Store Could Be Ousted to Make Room for Costco

Two discount retailers are waging war in the high desert. But the fight isn’t about market share; it’s about real estate.

Costco wants to expand its 126,000-square-foot warehouse store in the Valley Central Shopping Center, and has asked Lancaster city officials to force the 99 Cents Only store out of its 18,878-square-foot building next door.

Fearing the loss of Costco, city officials say they are considering using their power of eminent domain to do just that.

In a plan set to be voted on June 27, the Lancaster Redevelopment Agency has proposed spending $3.9 million to buy or lease the 99 Cents Only store and two vacant parcels.

The move has outraged 99 Cents Only Stores Inc. officials, who accuse the city of abusing its condemnation powers to play favorites among retail tenants. Condemnation should be used only as a last resort to reclaim blighted areas or create space for important public projects such as schools, they say.

And the shopping center that includes the two stores was already “redeveloped” once--when it was built over a two-year period beginning in 1989.

“If the city decides to favor one corporation over a smaller business, we’re planning to fight it,” said Russell Wolpert, general counsel for 99 Cents Only Stores, a publicly traded company based in Los Angeles. “We are not going to disappear.”

Lancaster redevelopment Director Stafford Parker said the city explored all possible alternatives before considering condemnation.

But when Costco, the city’s third-largest retailer, threatened to leave for Palmdale without a suitable alternative in Lancaster, Parker said the city had no choice but to accommodate the retailing giant.

“It would be derelict and irresponsible to be faced with the loss of Costco and do nothing,” Parker said. “There would be a loss of jobs, additional business closure and a substantial loss of sales tax.”

Bill Carlson, executive director of California Redevelopment Assn., a nonprofit group representing 325 local redevelopment agencies including Lancaster, said relocating one business while allowing for an expansion of another is within the scope of a municipal redevelopment agency’s powers. But actually doing that is rare, he said.

“Statewide, redevelopment agencies make very limited use of those powers,” Carlson said. “It’s controversial and expensive, so most agencies are very careful in any condemnation.”

Fullerton City Councilman Chris Norby, a leader of a statewide coalition of local government officials demanding redevelopment reform, said Lancaster appears to be abusing the process.

“The overreliance on sales tax has led to a growing abuse by redevelopment agencies of eminent domain,” said Norby, who thinks the Lancaster case is indicative of a pattern of abuse by municipalities around the state.

“The beneficiaries are almost always large corporate retailers playing one city against the other, for what amounts to more corporate welfare,” he said.

Officials for 99 Cents Only said Costco’s move was particularly hypocritical in that the company decried governmental meddling when the state Legislature passed a bill designed to restrict grocery sales at big-box retailers. Gov. Gray Davis vetoed the bill, AB 84.

Joel Benoliel, senior vice president for real estate for Issaquah, Wash.-based Costco Wholesale Corp., said the two issues were not related, and contended that 99 Cents Only was stirring controversy in order to get a better deal from the city.

“Without question, they are negotiating to maximize the amount they will receive as compensation for their lease,” Benoliel said. “They are a tenant in a shopping center. They have a few years remaining on the term of their lease and they are skillfully using the city to get the most out of that lease.”

He denied that Costco was using the threat of relocation to strong-arm Lancaster officials.

“We take very seriously our impact on cities like Lancaster, and we would never suggest flippantly to relocate strictly to gain an advantage in a negotiation,” Benoliel said.

The company needs to expand and upgrade the store, which is about 25,000 square feet smaller than the average Costco outlet, he said. Costco also wants to build a gas station and expand parking at the facility.

Wolpert said the 99 Cents Only location--squeezed between a HomeBase and the Costco--is a particularly good one that the company is loathe to relinquish.

99 Cents Only signed a three-year lease in 1998 with the shopping center landlord, Burnham Pacific Properties Inc., Wolpert said. As part of the deal, the store has three renewable options of five years.

Still, city officials say they are willing to spend $3.9 million to buy or lease the space from Burnham Pacific and give back any sales taxes to Costco above $350,000 annually, to pay costs of the company’s $5.5-million upgrade.

The return on that investment will be securing Costco for 15 years--keeping 171 part- and full-time jobs and adding any jobs the expansion would create at the shopping center, Parker said.

“We have just reached a plateau that we have fought to hold and gain after a long economic downturn,” Parker said. “We do not want to be in position to fight to get back there again.”