RDA Funding Approved to Finance New Hanlees Volkswagen Auto Dealership

At the unusually early hour of 9:30 a.m. on August 2, 2010, the City Council considered a City Staff proposal to provide financial assistance for relocating a VW auto dealership from Napa to a vacated/blighted parcel within the redevelopment project area of the city. The parcel in question is located at the former Ford dealership site in south Davis on Chiles Road. It is currently being underutilized for an auto repair shop. The proposed City Staff resolution authorizes the Redevelopment Agency to execute an Owner-Participation Agreement with Hanlees Partners (who already own several auto dealerships in Davis), to allocate up to one million dollars from the Redevelopment-Commercial Development funds (funding Davis receives from the federal gov’t) as a loan.

According to City Staff, discussions with Don Lee of Hanlees indicated it would cost approximately $2 million dollars to demolish the existing building, erect a new state-of-the-art showroom, remodel the service building and improve the site. A consultant, Economic and Planning Systems (EPS), was hired by the city to do a fiscal analysis of the project and Hanlees’ need for city financing. Prior to this, upgrades of such a nature have been done without the city’s fiscal assistance. However, because of the recent downturn in the economy, it has become virtually impossible for dealerships to obtain suitable financing on their own at reasonable rates, said City Staff.

To compound the problem, new car sales in CA have decreased by over 50% in the past 5 years. Yet VW sales in this state have increased 98% in the past year. To retain sales tax revenue and keep prosperous business in town, many cities and redevelopment agencies are providing financial assistance to keep auto dealerships in town. A rehabilitation and construction loan proposal has been negotiated between City Staff, RDA attorney Brent Hopkins, EPS and Hanlees, not to exceed one million dollars at a rate of 3.5% compounded over a 12-year term. The loan would be secured by a lien on the property held by the dealership as well as a personal guarantee from the principal. The loan would be repaid through a combination of dealer payments to the agency and credit from sales tax generated to the city, but exactly how was not made clear.

It was projected by City Staff that the new dealership will generate additional sales tax revenue of between two and three million dollars to the city over the life of the twelve year loan, which is a net gain of one to two million dollars over the loan principal amount. When the Ford dealership closed, the city lost a significant amount of sales tax revenue. From City Staff’s perspective, adding a VW dealership will assist in stabilizing future sales tax revenue. They insist this is not a loan to create a new dealership, but financing to replace one lost through closure and an attempt to fill the gap of two other vacancies at the Davis auto mall.

Hanlees is planning to work with Davis High School auto shop on developing an apprenticeship program to train and mentor students. Cars will also be donated by Hanlees for educational purposes if the loan is approved. The new VW dealership will bring 30 new jobs to Davis with hiring protocols established to attract local employees. It would also benefit the entire auto mall by bringing in new customers, eliminating blight by upgrading an existing building and occupying a vacant building. The project meets City Council policies and goals of retaining and attracting new business to Davis. If the city did not approve the loan, City Staff indicated the site would likely remain “as is”, and another use would probably not generate the same rate of return. City Staff considered it a rare opportunity to bring new economic development to Davis.

Council member Sue Greenwald expressed her appreciation of all that Don Lee of Hanlees has done for Davis, but had some questions for City Staff. She complained that the staff report generated was not distributed to Council members in a timely manner and was not written clearly enough for proper analysis. Consequently she wanted clarification on the specific terms of the RDA subsidy. The terms of the subsidy were twofold, as Council member Greenwald described it: 1) a below-market rate, and 2) forgiveness of the loan, depending on the amount of sales tax revenue generated. However, the parameters of the loan forgiveness were not clear to Ms. Greenwald.

“The loan amount is $133,000 annually”, according to Staff, “with a threshold of $100,000 applied to that”, which explanation was as clear as mud. So the attorney for the RDA Brent Hopkins tried to clarify further. Mr. Hopkins stated the RDA does not collect sales tax, only the city can do so. Consequently the city will receive all the sales tax generated by the proposed VW dealership in Davis. But for any sales tax generated in excess of $100,000, Hanlees is credited against annual loan repayment to the RDA. According to Paul Navazio, if the sales tax generated every year were no more than $100,000, the full amount of the loan at the stated interest rate would have to be fully paid. Whereas, “on an annual basis, sales tax to the city in excess of $100,000 would be credited against the amount owed on the repayment of the loan in graduating amounts up to potentially entirely negating the need to make repayments to the RDA…”

Ken Hiatt elucidated further, “So the way the loan repayment is structured is performance-based. So, if the dealer meets certain performance criteria in terms of sales tax generation to the city, then the loan in that threshold is $100,000. If they made $100,000 annually in sales tax payment to the city, every dollar over that $100,000 gets taken off of the principle and interest payments owed to the RDA. So depending on how much sales tax is generated over that $100,000 the equivalent is reduced in their loan repayment to the RDA. So we can’t state exactly what the ultimate subsidy will be for the RDA because we don’t know exactly what the performance will be… If the dealer does extremely well, then the entire loan amount would be forgiven.”

Council member Greenwald posed another issue in regard to the auto exception to Measure P. She stated the city would recoup all of Measure P tax, whether the new VW dealership was located in Davis or not. This called into question some of City Staff’s rosy numbers in terms of how much projected sales tax revenue will be generated by this new enterprise. The city recovers Measure P taxes no matter where a person in Davis purchases a car, even if outside the city. A person who wants to purchase a VW automobile will not fail to purchase a car just because there is no VW dealership in Davis, Greenwald noted. The more likely scenario is the person would purchase a car outside Davis. But if s/he did, the Measure P tax would still come into Davis city coffers. Councilmember Greenwald was concerned that citizens fully understand the breadth and details of the subsidy that is being given and the assumptions underlying it.

Paul Navazio further elucidated. “…the city’s current sales tax is 7¾ %. That is made up of the base statewide tax of 7¼ % known as the Bradley Burns sales tax; and then the city’s ½ cent transaction and use tax, originally Measure P renewed as Measure Q this past June, generates another ½ cent for a total of… 7¾%. On a transaction such as an auto purchase, the way it works is the 7¼% base tax is primarily a site-based tax. And so we receive 1% of that 7¼%. And for auto sales the city receives that percent on any sales in Davis with Davis auto dealers. The ½ cent transaction and use tax, the voter-approved piece, being a transaction and use tax, is …charged based on where the automobile is registered as opposed to purchased…We do not…charge 7¾% on sales to non-Davis residents and we do not receive any of the [Measure P/Q] ½ cent sales tax on transactions for vehicles purchased in Davis by non-Davis residents.”

Council member Souza asked an interesting question. He wanted to know what would happen if the proposed VW dealership failed to sell approximately 340 new and used cars annually at a minimum. City Staff indicated the loan would have to be paid in full, principle and interest, each year in which less than 340 cars were sold. Council member Rochelle Swanson proposed that one term of the loan be changed. City staff had negotiated  not to require payments the first two years of the loan while Hanlees was trying to get the VW dealership off the ground. Ms. Swanson wanted to know if this term in the Agreement was a deal breaker for Hanlees, to which question City Staff responded “no” – even though Don Lee of Hanlees was sitting in Council Chambers and could have answered for himself. Councilmember Swanson also requested more detail from staff in future staff reports, much as Council member Greenwald had.

Ultimately a motion was passed unanimously to approve the loan, with the caveat moved by Rochelle Swanson that payments of principle and interest begin immediately. Whether Mr. Lee will agree to this term is unknown. Both former mayor Ruth Asmundson and Elaine Roberts Musser praised this project during public comment. Each noted the need for more business development in Davis. Council member Greenwald expressed concern that this type of deal not be seen as setting a precedent for financing other auto dealerships in Davis. Councilmember Souza stated his anxiety that the city was putting all its eggs in the auto dealership basket.