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SS - Desk Item PREPARED BY: MONICA RENN Economic Vitality Manager Reviewed by: Town Manager, Town Attorney, and Finance Director 110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832 www.losgatosca.gov TOWN OF LOS GATOS COUNCIL AGENDA REPORT MEETING DATE: 12/06/16 STUDY SESSION ITEM NO: 1 DESK ITEM DATE: DECEMBER 6, 2016 TO: MAYOR AND TOWN COUNCIL FROM: LAUREL PREVETTI, TOWN MANAGER SUBJECT: ECONOMIC VITALITY IN LOS GATOS REMARKS: After the distribution of the staff report and addendum, staff received the following questions from a Council Member. Below each question is staff’s response in italics. I am thinking mostly about the downtown core with regard to these questions. Staff is answering the questions based on publicly available information. Given the small size of downtown, fine grain responses are not possible given the confidentiality of the sales tax data. Is the drop in sales tax related to a change in business types? The drop in sales tax has many factors. When business uses change to a non-sales tax collecting business then there will be a decline. In addition, customer shopping behaviors have changed and more is done online so less people buy in the store, also contributing to the decline. Traditional brick and mortar retailers are also less prevalent because the business model does not work as well as it did in the past. Thus, vacant spaces are more likely to appeal to a business providing a service, or food and beverages. We did have a car dealership in the downtown core (next to Civic Center). Did its moving have an effect? The sales tax generated by the dealership once located in downtown has shifted to another part of Los Gatos, and has not negatively affected our town's overall sales tax generation. The decline in sales tax has been Town-wide, and not specific to one area. PAGE 2 OF 3 SUBJECT: ECONOMIC VITALITY IN LOS GATOS DATE: DECEMBER 6, 2016 S:\COUNCIL REPORTS\2016\12-06-16\Study Session\Desk Item - FINAL.docx Do certain business types pay less sales tax, such as SoulCycle, in place of the four retail locations they will occupy? Soul Cycle will occupy three commercial spaces that were formerly retail. While this business offers some retail which generates sales tax, it is primarily a service based business which is not taxable. It is not possible to speculate the amount of sales this business will generate versus what would be generated if three separate retailers were occupying the spaces. The fourth retail space currently in this location has a pending Conditional Use Permit application in our planning process for a juice bar. Since traditional retail has become a less successful business model in today's market, the Town has seen a surge in food/beverage uses and service based uses looking for commercial space. Between these two in the downtown, the service based use typically has a cheaper and easier process due to food and beverage uses typically requiring higher traffic impact fees and application of Ordinance 2021 which strongly discourages retail from becoming restaurant. When a service based business opens in a space that was once a retail location, a decline in sales tax is likely; however, by law sales tax is not allowed to be a driving factor in land use decisions. Is some of the sales tax shift to business license fees for the change to some business types from a heavy sales tax type (I know it is the case for Netflix but how about others)? This would not be the case for downtown businesses or those retail/restaurant uses in other commercial zones such as the Boulevard, neighborhood centers, etc. All of these businesses would have a business license that is assessed on gross receipts. Do we have less business (more open store front) or less sales per business or asked above change in type of business? Based on staff observation and sales tax reports, staff believes it to be a combination of both declined sales and more vacant store fronts, along with change of uses that are non -sales tax generators. Is vitality only measured in sales tax. Is that the only thing that is important to us? No. Vitality is measured in many things including business mix, business and customer feedback, and vacancy rates. Sales tax has typically remained stable and has not been as big of a part of the conversation until recently when the declines have begun to become more dramatic and consistent. Businesses have started voicing more concerns about a decline in customers and sales, and property owners have expressed a decline in by right businesses able to lease spaces, and the uncertainty of the process for businesses that require a Conditional Use Permit. The concerns are being supported by the decline in sales tax. PAGE 3 OF 3 SUBJECT: ECONOMIC VITALITY IN LOS GATOS DATE: DECEMBER 6, 2016 S:\COUNCIL REPORTS\2016\12-06-16\Study Session\Desk Item - FINAL.docx There seems to be great concern by some residents regarding noise generated by businesses. Is this limiting our downtown vibrancy? Noise has been a difficult conversation for many residents and businesses due to issues stemming from years past. The commercial market, customer base and downtown environment have changed over the last several years, and noise complaints are rare in downtown, especially those that are founded to be caused by a business. Just as the shopping market has changed, the demographics of Los Gatos and the late night visitors have changed. With the rising cost of housing and living, Los Gatos night life customers has begun to shift to a more locally based crowd. In addition, the perception of noise is an interesting dynamic with businesses, customers, and residents. Both Jazz on the Plazz and Music in the Park have contracts that allow them to operate at noise levels above the sound ordinance where a local business could not and would not be able to operate within. When noise (i.e. sourced noise such as music, entertainment, events, etc.) is allowed, accepted, and encouraged, then the result tends to be a natural vibrancy that will fill an area because these types of activities lend themselves to drawing more people and creating opportunity for increased energy through shopping, dining and/or socializing. As a result both source and ambient noise are typically higher and can create a sense of uncertainty nearby residents. An employee at Lotus told me "The Council does not allow them to do the fashion show" (they did one for the ribbon cutting). It seems to me this kind of limitation hurts our economic viability. And surprises me because I am not aware we have such restrictions. The fashion show that was part of this particular business’ ribbon cutting was not permitted in the manner in which it was executed. It was a vibrant event that many would say was great and appropriate for a downtown location. There was a misunderstanding regarding the required permits, as the business was new to Town. A similar event could be reproduced with proper permits including a special event and encroachment permit. The cost and process for obtaining these permits can be unappealing or prohibitive for businesses.