Nordstrom shoppers, get out your credit cards. Two days of recent lobbying by a Nordstrom executive and two others seemed to have worked. One week before an expected June 26 vote, at least four Cincinnati City Councilmembers were ready to support a financial package of more than $50 million to build a downtown Nordstrom store at the vacant Fifth and Race Streets site, leaving the project one vote short of approval. With the remaining five councilmembers undecided — meaning no one has stood firmly against the proposal — the Nordstrom deal seems likely, unless unexpected information surfaces.
The support didn't come easily. When Eagle Realty — the subsidiary of Western-Southern Life Insurance negotiating the deal for the city — announced about a month ago it had signed a commitment to negotiate a lease with Nordstrom for the store, councilmembers didn't rush to support the proposal, perhaps realizing this is one of the votes many people will remember during the next election.
Instead, councilmembers balked at the estimated $48.7 million price tag, which could fluctuate, depending on the store's final design.
Since Nordstrom's intentions were announced, one-by-one, councilmembers have endorsed the project, with Mayor Charlie Luken leading the way. Councilman Jim Tarbell, who spoke skeptically at first, was swayed after meeting with David Mackie, Nordstrom's vice president of real estate, and Tom Stapleton, Eagle's vice president, on June 14. Minette Cooper joined the gang after a June 19 council committee meeting that dealt with the proposal.
Todd Portune said he also expects to vote yes.
But is this a good deal? For whom? What other options are there? And why are downtown stores so expensive?
A Tale of Two Studies
Cincinnati City Hall is lined with studies and reports requested by council, but never followed or fully funded. However, in March 1993, the city adopted a downtown retail master plan, written by the local firm Space Design International, now known as FRCH Design. The plan called for: a retail anchor at Fountain Square West (now called Fountain Place and occupied by Lazarus) and other stores after a decade of delays; enhancing Carew Tower retail; and a network of retail anchors to promote multiple store visits.
The city has spent a great deal of time and money on retail, according to Tarbell. A Nordstrom at the vacant Fifth and Race site is probably a good thing, he said. But "where's the housing?" he asked. The city has only reached 20 percent of the 6,000 housing units called for by the Cincinnati 2000 plan, adopted in 1982. "These are potential walk-in customers for Nordstrom," Tarbell said. "It's a holistic approach. One feeds the other."
Instead, the city has spent an inordinate amount of time trying to lure people in from the suburbs for daytime shopping trips, which increases the need for expensive parking garages.
"It's all half-baked," Tarbell said. "We're making downtown act like a shopping mall instead of a neighborhood."
However, after meeting with Nordstrom's Mackie and Eagle's Stapleton on June 14, Tarbell was less strident on the issue. He doesn't want to hold the Nordstrom deal hostage or to stop what it could do for downtown, in exchange for some sort of housing proposal. "My inclination is to support (Nordstrom)," Tarbell said. "But I'm going to continue to push the big picture."
The Deal
The city's financial package is either about $26 million, or double that, depending on what you believe is city money. The project is expected to cost $48.7 million, including a $39.5 million building, an $8 million below-ground garage, and $1.2 million in sidewalk and streetscape improvements. Funding comes from:
· $5 million from a state loan to be repaid by the city, possibly from the 2005-2014 capital budgets, which usually cover work such as street repairs and building maintenance;
· $5 million from tax increment financing (TIF), an advance on the tax dollars the project will produce;
· $16 million in city TIF money accumulated from previous city projects;
· $12.7 million from the Cincinnati Equity Fund, a pool of private money, to be repaid through store and parking garage revenues.
Some also count the $10 million the city spent to buy and tear down the arcade building once located at the Fifth and Race Street site.
Nordstrom will pay Eagle Realty $200,000 in rent per year, plus a percentage of the store's gross sales, ranging from 0 percent for less than $40 million in sales, to 1.5 percent from sales of $100 million or more. The lease runs 20 years. Options to renew could extend it up to 70 years. If Nordstrom breaks the lease, it still pays the remainder of its rent. Eagle is the landlord and owner of the building, and is free to find another tenant if Nordstrom leaves.
The city recoups some money though its 2.1 percent income tax on workers in the city. A July 1999 PricewaterhouseCoopers study estimated the city would bring in $126,000 in such taxes through a new Nordstrom store, plus $204,000 from other development attracted by Nordstrom. However, that study didn't consider the possibility of a second, suburban store.
Councilman Phil Heimlich believes in looking at the bigger picture, adding all of the incentives, plus a yet-to-be-built 700-space parking garage at Sixth and Elm streets, specified as necessary in the lease, but planned by the city anyway, for a combined total of $58 million, according to his estimate.
Rallying Support
Mayor Luken was the first to favor the Nordstrom deal. He has pushed the rest of the council on the issue, reminding them that $27 million was previously dangled to lure a Maison Blanche department store to the same site. That deal collapsed when Dillard's bought Mercantile, Maison Blanche's parent company, in May 1998.
Originally the city hoped to lure a Nordstrom to the riverfront, but that plan was rejected by city council in 1998. Nordstrom became a candidate for the Fifth and Race site, and Eagle has worked toward that goal for months. Downtown retailers expect the city to close the deal, or else, Luken told councilmembers.
If the city doesn't follow through with the Nordstrom deal, "There will be lights going off. There will be stores closing," Luken said, and asked if council would do what they'd been aiming to do for two years. "Or are we going for that bombed-out, Beirut look?"
"It's going to take something unforeseen for me to vote against it," said Councilman Portune. "I don't think there are any outstanding issues that can't get resolved ... favorably to the city."
Councilwoman Minette Cooper also recently sided with Luken, pointing out the months of negotiations that went into this proposal and the lack of another viable alternative at hand.
The Questions
The Cincinnati Nordstrom proposal is hardly unique. Nordstrom has been opening stores all over the country with the help of financial incentive packages.
Indianapolis and private developers gathered $314 million to build the 800,000-square-foot downtown Circle Center mall, which included a Nordstrom and a Parisian, 110 specialty stores, a 9-screen theater, among other items. Nordstrom received similar deals in Norfolk, Va., and Providence, R.I.
Paula Weigand, a Nordstrom spokesperson based in Seattle, characterized the deals as dual investments, or partnerships, rather than a large city subsidy that enables the company to make a profit. The governments reap income and sales tax revenues from the stores, plus attract more people to their downtowns.
"(Downtown stores) are very expensive projects," she said. "They can't go it alone."
"(Millions is) what it takes these days to get a Nordstrom," said Michael Beyard, a senior fellow of the Washington D.C.-based Urban Land Institute, which studies urban policies. "It's very difficult to say whether it's worth it or not."
Even in malls, retailers such as Nordstrom usually get a free building, Beyard said, which is made up by the rents paid by smaller retailers.
But why are downtown retail stores costing cities so much? Besides the obvious expense of building downtown, there's no doubt that political fragmentation helps stores like Nordstrom play cities and suburbs off each other to get better deals, Beyard said.
Beyard doesn't know that Nordstrom is doing that, but he did say the company is smart enough to.
They're a "master of marketing," he said. "They are sophisticated, I'll tell you that. I don't know of any other department stores that can demand $60 million dollars."
The company's Web site already lists the two planned Cincinnati stores — one in downtown and one in Deerfield Township near Mason-Montgomery Road — as opening in 2003.
"They've already started their marketing," Beyard said. "That's how good they are."
Still, some councilmembers were willing to take Nordstrom's word that the second store isn't a sure thing.
"I don't think they're convinced — nor am I — that the second store will happen," Luken said. Tarbell expressed similar views.
"The possibility of a second store is pretty alarming," said Sara Hinkley, a senior analyst with Good Jobs First, a small, Washington D.C.-based institute devoted to studying economic development policies. Besides the obvious fear that a suburban store would reduce the impact of a downtown store, two stores increase the chance that Nordstrom will be attracting money that shoppers would have spent anyway in other existing area department stores.
In short, the question is, will Nordstrom bring a net increase in regional retail spending, or just shuffle dollars from the suburbs back into the city?
For example, Indianapolis' downtown Circle Center mall attracted $43 million in new retail spending when it opened in 1995, but it also drew $66 million from the existing malls in the Indianapolis area, according to a 1998 report by the International Council of Shopping Centers, an trade association with 40,000 members in 75 countries. All told, the existing Indianapolis malls, which expected a 2 percent annual growth in sales, either barely made that goal or lost up to 9 percent in sales, with the smaller, less frequented malls hit the hardest, the report said.
And while TIF dollars seem like free money to many people because they don't come out of a budget, it's not that simple, Hinkley said. TIF was created to bring investment to the most blighted neighborhoods, where otherwise no one would build anything. But these days TIF is being used to finance projects on land that might have attracted TIF-free private investment. That means the city could be cheating itself out of future tax revenue, money that the non-subsidized project would have brought in. Such money could have been used for schools, or roads, or police, or firefighters.
The Details Need Work
The initial agreement is only a letter of intent, meaning Eagle and Nordstrom still have to negotiate a final lease. They hope to finish that in September, and open the store in the spring of 2003. "This by no means is the end of the work," City Manager John Shirey said.
And as of Monday, June 19, a few councilmembers were skeptical the city was getting all it could from the deal. A committee vote to recommend the deal was expected a week later, with a final council vote on June 28.
Councilmembers Paul Booth and Pat DeWine remained undecided, while Alicia Reece wants Eagle Realty to set a maximum city contribution for the project.
"I'm not interested in another Bengals stadium mess," Reece said. However, "we don't really know actual costs — that's the problem."
Gary Gerwe, owner of Bromwell's, a fireplace store on West Fourth Street, was less skeptical. In 1988, L.S. Ayres closed, and later so did Gidding-Jenny, and Burkhardts', among many others. "The whole downtown fell apart," Gerwe said.
Now, there's a whole different momentum downtown compared to 12 years ago. "We need one more department store," Gerwe said. "The cost is high, and we don't want to do it. But we have to."
"This is nothing but corporate welfare," said Tom Brinkman, a tax opponent and Republican candidate for the Ohio House's 37th district. "If (the stores) were so great, then why did they leave? They left because it was advantageous for them to leave."
And, one could argue, now they're coming back because it's advantageous to do that. ©
