Lancaster Snubs Smaller Retailer in Favor of Costco.

The city of Lancaster has agreed to pony up $3.9 million in subsidies and use its power of eminent domain to evict a 99 Cents Only store so the city's only Costco outlet can expand.

The decision is infuriating officials with 99 Cents Only Stores Inc., who believe they are being treated unfairly by the city simply because their outlet is smaller than Costco.

As part of the incentive package, Lancaster has agreed to either buy or lease the site of the smaller discount store as well as two other parcels, and lease the land back to Costco Wholesale Corp. for $1 a year, all to keep the mega-retailer from moving to Palmdale,

"Costco is the third-largest retailer in our city. For them to leave would create a major hole in our ability to provide the level of services we do," said Lancaster City Manager Jim Gilley. "Just to maintain our sheriffs contract (in the face of increasing costs), we would have to build two Costcos a year. We can't afford to lose the one we have."

The lengths that this high-desert town has been willing to go to retain Costco is indicative of the power large retailers can wield these days -- due in large part to lucrative sales tax revenues for cash-strapped cities like Lancaster. It also illustrates how economic one-upmanship between neighboring communities like Lancaster and Palmdale can end up costing the taxpayers big. "That's the real world," said Gilley. "I'm stuck."

'Grossly unfair' decision

The city is offering to relocate the 99 Cents Only outlet to a nearby space, but officials with the publicly traded company say other locations wouldn't enjoy the same foot traffic.

David Gold, chairman and chief executive of 99 Cents Only Stores, said it's "grossly unfair" for the city to evict a profitable company to make way for a larger competitor, and he characterizes the Costco deal as an abuse of the city's redevelopment authority.

"I've always believed the purpose of eminent domain should be to help build libraries or freeways or parks or senior centers," said Gold. "For them to take away a person's business who has a lease on the property and give it to someone else at a gigantic discount, well, where's free enterprise?"

Gold vows to fight Lancaster in court if the city persists in attempting to evict his store, but Gilley said he's heard it all before. It's a common tactic for companies to threaten legal action to strengthen their bargaining position going into an eminent domain proceeding, he said.

Gilley said his city had little choice but to offer Costco incentives to stay because officials learned in September that Palmdale was stepping up efforts to attract the warehouse retailer with an offer of $5 million in public subsidies.

Costco, which operates a 126,000-square-foot store in Valley Central Shopping Plaza just north of the Antelope Valley (14) Freeway at Lancaster Boulevard, told city officials it needed extra space to expand the store and build a gas station as part of a corporate-wide plan to improve older stores.

But the 18,878-square-foot 99 Cents Only Store stands in the way. Costco also wants the land containing a former Hudson's Grill and a Payless Shoe Store, but those stores are vacant and present no relocation problems.

'We're within our rights'

Because Valley Central Shopping Center lies within a redevelopment area, city officials agreed to spend up to $3.9 million in funds to purchase or lease property from owners Burnham Pacific. Under the deal, the city would return to Costco any sales taxes beyond a $350,000 annual benchmark. The deal, which would last for 15 years, is designed to reimburse Costco for its $4.5 million cost of expansion.

The Lancaster City Council, sitting as the city's redevelopment agency, agreed earlier this month to negotiate a lease or purchase agreement with the property owners. After an agreement is consummated, the city will turn its attention to relocating the 99 Cents Only store to another site, said Gilley.

If the discount store refuses to go, the city will have to use its power of eminent domain to evict it.

The city has identified two other similarly sized spaces in the same shopping center, across the street from Costco. "We're only talking about moving them a few hundred feet," Gilley said.

But Gold said those sites don't compare. With its location between the Costco and a HomeBase, the store has strong foot traffic and is one of his chain's top performers, ringing more than $5 million in annual sales. "It's not a blighted area at all, and we spent $600,000 on fixtures and remodeling," he said. "We don't want anything. We just want to stay."

City officials have said the Costco expansion will mean 20 additional jobs to the area, but Gold notes that his store employs 50 - so if it left, it would mean a net loss of 30 jobs.

Danny Roberts, Palmdale's assistant executive director of redevelopment, confirmed that the city had offered a mall developer $5 million in sales-tax subsidies if it could attract a big-box retail store to a redevelopment area in the city. But that offer was made three years ago, and it expired in December 1998, he said.

Roberts maintains that the city has no offers on the table for a big-box store, but Gilley says, "That's just wrong." Lancaster officials heard from sources within the city of Palmdale and from Costco itself that Palmdale was working to lure the retailer to that city, said Gilley.

Bob Toone, Palmdale's city manager, did not return phone calls. Nor did Costco officials.

Under the terms of its agreement with Costco, Lancaster has until the end of December to pull together the three parcels and turn them over to the retailer. Gilley concedes that the entire deal could unravel if Gold drags the matter out in court, but he's confident the chief executive will agree to the right relocation offer.

"It's just business," he said.

Asked what will happen if he's misreading Gold and his resolve to fight the relocation, Gilley quipped, "It could be a problem."