Revelations Mount on Costco in Wheaton

Last week, MPW broke the story that the county was secretly considering a $4 million subsidy to bring Costco to Westfield Wheaton. This story is moving rapidly as new facts are emerging. Here are just a few.

1. Westfield Wheaton is one of the company’s most profitable malls in the U.S. Yet, it has asked repeatedly for county subsidies.

Westfield Group is a giant retail owner and developer based in Australia. It owns properties in its home country, New Zealand, the U.K. and the U.S. In the first half of 2009, Westfield reported operational earnings before interest and tax of $1.446 billion, an increase of 18.1% from the prior year. Comparable shopping center net operating income actually grew by 3.0% despite the worldwide recession.

The conventional wisdom that Westfield Wheaton is an underperforming mall is untrue. In fact, Wheaton is one of Westfield’s most profitable malls in the U.S. According to Westfield’s last filing with the Securities and Exchange Commission, Wheaton had an estimated initial yield (a measure of operating profitability) of 8.71% on 6/30/09, up from 7.11% on 12/31/08. That ranked second of Westfield’s 55 U.S. malls and was significantly higher than both Westfield Annapolis (6.16%) and Westfield Montgomery (6.38%). Westfield has successfully persuaded the Executive Branch to subsidize one of its most profitable assets. We reprint all of the U.S. mall yields below.



How many small businesses in the Wheaton Central Business District (CBD) have a positive eight percent net profit rate or greater right now? Maybe zero. How many of them are getting four million dollars from the county? Definitely zero.

This would not be Westfield’s first subsidy. Westfield obtained a $6 million parking garage expenditure from Montgomery County for its Macy’s project in 2003, which was completed in 2005. The property also earned a $2.6 million property tax credit over ten years. The Post carried this quote from one of the subsidy’s supporters:

“Getting the Macy’s is a huge boost to downtown Wheaton,” said County Council member Steven A. Silverman (D-At Large), chairman of the council's economic development committee. “It will draw thousands of people to Wheaton. Wheaton is an area that is the second target for the county, after redeveloping Silver Spring.”

Silverman is now the county’s Director of Economic Development who is in charge of negotiating Westfield’s newest subsidy. If the last subsidy worked out so well five years ago, then why are we doing it again?

2. Costco needs a special change in zoning rules for its planned gas station.

Costco invariably includes gas stations on its store sites. It wants to build a gas station at its Wheaton location, but is not permitted to do so by the zoning on Westfield’s property. So it must obtain a Zoning Text Amendment (ZTA) from the County Council to get around the restriction.

The Wheaton CBD already has five gas stations. Why does the county need to spend money and change its zoning rules to create another one? And why does one of the county’s most attractive potential smart growth sites – an area targeted for the creation of a pedestrian-friendly downtown – need a sixth gas station?

3. The project may undermine labor standards in the county.

It is true that Costco pays more than Wal-Mart or Dollar General. Still, saying that Costco is not as bad as Wal-Mart is akin to saying that a politician is not as bad as Saddam Hussein: it’s a very low standard of comparison. Only 13,500 of Costco’s 142,000 employees are union members, and its unionized stores are solely a legacy from a prior company that merged into Costco. Costco opposes provisions for card check and mandatory arbitration contained in the Employee Free Choice Act. The Teamsters once accused Costco of requiring employees to circulate petitions on behalf of a California ballot initiative that would have made it harder to collect workers compensation benefits. Separately, the company has an immense legal history of overtime and discrimination lawsuits that we will chronicle in a future post.

According to the Bureau of Labor Statistics, the hourly mean wage in the Bethesda-Gaithersburg-Frederick Metropolitan Division, which includes Montgomery and Frederick Counties, was $26.37 in May 2008. The administration has estimated that Costco’s average wage in Wheaton would be $18 per hour, with starting wages as low as $11. So the county is prepared to subsidize a project that could actually lower its mean wage level. How can this be an acceptable use of public funds?

If the county was sincerely interested in creating high-wage jobs, it could make its subsidy contingent on Westfield’s use of a project labor agreement to construct the Costco building and on use of card check or mandatory employer neutrality in the event that Costco employees decide to organize a union. That would assure that all of the construction workers would receive adequate wages and benefits, and that Costco would not undercut the unionized Giant next door on the basis of cheap labor once the store is built. Neither of those requirements are part of the current deal.

4. The administration selectively leaked certain details of the proposal to a handful of individuals to build support for the subsidy while keeping it secret from the general public.

Administration representatives first formally briefed the County Council on the $4 million Costco subsidy in closed session on January 12. The session was closed ostensibly because economic relocation incentives are often competitive matters with other jurisdictions and the county would not want to show its bid to its rivals. However, no other jurisdiction is competing to land this Costco branch. After the session, the administration insisted on keeping the proposal details secret from the general public for an indefinite period thereafter.

However, they immediately contacted at least three members of the community whom they believed would be supportive of the proposal and had them contact County Council Members to express that support. One of those individuals began leaving positive phone messages within twenty-four hours. Two more sent emails of support on January 14. It is unclear whether any of these people were told about the cost of the subsidy or if they were only told of Costco’s arrival. No information was released to the general public until this blog broke the story on January 15 at 7:00 AM. The story received especially strong traffic since it was the only public report on the issue and it will almost certainly finish in our top ten posts of the month.

Clearly, the administration gamed the closed session process to build support for its plan to the point where it might have a fait accompli in hand. But that support was based on incomplete information that was released to only a few. This selective, need-to-know secrecy is a serious departure from the standards of open government typically embraced by Montgomery County.

Not only is the goal of this proposal questionable given the above revelations, but the process of reaching it has been tainted because of how the information was circulated, controlled and exploited. It is time for the Executive Branch to release all information in its possession about the project.