Bad Deal For South Euclid

FISCAL IMPACT OF OAKWOOD COMMONS

 

What economic impact will the proposed Oakwood Commons shopping center have on the City of South Euclid? This key question has not been adequately addressed by the City or FISE (the developer).

 

Our goal here is to estimate annual City revenue based on simple common sense reasoning and publicly available data. As we proceed with the calculations, keep in mind that FISE has consistently characterized Oakwood Commons as a value-oriented big-box strip mall with out-parcel restaurants (including drive-thrus).

 

The revenue to the City has three components: property taxes, personal income taxes, and costs. The overall revenue is just the sum of the property tax and income tax components, minus the costs.

 

FISE predicts that Oakwood Commons will have a market value of $45M.[1] Let’s assume this is accurate. The Oakwood Commons land sits in South Euclid, but it is in the CH/UH School District. The overall property tax rate is 3.97% of market value, but only 11.55% of this 3.97% goes to the City; the rest goes to the county, and the CH/UH schools and libraries.[2] So the property tax revenue to the City from Oakwood Commons will be $45M x 0.0397 x 0.1155 = $206k per year.

 

FISE predicts that Oakwood Commons will have a total floor space of 325,000 square feet.[1] Let’s assume this is accurate. Strip malls typically employ one full-time-equivalent worker per 818 square feet of floor space, so Oakwood Commons can be expected to support about 325,000 / 818 = 397 workers.[3]

 

The average wage of a worker at a value-oriented strip mall with out-parcel restaurants is typically $13 per hour ($27k per year).[4] The income tax rate of South Euclid is 2%.[5] Putting all of this together we can estimate that the income tax revenue to the City from Oakwood Commons will be 397 x $27k x 0.02 = $199k per year.

 

If built, the Oakwood Commons strip mall will impose certain costs on the City. The most significant costs will be for police, road and traffic systems maintenance, and administration. Neither the City nor FISE have made any attempt to estimate these costs.

 

Fortunately, a number of other Ohio cities have conducted so-called Fiscal Impact Analyses (FIAs) of various types of development, such as housing, retail and office parks. The details of one of these studies are publicly available: Dublin, Ohio found (in 2007) that its municipal costs for retail development were $1.514 per square foot of floor space per year.[6] Like South Euclid, Dublin is a suburb of a large Ohio city, and the cost of living index in each city is nearly the same.[7] So we expect the costs for police, road and traffic systems maintenance, and administration in South Euclid to be comparable to those measured in Dublin. We can estimate that the costs to the City of South Euclid from Oakwood Commons will be 325,000 x $1.514 = $492k per year.

 

We are now in a position to estimate the total revenue to the City from Oakwood Commons: $206k + $199k - $492k = - $87k per year. Please note the negative sign: it means that if Oakwood Commons is built we can expect it to cost the City about $87,000 per year!

 

Reality Check #1

 

How can it be that building a shopping center actually costs a city money? Surely this cannot be the norm?

 

Actually, it is the norm. In 2004 the Mid-Ohio Regional Planning Commission analyzed FIAs from eight Ohio communities and found that the net impact of retail development was negative in seven of the eight. The average cost to cities per square foot of retail development was $0.44 per square foot per year.[8] Applying this figure to Oakwood Commons predicts an annual loss for the City of South Euclid of 325,000 x $0.44 = $143k.

 

It is the norm for retail developments to cost cities money. South Euclid will be lucky if the cost is only $87,000 per year.

 

Reality Check #2

 

But FISE claims Oakwood Commons will generate $500k per year for the City.[9] How can the developer be that wrong?

 

It’s simple: FISE inflates the estimate of the number of workers, and fails to include any costs.

 

In their Application for Rezoning submitted to the City of South Euclid, FISE estimates that Oakwood Commons would employ about 400 full-time-equivalent workers.[1] This is consistent with our estimate of 397. However, in their public literature they use a figure of 700 jobs. Why? They explain:

 

These figures include direct employment; "indirect" employment created in the local supply chain; and "induced" employment created in industries that supply goods and services to the workers (dry cleaners, accountants, etc.).[10]

 

So, for every 4 jobs at Oakwood Commons FISE predicts there will be 3 new jobs created elsewhere in South Euclid. No supporting evidence is given for this extraordinary claim. And FISE fails to acknowledge that Oakwood Commons will compete with other South Euclid businesses, likely forcing some to downsize. As a concrete example, consider Marc’s and Giant Eagle: do you think these businesses will be helped or hurt by Oakwood Commons? Will the “indirect” and “induced” employment effects outweigh the “downsizing” effects? Maybe, maybe not. But one must wear a very rosy pair of glasses to believe 400 jobs will turn into 700 jobs.

 

By assuming 700 jobs instead of 400 and completely neglecting costs to the City, FISE predicts an enticing (but woefully inaccurate) annual revenue of $500k.

 

Conclusion

 

The proponents of Oakwood Commons claim it will enrich the City. However, careful analysis of both taxes and costs leads to the opposite conclusion: it will make the City poorer. This is not a unique result for South Euclid: retail development in today’s economy is a losing proposition for most cities.

 

But this does not mean South Euclid cannot prosper from the Oakwood land. Indeed, FIAs consistently show that other types of development – such as office parks and senior housing – tend to be winning propositions. The Oakwood land is the last large undeveloped parcel in South Euclid: it must not be squandered. South Euclid can be a winner if it holds out for a smarter development plan.


(Download and print out a shorter version of Bad News for South Euclid at the end of this post.)

References

 

[1] Application for rezoning submitted by FISE to the City of South Euclid (2010). (hyperlink)

[2] Property tax calculations provided by FISE (2010). (hyperlink)

[3] Estimate of number of workers based on floor space from the Energy Information Administration (1995). (hyperlink)

[4] Annual retail wage estimate from the National Retail Federation. The value used is a blend of the values given for “retail” and “food service” for 2010. As a value-oriented big-box strip mall, wages for Oakwood Commons would be expected to fall below the given national averages. (hyperlink)

[5] Income tax rates from RITA (2011). (hyperlink)

[6] Fiscal impact analysis for Dublin, Ohio by Tischler-Bise (2007). See figure 23 on page 26. (hyperlink)

[7] Cost of living index for Dublin, Ohio (hyperlink) and South Euclid, Ohio (hyperlink).

[8] Understanding the fiscal impacts of land use in Ohio. Prepared for the Mid-Ohio Regional Planning Commission by Randall Gross (2004). See Appendix on page 26. (hyperlink)

[9] This claim has been made in literature FISE has recently distributed to residents of South Euclid.

[10] This quote is from a brochure distributed by FISE to South Euclid residents in early 2011.

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CFO Info,
Oct 17, 2011, 4:54 AM
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