Can redevelopment dollars create a critical mass of restaurant and entertainment space without sending existing businesses over the edge during difficult economic times?

The City of Sacramento says the answer is yes. Despite cries of unfair advantage from existing downtown restaurants struggling to keep their doors open during the current economic climate, Leslie Fritzche, Sacramento’s downtown development manager, believes encouraging new restaurant development is even more necessary during a recession.

“We have to keep the momentum going on K Street,” Fritzche says. “We have to show that we are open for business.”

Continuing the drive to replace empty storefronts was the reason Sacramento City Council gave in March for approving a $5.7 million subsidy and city land for a trio of bars and restaurants in the 1000-block of K Street over the protests – including a now-dismissed lawsuit – from existing restaurant owners.

Councilman Rob Fong praised the development for “filling in the blanks” on K Street with Pizza Rock, a gourmet pizza restaurant, a Dive Bar complete with a mermaid tank, and District 30, a dance club for the over-30 crowd.

Rob Kerth, a representative of the Midtown Business Association, accused the city of moving the blank spaces around by causing existing businesses elsewhere that don’t have the benefit of a city handout to fail.

Which Rob is right? The answer might be in the fine print. Cities don’t just hand out large bags of cash. Like any investor, they do due diligence and if they think the project fits the city’s vision and is viable, they underwrite the gap using tax increment dollars reserved for fighting blight in specific areas or – in the case of the recent subsidy – reserved from the sale of a property with the express purpose of investing in downtown development.

Where the developer’s headquarters is located is less important than the track record, according to Fritzche.

“We look at what he has delivered in projects,“ she said.

In this case, the developer is a partnership between local developer David Taylor Interests Inc. Los Angeles-based CIM Group and San Francisco-based nightclub owner George Karpaty. Taylor has built $325 million in projects downtown including the Esquire building and the Cosmopolitan downtown, both with the help of redevelopment dollars.

Existing restaurateurs, who reported a 20 percent to 40 percent decline in business since the stock market crashed, were not eager to see more competition for a shrinking piece of the pie. However, the city felt that by the time the improvements are complete at the end of 2009, the economy will be growing and the increased entertainment options will lure more people to the area, helping all businesses.

“The city’s role is even more important in the current economy when traditional funding has become tight,” Fritzche says.

Many cities are finding themselves with fewer resources just when they are needed most as the state and cities look to redevelopment funds for operating expenses, says John Shirey, executive director of the California Redevelopment Association.

Thanks to modeling developed at California State University, Chico called IMPLAN, Shirey can calculate exactly how many jobs are created – or lost – when revenue is diverted from civic investment projects.

“If the state takes $350 million, that translates into 3,000 jobs lost,” Shirey says.

In Sacramento, the rule of thumb is that every $100,000 in redevelopment dollars creates two permanent and five construction jobs. A total of $58.5 million in city investment was leveraged by $363 million (a 2 to 6 ratio) to jump start the Cathedral building, Ellas Restaurant, Pyramid Brewery, the Elks Building, the Citizen Hotel, 800 J, the Orleans, IMAX/Exquire and Chops Restaurant. That resulted in 1,240 permanent jobs and 2,985 construction jobs.

Sometimes investments pay off better than other times. Taylor’s Cosmopolitan transformed the empty Woolworths building in the heart of K Street into the Cosmopolitan dinner theater and nightclub. The city invested $9 million, which using traditional tax revenue calculations would take an anticipated 15 years to realize a return on investment.

However, the city structured the agreement to participate in cash flow upside as a partner so Frtizche says the payoff will come much sooner.

Like any investor, some don’t hit home runs. Two years ago the city invested $50,000 to help the building owners preparing a space for Three Monkeys restaurant near Downtown Plaza meet new seismic requirements. The restaurant lasted little more than a year before it was closed, owing $206,796.72 in back rent. The seismic improvements remain intact, however.

Another way cities help businesses get a healthy start is to make allowances on sewer connections and streamlined approval processes.

“Non-cash subsidies are an essential element of economic development,” Fritzche says. “By cutting through red tape, we contribute to the
bottom line.”

To protect their investment goals, cities can stipulate everything from how much a business will pay for employees to hours of operation, says Shirey. Some are getting creative and using green building funds to lower the cost of construction and operations.

The city of Sacramento is eager to encourage restaurants to stay open late to encourage foot traffic downtown in the evenings after the state workers have gone home.

“There are many ways to measure success,” Fritzche says. “Sales tax revenue and jobs are only two. Buzz and people on the street also count.”

The way Fritzche sees it, “Redevelopment is more of an art than a science.”

This article originally appeared on PublicCEO.com in April, 2009. JT Long can be reached at jtlongandco@gmail.com.

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