State, Federal and Local Incentives Program Descriptions
State/Federal Financial Incentives
City-Facilitated Financing Programs
CDBG Section 108 Loan Program: Section 108 is the loan guarantee provision of the Community Development Block Grant (CDBG) program. Section 108 provides communities with a source of financing, up to five times a community's CDBG entitlement (for Sunnyvale, 5 x $1.4 million = $7.0 million) for economic development, housing rehabilitation, public facilities, and large scale physical development projects. This makes it one of the most potent and important public investment tools that HUD offers to local governments. It allows them to transform a small portion of their CDBG funds into federally guaranteed loans large enough to pursue physical and economic revitalization projects that can renew entire neighborhoods. The projects funded by the loan must be located in and benefit areas designated as low and moderate income. Local governments borrowing funds guaranteed by Section 108 must pledge their current and future CDBG allocations to cover the loan amount as security for the loan.
Such public investment is often needed to inspire private economic activity, providing the initial resources or simply the confidence that private firms and individuals may need to invest in distressed areas. Section 108 financing is at work in hundreds of communities across America. Over 1200 projects have been funded since the program's inception in 1978.
EDA Grants: EDA provides direct grants, on a cost-share basis, for projects that will create and retain private-sector jobs and leverage public and private investment in distressed areas. EDA provides community and regional economic development assistance for planning and technical assistance to build local capacity for economic development programs and projects. This includes assistance for local, state and regional planning organizations that target distressed rural and urban communities, and for university centers and other projects that provide technical support for economic development. EDA provides assistance for public works and development facilities to support industrial, commercial, and technology-based employment in eligible areas experiencing significant economic distress. These projects are intended to diversify the local economy and improve conditions for sustained economic growth. Examples include grants to improve or develop transportation facilities, water and sewer systems for industrial use, industrial parks and buildings, business incubators and technology training centers, telecommunications facilities and research parks.
The City of Sunnyvale explored the potential for an EDA grant in 2003 when staff was preparing the Community Development Strategy. EDA eligibility is based on unemployment, per capita income and “competitiveness.” The unemployment rate must be at least one percent greater and per capita income must be eighty percent or less than the national average for the most recent 24-month period for which data are available. Special needs can be considered, such as substantial out-migration or population loss, military base closures, natural or other major disasters or emergencies. The maximum grant based on these criteria is fifty percent of the project costs. Areas can receive a grant up to eighty percent of costs but the eligibility criteria increases significantly (e.g., the 24-month unemployment rate must be at least 225% of the national average and the per capita income not more than 50% of the national average). Additionally, the grants are highly competitive. EDA stated that they are out of funds for the current fiscal year. They had fourteen applications for this region and only one construction grant and a handful of planning grants were awarded. Communities that are receiving the grants are experiencing 13-18% unemployment.
Impact Fee Financing Program/SCIP: The Statewide Community Infrastructure Program (SCIP) is a development impact fee financing program for roads, water, sewer, storm drainage, parks, etc. that can be funded by tax-exempt bonds. SCIP is an economic development tool for residential, commercial and industrial projects, as developers must pay substantial fees to obtain permits. From an economic standpoint, SCIP works well for smaller residential projects (under 300 units), which do not require significant amounts of offsite infrastructure, and where it would be too expensive to form a stand-alone district. SCIP can be used as a substitute for large scale Mello Roos or assessment districts that require major infrastructure, if at least a portion of the financing is to fund fees, and the Local Agency agrees to administer acquisition payments for improvements to developers. SCIP also works well for larger scale developments when the local agency needs to expand city or countywide improvements such as water, sewer or major roads. In these cases, SCIP can be used as an alternative to acquisition type financing to pre-fund impact fees. Pre-funding fees provides up front financing to cure a bottleneck in the local infrastructure that is impeding development and hampering timely project approvals due to inadequate infrastructure.
SCIP can serve as an alternative to fee deferral programs, while sparing the local agency from having to act as the bank. It can provide 100% financing for SCIP eligible fees at tax-exempt rates for 30 years. SCIP can also refinance existing installment agreements, often at more favorable terms than existing agreements, with the local agency receiving the fees up front.
The SCIP program is administered by the California Statewide Communities Development Authority (CSCDA), a joint powers authority sponsored by the California State Association of Counties and the League of California Cities. The Statewide Community Infrastructure Program uses limited obligation bonds that pool together a variety of infrastructure projects to raise capital to finance projects. The property owners are responsible for paying the bond back to the California Statewide Communities Development Authority who imposes a special assessment on the owner’s property to repay the portion of the bonds issued to finance the fees paid with respect to the property. California Communities has issued more than $20 billion in tax-exempt bonds since its creation in 1988.
The benefits to a City or County are that CSCDA administers the total program including any defaults or bankruptcies. Cities have opted not to participate in the SCIP program for a variety of reasons. Lack of knowledge about the program is the most common reason, but in some cases cities have wanted to limit the program to a specific type of project (residential, commercial, etc.) or there were concerns that a developer would participate in the program and the costs would be paid by the subsequent property owner who had no knowledge of the financial commitment until it appeared on their tax statement. For large projects, the timing of when bonds are issued could cause delays in moving the project forward. The bonds are typically issued in July of each year. However, in 2006, CSCDA anticipates issuing bonds in July and October. If there is a large enough volume – $5-6 million statewide – they can issue the bonds even more frequently. This program is available on a voluntary basis for higher density projects that have impact fees for housing or transportation. The assessments are collected with the property tax.
Industrial Development Revenue Bonds (IDRB): Industrial Development Revenue Bonds are tax-exempt debt obligations issued by public corporations to provide money for the acquisition, construction, rehabilitation and equipping of manufacturing and processing facilities for private companies. Projects can include the cost of building or refurbishing a manufacturing plant or setting up a utility facility. The project must either create new jobs or retain jobs that would have been lost if the project were not undertaken. The State Infrastructure bank has not issued any IDRBs in Silicon Valley since 2000. Only one or two per year have been issued since that time, all in Southern California. This is primarily due to the requirement that a company cannot expend more than $10 million in capital expenditures for three years before or three years after the bond is issued, and they are required to pay prevailing wages. Federal legislation is pending that would increase this cap to $20 million.
Recycling Market Development Zone (RMDZ): RMDZ is a program through the California Integrated Waste Management Board and provides direct loans up to $2 million to manufacturers that make a recycled product and are located in a RMDZ. Eligible businesses must manufacture with recycled material, produce recycled products and divert waste from the landfill. Technical assistance is also available on financial strategies and assistance on marketing nationally and internationally. Sunnyvale is eligible for this program. The types of activities that usually locate in RMDZs are land intensive and do not generate profit levels that support high land costs. Most companies that manufacture recycled products with recycled materials have opted to locate in less expensive locations. This program is available in San Jose and the Stockton/San Joaquin Enterprise Zone (programs are not limited to Enterprise Zones).
The application process for establishing a RMDZ includes a zone profile, establishing a map of the area, a marketing development plan and CEQA review, and a City Council resolution. Currently, there are discussions underway about establishing all of Santa Clara County as a RMDZ. The zone would have multiple administrators and would require a resolution from each city. The details for accomplishing this have not been determined, including whether additional CEQA review would also be required.
Foreign Trade Zones: The Foreign-Trade Zones Act was created to "expedite and encourage foreign commerce" in the United States. This is accomplished through the designation of geographical areas in or adjacent to Customs Ports of Entry under the supervision of the U.S. Customs Service. Commercial merchandise receives the same Customs treatment it would if it were outside the commerce of the United States. Merchandise of every description may be held in the Zone without being subject to Customs duties and other ad valorem taxes. This tariff and tax relief is designed to lower the costs of U.S.-based operations engaged in international trade and thereby create and retain the employment and capital investment opportunities that result from those operations.
San Jose has a Foreign-Trade Zone that encompasses Santa Clara, South San Mateo, South Alameda, San Benito, Santa Cruz and Monterey Counties. Companies located in these counties can apply for a subzone through San Jose and receive the benefits of the Foreign-Trade Zone. Subzones can be located outside the geographic area of the Foreign-Trade Zone. To date, three companies in Silicon Valley have been approved for subzone although none are active at this time. The companies can choose to activate their subzone status at any time. One additional company in Palo Alto has applied for subzone status and their application is expected to be approved this spring. The role of the City in which the company is located is to provide letters of support. The City of San Jose works with each participating city to keep them informed of the application process.
Enterprise Zones/Empowerment Zones: The Enterprise Zone Program targets economically distressed areas throughout California. Special state and local incentives encourage business investment and promote the creation of new jobs. There are thirty-nine Enterprise Zones located throughout California. Enterprise Zones designations are for fifteen years from their original date of designation (1986-1997 depending on the zone). The Empowerment Zones and Enterprise Communities (EZ/EC) Program is a Presidential initiative for growth and revitalization. Its mission is to create self sustaining, long-term economic development in areas of pervasive poverty, unemployment and general distress. Sunnyvale is not eligible for either program.
Direct to Business Loan/Financing Programs
Small Business Administration (SBA) 504 Loan Program: The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets. SBA 504 loans are marketed, processed, closed, and serviced by Certified Development Corporations (CDC) throughout California. A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community. CDCs work with the SBA and private-sector lenders to provide financing to small businesses.
Proceeds from 504 loans must be used for fixed asset projects such as purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment. The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing. To be eligible, the business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, the business qualifies as small if it does not have a tangible net worth in excess of $7 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
504 loans are available to any small business and are not restricted to distressed or underserved areas. The intent is to create jobs and help small businesses own their own facilities. The CDC serves as the advocate for small businesses throughout the loan process. Companies are first pre-qualified for the loan by the CDC. The CDC then prepares the loan package and works with a bank to secure the loan. Banks typically fund 50% of the project and hold the first mortgage on the property. SBA funds 40% and the borrower puts down as little as 10%. A start-up or special purpose building requires 15% equity. A start-up and special purpose building requires 20% equity. SBA has a list of eligibility criteria and a company must meet one criteria. Criteria includes adding new jobs, manufacturing facility, a minority or woman-owned company, a company in a redevelopment area or a company adversely impacted by base closure. Currently, the maximum size of the SBA portion of a loan can be up to $2.0 million. However, the total project cost can reach above $10 million.
Employment Training Panel (ETP): ETP is a State of California agency that provides up to $85 million in job training funds annually to employers throughout the state. ETP contracts directly with employers or groups of employers, training agencies and vocational schools and with Workforce Investment Boards. They fund three types of programs. The retraining programs focus on training employees in companies that have out-of-state competition to help these companies be more competitive at their California locations. These programs are generally administered by the employers who apply for and administer the contracts. The small business program provides training for companies with 100 or fewer employees. The process is somewhat more streamlined than for larger companies and reimbursement rates are higher. New-hire training programs train the unemployed and programs are administered by training agencies and approved vocational schools. Reimbursement for training costs is based on a fixed fee system. Reimbursement for retraining workers is $13/hour per trainee, $15 for new-hire trainees, and $20 for small businesses. Trainees must receive a minimum of twenty-four hours of training and employers must retain the employees for at least ninety days. In past years, this program was considered to be cumbersome and bureaucratic. However, the process has been streamlined and businesses involved in the program have stated that it is a valuable tool for improving competitiveness by updating employee skills.
Pacific Gas and Electric Company: PG&E works with companies that are expanding or relocating to conduct customized rate analyses to assist companies with evaluating costs and buying options based on estimated energy usage. Company representatives work directly with the City on proposals for site selection or with companies planning or involved in the development process. In addition, PG&E has approved a new incentive program that offers an electric rate incentive to qualified businesses that locate or keep their businesses in California. The rate is intended for electricity-intensive businesses sensitive to the cost of electricity and do not necessarily have to have their production location in California. The incentive program offers a twenty-five percent discount that declines by five percent each year over a five-year period. There must be a competing location for the company outside the state. Companies must sign an affidavit attesting to the fact that “but for” this incentive rate, the customer would not have located or retained operations in California. It is still uncertain how valuable this incentive is as an economic development tool given the range of considerations that go into a company location decision. Utility rates are not always the only driving factor.
Local Financial Incentives
Sales Tax Rebates (Mountain View): The State of California enacted legislation in 2003 that prohibits a local government or redevelopment agency from providing any form of financial assistance to an automobile dealership or big box retailer that is relocating from one community to another within the same market area unless the receiving agency shares the resulting sales tax revenues after subtracting the value of the assistance for the first ten years. The analysis of this act states that subsidizing relocation of stores within the same market area is hollow economic development; instead of boosting economic activity, it simply moves it around.
In 1992, the City of Mountain View entered into a sales tax agreement with Costco. The City made a finding that the high cost of land assemblage and site redevelopment costs made the project unfeasible without financial assistance. Under the proposed business terms, Costco received a total of $1.9 million of which approximately $400,000 was for off-site public improvements and development fees. The formula for distributing the $1.5 million balance included a baseline minimum receipt of $200,000 in sales tax by the City in 1993, Costco the second $200,000 and the balance divided 50/50 after that. The baseline increased to $300,000 after 1993. The agreement was for a maximum of seven years or until the $1.9 million was repaid after which the City received 100% of the sales tax. The agreement also defined protection for the City should Costco “go dark” within ten years and provisions to protect the City should the State change the rules governing sales tax distribution. The City has not entered into other sales tax agreements.
The City of Mountain View Economic Development Action Plan 2004-2009 allows for consideration of economic development and redevelopment incentives to attract and retain businesses – especially those that generate revenue to the City – and allows the City to use sales tax, transient occupancy tax or other appropriate taxes to invest in unique commercial development that will result in net new revenue to the City. As with the Costco development, the unique circumstances includes circumstances such as the cost to assemble a number parcels to accommodate the project and make it financially feasible.
Tax Offset (Gilroy): Businesses that generate new sales taxes or new TOT may use the new tax amount to offset development impact fees. The business must generate a minimum amount of sales tax revenue (varies by type of business) and the tax offset accumulation may not exceed three years. The offset cannot exceed the total amount of development fees. This policy is intended to support new or expanding businesses and commercial/industrial centers that generate new local taxes. There are three categories for the tax offset. In each case, the tax offset must be applied against the development fees due for the project, and may not exceed the amount of development fees plus interest due from the new business. A performance bond is required to ensure the City collects the fee.
For a single business, at least $50,000 in sales tax revenue must be generated to the City annually.
For commercial or industrial centers comprised of multi-tenant businesses, it must collectively generate an average of at least $50,001 in sales tax revenue to the City annually. The amount of sales tax generated by the multi-tenant center must: (1) exceed $50,000 annually when averaged over a three year period, and (2) be equal to an amount of $2.00 or more per gross square foot of the multi-tenant center building area in excess of 25,000 square feet.
Small businesses or commercial centers for which a building permit application is complete on or before April 30, 2007, and that are not anticipated to generate sales tax or transit occupancy tax revenue in excess of $50,000 annually, will be eligible for a credit against development impact fees for the estimated amount of sales tax or transient occupancy tax to be generated. The tax offset may be extended only to a new business, hotel or similar establishment, or a new commercial center. No credit is allowed for an entity that is relocating from within the City of Gilroy.
Jobs Offset (Gilroy and Livermore): Industrial businesses in Gilroy are eligible for a jobs offset if they create at least 25 permanent full-time jobs within two (2) years of the opening of the new business. A credit of $4,000 per job may be granted for all jobs that have an average annual wage and benefit package of at least $35,000. The number of jobs created and the wage and benefit package minimums must be met for three consecutive years following the initial attainment of the guaranteed employment level. The credit must be applied against the development fees due for the project, and may not exceed the amount of the development fees plus interest thereon due from the new business. A performance bond is required to ensure the City collects the fee.
Developers of multi-tenant/owner industrial buildings may be eligible for a job-offset credit if the businesses that will ultimately occupy the multi-tenant/owner building employ a cumulative total of at least 25 permanent employees that meet the minimum wage and benefit requirements stated above. The minimum employment level must be met within two years of the issuance of the first certificate of occupancy for the building. The minimum 25 permanent employees that meet the wage and benefit package must be maintained for a minimum of three consecutive years following the initial attainment of the guaranteed employment level.
Livermore offers industrial businesses a $5,000 incentive for every job with a salary of at least $86,000 (excluding benefits). The incentive is paid to the business over five years at 20% per year. The minimum requirements to qualify for the incentive are that the business must have at least 50 jobs at its Livermore location and 66% of those jobs must have a salary equal to or above the average Livermore wage ($67,000 in 2004). Affordable housing credits are also considered on a case-by-case basis for businesses that generate a high proportion of high wage jobs that reduce the number of affordable housing units that could be needed.
Tax Increment Financing (RDA): The most important redevelopment tool, authorized by state law, is tax increment financing. Under this tool, all increases in property taxes within the redevelopment project area go to the redevelopment agency "to pay the principal of and interest on loans, moneys, advances to or indebtedness… incurred by the redevelopment agency to finance or refinance… the redevelopment project." Agencies use these funds to stimulate private investment in the project area; typical uses include infrastructure improvements, land assembly and resale at less than cost, and direct rebate to a developer through a disposition and development agreement.
Hypothetical case: When this hypothetical redevelopment project begins, the uses in the area are generally physically and economically distressed and generated property tax income of only $300,000. A redevelopment plan is prepared wherein private developers would be encouraged to invest $200 million in new development, yielding $2 million in annual property taxes. The difference between the before and the after tax income, $1.7 million, is the tax increment generated by the redevelopment project.
All of the tax increment flows to the redevelopment agency for reinvestment in the project. A projected future annual tax increment income of $1.7 million would allow the redevelopment agency to borrow approximately $19 million today, the principal and interest for which would be paid back over 20 years at $1.7 million per year. During this period, all taxing bodies (city, county, school district) would continue to receive their share of the base property tax of $300,000, and would share in the new property tax of $1.7 million beginning in the twenty-first year.
The basic premise of the law is that the property would remain blighted if it were not for the investment by the redevelopment agency. Without redevelopment, property tax income for the area would remain at $300,000, and the City would live with a blighted area, which could cause adjacent properties to become blighted. It is only because of the investment by the redevelopment agency that private developers invest in redeveloping in the area (in this case a private investment of about $200 million). The extra property taxes generated by the new development are then used to reimburse the agency for its investment.
The City and other taxing bodies do not lose money, because the extra tax dollars would not exist if it were not for the redevelopment. These taxing bodies could actually realize an increase in tax revenue due to the positive effect of the redevelopment on surrounding properties.
The redevelopment agency is independent of the city which formed it; therefore, its debt is not a burden on local taxpayers. According to State RDA laws, the redevelopment agency must have debt in order to collect and utilize tax increment funds are only available to redevelopment agencies for investment in redevelopment projects. They are not available to cities or other taxing bodies to support general fund services such as police and fire.
The City of Sunnyvale has used tax increment financing to support redevelopment of the Town Center Mall. Most of the City’s tax increment is dedicated to meet existing debt obligations.
Provision of Incubator Space (San Jose): A number of Cities throughout the nation support small business incubators. The City of San Jose, through its Redevelopment Agency has developed incubators for software, bio, environmental and international business clusters. The City of Sunnyvale has not had the resources to develop business incubators but does support developers interested in building business incubators.
Bill Musgrave, Director of The Enterprise Network (TEN) provided information on a lease guarantee program he has proposed to the City of San Jose (not yet approved). Sobrato Development Companies donated a building in San Jose to TEN, and they received a tax write off for the appraised value of the building for donation to a non-profit. TEN is currently working with Marcus & Millichap Capital Corporation to sell the building to investors and lease it back. Money from the sale of the building would be placed in TEN’s 501(c)(3) Entrepreneur Support Foundation and earn interest. The money would be used to pay for the lease, operating expenses and provide seed stage venture capital to attract start-ups to the incubator. This plan requires that a third party guarantee the lease, i.e., the City. They would also offer indemnification to the City by using the endowment in the Entrepreneur Support Foundation as a source of funding to protect the City’s investment and place six months rent payment in escrow to ensure payment of rent and opportunity for sale of the building in the event TEN would default on rent payments. Mr. Musgrave has suggested that a similar program could be presented to other cities.
Façade Improvement Program: Businesses in designated areas may receive rebates or loans when they invest in improvements to the building exterior. Eligibility may be linked to source of funds (e.g., CDBG low- and moderate-income requirements). Some local governments have funded programs through general fund or Redevelopment Agency funds which have restrictions established by the City.
The City of Mountain View funds the façade improvement program in the downtown through the Revitalization Authority (RDA). Businesses must have a business license and be in compliance with the Downtown Precise Plan. Improvements to multi-tenant buildings should work well for all of the tenants. In order to be eligible for a façade grant, proposed renovations must satisfactorily address the entire building, including front, back and side façades (if any). Most important, the renovation must result in a significant long-term improvement to the building such as storefront renovation, doors, windows and awnings. In 1996, The Façade Program began with $100,000 appropriated by the Mountain View Revitalization Authority. The funds originated from the Revitalization Authority Seed Money Fund with the purpose of fostering private investment in downtown. In 2004, an additional $121,000 from the Revitalization Authority Seed Money Fund was appropriated in order to continue to administer the façade program. Eligible property owners and/or tenants who propose façade improvements can apply for a grant of up to 50 percent of the costs upon completion of the improvements; the maximum grant is $20,000, depending on the size of the building. Since its inception, 15 grants have been issued. The program has not proven to be a significant factor in attracting businesses to the downtown, but has provided an incentive to existing businesses and newly located businesses in improving buildings in the area.
Morgan Hill also offers a façade improvement program through tax increment financing from their redevelopment agency. Businesses located in the downtown, Monterey Road, Dunne Avenue and Tennant Avenue corridors may be eligible for rebates when they invest in improvements to their building exterior. Emeryville and Livermore offer similar programs. The Livermore Economic Development Manager stated that there is little interest in loans from CDBG because of the requirements that are tied to the loan, but some businesses have taken advantage of loan programs through the redevelopment agency.
Creation of a façade improvement program in Sunnyvale would require dedication of funds from the Redevelopment Agency which would be restricted to the redevelopment area or from the General Fund which could be used citywide. Most of the City’s redevelopment area tax increment is dedicated to meet existing debt obligations.
Special Tenant Incentive Program (San Jose): The San Jose Special Tenant Incentive Program provides incentives to developers to expedite tenant improvement (TI) projects in vacant buildings to make the space ready for quick occupancy for industrial and R&D office uses. Financial incentives include construction tax suspension, plan check fee deferrals and phased project building permit fee payment plans. This program was first approved by the San Jose City Council April 30, 2002 and reauthorized October 15, 2003. The program is restricted to vacant research and development buildings in industrial-zoned areas. In 2004, the City Council added vacant research and development buildings in the downtown. Plan check fee deferrals are allowed until the time of building permit issuance. If a permit is not issued, plan check fees are due no later than twelve months from the date of application for the express plan check. Building permit fees are phased. In the first sixteen months the program was in operation, approximately 1.5 million square feet of vacant space was occupied and approximately $33 million in additional investment was made in San Jose. The City of San Jose Economic Development staff also estimate that 2,800 jobs were created and retained as a result of this program. They report that the cost to the City for implementing the construction tax suspension, plan check fee deferrals and phased project building permit fee payment plans was $460,000, and that it generated an investment of $12.5 million. The construction valuation in the second phase of the program rose to $44 million. From October 2003 to April 2005, forty-seven development projects totaling 2.6 million square feet of space were permitted. San Jose reported that between 2003 and 2004, gross absorption in San Jose increased 49% compared to 15% in Silicon Valley. On May 17, 2005, the City Council again extended the program to October 2007.
Creation of a program in Sunnyvale that would defer fees for plan check until such time as a building permit is issued and/or phased building permits or deferral of fees until time of occupancy would require an amendment to the Municipal Code. Currently, Municipal Code 16.08.100 regarding plan review fees states that the fees shall be paid at the time of submitting plans and specifications for checking. The plan checking fee shall be equal to seventy percent of the building permit fee (Ordinance 2704-02 § 2). Municipal Code 3.36.080 regarding issuance of building permits requires that fees be paid prior to the issuance of any permit required for construction (Ordinance 1775-75 § 1).
This type of program may provide an incentive for owners and potential tenants of vacant buildings in industrial areas to upgrade their facilities. At the end of 2005, Sunnyvale had a 17% vacancy rate in R&D building inventory with 4.7 million square feet in 143 vacant buildings. Most of the vacant buildings are class B and C structures. This compares with 37 million square feet in 1,019 vacant buildings in Silicon Valley. This translates into 13% of the total square feet and 14% of the vacant buildings in Silicon Valley located in Sunnyvale. However, vacancy rates are declining. The R&D vacancy rate was 22.25% in the first quarter of 2005 and dropped to 17.29% in the fourth quarter of 2005. This has dropped further in the first quarter of 2006 to 16.84%. This trend is expected to continue. Most of the vacant buildings in Sunnyvale are between 40,000 and 60,000 square feet. Smaller spaces are being leased.
The cost to the City for a special tenant incentive program would include updating the planning and building modules to allow certain permits to be issued without fees paid, generate reports to show permits issued with outstanding fees, generate reports to track due dates for outstanding fees and to not allow occupancy or final of a permit until all fees have been paid. Customers may have to be invoiced for the outstanding fees. The cost to issue an invoice from the Finance Department is $16.50 per invoice. Information Technology estimates that it would cost approximately $12,000 to update the planning and building modules.
Larger developers are not likely to take advantage of this type of incentive because they would not want to invest in tenant improvements without knowing the requirements of an unknown tenant. However, smaller business owners and potential tenants could benefit by reducing upfront costs and financing making it more economically feasible to relocate to buildings that are currently vacant. Brokers marketing vacant buildings have indicated that the streamlined permit process for tenant improvements in vacant R&D buildings in San Jose is the primary reason for the success of the program rather than the deferral of fees.
Development Impact Fee Deferral (Gilroy, Morgan Hill and Livermore): In Gilroy, new buildings in industrial parks where full street improvements exist, all City-imposed development impact fees can be deferred until the building is occupied. For a single occupancy structure, the fees may be deferred until the building owner and/or tenant applies for a building Tenant Improvement (TI) permit. Fees are paid prior to TI permit issuance. For multi-tenant occupancy structures, the fees may be deferred until the building owner and/or first tenant applies for a building TI permit. Fees are paid prior to TI permit issuance. A performance bond is required to ensure the City collects the fee.
Morgan Hill has three programs to assist business owners ease the potential impact of City development fees. The Sewer/Traffic Fee Financing Program enables business owners to pay a portion of their sewer and/or traffic impact fees, and amortize the balance over up to five years at the prime lending rate. Total deferred fees must exceed $10,000. The Utility Undergrounding Fee Financing Program enables business owners to pay a portion of their Utility Undergrounding in-Lieu fees, and amortize the balance over up to five years at the Local Agency Investment Fund (LAIF) rate plus one-half percent. The Small Business Fee Deferral Program offers loans between $3,000 and $10,000. This program allows a 6-month deferral followed by installment payments for up to 12-months at no interest charge.
Livermore offers a fee deferral program for restaurant sanitary sewer connections as an incentive to attract restaurants to their downtown. Sewer connection fees can be spread over 20 years for restaurants in the downtown and three years for restaurants outside the downtown area. This requires an agreement with the property owner and becomes a lien on the property. They have a program to defer payment of sewer connection and traffic impact fees to the time the building occupancy permit is issued. This enables the developer to reduce the size of the up-front funding required to develop a site. They also offer development impact fee credits for the reuse of buildings and for demolished buildings based on the prior use and size of the building(s). The credit is tied to the building and not the tenant.
Creation of a program that would defer development impact fees until time of occupancy may offer an incentive for larger businesses and developers to expand or build new facilities in Sunnyvale. However, it does not reduce their overall costs. The Sunnyvale Municipal Code currently states that Transportation Impact Fees, (SMC 3.50.070 - (Ordinance 2737-03 § 1) and Housing Impact Fees (Title 19. Zoning, Chapter 19.22 - Ordinance 2733-03 § 1) must be paid before any building permit is issued. Therefore, an amendment to the Municipal Code would be required.
The cost to the City to implement this program would include development of a process to track and monitor payment of fees as well as additional staff hours to ensure that the final inspection is not completed until fees are paid.
Non-Financial Incentives
State Program
California Association for Economic Development (CALED): Businesses requesting financial incentives or seeking information on financial incentives can receive a broad range of advice and support from CALED, located in Sacramento. CALED works with companies on a case-by-case basis to assess and help determine what funding resources best match their individual needs. They can link them to resources that offer financial assistance or may recommend working with the local community to request IDRBs, refer them to a Certified Development Corporation for SBA 504 loans, private equity investors specializing in underserved markets, CalPERS investment programs and other loan and investment programs.
Local Programs
One-Stop Plan Check & Permit Process: The City of Sunnyvale One-Stop Permit Center, established in 1985, provides fast and convenient development related services including obtaining permits, licenses, information on developing properties and operating a business in Sunnyvale. The One-Stop Center is supported by a City staff team with members from the Community Development, Public Works and Public Safety Departments. The team effort by all of these departments results in fast and convenient services. Some of the services provided at one location are coordinated customer contacts with appropriate staff representatives, related development services in a central location, streamlined permitting process, computerized land use information and building permit tracking system and plan checks and permit issuance. Time-to-market is essential for companies to keep development costs at a minimum. Delays translate into dollars as costs increase for building materials and businesses are striving to begin operations as quickly as possible so they can generate revenues for the company.
Customer Service: Government provides the regulatory framework for permits, taxes, licenses and fees. The environment in which this is done will set the tone for a City’s business climate. Often, it is not the regulation that is problematic, but the environment in which regulations are enforced. Costumer service includes consistency, fairness, positive attitude and a staff committed to finding solutions and problem solving. Staff must also be flexible in working with businesses in a constantly changing economy. During the economic boom of 1998-2000, businesses wanted fast service and were willing to pay extra to meet construction deadlines. During the economic downturn, time-to-market was still critical, but costs for services became more of an issue. Recognizing these nuances assist staff in techniques for working with companies going through the City’s approval processes. The research conducted on programs in other communities, as well as developers, emphasized customer service and permit streamlining above all financial incentive programs. Regardless of the amount of financial assistance offered, the most important goal of the company is to start or expand operations as quickly as possible. Setting timelines, meeting those timelines and providing staff with the tools and training necessary to offer the highest professional assistance and quick responses to customer needs is critical to a positive business climate.
Permit Bundling (Palo Alto): The Santa Clara County Cities Association Joint Policy Collaborative (JPC) Committee on Tax and Fee Relief for Small Businesses is looking at ways to decrease the cost of doing business in Silicon Valley. One concept currently under review is “bundling” permits and fees as a way to decrease costs. Palo Alto used this process to reduce costs to businesses on California Avenue by issuing a single encroachment permit to ten businesses along the street. This reduced the costs to the businesses who wanted to provide outdoor dining and other services in the public area and, in turn, the City got consistency in providing access along the sidewalks. Other ideas will be sought from the business community through roundtable discussions. As “best practices” are identified, the City will review these programs to determine their relevance to doing business in Sunnyvale and the benefits to the City. Councilmember Howe serves on the JPC and the Committee on Tax and Fee Relief for Small Businesses and Councilmember Chu is the alternate member.
Ombudsman: The Economic Development staff serves as a project management team for guiding companies through a city review process. This may include major development projects, policy reviews or other needs specific to an individual or group of businesses. Economic Development works with the Planning, Building and Neighborhood Preservations Divisions and other City departments as appropriate to support businesses for the duration of a project.
Action/Advocacy Teams: An ad hoc task force is assembled as needed to support and collaborate on major development projects, site selection processes, or to solve a business problem. It can be made up of experts and senior decision-makers from public and private sector organizations, including City, County and State governments, public utilities, and affected businesses depending on their individual needs. The Community Development Strategy developed in 2003 highlights this program as part of the ongoing Economic Development work program.
Site Identification: Companies seeking to locate a new facility in Sunnyvale often approach the Economic Development staff for assistance in locating a site. Staff maintains an inventory of potential sites through its network with local commercial real estate brokers and through direct contacts with businesses and property owners. The City offers site location assistance on the website through a contract with LoopNet. LoopNet, Inc. is an information services provider to the commercial real estate industry. LoopNet members can list, search, market and finance commercial real estate properties over the Internet. This service allows new and expanding companies the ability to research, compare and identify potential sites within Sunnyvale. For proposals with specific requirements identified, staff works with individual brokers to narrow down properties that will meet the unique needs of each company.
Workforce Recruitment and Screening: The City has offered assistance in recruiting and screening employees through NOVA, Connect! and ProMatch. NOVA and CONNECT! offer no-cost assistance to help a company find the right candidates for their employment opportunities. Through their extensive network of career service professionals, they will broadcast employment opportunities to career centers and their CONNECT! education and training partners throughout the Bay Area. ProMatch, a service for job-seeking professionals at both management and individual contributor levels is a source of candidates for the labor market. There is no fee to participants or the business community as ProMatch is co-sponsored by the NOVA Workforce Board and the California Employment Development Department in Sunnyvale. ProMatch members' mini-resumes, called "Profiles," are posted online so that businesses have access to the latest information about ProMatch members. ProMatch staff works with hiring managers to find the right people to interview. Additionally, employers' staffing needs are posted in ProMatch's resource center. Job openings are announced at ProMatch membership meetings and businesses are encouraged to be on employer speaker panels to address ProMatch members directly. These services are marketed to employers who are looking to locate in Sunnyvale as well as companies expanding in the city. Economic Development works with NOVA on other programs that can be tailored to meet the individual needs of a company. This occurs most often when working with proposals from site selection consultants or companies looking to relocate.
Job Training: NOVA's On-The-Job Training Program (OJT) can help employers connect with the right employee for a job. Employers may receive reimbursement of up to 50% of a new employee's wage during a specified training period, usually two to four months. NOVA may also provide uniform and tool reimbursements. NOVA keeps reimbursement simple and minimizes paperwork so that the employer can concentrate on working with new employees. Additionally, NOVA's professional staff stays in contact with all OJT employees to help them adjust to their new work environment and maintain their commitment to their employers. NOVA also works with the community college system and other colleges and universities to develop training programs tailored to the needs of a specific business. In business retention and business attraction, workforce is the highest rated requirement for employers. NOVA also works with the Employment Training Panel for job training.
Zoning/General Plan Amendment/Specific Plan/Specific Plan: Zoning is the division of a city by legislative regulations into areas (or “zones”) which specify uses for real property and size restrictions for buildings within these areas. Zoning protects preferred uses in areas of the city and can be an incentive to encourage development by offering higher densities or making areas affordable for users such as service companies (e.g., auto repair shops, upholstery businesses) by zoning for lower densities. The City has specifically zoned to encourage residential development, to protect commercial and industrial areas from transitioning to residential or non-industrial uses.
A Specific Plan is a detailed plan for a defined geographic area which, when adopted, serves as the land use control regulation (e.g., zoning) for the area. A Precise Plan is a plan for a defined geographic area which is adopted as policy and serves as a guide to developers and to staff. A Design Plan is a detailed plan for a defined geographic area which establishes a physical urban design framework and design guidelines intended to improve the physical appearance, functionality and user comfort of the area. It serves as a guide to developers and to staff and may be adopted as part of a specific plan. These tools assist developers by expediting projects that are in conformance with approved guidelines.
The ability of Sunnyvale to participate in the anticipated growth of the Silicon Valley economy is dependent upon the City’s competitiveness to attract and retain office and research and development facilities of cutting-edge companies. It is the goal of the City of Sunnyvale to maximize Moffett Park development with corporate headquarters and facilities of high technology companies which will represent the next wave of economic growth. The Moffett Park Specific Plan, adopted by the City Council in April 2004, encourages targeted development through streamlined development permitting processes. The Program Environmental Impact Report allows conforming development to proceed with increased certainty. The transit oriented development sub-district permits a standard floor area ratio (FAR) of 50% with a maximum allowed FAR of 70%. The industrial sub-district permits a standard floor area ratio (FAR) of 35% with a maximum allowed FAR of 50%. Projects which do not exceed the standard FAR may typically proceed as a matter of right, with only staff-level review. Projects seeking FARs greater than standard FAR will require a Special Development Permit from the Planning Commission. If the project is designed to meet “green building” standards, the increased floor area entitlement may be approved by staff with only design review by the Planning Commission.