SR - AGR-6110 - PARTICIPATION AGREEMENT1. SUBJECT
Participation Agreement by and among the City of Orange, Southern Counties Oil Co., a
California Limited Partnership and Orange Katella, LLC, a California Limited Liability
Company.
2. SUMMARY
A public hearing of the City Council of the City of Orange to consider approval of a
Participation Agreement by and among the City of Orange, Southern Counties Oil Co., a
California Limited Partnership, and Orange Katella, LLC, a California Limited Liability
Company for sales tax sharing. In January 2010, the Orange Redevelopment Agency and SC
Fuels approved Owner Participation Agreement in which financial assistance from property tax
increment was provided to SC Fuels in an amount equivalent to 49% of sales tax revenues
generated to the City. Heightened competition among other cities attracting petroleum companies
and related petroleum brokers has necessitated the City to modify the 2010 Agreement to retain
SC Fuels. The proposed Participation Agreement will provide for a greater sales tax sharing
increase to SC Fuels under a three -tier performance based structure.
3. RECOMMENDED ACTION
1. Approve the Participation Agreement by and among the City, Southern Counties Oil Co., a
California Limited Partnership, and Orange Katella, LLC, a California Limited Liability
Company; and,
2. Authorize the Mayor to execute and the City Clerk to attest to the Participation Agreement.
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4. FISCAL IMPACT
The proposed Economic Development assistance will be performance based and budgeted
through the City's Budget on an annual basis.
5. STRATEGIC PLAN GOAL(S)
1. Provide for a safe community
a. Provide staffing and resources to deliver services that ensure public safety.
2. Be a fiscally healthy community.
b. Analyze future fiscal needs and potential revenue opportunities.
e. Create an environment to attract, retain and expand economic opportunities.
6. GENERAL PLAN IMPLEMENTATION
Economic Development Goal 2.0: Cultivate a business environment that is conducive and
appealing to the commercial and retail industry including smaller entrepreneurs.
Policy 2.1: Encourage public - private partnerships that will support business and employment
growth.
Policy 2.2: Increase local tax revenues by providing performance -based financial assistance to
new and existing businesses in Orange.
7. DISCUSSION and BACKGROUND
Background
Southern Counties Oil Co. has operated its business at 1825 W. Collins Avenue in Orange since
1988. Orange Katella, LLC, an affiliate of Southern Counties Oil Co. established its corporate
headquarters at 1800 W. Katella Avenue in 1999. Both Southern Counties Oil Co. and Orange
Katella, LLC (collectively "SC Fuels ") operate and distribute petroleum products, and combined
are the largest sales tax generator in the City.
SC Fuels has been approached by other cities including Long Beach and Anaheim who are
offering better incentives to attract SC Fuels and other petroleum brokerage providers. It is an
industry that continues to see more consolidation. In order to remain competitive and retain SC
Fuels in the City, reconsideration of the existing 2010 Owner Participation Agreement (OPA)
between SC Fuels and the Orange Redevelopment Agency (RDA) is necessary. Approved in
January 2010, the OPA provided for RDA financial assistance in two components for
employment retention/creation and business expansion. The employment assistance had in place
adjusted maximum cap of $8.2 million that SC Fuels will reach by the 4 th quarter 2014. For
employment retention/creation, SC Fuels receives quarterly tax increment payments (funded by
the RDA) in the amount equivalent to 49% of sales tax revenue received by the City. The
business expansion assistance of up to $11 million has not been utilized by SC Fuels.
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Discussion
The desire by other cities to seek out SC Fuels is not unexpected given the level of sales tax
generation. The loss of SC Fuels would leave the City in a precarious financial position with the
major loss to General Fund revenues and would risk impacts to city services. The priority is to
mitigate revenue loss and retain SC Fuels in Orange. Staff evaluated the existing 2010 OPA,
confirming other city interests to attract SC Fuels, and understanding the higher level sales tax
incentives offered by other cities.
Redevelopment dissolution in 2012 left cities with loss of significant local resources to
encourage economic development activities. For the City of Orange, this economic impact
resulted in nearly $40 million of local redevelopment funds taken by the State to bridge its
budget shortfall in 2012 and 2013. In a climate of economic recovery, the State realized the
necessity for job retention and business retention could not be accomplished without new
economic development tools to supplement the loss of redevelopment. In 2013, the State
legislature and Governor Brown approved Assembly Bill 562 (AB 562), which went into effect
on January 1, 2014. This new legislation provided expanded flexibility for local agencies and
cities to create and retain jobs as well as incentivize business retention and attraction efforts
through sales tax sharing and other financial assistance.
To that end, the proposed Participation Agreement (Agreement) pursuant to AB 562 has been
negotiated for the retention of SC Fuels corporate offices and its employment base of 150
employees locally with growth opportunities anticipated during the term of the Agreement.
Terms of Participation Agreement
The terms and conditions of the Agreement provide for the following:
1. The term is twenty (20) years.
2. The Agreement shall commence on January 1, 2015.
3. SC Fuels is required to maintain a minimum of 150 full -time employees in the City
through retention of jobs in the City.
4. The three- tiered performance based structure is comprised of:
a. Tier 1 shares sales tax revenue of up to $4 million (49% to the City and 51 % to
SC Fuels);
b. Tier 2 shares sales tax revenue between $4 million to $6.5 million (35% to the
City and 65% to SC Fuels); and
c. Tier 3 shares sales tax revenue in excess of $6.5 million (25% to the City and 75%
to SC Fuels.)
5. The payments would be made on a quarterly basis subject to the City confirming receipt
of sales tax.
6. The first two years of the Agreement incorporates reduced percentage payments to
accommodate a ramp -up period for the City.
The proposed tax sharing under the Participation Agreement, will allow the City to retain
approximately $2 million when applying the three- tiered performance based assistance. Tier 1
shares $4 million (49% City /51% SC Fuels); Tier 2 shares $4 million to $6.5 million (35%
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City /65% SC Fuels); and Tier 3 shares excess of $6.5 million (25% City /75% SC Fuels.) This is
a revenue mitigation loss agreement to manage competing tax incentive offers from other cities.
SC Fuels anticipates revenue growth during the term of the Agreement. The proposed effective
date will be January 1, 2015 at which time the 2010 OPA would terminate.
AB 562 Summary Report
Implementation of AB 562 further requires certain public notice requirements and a detailed
report of the amount of subsidy. The attached report provides the information required by AB
562 detailing the fiscal analysis to determine the projected revenue generated by SC Fuels to the
City during the term of the Agreement. The retention of sales tax revenue to the City, of which a
portion of sales tax revenues generated by SC Fuels will be shared, will help to mitigate
significant fiscal impacts to the City's General Fund and city services. The term of the
Agreement is twenty years.
It is recommended that the City Council approve the Participation Agreement with SC Fuels.
8. ATTACHMENTS
• Participation Agreement between SC Fuels and the City of Orange
• AB 562 Summary Report
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