The Hollister City Council unanimously approved a resolution on Nov. 2 to use an economic development subsidy of $4.25 million as a lifeline to keep the Hollister Farms shopping center project afloat. Without the subsidy, said City Manager Brett Miller, construction would not be able to continue, breaking the city’s hopes of hundreds of jobs and millions in sales tax revenue.
By reviewing the last year of Hollister City Council agendas, BenitoLink discovered the future of the project, located beside the Pinnacles Highway bypass on East Park Street, was discussed over the course of 10 months in closed sessions only, indicating the council knew the project was in financial trouble back in 2019. However, it was never discussed publicly until Nov. 2, the day before local elections.
Even though it did not come out in public meetings, the information, according to the Nov. 2 agenda, was posted on the city’s Economic Development website 72 hours before the meeting, as required by the Brown Act.
Mayor Ignacio Velazquez said the closed session meetings were necessary for negotiations.
He said he supported the incentive plan, even though early negotiations were “a little messy” and “promises were made in the past having to do with infrastructure and retention ponds that created a mix-up in the system.”
By “messy” he meant the project took several years because it was done in multiple stages, including approving changes to McCray Street and using the storm drain retention ponds on the western side of the city. Only in the last few months did the city learn that plan would not work, and that it would have to build another retention pond on the Leatherback property, along McCray Street.
At one time, the Leatherback property was purchased by the former Redevelopment Agency for civic buildings, as the possible site of a new library, or even a build-to-lease education center, but only after nearly $2 million was spent to remove five feet of soil to eliminate contamination from the former tar paper plant. In 2015, the late councilmember Marty Richman wrote that the site generated no income for the city, but cost $5,200 a year to maintain.
Velazquez said the pond should have been completed before the Hollister Farms project began.
“The incentive agreement is not exactly what I wanted, but it’s what we need to be doing to bring more retail in,” he said. “It’s been a long conversation. I don’t remember what parts of the conversation we had. It just got to that point of ‘here’s where they’re at and here’s the recommendation’ and we just needed to get it done.”
Another example of the messiness and confusion would be the promise that Rancho San Justo Middle School would receive $395,000 for a new building containing restrooms, a field house and a snack bar by the sports field.
Now, Miller can find no indication of the money being slated for or paid to the school, and Velazquez doesn’t even recall it being part of the agreement.
However, former city manager Bill Avera told BenitoLink there was a deal to give the school the $395,000, but it did not go forward.
“The district realized that the project was going to be much more expensive than anticipated because of the state architect requirements,” he said.
Councilwoman Carol Lenoir described the incentive agreement as necessary, but a “tough pill to swallow” to save the project.
The complex, multi-layered agreement is between the city and three Idaho-based companies: GRH California LLC, PMA Investments California LLC, and HC Hollister LLC, collectively called The Group.
According to the agenda packet, the incentive will entail using the city’s Economic Reserve Fund of $525,000, along with $160,000 of stormwater in-lieu fees. Seventy-five percent of the sales taxes—an estimated $195,000—produced by Hollister Farms businesses already open will be withheld from the city until construction is completed on the remaining businesses.
Additionally, there will be an interfund loan of $3.37 million at 1% interest between the general fund and the stormwater fund, which will be paid back using 75% of the sales tax generated by the existing businesses. The city will set aside sales tax revenue and reserve it for paying back the incentive. The estimated payback term of the loan is 5.75 years.
For the project, the council also approved using the construction cost reimbursement of the storm drain retention pond at the former Leatherback property.
‘It looks like a loan, but it’s not’
Avera agreed, to some degree, with Lenoir that the incentive was necessary. He told BenitoLink the city relies on sales tax revenue to survive because it receives “virtually nothing in property taxes,” to maintain the levels of service the public demands. He said it was crucial to have a commercial retail center.
“The amount of sales tax that’s generated from those is substantial,” he said. “When people say ‘half of something is better than nothing,’ you have to realize those stores will be here forever and if the payback is over a period of five or six years, we still have 15 or more years of sales tax increases. You’re going to be receiving 25% of sales taxes over the next few years, then you’re going to be receiving 100% from then on. That’s what’s important, and people need to realize there’s not a lot of opportunity out there with COVID-19, and retail is changing. The window is closing rapidly.”
Former councilmember Karson Klauer saw a problem with taking money from the storm drain funds because it could delay capital improvement plans up to 10 years for other projects that were already in line for development.
“The city is fronting $4 million and then it will get it back in sales tax,” he told BenitoLink. “It looks like a loan, but it’s not.” He said the final cost of the $3.3 million interfund loan will be significantly more than what the city is claiming.
“If the city used that money now on projects that were scheduled, that would be dollar-for-dollar, but in 10 or 15 years when they have to come back to those projects, they will be a lot more expensive to do.”
Klauer was also concerned about how quickly the agreement was consummated and that there was no public discussion. He said he tried to comment via Zoom during the meeting, but was unsuccessful.
“It’s a lot of money, but when you’re looking at it during a hiring freeze, it’s hard for me to make sense of it,” he said. “It’s just weird that nobody else is trying to oppose it. That’s money that could have been used for other services over the next five to 10 years for road repairs or hiring police officers.”
Council sees long-term benefits
Velazquez said Klauer was wrong and that no projects will be delayed because of the incentive.
In the past, Klauer had issues with tax incentives for some developments, particularly the Fairfield Inn & Suites by Marriott at 390 Gateway Drive. He was outvoted for a $2 million incentive to be paid for a hotel that was already built. He argued at the time that the developer built the hotel without being offered an incentive, so he felt the city shouldn’t pay it after the fact.
Velazquez told BenitoLink the structure of the agreement is a carry-over from how the city used to grant incentives in order to attract retail. He said the city is now trying to change these programs to resemble those offered to hotels that pay the city based on revenues they bring in.
“I want it to be clearer that the incentive is based on sales tax brought in,” he said. “What happened on this one is that conversations about incentives weren’t cleared up early enough through some of the negotiations. That’s the way I set it up for the hotels and that’s how I wanted to set it up for retail.”
If all goes as intended, the council believes the long-term operation of Hollister Farms may still result in the creation of a significant number of new jobs, property tax revenues, sales tax revenues, reduction in regional traffic and other ancillary benefits.
This was the same intention expressed by Velazquez in 2017, when the development was first announced, but it has failed to come to fruition.
“If there was no incentive, they would have tried to sell that part of the property, or it would take five to six years to build those stores,” Miller said, who added that if the incentive was not offered it could also mean the loss of 300 to 350 jobs. “If the developers are not able to do the project for retail, we are concerned that they would seek to do residential projects, which we do not want at that location.”
“It’s an unfortunate situation, but it is so worthy a project that we so desperately need,” Lenoir said. She said the move will send a message to other commercial developers.
“I’m not saying we can give them a deal all the time, but this shows we’re taking it serious that we want to be considered as a commercial destination,” she said. “We have a large county of 66,000 people and you build a new store people will come from out of town to shop. I can’t let this get away from this town.”
When originally approved in March 2018, the 130,000-square-foot shopping center was supposed to include nine large retail businesses and 25 or more smaller stores. Paul Stephens, senior partner of the Idaho group, said in 2018 there would be a T.J. Maxx, Petco, Panera Bread and Wendy’s.
None of those stores have materialized, and neither have the hundreds of jobs or $900,000 in sales taxes.
Hollister Farms businesses that are currently open include: Smashburger, Hokulia Shave Ice, Aspen Dental, Verizon and Chipotle. A building for a healthcare company is now under construction.
In 2018, San Benito County Supervisor Mark Medina and Velazquez described the development as the “smart growth” both favored.
“We’ve been waiting for this for a while,” Velazquez said then. “This is a very good company and they’ve been moving through the process and it’s all coming together.”
Under the new arrangement, Hawkins Companies has two years to begin construction on any new buildings. In order to induce the developer to continue construction, the council determined that it was in the city’s best interests to offer to pay the incentive, provided that four out of five tenants generating sales tax revenue opened for business in the new buildings.
According to the Nov. 2 agenda packet, as directed by California Assembly Bill 562, the public was told how to find information about the economic incentive subsidy by going to the city’s Economic Development website or by contacting the city clerk.
Miller said the link to the incentive subsidy was posted on the website at the same time the Nov. 2 agenda was posted in front of City Hall and sent out by email, but there is no indication of how the public was informed about the link or even its significance.
Other related BenitoLink articles:
BenitoLink is a nonprofit news website that reports on San Benito County. Our team is working around the clock during this time when accurate information is essential. It is expensive to produce local news and community support is what keeps the news flowing. Please consider supporting BenitoLink, San Benito County’s news.