Consideration and Adoption of Ordinance No. 2015-18:  An ordinance to enter into a second Amendment to Development Agreement (DA) with Nestle-Purina Petcare Company to extend the agreement and underlying lease for up to six months  (Possible extension of development agreement with Nestle-Purina).

Nestle-Purina and the City of Flagstaff request a six month extension of the existing development agreement and underlying lease which are scheduled to expire October 14, 2015. This extension is to achieve original purposes and to explore feasibility of voluntary installation of equipment to achieve measurable odor mitigation related to expanded production.

If, within the six month extension period, Nestle-Purina has not identified a means agreeable to the City to substantially mitigate odor related to production the Development Agreement and underlying lease will expire in April 2016.

If Nestle-Purina has identified a means to objectively and substantially mitigate odor related to production, Nestle-Purina and City staff will return to council requesting further extension not to exceed three years to achieve the original purpose and will include specific measurable outcomes to be met.

In the not too distant future, a new rule from the Governmental Accounting Standards Board (GASB) will require cities to disclose tax abatements such as the one entailed in this amendment.  The new GASB rule will impact Flagstaff in our financial statements for the year ending June 30, 2017.  The first year of implementation will be for any budget adopted after December 15, 2015.
 

 

The intention is there will be no financial impacts to the parties or other governmental agencies, unless a third amendment or longer term agreement (beyond April 2016) is achieved and approved.  Should the City and Nestle-Purina not reach a longer term agreement, Nestle Purina would be responsible for the taxes owed for 2016.  If an agreement is reached, there will be a reduction in taxes received that will impact a number of community partners (including Flagstaff Unified School District, Coconino Community College, County, and the city).  Specifics of that number would be provided as a part of any action extending the lease beyond the six month period.  Currently, the net reduction in taxes is approximately $400,000 annually, which tax loss is shared by the community partners and the City.

COUNCIL GOALS:
#7) Address key issues and processes related to the implementation of the Regional Plan
#9) Foster relationships and maintain economic development commitment to partners
10) Decrease the number of working poor


REGIONAL PLAN:
Goal ED.3. Regional economic development partners support the start-up, retention, and expansion of existing business enterprises.

Council approved the Development Agreement and underlying lease with Nestle-Purina in 2003. The agreement and lease were amended in 2008.

1. Approve the six month extension of the Development Agreement and underlying lease in order to explore options to further the original purpose and mitigate odor related to production.  
Pro: This will provide the two parties with the opportunity to determine if an effective and measurable option can be agreed to. 
Con: it defers, but does not forgive, property taxes.
2. Approve an extension of the Development Agreement and underlying lease  for a period not to exceed three years from the original expiration date of October 14, 2015. 
Pro:  This provides the time and financial capacity to achieve the original purposes and for the installation of equipment to reduce odor.
Cons:  It would reduce tax revenues and there is not a specific measurable goal determined at this time. The community partners also have not had time for consideration.
3. Reject the request to extend the Development Agreement and underlying lease for six months. 
Pros: This will result in tax revenues returning to the normal level (add $400,000 per year to the community partners and the city). 
Cons: This action will not support achieving the original purposes (projected tax savings) or reducing the odor impacting the community associated with the Purina expansion and increased production. 

Nestle-Purina has been expanding operations in Flagstaff ever since Purina was acquired by Nestle, S.A. in December of 2001. In 2003, Nestle-Purina entered into a development agreement with the City of Flagstaff and underlying lease. Performance requirements of that agreement included 100,000 square foot addition, hiring additional employees, and continuing operations. In 2008, the development agreement was amended to accomplish a number of other development related items including: selling the City two acres of land for a fire station, dedicating right of way to realign Industrial Drive, while  Nestle-Purina constructs another 94,000 square feet and provides parking for 292 vehicles,  and use all commercially reasonable efforts to add another 50 full time employees. Details of both agreements are included in this packet.

Under the Development Agreement, the City has accepted title to Purina property. This enables the property to be constitutionally exempt from property tax (about $490,000 per year savings).  The City leases the property back to Purina, and Purina pays a Government Property Lease Excise Tax (GPLET) (about $90,000) per year.  Thus, currently the net tax savings for Purina is about $400,000 per year.

Nestle-Purina has met all requirements thus far while, due to the market correction and reduced property values, falling short of the DA projected tax savings by at least $600,000 and possibly as high as $1 million (City staff is still determining the actual number). During this period, production has increased greatly which means Purina's operations are running more frequently, in turn creating more instances when there is the related odor of production. As Nestle-Purina seeks to be a great community partner, they have already been exploring ways to mitigate the related odor from production and are currently studying the issue.  To be clear, although the smell is evident, Nestle-Purina continues to meet all air quality and odor requirements at the state and federal levels. Part of being a great community partner inspires Nestle-Purina to explore the often costly measures to mitigate odor.

Nestle-Purina is currently exploring methods to objectively and substantially mitigate the odor from production; however, there is currently no funding budgeted to do so. Extending the  DA to allow time to develop a plan and measurement strategy provides the time necessary to explore this option.  Potentially the extension could result in using the DA for the original purposes (achieve closer to projected tax savings) and apply funds towards odor mitigation efforts to achieve measurable reductions in odor from production.  As a large employer, the image of manufacturing is critical to the workforce pipeline for the entire industry. Supporting the expeditious mitigation of the odor contributes to a more appealing workforce option.  Additionally, it would have the benefit of assisting economic development in the east and reduce a nuisance to residents.

The DA and underlying lease allow a business to turn over title of real property to a municipality, which in turn leases the land back to the owner in order to experience relief from property tax for a limited amount of time.  This is intended to support  business expansion and other public benefits. The city and community partners understand that their revenues are diminished as the business is not paying property taxes; in this case since 2003, Nestle-Purina  has experienced a total tax savings of approximately $2.5 to 3 million while at the same time investing greatly in their operations and now employing approximately 250.

As odor may be off-putting to a workforce pipeline, so too may the odor negatively impact other uses in the area. Increased housing in the area supports many neighborhoods that are impacted by the odor. Business around the Flagstaff Mall are also impacted by the odor. Supporting the effort to mitigate the odor supports the populations and industry that are also in the area.

The east side of Flagstaff and the Flagstaff Mall could potentially benefit greatly through a reduced nuisance odor.  The Mall contributes almost 17% of the total sales tax revenues for the City of Flagstaff.  One item that has been mentioned is that businesses are impacted by the odor.  Additionally, residents in the area have unfavorably commented about the odor.  Nestle-Purina supports numerous families through their hiring and their increased shifts have been a benefit to the community, but the increased production has also increased the odor.

Involve - To support the extension of the DA and underlying lease will respond to a diverse population with a unified voice regarding their interest in odor mitigation.

City staff will be contacting community partners to see if there is support for a longer agreement with Purina-Nestle.

Another option would be to explore an entirely new DA and lease. Due to changes in state laws, Purina would need to provide direct consideration for any property tax savings, and would need to pay much higher government property lease excise tax (GPLET).  Therefore, a new development agreement may not be an effective financial tool.