Consideration and Adoption of Ordinance No. 2016-09:  An ordinance to enter into a third 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 April 14, 2016. This extension is to achieve the original purposes of the previous extensions and to explore feasibility of voluntary installation of equipment to achieve measurable odor mitigation related to expanded production.

Nestle-Purina has completed their study of ways to mitigate odor from local production. Nestle-Purina is currently working with city staff to negotiate an extension of the existing development agreement and underlying lease in order to facilitate a phased implementation of odor mitigation measures that are anticipated to cost approximately $3 million.

Recent changes to the Council Meeting Calendar, specifically moving the March 15, 2016 meeting to March 22, 2016, make this extension request necessary. The goal originally was to present a multi-year extension request with details regarding an odor mitigation plan for final approval on March 15, 2016. The schedule change however reduces the 30-day effective period thereby requiring this additional extension which will allow proper analysis and negotiating time without additional impacts.

COUNCIL GOALS:
#7) Continue to implement the Flagstaff Regional Plan and focus efforts on specific plans.
#9) Improve the economic quality of life for Flagstaff through economic diversifications, and by fostering jobs and programs that grow wages and revenues.
#10) Support and assist the most vulnerable.


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. More recently, Council approved a short term extension of the agreement and lease for the purposes of exploring odor mitigation options and developing an implementation strategy. Discussion and first reading of the ordinance occurred at the February 16, 2016, Council Meeting.

1. Approve the six-month extension of the Development Agreement and underlying lease in order to develop an odor mitigation implementation plan

Pro: This will provide the two parties with the additional time required to analyze the opportunity and develop a strategy that meets community and business needs.
Con: Maintains the tax exemption for six months

2. 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 (additional $400,000 per year to the community partners and the city).
Cons: This action will not support achieving the original purpose of projected tax savings or opportunity to reduce 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 of space, providing parking for 292 vehicles, and using 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) of approximately $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 yet has fallen 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) which is attributed to the market correction and reduced property values. 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 typically costly measures to mitigate odor.

Nestle-Purina has invested $120,000 to study means of mitigating odor related to their local production facility even though they are compliant with applicable regulations. 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 (yield 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 eastern portion of the City 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 in and 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 a much higher government property lease excise tax (GPLET). Therefore, a new development agreement may not be an effective financial tool.