on KMA's Analysis Of Downtown Impact of San Luis Marketplacc ADK&A would submit that people deciding to make shopping trips to Target and Kohl's are doing so as a function of that store's merrchandizing and advertising and not as an alterative to patronizing the small shops of Downtown. Since Kohl's and Target are both in the marketplace serving San Luis Obispo already or clearly plan to enter it at directly competitive locations outside the City, it seems highly inapprpriate to ascribe all their sales impact to Downtown_ Furthermore, the presence of large other anchor stores which materially reduces the amount of competitive strop space further erodes the comparison. It is the 60,000 sq. ft- of small shop space that could arguably be compared meaningfully to Downtown San Luis Obispo. This 60,000 sq. ft. represents only approximately 10% of the Downtown inventory. If, as KMA assumes elsewhere, impact were based solely on area, the impact would be about 10%. But since, ADK&A believes that not all of the small space will be directly competitive,therefore the impact is much likely to be less than one for one_ Numerical Analysis While ADK&A continues to believe that the basic premise of interchangeable shopping that underlies the KMA analysis is flawed, an examination of the specific numbers shows that, even with this flawed prernise,the calculclated impact would be much smaller than shown in the KMA report. The 13% estimate of impact arrived at by KMA rests on two reinforcing computation. In one, the balance between Downtown retailing and the Madonna area is alleged to shift from "50—50" to 63) —37 for 13%shift In another analysis, the $20,000,000 representing half of the total transfer effect is ascribed to hit only Downtown. If that $20,000,000 were to effect Downtown it would represent by a reconstruction that KMA has undertaken approximately a 13%loss. ADK&A has undertaken to recreate the analysis with what it believes to be a more accurate treatment of the critical factors. This recreation is summarized in the attached Exhibit 1. The fust part of Exhibit 1 shows that m the KMA analysis, the allocation of impact of the project as between 50% to Downtown and 50% everywhere else completely ignores that fact that much of the impact will felt on stores outside of Downtown and on stores already in the "expanded Madonna area" that KMA has identified. If in fact'the impact were in somewhat general proportion to the allocation of sales space there would not be a 13%loss, there would be something much closer to 9%loss as shown in Exhibit 1. Similarly, the other analysis, which concerns the change in the balance between square feet, is also flawed. (ADK&A would note that the inherent premise that sales follow square feet without regard MoremKMA-0621 doC Altar D.Kodn&Associates Page 2 6/21/2004 f\{-N ( � OV �2 RDK&A ATTACHMENT 3 Memorandum RE: Further Comments on E M 's Analysis Of Downtown Impact of San Luis Marketplace to their composition is one that is weak and does not support the conclusion.) Nevertheless, even using this logic it is inappropriate to ascribe 400,000 sq. ft. of competitive space even by the most generous definition of competition to the SLO marketplace. ADK&A has reduced the 400,000 sq. ft- to 290,000 sq. ft. to specifically account for sub-anchor space representing types of stores that cannot, will not locate in Downtown San Luis Obispo and are not directly competitive with stores that are located there. Somewhat coincidentally in the case of the ADK&A analysis, as in of KMA, the results are generally similar showing a 10%reduction rather than a 13%reduction. Concluding Observations. First of all, ADK&A does not accept the idea that there is a reduction of 13% since it implies that the bulk of the space in the Marketplace represents a clear alternative choice to shopping in Downtown. This is not the case since big box retailing, which dominates the Marketplace, is a different shopping experience than Downtown shop retailing and that difference will remain. Even if the logic of the KMA position is supportable, its computations using corrected data would produce a much lower impact. Finally and perhaps most critically, Target and Kohl's are forces in the market whether or not they locate at Marketplace. Whatever adverse effect they may bave on Downtown merchants, it is clearly better for the City and for the Downtown merchants that the Marketeplace bring the customers of these big boxes to the City rather than draw them away. 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