A new form of tax incentive will be applied for the first time to bring a SCHEELS sporting goods store to northeast Colorado Springs.

Fargo, N.D.-based SCHEELS All Sports has proposed building a 220,000-square-foot store in the InterQuest Marketplace commercial area northeast of Interstate 25 and Interquest Parkway.

Colorado Springs City Council on Tuesday approved an ordinance creating a new tool called a credit public improvement fee agreement.

According to an agreement with SCHEELS also ratified Tuesday, SCHEELS may collect —and keep — a public improvement fee amounting to 1 percent of taxable sales. The company also will receive a 1 percent sales tax credit over 25 years. The PIF and agreement together comprise the credit PIF.

Bob Cope, the city’s economic development officer, said SCHEELS will be investing $84 million in land, construction, furniture, fixtures and equipment for the new store. It is expected to generate $60 million in annual sales; 400 direct, permanent jobs at an average wage of $46,600 plus 145 new indirect jobs (janitorial services, insurance, banking and other business-to-business employment); and a total estimated economic impact of $1.5 billion over that 25-year period.

“This project also will attract a huge sales tax surplus, which means we have people out of the trade area that would be shopping in Colorado Springs, that wouldn’t have been before,” Cope said.

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If  SCHEELS’ sales meet the company’s projection of $60 million annually, the incentive would be worth $16.2 million to the company over the 25 years, Cope said. It would also generate an estimated $40 million in net revenue to the city.

SCHEELS stores are intended to provide shoppers with a “retail adventure,” according to its website. Its 27 stores include attractions such as aquariums, arcade games and Ferris wheels.

Incentive pros and cons

Incentives generally are aimed at primary employers — companies that generate more than half of their revenue from outside the trade area, Cope said.

“Overall, there’s going to be some opponents that will say, ‘How can this city afford to give $16 million to this retailer or to any business?’” Cope said. “First of all, we’re not giving them $16 million. That $16 million does not exist until SCHEELS comes in and makes that investment and generates those sales. That’s $16 million that we do not have today.”

Credit PIFs are just one tool the city has in its incentives toolbox.

The city can offer sales and use tax rebates on construction materials to companies that are building a new facility or doing a major remodel, or an ongoing sales tax rebate on the purchase of business personal property. The amount of the rebate typically is 1 percent, or half of the city’s 2 percent sales and use tax.

The city has used sales and use tax rebates to incentivize projects such as the Walmart Data Center in northeast Colorado Springs, and most recently Trisco Foods, an Australian company that will locate its U.S. headquarters and production facility in northwest Colorado Springs.

Developers also can apply for tax increment financing to make improvements around projects in urban renewal areas.

Incentivizing projects in the retail and hospitality sectors through sales tax rebates “is something we don’t take lightly,” Cope said. “The main reason is that they are in competition with other local retailers and local hotels. So there needs to be something pretty unique or compelling about the situation before we even get into those discussions. It’s only happened a few times in the past outside of an urban renewal area.”

The SCHEELS situation is taking place in a very competitive environment, Mayor John Suthers noted.

“Generally we proceed from the premise that we have a very attractive place to move to, and we don’t have to be at the top of the list in incentives,” Suthers said. “When we first began conversations with SCHEELS, it was pretty clear we were in competition with Boise, [Idaho]; Milwaukee, [Wis.]; and Wichita, [Kan.]. … Our personal feeling was that it was really between us and Boise. We don’t feel like we need to give away the world, but they do need incentives. … The toughest issue is, once you’ve got them focusing on the Pikes Peak region, is it going to be inside the city or outside the city? We’ve had some experience in taking it for granted they’re going to be inside the city.”

Suthers said the city did not agree to a 1 percent, 25-year incentive for Walmart and Sam’s Club, which got a better deal with Fountain.

“It’s not just competition from other cities,” Suthers said. “It’s also competition to make sure it’s in Colorado Springs. The city has lost millions of dollars in revenue by Sam’s and Walmart being in Fountain.”

The city evaluates incentive requests on a case-by-case basis.

“Historically we’ve been pretty conservative,” Suthers said, “I don’t see us throwing billions of dollars at companies, but I do see us continuing to assess our competition and make reasonable incentives that are very sustainable over time.”

It’s “clearly true” that SCHEELS will be competing to some extent with other sporting goods stores in Colorado Springs, “but the big factor here is that it won’t be total cannibalization,” he said. “Sixty percent of the business is going to be folks that wouldn’t be shopping in Colorado Springs otherwise.”

Suthers said the city is doing a lot to bolster existing business: eliminating the business personal property tax on large equipment; creating areas such as the Commercial Aeronautical Zone surrounding the airport, where businesses can take advantage of city and state benefits; investing in public infrastructure; and creating amenities such as bike lanes to attract Millennials, software engineers and cybersecurity experts.

ROI of incentives

Incentives “have become much more a mode of doing business in trying to attract economic development,” said Tom Binnings, senior partner at Summit Economics, who spoke with the Business Journal with the understanding that he would not be commenting on the SCHEELS deal itself.

Incentives are a fairly new phenomenon that gained traction when highly unionized firms from the Rust Belt started moving to more favorable right-to-work states in the Southeast in the 1980s, fell out of favor in the 1980s and gained momentum again after 2007,  Binnings said.

“Once it was obvious that there was going to be an exodus of firms, a lot of Southern states began getting into this competitive posture to offer all kinds of incentives,” he said. “Meanwhile, in the West and Mountain West, we sort of have felt pretty good about ourselves. But more and more entities were looking at the success of incentives in the relocation of industry to the South, and that became a greater consideration to their use. Denver has been very active, as well as the state of Colorado. …

“If you take the position that, well, we’re not going to do anything because we’re too good, we have a beautiful community, and people should want to come here, you might do OK — but there are opportunities flying around the world looking for a place to land. The reality is that public sector incentives on the margins can make a difference.”

Regarding direct incentives to entice companies to relocate, expand or do something else the community wants, “there’s certainly a concern about whether American communities competing with one another for corporate locations is a good longterm paradigm,” Binnings said.

“Looking at it from a community’s perspective, it’s all about ROI. What is the community giving up, what is it getting, what are the benefits relative to the cost, and what’s the timing of those? Any time there’s a large investment up front, that’s going to be a riskier deal than a deal that says incentives will be, over time, relative to the success of the firm we’re trying to entice or the activity we’re trying to entice.”

An example is tax credits in the Commercial Aeronautical Zone.

“The upfront cost of eliminating sales tax for businesses on the west end was really very small,” Binnings said. “The real benefit would be competing with other airports that are already offering [incentives], so COS would be at a competitive disadvantage by not offering them.”

Similarly, Manitou Springs offered the Pikes Peak Cog Railway sales and use tax incentives to make sure the cog’s owners would take on a $100 million investment to repair and upgrade the railway.

“That’s where incentives can work well,” Binnings said. “The use of incentives to get the private sector to come in and make large investments at low to no cost up front to the community but the small cost of forgone taxes that would not even be there but for the private investment — to me it’s hard to argue against that kind of incentive.”