Resolution Approving a Retail Sales Tax Rebate With West Jeff Auto Sales/Johawk (Hawk Auto)

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1 OFFICE OF THE CITY MANAGER Steve Jones Deputy City Manager/ Economic Development Director PHONE: 815/ FAX: 815/ CITY OF JOLIET 150 WEST JEFFERSON STREET JOLIET, ILLINOIS DATE: December 12, 2017 TO: FROM: SUBJECT: Economic Development Committee Steve Jones, Deputy City Manager/ED Director Resolution Approving a Retail Sales Tax Rebate With West Jeff Auto Sales/Johawk (Hawk Auto) PURPOSE To seek Economic Development Committee recommendation to approve a retail sales tax rebate with several entities that are part of the Hawk automotive group. BACKGROUND Hawk s dealerships consists of several entities known as West Jeff Auto Sales, LLC and Johawk, LLC. Ownership is seeking to relocate the existing Mazda and Volkswagen dealerships from Jefferson Street to property presently under contract with the Park District, located at the northwest corner of Caton Farm Road & Route 59 (Exhibit 1). Initially there was an intent to locate the Hawk Subaru dealership at this location, but the property was under contract for a potential Art Van Furniture store. Hawk then began pursuit of a Plainfield location, but following an expiration of the developer s purchase contract on the Park District site, Hawk renewed interest in the Route 59 property and now has a purchase contract. The Volkswagen dealership presently receives sales tax sharing per criteria established in the City Code with a 50% sharing amount. No sales tax sharing exists with the Mazda dealership. Hawk seeks to construct a new dealership and service center for each of the named vehicle brands. Sufficient land area will remain to potentially create another dealership at the site in the future. As is the trend with all dealerships, the manufacturers seek modern and upgraded facilities to enhance the customer experience for both sales and service. Based upon representations made by Hawk, the proposed dealership relocation would result in the following:

2 Retention of 35 FT/PT positions. Creation of 15 FT/PT positions. Property improvements estimated at $9 million. Potential to add a new dealership to the area on available property. To move forward with the relocation and retention of the Mazda and Volkswagen dealerships, the following request has been made: 70% of generated tax from sales/service (to 5 th anniversary of agreement) 60% of generated tax from sales/service (from 5 th to 10 th anniversary of agreement) 50 % of generated tax from sales/service (from 10 th anniversary until 15 year anniversary, or payment of $3.5 million, whichever occurs first) Limitation of building related fees to $10,000 It should be noted that this request differs from and exceeds the maximum amount stated in the existing City Code regarding incentives to auto dealerships. A copy of the relevant City Code section is attached as Exhibit 2. Ownership feels the dealership will be more productive in the proposed new location resulting in additional sales tax generation. However, financial performance regarding the past and future sales tax to be generated by Mazda and Volkswagen is proprietary information that I am unable to release. Nevertheless I can indicate that the amount of sales tax the City will receive from these two dealerships will decrease as a result of the greater level of sales tax being retained by ownership. My estimate of decreased revenue after accounting for sales growth is in the range of $100, ,000 per year. DISCUSSION Ownership claims to have had discussions with other communities with sales tax incentives to encourage relocation (I have also heard this from another Joliet car dealer as well). As we well know, neighboring communities are willing to offer very lucrative incentives to poach dealerships due to the fact new sales tax opportunities would be created for their community. Since Joliet has a number of dealership operating in the community, we are a target of poaching and are required to take a defensive posture to insure dealerships remain. Thus, our approach to auto dealership incentives need to strongly consider the incentive market being created by our neighbors. While this is a distasteful and irrational approach to offering economic incentives, it is the reality we face. Dealerships must make economic business decisions. The request from Hawk is very similar to the recent agreement terms that were approved with to Thomas Toyota in Romeoville. To act upon this request, or any similar auto dealer request outside the confines of the existing code, we will need to either amend City Code to allow more flexibility, or abolish this section in its entirety and utilize individual agreements to determine incentive terms.

3 RECOMMENDATION Recommendation #1: I would recommend that the committee provide a recommendation to move forward with the preparation of a sales tax agreement that is in general conformance with the request outlined above. There are several details that still need to be worked out in negotiations, but I believe this is the correct action necessary. Recommendation #2: If the committee feels we should move forward with the concepts above, it will require action to reconcile the conflict between the incentive request and existing City Code. While the language in the code was intended to provide a uniform methodology towards auto dealer incentives, I feel it is not reflective of unique circumstances that may arise in negotiations with new dealers. I would recommend that the committee consider a recommendation to eliminate a code reference towards these incentives, and utilize the negotiation process to determine future incentive agreements.

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5 Sec Incentive program established. Dealers that enter into a development agreement approved by the mayor and city council in which the dealer agrees to complete a property improvement project and also makes a business retention commitment shall be eligible for a rebate of a portion of the sales tax paid by the dealer as set forth herein. Sec Amount of sales tax rebate. The rebate shall consist of a percentage of sales tax attributable to a particular dealer for a given calendar year and shall vary in relation to the number of motor vehicles sold by the dealer in the same calendar year, as follows. MOTOR VEHICLES SOLD ANNUALLY ANNUAL SALES TAX REBATE Less than 400 0% % 1,000 20% 1,200 25% 2,000 30% 2,500 35% 3,000 40% 3,500 45% 4,000 and above 50% The maximum annual rebate that may be given to a dealer for any one dealership shall be one hundred thousand dollars ($100,000.00). The maximum total rebate that may be given to a dealer for any one dealership shall be one million dollars ($1,000,000.00) if the value of the property improvement project is one million dollars ($1,000,000.00) or more. If the value of a property improvement project is less than one million dollars ($1,000,000.00), the maximum total rebate shall be the value of the property improvement project. The maximum number of years that a dealer shall be eligible for a rebate for any particular Page 2

6 dealership shall be fifteen (15) years. In addition to any other provision of this article, a dealer shall not be entitled to a rebate unless the dealer sells more than four hundred (400) motor vehicles in the calendar year for which the rebate is sought. Sec Payment of rebate. The rebate shall be paid to the dealer on an annual basis. The first payment shall be paid in January of the year following completion of the property improvement project. The first rebate may be prorated to include distributions made to the city in respect of the dealer after the property improvement project was initiated, but in no event shall the first rebate be for distributions made for more than a twelve-month period. Future payments shall also be made in January for the preceding twelve-month period. The dealer shall not be entitled to a rebate unless the dealer authorizes the Illinois Department of Revenue to release to the city information reasonably necessary for the city to calculate the amount of a rebate, such as the number of vehicles sold by the dealer and the amount of tax paid by the dealer pursuant to the Retailers Occupation Tax Act. Sec Development agreement required. A dealer shall not be entitled to a rebate unless the mayor and city council have first approved a development agreement. The mayor and city council shall not approve a development agreement unless they first find that it will materially contribute to the economic development of the city or to the preservation of a suitable tax base. This article shall not be construed so as to require the mayor and city council to approve a development agreement that they find to not be in the best interests of the city and no civil action shall lie to compel the making of a development agreement or to compel the payment of a rebate in the absence of a development agreement. The dealer shall not be entitled to a rebate if it violates a business retention commitment or if the dealer fails to complete the property improvement project in accordance with the development agreement. The development agreement may provide additional terms and conditions related to the rebate or the administration of the economic development and business retention program for new and used car dealers. In addition, the city manager may promulgate rules and regulations consistent with the purposes and objectives of this article. Secs Reserved. Page 3