Business & Real Estate

Elk Grove council approves hefty incentive for Costco project

Steve Shaffer pushes a cart with groceries at the Costco in Sacramento near Highway 160. Costco Wholesale Corp. is slated to begin construction of a new store in June on a 17-acre site in Elk Grove.
Steve Shaffer pushes a cart with groceries at the Costco in Sacramento near Highway 160. Costco Wholesale Corp. is slated to begin construction of a new store in June on a 17-acre site in Elk Grove. Sacramento Bee file

Elk Grove residents will soon be able to stock up on Kirkland toilet paper without leaving town, after the City Council last week approved $8 million worth of incentives for the project’s developer.

Costco Wholesale Corp. is slated to begin construction in June on a 17-acre site in the sprawling suburb of 160,000. Design plans call for a 150,000-square-foot store and up to 30 gas pumps near Elk Grove Boulevard and Bruceville Road.

Council members voted 4-0 to share $8 million in sales tax with Pappas Investments, the landowner. (Councilman Darren Suen abstained because he owns Costco stock.) Pappas had requested a tax-sharing agreement, saying the lease with Costco was not viable without a public subsidy.

The amount would be worth roughly $14.8 million when adjusted for inflation during the 25-year period, according to Elk Grove Economic Development Director Darrell Doan.

“You’ve got a piece of land that is vacant in the heart of the city that will be put to productive use, finally,” Doan said.

The public incentive is the largest afforded to a private company in exchange for setting up shop in Elk Grove. Last year, then-mayor Gary Davis said Costco had made it clear that the company would only locate in cities where 100 percent of impact fees are reimbursed through sales-tax sharing.

Councilman Pat Hume said the deal made sense because Costco would generate more sales tax than other potential retailers. Mayor Steve Ly did not respond to a request for comment.

Doan played down the impact to city coffers because “there’s no upfront check that the city has to write.”

“The beauty of a sales tax sharing agreement is there’s absolutely zero risk to the city’s finances or taxpayers,” he said, adding that the city is expected to net nearly $28 million during the first 25 years. “If nothing is ever generated, we don’t remit anything.”

The project has encountered opposition from some residents who have complained about the planned store’s proximity to residential housing. Others have criticized the public subsidy.

“It’s a rip-off,” said Michael Monasky, an activist who ran for mayor last year. He warned that the agreement may set a precedent for other businesses coming to town.

Larry Chen, a 16-year resident and Costco member who lives a block from the site, voiced concern over the environmental impact that a big-box retailer like Costco will bring.

“People will be waiting to fill up at the gas station. There will be a lot of air pollution,” said Chen, who lives with two young daughters and elderly parents.

Of the five Costcos in the Sacramento region, none is located in Elk Grove, which is the area’s second-largest city by population. Fans of the warehouse retailer must venture 6 miles north to the heavily trafficked south Sacramento location or more than 20 miles south to Lodi.

Costco previously said it has 40,000 members in Elk Grove alone, which is enough to sustain another store.

Costco’s debut in Elk Grove has been nearly a decade in the making. While the City Council approved the project last year, no construction started while Pappas negotiated an incentive since Costco was unwilling to pay more for the ground lease. With the final hurdle removed, Doan expects Costco to open the store early next year.

Scott Rose, a Pappas spokesman, declined to disclose how much Costco will pay during the initial 25-year agreement.

Doan said he had reviewed the lease and concluded that the $8 million incentive was “necessary to move this forward.”

The new Costco, Doan said, puts Elk Grove on the path to developing retail self-sufficiency, estimating that the city loses $1 billion in sales annually from residents who shop in neighboring areas.

“We’re just not a retail destination, but we have all the demographics for it,” he said.

Richard Chang: 916-321-1018, @RichardYChang