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Business Observer Friday, Oct. 24, 2003 14 years ago

Whole Foods: The Whole Story

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The city of Sarasota wanted the Whole Foods grocery downtown so badly it skipped over many of its owndevelopment policies and practices.

Whole Foods: The Whole Story

The city of Sarasota wanted the Whole Foods grocery downtown so badly it skipped over many of its own

development policies and practices.

This is the first of two parts.

By Kendall Jones

Senior Editor

Publix tried it but couldn't make the numbers work. Albertson's also tried it without success. Even Fresh Market, an upscale organic market, took a run at it - no one is quite sure what happened to them.

The gospel, according to urban planner Andres Duany, says downtown Sarasota needs a grocery store to accommodate the growing residential population, serve as an anchor for a revitalized downtown and promote the walkable, new urbanism Sarasota seeks to embrace. But with the high cost of downtown real estate, no grocer could devise a financially sound plan. Of course, none had asked the city for financial assistance.

Neither did Whole Foods. Fact is, the city approached Whole Foods.

About two years ago, a Sarasota contingent, including Director of Downtown Redevelopment Karen Hartman, went to Winter Haven to "do a field inspection on Whole Foods," says Hartman. "We were trying to court a grocery anchor in the downtown core. This was a highest priority project for downtown Sarasota. We looked at Whole Foods and said 'we love it.' Putting a Wal-Mart downtown, maybe that would have been a financial drain to downtown stores. But economics is economics and competition breeds. With Whole Foods, the name alone is an attraction."

The city's obsession with Whole Foods began. The city wanted one downtown and would do what it took to make it happen. The city would not lose this one. This obsession led the city to violate its own policies, to bypass competitive bidding and to give the project developer millions more in incentives than it might otherwise have required.

At first, Whole Foods did not respond well to Sarasota's flirtations. "Whole Foods was hesitant to come in," says Hartman. "But then we found they had a relationship with Casto, and things started to happen."

Brett Hutchens, president of developer Casto Southeast Inc., which had done other projects with the upscale organic grocer, says Whole Foods was not interested in a downtown location; it was looking at locations on U.S. 41, where land is cheaper, access is easier and traffic is higher. "We sold them on downtown," says Hutchens. "That bridge made a big difference to them, because it means they can easily draw from St. Armands, Lido Key, Longboat Key. That was a key factor in their meetings."

Casto, in a joint venture with Zenith Insurance Co., owner of half of the property on which the project is located, is the developer of the Whole Foods project. The project includes a 36,000-square-foot Whole Foods grocery store, about 20,000 square feet of other retail space, 98 condominiums priced from the $300,000s, and a multistory "disguised" parking structure. The other retail space is slated to include Starbucks, Panera Bread and Washington Mutual.

In exchange for bringing this anchor project downtown, Casto-Zenith gets free land from the city and a waiver and/or reimbursement of all government-imposed construction fees and costs. Much ado has been made of the 300 public parking spaces the city "gets" as the result of the project, but the city will pay full price for those.

In exchange for the subsidies, the city gets its vacant, 114-space parking lot that currently nets the city zero income transformed into a flagship project that brings in tax dollars while more than doubling the number of public parking spaces in that area. The Whole Foods project is projected to return $5.4 million to the city's tax increment financing (TIF) fund by 2021, and that's just the direct contribution. Proponents hope the project will spur additional development downtown, indirectly bringing even more money into to the TIF fund.

The project also fulfills the Duany grocery recommendation, giving the city that critical economic driver. Part of the agreement between the city and Casto states that if Whole Foods leaves within five years and Casto fails to find an appropriate grocery replacement during that five-year period, the property ownership and control reverts to the city. It's a virtual guarantee the city will have a grocery store on that site, because reversion of the property would mean at least a $40 million loss for Casto.

Forget that everyday products such as brand name laundry detergent and toilet paper are not available at Whole Foods, so it won't really be a full-service grocery store catering to the basic needs of downtown residents - a Publix is going in on U.S. 41 for that.

"A vibrant 24/7 downtown requires a residential component," says John Tylee, executive director of Sarasota's Downtown Association and current chair of the CRA Advisory Board that approved the subsidies to Casto-Zenith. "You start off at the high end, as high as you can get it, and the rest of the market fills in. You can't upgrade later. We are lucky to start off with such high-end projects."

But in its feverish haste to attract Whole Foods and complete the deal, the city skipped many of its own policies and practices. Asked why, most parties involved point the finger at someone else.

No RFP

When Sarasota seeks commercial development for a public parcel of land, it creates a Request for Proposal. An RFP specifies what the city wants on the site. Developers respond with a project proposal and a detailed estimate of the cost of that project, plus information regarding the developer's experience, financial backing, etc. A typical RFP is at least a couple dozen pages. RFPs are published in newspaper legal notices, and the city also sends copies to a targeted list of developers or contractors. For significant projects, the RFP gives developers 45 days to respond.

Sometimes an RFP is preceded by an RFQ, or Request for Qualifications, specifically mailed to hundreds of developers, asking for their experience and qualifications, so the city can determine which ones merit receipt of the RFP and opportunity to bid.

The RFQ and RFP process, though time-consuming, is the city's way of marketing the property for development. The resulting competition among developers ensures the city gets the best offer in the best interest of taxpayers.

In 1997, the city sought commercial development for the Mission Harbor property, now the site of the Renaissance. It first sent an RFQ to hundreds of developers across the country, then followed that with about a 30-page RFP, published in the newspaper and sent to more than 200 qualifying developers. The winning developer of the Renaissance beat others vying for the project by offering to pay full price for the property, plus contribute an additional $1 million to various community projects.

In 2000, the city sought development of Palm Avenue, and it sent out an RFP that was more than 70 pages. The RFP was published in the paper and mailed to potential developers across the country. The winning developer did get the real estate at no cost from the city, but in exchange for that free property, it had to build a certain number of public parking spaces for the city, at no cost to the city.

No such RFP was ever sent out regarding the Whole Foods project.

That's because the city's deal with Whole Foods was basically done before it ever notified the public of its intentions.

On Oct. 2, 2002, for example, Casto-Zenith had a pre-application conference with the city. The Whole Foods project is located on 3.17 acres of downtown property, about half of which is owned by Zenith. Zenith's half, including a parking lot and an abandoned bank drive-through, is zoned for the Whole Foods project. The other half was a city-owned parking lot zoned G, for Government purposes. The city lot had to be rezoned before the Whole Foods project could happen. By October 2002, Casto-Zenith was meeting with city representatives to discuss rezoning the city property for purposes of the project.

By Oct. 10, 2002, city staff had completed a Transportation Concurrency Analysis and Traffic Circulation Review on the current Whole Foods site.

By Oct. 16, 2002, a meeting was held in City Hall, introduced by Hartman and Robinson, during which the details of the final Whole Foods project were discussed. On that agenda: coordinating the SCAT transfer station and Lemon Avenue streetscape project with the Whole Foods construction, rezoning the city parcel, variances Casto-Zenith would require, the traffic study, a calculation of impact fees and fees the project would incur, utility line location issues and phasing and staging of the construction.

By December 2002, the parties had agreed on the general terms of the contract the city would later sign with Casto regarding the project and all its complicated details, and the respective attorneys already had initial drafts of the contract drawn up. By the end of 2002, the city was deep in the process with Whole Foods, and no RFP had been sent to anyone. In fact, many commercial Realtors and businessmen in town thought Whole Foods was still mulling over its initial site at Ringling and Osprey.

But suddenly, on Jan. 10, a tiny "Notice of Invitation to Submit Proposals and Disposition of Real Property" appeared in the legal notices of the daily paper. Few people noticed it; developers used to receiving RFPs never saw it.

When printed on 8 x 11 paper, the notice is only about 1-1/2 pages long. It says the city seeks a food market on the described site, along with other uses that would help redevelop the downtown area. Unlike RFPs for commercial development on other city-owned property, this invitation was remarkably brief; it gave developers only 30 days to respond, and the city did not send it out separately to a single developer.

The message implicit in that notice was apparent: We are doing this deal with Whole Foods, no one else. We do not want a competitive bid. Do not come to us with a better deal.

It worked. Casto-Zenith was the only developer to file a response; it filed on Feb. 3. But Hartman denies that was a sure bet. "I disagree that it was a done deal when we sent out that notice," she says. "Casto could have not responded."

But that would have been the real surprise. On Jan. 28, Hartman and other city staff walked the CRA Advisory Board through the key terms and financial implications of the agreement the city had worked out with Casto. That meeting included detailed discussions of the financial incentives city staff recommended the Advisory Board approve for the project.

"David Cardwell (the Orlando attorney advising the city on the Whole Foods matter) calls that notice an RFP," says Hartman. "He said it was legal and the appropriate notice to send out, so that's what I sent out."

Indeed, the "invitation" to bid does meet the minimum statutory requirements for such a notice. But there's still a problem. Even if a notice is technically legal on its face, if its use manifests disparate treatment by the city - meaning the city is treating this project and this piece of property differently than it treats similarly situated projects and properties - that may make it illegal in operation. In fact, Hartman says, she has never used such a notice while employed in Sarasota, though she does recall doing so one time when she previously worked in Palmetto.

In response to the question of disparate treatment, Hartman referred the Review to Cardwell. The Review called Cardwell more than once and sent him a list of questions by e-mail, but Cardwell did not respond prior to the time of publication.

And there is another concern with the "invitation." The site described in the invitation for the project includes both the G-zoned city-owned property and the private property owned by Zenith.

"They can't do that!" exclaims Hutchens. "A city can't invite bids for a project on private property."

Again, Hartman referred the Review to Cardwell, whose opinion, she says, guided the wording of the notice.

No pro formas

Many of the financial elements of the project remain a mystery to the city. And yet, the city felt comfortable subsidizing the project for millions of dollars.

A pro forma is a list of expenses and expected revenues for a project, with the bottom line showing the projected net return. For example, when a developer seeks a construction loan from a bank, he must show the banker how much it will cost to build the project, how much he expects to make out of the project and what the bottom line profit or return will be as a result. If the numbers are sound, the project is viable and the developer is reputable, the developer has a strong likelihood of getting the loan.

Similarly, when a developer asks the city to assist with a desired redevelopment project, he must show a need for such assistance to make the project come to fruition. That need is demonstrated in a pro forma.

There is no pro forma for the Whole Foods project in the planning department file, and Hartman says she does not have one. No CRA Advisory Board member has one, either.

In 2001, when the project was going to be at the corner of Ringling and Osprey - and it was going to include a smaller grocery store, some retail and 180 rental apartments - Hutchens says he showed a pro forma to the city. "I told them that we won't even consider doing a project if we can't get 11% to 11.5% return against costs, and we could not get that with the project as it was," says Hutchens. Hutchens says he took back the pro forma from the city representatives because of the sensitive nature of the information it contained.

The city turned the financial analysis over to its Orlando-based consultant, Real Estate Research Consultants. RERC performed a cost-benefit analysis of the project as then-planned, including recommendations on financial incentives the city might consider giving Casto-Zenith in light of those project terms, and published its report in February 2002.

"RERC and Cardwell asked to see the Whole Foods lease and rents and the other rent information," says Hutchens. "They checked those with other rental rates to see if they were reasonable, and that's all they should be asking. Their concern is only the tax increment benefit the project will create. The city does not underwrite my construction risk and ensure my rate of return - I would love it if they decide to do that one day, but they won't. The decision on incentives is always based on the increment created, not developer return."

In other words, if the city or its consultant determines that a project will create tax increment revenues of $5 million over time, that could conceivably justify $5 million of incentives to ensure the project comes to fruition successfully.

But the Whole Foods project changed a whole lot between the time of the RERC report and the day the CRA approved the incentive package for Casto-Zenith. The entire site moved, the size of the grocery store increased by about 8,000 square feet, the 180 rental apartments became 98 condominiums. The pro forma and the calculations used for the incentive recommendations would have changed dramatically.

But RERC did not do another cost-benefit analysis or report. Hutchens and one CRA Advisory Board member recall that RERC presented a verbal amendment to its February 2002 report, but no documents reflect any specific changes. The city's RERC representative did not return the Review's phone calls by deadline.

In fact, no one involved in the decision-making process at the city has any clear idea how the numbers changed and whether the amount or level of incentives should have changed as well.

"We did ask for more information," says Tylee. "We would have liked to have a complete pro forma. But we were a newly formed board, just feeling our way. The city was just feeling its way. There was a learning curve for all of us. The developer had a clear deadline from Whole Foods, and time was clearly of the essence, which put pressure on us."

There is no substantiation to demonstrate whether, in its haste, the city approved more incentives than necessary. Perhaps the proof is in the returns. Without the incentives, Hutchens says, he calculated Casto's return against costs on the $40.3 million construction would have been about 9%. Hutchens asked the Review not to publish the projected returns with the incentives, but it's more than 11%.

No market value

When the city defined the value of the land it gave Casto-Zenith free as part of the deal, it used the assessed value of the land, rather than the fair market value. There's a big difference. The land's assessed value, or value as shown on the tax rolls, is $1,739,500, or about $33 per square foot.

Market value for downtown real estate, on the other hand, is a lot higher. The land for Five Points Plaza sold for about $95 per square foot. At that rate, the city property has a market value close to $5 million. That translates into a $3 million difference between the value of the incentives the city says it is giving in the deal, and the actual market value of some of those incentives.

Here's the trick: The statute pertaining to this conveyance of land says the CRA only must refer to the property's "fair value," not "fair market value." Hartman says the interpretation of "fair value" as it related to the Whole Foods project was made by Cardwell and RERC.

Hutchens explains that the fair value of this land is actually zero, because it is now encumbered with the covenant that a grocery store and parking must be built on that site. Moreover, the covenants require operation of a grocery store on the site for five years or the property reverts to the city. "With those encumbrances, you can't sell it to anyone," says Hutchens.

No precedent

Did the awarding of the Whole Foods project create a new precedent?

Tylee and the CRA Advisory Board know the situation is unacceptable, and they have no intention of letting it set a precedent. The Advisory Board has already obtgained city commission approval of operating guidelines for future decisions. The Advisory Board has made it clear that, in the future, it expects complete information and adequate time to investigate issues of concern. Board member Charles Githler is working with city staff to devise a standardized format to present pro forma data for a project to the board and to enable the board to compare various projects.

If those things had all been in place when the Whole Foods project decision was made, Tylee cannot say whether it would have changed the outcome. Says Tylee: "I do think we would have had a much easier time making conclusions about the project and communicating those conclusions to the public."

Next week: The parking space deal the city struck with Casto-Zenith.

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