CITY COUNCIL COMMUNICATION

CITY COUNCIL COMMUNICATION

MEETING DATE: November 17, 2020               ITEM NUMBER: 12.1

SECOND READING: December 01, 2020              {{customfields.ResoOrdNumber}}

TYPE OF ITEM: General Business

PRESENTED BY:
Harold Dominguez, City Manager's Office, Harold.Dominguez@longmontcolorado.gov
Dale Rademacher, City Manager's Office, Dale.Rademacher@longmontcolorado.gov
Jim Golden, Finance Administration, Jim.Golden@longmontcolorado.gov
Eugene Mei, City Attorney's Office, Eugene.Mei@longmontcolorado.gov

SUBJECT/AGENDA TITLE:
A Bill For An Ordinance Approving A Public/Private Partnership Agreement Among Diamond G
Concrete Company, Costco Wholesale Corporation, And The City Of Longmont In Furtherance
Of Development Of A Costco Membership Warehouse Facility, Affordable Housing And
Additional Commercial/Retail Uses

EXECUTIVE SUMMARY:
This item consists primarily of an economic development agreement between the City, the
property owner Diamond G Concrete Company (Owner), and Costco Wholesale Corporation
(Costco). Around mid-year 2019 the City staff became aware that Costco was considering
locations in and around the Longmont area for the development of a new retail
warehouse. Since that time staff has been working collaboratively with Costco and the Owner
to secure a location within city limits to locate their new warehouse facility. The result of
those negations is the intended development of a 48.66 acre site within the Irwin-Thomas
annexation. The planned development of this property has the added benefit of pushing the
future gravel mining operations away from existing residents located immediately west of the
property. Please refer to the attached vicinity map and concept maps.

Location of the Costco retail warehouse (Costco Project) within City limits represents a
significant economic development opportunity for Longmont community members to enjoy a
diversification of retail opportunities locally as well as stemming the leakage of sales tax
dollars from the City. In addition to the economic development benefits of this proposal, the
City has also negotiated with the Owner an opportunity to acquire 9 acres of property for
future affordable housing needs in the community. The Council is being requested to act on
the following items:

     Consideration of an Ordinance approving the three party Public Private Partnership
   Agreement (P3) which addresses the key business aspects of the relationship between the
   Owner, the City and Costco.

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      Consideration of an Ordinance approving the creation of the Harvest Junction East
   Special Revenue Fund.
    Consideration of a Resolution approving loans from the Fleet Fund to the Harvest
   Junction East Special Revenue Fund and the Affordable Housing Fund. (to be considered at
   the City Council’s December 1st Regular Session for final action)
    Consideration of an Ordinance approving the appropriation of the City’s funding
   obligations for the Costco Project which include the following:
           o Funding to acquire 9 acres for future affordable housing needs.
           o Funding to acquire 17 acres as an economic development incentive for the
           Costco Project.
           o Funding to rebate the raw water deficit from the 22.66 acres of the Owner’s
           property (Owner Remainder Property) as an economic development incentive.
           o Funding of the City’s pro-rata share of the cost of public improvements,
           permits, development fees and commission costs, all related to the development of
           the 48.66 acre site.
           o Application of the City’s Raw Water policy intended to incentivize affordable
           housing wherein the raw water deficits associated with the 9 acres of affordable
           housing (City Affordable Housing Property) is rebated from the City’s Water
           Acquisition Fund
           o Application of the City’s Raw Water policy intended to incentivize economic
           development opportunities wherein the raw water deficits associated with 17
           acres of land for the Costco Project (Costco Property) is rebated from the City’s
           Water Acquisition Fund
    Consideration of a Resolution authorizing an Intergovernmental Agreement between
   the City and Boulder County for the use of Quick Silver Road as the approved haul route
   for the eventual gravel mining of the balance of the Irwin-Thomas property. (to be
   considered at the City Council’s December 1st Regular Session for final action)
    Consideration of a Resolution approving an Agreement between the City and
   Aggregate Industries outlining the responsibilities and costs associated with the use of
   Quick Silver Road for gravel hauling. (to be considered at the City Council’s December 1st
   Regular Session for final action)

It is anticipated that, subject to Council action, that the execution of these agreements will
initiate the land development review process for the 48.66 acre site. The completion of that
process is anticipated to occur around mid-year 2021. At that time the closing on the property
acquisitions will take place and Costco will give direction to proceed with the construction of
the public and private site improvements. That effort is anticipated to take anywhere from 12
to 18 months. Once those improvements are complete, or substantially completed, Costco
will proceed to construct their warehouse and fueling island ahead of an anticipated opening
date no later than July 2024.

CITY COUNCIL COMMUNICATION

COUNCIL OPTIONS:
1. Approve the Ordinances for the P3, fund creation, and appropriations. The Resolutions will
be presented for final action at the December 1 Regular Session when City Council will
consider the Ordinance on second reading.
2. Do Not Approve the Ordinances

RECOMMENDED OPTIONS:
Approve the Ordinances

FISCAL IMPACT & FUND SOURCE FOR RECOMMENDED ACTION:
The City commitment under the P3 is up to $11,060,803 from the to be created Harvest
Junction East Special Revenue Fund that will be funded with sales tax from the Costco
Project; $1,470,150 from the Affordable Housing Fund; and $459,758 of reimbursement of
cash in lieu of water fees from the Water Acquisition Fund that will be paid by the Owner for
the Costco Property and City Affordable Housing Property. The amounts from the Harvest
Junction East Fund and the Affordable Housing Fund will come from a loan from the Fleet
Fund.

BACKGROUND AND ISSUE ANALYSIS:
Project Concept, Considerations and Negotiations

During the summer of 2019 City staff became aware that Costco was considering locations in
or near Longmont for development of a new retail warehouse facility. This immediately
became a high priority to become involved in those discussions and to try and help influence
the decision-makers at Costco that a site within Longmont was the best location for that
prospective facility.

There are a number of reasons that locating this facility in Longmont was critical to the City:
    A goal within Envision Longmont is to support the expansion and diversification of
       retail opportunities, categories, and levels within the City as the market supports,
       allowing residents to meet more of their needs locally.
    A Costco facility plugs a key source of sales tax leakage from within the City.
    Costco was intending to locate in or near Longmont in order to reach the Longmont
       market as well as retail markets to the west of Longmont. If this facility had been
       located nearby but outside of Longmont the sales tax generated from it would not
       reach Longmont coffers while sales tax loss would have been experienced from sales
       it could likely draw from existing Longmont discount and grocery retailers.
    Adding a Costco facility in Longmont makes a statement about our City reaching a
       certain retail trade demographic level. While new brick and mortar retail growth is
       limited in this day and age of internet sales, the Costco decision reflects a belief that
       Longmont and its surrounding area can support a regional retailer. This development

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       can have a positive rollover impact in nearby Harvest Junction and maybe sets a tone
       for other retail infill development with the City.
      The sales tax from a Costco facility is significant. Using Costco’s first year sales
       projections and our conservative growth projections, the associated city costs and
       incentives of $11.06 million planned to be funded through sales tax are “paid back”
       within 4 years and the total new sales tax from the facility, net of possible
       cannibalization impacts, is more than $73 million over twenty years.

As a part of the Costco Project the City had an opportunity to acquire 9 acres for affordable
housing purposes. This helps meet another goal of Envision Longmont of insuring there are
affordable and accessible housing options that meet the need of residents of all ages,
abilities, and income levels.

Costco is very selective about the locations of their facilities. Costco has a facility to the north
located in Timnath (32 miles from downtown Longmont), one to the Southeast located in
Thornton (19 miles); and one to the southwest located in Superior (18 miles). Each of these
are located along a major highway, either I-25 or Highway 36. Costco is looking to reach a
market that is effectively located a reasonable distance away from these other facilities while
still located in or near a highly populated area. The facility could draw from Niwot, Gunbarrel,
Boulder, Lyons and Estes Park to the west. Mead; Berthoud; Johnstown; and even south
Loveland to the north. Platteville; Firestone; Frederick; and Dacono to the east. Erie and
Lafayette to the south.

Costco expressed a desire to be in the general location of Longmont, but was also considering
locations to the east of Longmont closer to I-25. Incentives are typically a factor in the
location of a Costco facility. When City staff became aware of their interest in locating in
Longmont we began to look for an attractive location with a willing landowner. A few
locations in Longmont were suggested to the commercial realtor and Costco representatives
but most were not deemed viable except for this one location immediately east of Harvest
Junction owned by Reggie Golden and his family. This property was annexed to the City
several years ago. The property is planned to be gravel mined according to an approved
mining plan which was in place prior to the property annexing to the City. The proposed
development of the 48.66 acres will remove the potential for it to be mined in the future.
This will effectively push the future mining activity further away from existing residents and
their homes

The expectations of Costco are to receive a property in a condition fully ready for them to
build their facility on. When staff began to collaborate with the Golden family on the Harvest
Junction East property, other opportunities were also identified. The Golden family agreed to
sell a part of the property to the City to use for affordable housing purposes. The full
property site planned to be developed is a total of 48.66 acres. Of that total, 17 acres is for

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the Costco site itself; 9 acres are for affordable housing to be located south of Costco; and
the remaining 22.66 acres will be developed by the Golden family.

Project Costs and Allocation Among the Parties

The 26 acres of land for the Costco Property and for the City Affordable Housing Property is
being purchased at a cost of $3.75 per square foot for a total of $4,247,100. That breaks out
as $2,776,950 for the Costco Property and $1,470,150 for the City Affordable Housing
Property.

Public infrastructure improvements necessary to prepare the full 48.66 acre site for final
development are estimated to cost a total of $7,868,715. They include design and
construction of utilities; road improvements; and traffic signal. These costs are all shared by
the City and the Owner in a pro rata share based on the total 48.66 acres to be developed
with the City paying the share of the 26 acres for the Costco Property and the City Affordable
Housing Property. The City share of that cost is $4,204,410 with the Owner paying the
remaining $3,664,305 for the Owner Remainder Property share.

The community investment fees related to the Costco facility total $1,481,965.13. Of that
amount, the City will be paying the fees associated with the electric, transportation, and
storm drainage systems at a cost of $678,746. Costco will be paying the remaining fees at a
cost of $803,218.99. In addition, the City is paying $250,000 for a temporary construction
easement needed to locate a temporary stormwater detention and treatment facility from
public streets during construction. This TCE will be located adjacent to the Owner’s subject
48.66 acres, and will be extinguished once the permanent stormwater detention facility is
constructed. The payment for the TCE is expected to be covered from unused contingency
on the City’s share of the site improvements and/or savings in the City’s commitment for up
to $3 million of site development costs addressed in the paragraph below.

Costco has committed $6.16 million to pay for private site development costs associated with
the development of the Costco Project itself. If there are private site development costs that
exceed Costco’s $6.16 million budget, the City will cover up to $3 million of those costs with
the Owner being responsible for the rest.

The total raw water deficit on this 48.66 acre development is estimated to be $860,455 at the
current cash-in-lieu fee. In accordance with Chapter 14.05 of the Longmont Municipal Code,
the City will be satisfying the deficit on the Costco Property through an allocation of 17 acre-
feet of raw water from the City’s overall water supply to spur the certain economic
development in the City. The Costco Development far exceeds the requirements set forth in
Chapter 14.05 with a positive benefit to cost ratio for the City. Similarly, and in accordance
with Chapter 4.79 of the Longmont Municipal Code, the City will satisfy the Raw Water

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Deficit on the City Affordable Housing Property through the allocation of 9 Acre-Feet of raw
water from the City’s overall water supply to support the development of additional
affordable housing on 9 acres within the Property. Lastly, the City will financially satisfy the
Raw Water Deficit on the 22.66 acres of Owner’s Remainder Property through payment to
the Water Acquisition Fund in the amount of $400,697 which represents the payment of
cash-in-lieu at the current rate of $17,683 per Acre-Foot needed to satisfy the 22.66 Acre-
Foot deficit.

The total hard dollar cost to the City of this overall development is estimated at $12,530,953.
Of that amount, $9,605,431 is the cost to the City to essentially incentivize Costco to locate in
Longmont. The balance of $2,925,522 is the costs related to the affordable housing aspect of
the development. Of the total $12,530,953 of hard cost to the City, $1,470,150 will ultimately
be funded from the Affordable Housing Fund. That represents the cost to acquire the City
Affordable Housing Property. The balance of the City cost of $11,060,803 will ultimately be
funded through sales tax to be generated from the Costco Project. That includes $1,397,847
of site improvements and $57,525 of fees related to the affordable housing property. These
cost allocations are broken out on the table below.

The latest projected opening date in the P3 is July 2024. The City’s investment in the Costco
Project is protected by a series of “clawback” provisions whereby Costco has agree to

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reimburse the City for its costs if Costco closes on the Costo Property but does not open by
the agreed upon date. The amount of the clawback due to the City varies based upon various
stages of completion of the public and private improvements. In the event Costco fails to
remain open for a continuous period of five years, the P3 obligates Costco to reimburse the
City for the difference between the City’s costs and the gross sales tax received to date
generated by the Costco Project. The City may, but is not required to, retain ownership of the
nine acres of affordable housing property in each of the clawback scenarios.

Staff made an analysis of the sales tax impacts of the Costco Project on the City of Longmont
revenues. Based on information received from Costco, the potential taxable sales generated
by a Costco facility is $767 per square foot. For the 150,000 square foot facility that is
anticipated in the Costco Project, the sales tax to be generated would be estimated at $4.06
million in the first full year of operation. Staff estimated that 25.9 % of that revenue could
come from cannibalization of existing Longmont retailers. That would still result in over $3
million of net new sales tax to the City annually. That means that the City investment of $9.6
million to incentivize the Costco project would essentially be recovered in just over three
years. The City investment of $11.06 million of costs from the Costco Project and the City
Affordable Housing Property to be covered by sales tax from the Costco Project would
essentially be recovered in less than four years. Using growth projections of 2% annually, the
Costco Project revenue projections net of cannibalization over twenty years would be over
$73 million.

In September, the City of Denver approved an incentive agreement for a development in
northeast Denver called “The Flyway” that will include a Costco warehouse facility. In that
agreement Denver committed to share-back $9.5 million of sales tax from the facility.
Denver Economic Development & Opportunity reported data on recent Costco projects on
the Front Range and the incentives involved including: $14 million in Timnath in 2014; $11.6
million in Parker in 2009; and $3.47 million in Thornton in 2007. These amounts seem to
indicate that the $9.6 million in the Longmont agreement is not excessive.

City Financing Proposal

None of the expenses identified above related to the Costco Project are appropriated at this
point in time. In order to provide the funding needed the staff is recommending that
interfund loans be approved from the Fleet Services Fund. There will be expenses related to
the Costco Project as well as the City Affordable Housing Property. To account for the project
expenses expected to be repaid with sales taxes from the Costco Project we are proposing to
create a new Special Revenue Fund of the City called the Harvest Junction East Special
Revenue Fund. A loan of $11,060,803 is proposed to be made to this fund. A second loan of
$1,170,150 is proposed to be made to the Affordable Housing Fund. The AH Fund will pay

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$300,000 toward the transaction in 2021 and then repay this loan out of its annual revenues
derived from the General Fund over four years beginning in 2022.

The City sales tax rate is 3.53%. Of that total, 1.53% is earmarked by voters for specific uses
including .75% for Streets; .20% for Open Space; and .58% for Public Safety. The remaining
2% is non-earmarked but under current City Council financial policy it is allocated 1.70% to
the General Fund and .30% to the Public Improvement Fund (PIF).

For the $11,060,803 loan to the Harvest Junction East Special Revenue Fund, staff is
proposing that 50% of the non-earmarked sales tax from the Costco Project go toward
repayment. The other 50% of the non-earmarked sales tax would continue to accrue to the
General Fund (85%) and the PIF (15%). This financing arrangement is similar to the use of the
sales tax from the Village at the Peaks (VATP) going toward repayment of the Certificates of
Participation that were issued to fund public improvements at the VATP. In that arrangement
the sales tax plays a small part in the repayment of the COP’s so only .31% of the non-
earmarked 2% is needed. For the Costco Project, sales tax is the only proposed source of
repayment. Thus the proposed financing arrangement is for 50% of the non-earmarked 2% to
go to repayment while the other 50% goes to the General Fund and PIF to first offset any
impacts of cannibalization and then to provide new revenue to those two funds.

Inter-fund loans are charged an interest rate based on the rate of return of city investments.
That way the Fleet Fund, from which the loans are made, remains whole. Staff projections
are using an interest rate on the loan of 1.5% during 2021; 1% during 2022; and 2% afterward
which is well above current returns. Using those interest rates and the projections of sales of
$767 per square foot and 2% annual growth, the loans from the Fleet Fund would be repaid
with 50% of the non-earmarked sales tax (1.0% tax rate) early in the eleventh year of
operations (sometime in late 2034). Staff recommends that any sales tax from the Costco
Project, including from the retail opportunities developed on the nearby pads, be subjected
to this repayment plan. Those revenues are not included in the staff projections so anything
from that source and Costco sales performance greater than $767 per square foot would all
combine to accelerate the repayment.

The Fleet Service Fund is an Internal Service Fund of the City which was created to centralize
control over the acquisition, maintenance, allocation and disposal of all city-owned motor
vehicles and motorized equipment. The Fleet Fund accumulates replacement monies over
the useful life of the vehicle and equipment assets so that replacement can be made when
the vehicle is removed from service. With almost 800 vehicles or motorized equipment at a
value of over $42.7 million, there is always a significant fund balance in the Fleet Services
Fund representing accumulated replacement dollars. In 2019 the accumulated fund balance
for replacements was approximately $23 million. In the past we have found that we have
been able to make loans to other funds for equipment or capital projects at much lower

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interest rates than if we were to secure financing from the private sector. At the end of 2018
the total of loans outstanding from Fleet was just over $3 million, a relatively small
percentage of the accumulated fund balance for replacements. In April of 2019, the City
Council authorized a loan to the Storm Drainage Fund of $3.6 million for the Resilient St.
Vrain Project. Then in December of 2019 two more loans totaling $2,188,971 were
authorized to the Streets Fund and the Storm Drainage Fund for purchase of the Tull
property. Net of payments during 2020, loans outstanding at the end of 2020 should total in
excess of $6.3 million.

With the increase in loans in 2019, and with this proposal to make additional loans of $11.78
million for the Costco Project and City Affordable Housing Property, staff believes it is
prudent to propose a new financial policy regarding the use and amount of loans from the
Fleet Fund. In the 2022 annual budget process the staff will recommend a financial policy
that interfund loans from the Fleet Fund should never exceed the lower of 70% of the current
fund balance for replacements or 70% of the average of the projected fund balance for
replacements for the next five years.

City Council Actions

The following are all actions that the City Council will need to consider to facilitate the Costco
project:

      An ordinance approving the Public Private Partnership Agreement between Diamond
       G Construction Company, Costco and the City of Longmont
      An ordinance approving the creation of the Harvest Junction East Special Revenue
       Fund
      An appropriations ordinance
      A Resolution approving loans from the Fleet Fund to the Harvest Junction East Special
       Revenue Fund and the Affordable Housing Fund (to be considered for formal action at
       the December 1, 2020 regular session)
      A resolution approving the Quicksilver Road IGA with Boulder County (to be
       considered for formal action at the December 1, 2020 regular session)
      A resolution approving the Quicksilver Road Agreement between the City and
       Aggregate Industries (to be considered for formal action at the December 1, 2020
       regular session)

ATTACHMENTS:
   A. Vicinity map
   B. Site map

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  C. Ordinance approving the Public Private Partnership Agreement between Diamond G
     Construction Company, Costco and the City of Longmont
  D. Resolution approving loans from the Fleet Fund to the Harvest Junction East Special
     Revenue Fund and the Affordable Housing Fund (to be considered the December 1,
     2020 regular session)
  E. Resolution approving Quicksilver Road IGA with Boulder County (to be considered at
     the December 1, 2020 regular session)
  F. Quicksilver Road IGA with Boulder County (to be considered at the December 1, 2020
     regular session)
  G. Resolution approving Quicksilver Road Agreement between the City and Aggregate
     Industries (to be considered at the December 1, 2020 regular session)
  H. Quicksilver Road Agreement with Aggregate Industries (to be considered at the
     December 1, 2020 regular session)