Cities See Red in Kmart Closings
The pending closure of 16 Kmart Corp. stores across California won’t make much of a ripple in the state’s giant real estate market and economy.
But on a local level, the store closures announced last week as part of the company’s reorganization in U.S. Bankruptcy Court are expected to have a profound effect on small property owners and cities that are heavily dependent on the discount store chain for rent and sales tax revenue.
The closure of a large Kmart store could translate into the loss of $200,000 to $300,000 in annual sales tax revenue in addition to job cuts, said real estate consultant Larry Kosmont.
The loss may take a painful toll on small cities that are slated to lose a Kmart, including Compton, Fountain Valley and La Verne.
“For many communities, that [amount] is the equivalent of two to three police cars fully manned,” said Kosmont. “Each city ... has to create a plan to deal with the loss quickly. If they don’t they are foolish.”
Los Angeles is slated to lose three Kmart stores, but the effect on the city’s treasury will be minimal given the city’s tax base and the legion of rival stores that will pick up former Kmart shoppers.
In contrast, the closing of three Kmarts in the much-smaller Central Valley city of Fresno is expected to have a larger effect fiscally.
“If you’re a city that has limited retail resources, and your Kmart closes, it’s going to pinch,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. “Fresno really got hammered.”
The Kmart stores to be closed in dense urban areas are expected to be scooped up by other major retail chains, such as Target Corp. or Home Depot Inc., or speedily recycled into other uses because of the shortage of developable land, say retail and real estate observers.
“For the most part they will be absorbed into the retail community fairly rapidly,” said Brent Howell, a retail real estate broker at CB Richard Ellis. “Some of these sites will take longer than others but we have always been able to fill the void.”
But finding and moving in a replacement tenant could take several months under the best of circumstances, leaving individual property owners and city officials without rental and tax income for a significant amount of time.
The wait could be much longer if the property needs to be redeveloped for other uses, such as housing, schools or offices.
“They [landlords] are going to be challenged,” said Michael Zugsmith, chairman of NAI Capital Commercial, a real estate brokerage and investment firm.
“If you have a substandard location ... you could be sitting with that empty space for a year or more,” he said.
In La Verne, located at the eastern edge of Los Angeles County, the upcoming closure of the Kmart on Foothill Boulevard has city officials preparing to work with property owners to market the site and find other tenants.
The store is one of the city’s largest sources of sales tax revenue--about $2.7 million annually.
“Kmart was in the top five,” said City Manager Martin R. Lomeli. “Their loss will certainly be felt in our budget for next year.”
Lomeli said the fiscal effect on the city will be softened a bit as La Verne’s remaining retailers, including a Target store, capture some of Kmart’s sales, and contribute more sales tax to the city treasury.
In addition, Kohl’s, a fast-growing discount department store, has filed permits to open a store in the city.
That could help replace some of Kmart’s sales tax revenue but Kohl’s is not scheduled to open until spring 2003.
“There is a void to fill in our community,” said Lomeli, “and we will work hard to fill it.”
