Tempe scored a major coup last year in the Valleywide retail war when it landed IKEA, an international furniture store. And the timing couldn’t have been better for a city on a losing streak.
In recent years, the city has watched the Arizona Cardinals and the Tostitos Fiesta Bowl agree to leave town for a new stadium in the West Valley.
The loss was a huge financial hit to the city that was also battling a shrinking sales tax base. Shoppers were passing on Tempe stores to spend their money at newer malls such as Chandler Fashion Square and the Desert Ridge Mall in north Phoenix. Starting today, however, Tempe hopes that the much-anticipated grand opening of IKEA will capture some of that lost sales tax revenue by winning back shoppers.
But last year, the pressure to bring IKEA to the city was enormous. With millions of dollars in tax revenue up for grabs, winning the store wasn’t going to be easy.
Other Valley cities were offering free land, millions of dollars in incentives and even baked goods to lure the company.
But in the end, the decision came down to a real estate maxim: Location, location, location. That, and a city willing to push hard to cut a deal.
The story of IKEA underscores the competitive environment that cities battle in to bring retail to their communities. While many public officials refuse to comment on the competitive atmosphere of recruiting retail stores, the stakes are high.
Valley cities depend on sales tax to fund basic city services as well as their police and fire departments.
The problem has grown so much that Phil Gordon, the mayor of Phoenix, recently called for an end to the retail wars.
Tempe Mayor Hugh Hallman also has promoted regional cooperation as a major theme of his administration and has been working with neighboring communities to hammer out an agreement that curbs the practice of tax incentive giveaways to developers.
The courting of IKEA began five years ago when Chandler officials sent the company a demographic breakdown of the city along with a box of brownies from a local bakery.
While the move did not sway IKEA officials, it did set a precedent.
During the next half-decade, Chandler continued sending baked goods with updated information on their community. “It’s very flattering,” said Joseph Roth, an IKEA spokesman. “But in the end, it’s a business decision, and we have to look out for what’s in our best interest in the long run.”
It eventually took Tempe $6.8 million to get IKEA, with the developers taking the lion’s share of incentives from the city. City documents show Tempe gave Tait Holdings $5 million. Ikea received $1.8 million.
Although company officials would not offer specific details, there were bigger offers from other cities. Had IKEA been seeking out larger incentive packages in the Valley, Roth said it would not have picked Tempe.
Although he did not name all of the Valley cities, Roth said other communities had more money and free land on the bargaining table.
Besides Tempe and Chandler, officials in Mesa acknowledged they talked with IKEA. Mesa was looking into the possibility of locating the store near Loop 202 and Dobson Road, city officials said.
“If we were looking for land, we wouldn’t be where we are right now,” Roth said. He said the company decided on the Warner Road and Interstate 10 location because of freeway access and high visibility.
Roth said he works with cities throughout the country and has experienced many differences in bargaining styles.
Western states, he said, are more willing to offer up incentives than states on the East Coast. The difference in the West comes down to dependance on sales tax, Roth said. Back East, cities rely heavily on property taxes to pay for community services.
“Western states are very much sales-tax oriented,” he added.
For Gilbert, ranked among the fastest-growing communities in the nation with a population over 100,000 for the past several years, expanding the sales tax base has been critical for supporting its population boom.
“Without sales taxes, there would be nothing left but to tax people’s homes,” Mayor Steve Berman said. Berman’s town is locked in a battle with neighboring Chandler over a proposed auto mall, which is expected to bring his town millions of dollars in revenue. Tempe uses nearly half of its sales tax to fund the police and fire departments, said City Manager Will Manley. The rest, he said, is spread out among other city services such as parks and recreation, development services and human resources. A year before landing IKEA, Tempe was tussling with Glendale to place the new Arizona Cardinals stadium on the northeast corner of Warner and I-10.
The city lost the stadium, but city officials say they won the larger prize. The city predicts IKEA will anchor the new Emerald Center, a mixed development area that could bring Tempe more than $127 million over the next 20 years.
“To me, it’s not just about IKEA, it’s about the other retail stores that they will attract,” Manley said. Garrett Newland, the economic development director for Chandler, said the city lost to Tempe because they could not offer freeway visibly. Had IKEA wanted to move into the Valley a couple of years earlier, Newland said the city could have placed the furniture store at I-10 and Ray Road. That location would have offered freeway visibility and 1 million square feet, and is one mile south of where IKEA decided to build in Tempe.
“The great thing about IKEA is the regional draw that the store brings,” Newland said. Newland, like other city officials throughout the Valley, expect IKEA to draw shoppers from as far away as Colorado and New Mexico.