Cincinnati taxpayers have forked over millions in subsidies to demolish vacant buildings and build new downtown stores, apartments and businesses. But unlike public dollars that have been given to private companies before, $6.6 million for remodeling downtown's Saks Fifth Avenue will not make any public improvements, will not create any new jobs and will not revive any vacant or slum properties.

        And despite usually requiring developers to repay the city, this deal — which still requires the approval of Cincinnati City Council — does not require Saks to pay anything back.

        “It is unusual,” former Indianapolis Mayor William Hudnut says of the Saks agreement. “I don't know that I've ever heard of that happening.”

        Opponents say the deal is a bad one for taxpayers. But defenders say the city had no choice in departing from the way subsidies have been given in the past. Downtown's future could be at stake, they say.

        “In this day and age, we have to understand that if downtowns don't survive, then cities will become places of impoverished ghettos,” says Mr. Hudnut, who is now a senior resident fellow with the Washington-based Urban Land Institute. “I think Cincinnati has made heroic efforts to improve downtown, which is in competition with suburban shopping malls.”

        Mr. Hudnut says more and more cities are making “judgment calls” to save downtown business districts.

        He acknowledges that the kind of subsidy going to Saks usually pays for expansive public improvements in cities trying to jump start development.

        But here, the $6.6 million is earmarked for an interior remodeling of the department store to help the high-end merchant better display goods by prestigious designers.

        That bothers Councilman Pat DeWine, one of three council members who opposed a preliminary deal in November.

        “When we put money into these downtown projects, we expect money to be generated by it,” Mr. DeWine says. “The city is not going to be getting additional revenues because Saks has new shoe racks.”

        Mayor Charlie Luken, who pushed the initial deal with Saks through City Council, dismisses any differences between this and other subsidies doled out by the city.

        “I don't think the public or developers will draw that distinction,” he says, adding that helping Saks helps the entire city. “The impression I got was it was either downtown or Kenwood Towne Centre.”

        Saks officials declined comment. But in a November letter to council, Saks senior vice president Jeffrey Martin outlined how the $6.6 million would be used.

        “The handbag and accessory department would be expanded. It would be anchored by a new Louis Vuitton shop (already a very successful business for us) surrounded by shops of new designer additions, such as Christian Dior, Prada, Gucci and Burberry,” he wrote.

        “Finally, our Fifth Avenue Club, which provides individual attention to many fine customers, would be upgraded and enhanced to give customers more amenities in a more relaxing environment.”

Is Lazarus next?
        If Saks acts on threats to leave the city, officials fear other retailers would fall like dominoes. That's because contracts between the city and Lazarus, Cincinnati's other key downtown retailer, hinge on maintaining two department stores. If Saks leaves, then Lazarus could follow in five years.

        That fear was evident when City Council voted 5-3 last month in favor of the preliminary Saks proposal.

        “It's either a hole in the ground or Saks,” says Councilman Chris Monzel, who supported the subsidy. “It's kind of pitiful, really, but there was no other project we could put money into.”

        Mr. Monzel admits concern that the deal could set a precedent. He says city officials should look closely at how the deal is structured before next month, when council is likely to vote on a final contract.

        Mr. Luken last week angrily denied that the Saks subsidy would set a new standard by which other deals are measured, or lead other businesses to seek money from the city.

        “I don't think any deal we ever make is a precedent,” he told the Enquirer Tuesday afternoon.

        But less than two hours after making the statement, Mr. Luken announced that he wants to create a subsidy similar to the Saks deal to help other downtown businesses. He asked interim City Manager Tim Riordan to figure out how to set aside $5 million for small businesses in downtown, Over-the-Rhine and the West End.

        Several small-business owners have questioned the fairness of the Saks subsidy, saying they have been ignored while the city concentrates on big businesses.

        State economic development officials say the Saks deal is unlike any in Ohio.

        “I know of no other agreement in the state of Ohio that is like that,” says Daryl Hennessy of the Ohio Economic Development Department.

        He says the pool of money being used to pay Saks usually goes for public improvements such as roads, sewers and sidewalks, or to erect buildings and tear down old ones.

        But Mr. Hennessy stresses that while the deal is different, that doesn't make it illegal or unethical.

        The city is subsidizing Saks through what is known as tax-increment financing.

        Usually, the city borrows money by issuing bonds to pay for improvements that increase the value of the property. That in turn increases property taxes. The increase — or the difference between the original proper ty value and the new value — goes to repay the bonds.

        This deal won't add to Saks' property value, says the Hamilton County Auditor's office.

        “Taking a department store and making it look prettier is not going to increase the assessed value,” says Stephanie Frank, assistant director in real estate information services.

        “It's like the difference between a chrome faucet and a gold-plated faucet. To us it doesn't matter ... It's still just a faucet,” says Ms. Frank, who reviews tax-increment financing deals.

        If Saks' property value doesn't increase, then the department store won't be able to pay back the bonds through the project, the way most tax-increment financing deals are structured.

        To repay the $6.6 million in bonds for Saks, the city is going to tap funds generated by other downtown businesses. These are businesses that used tax-increment financing and increased their property values enough to repay bonds and have money left over.

        The $6.6 million for Saks is coming from the same pot of money that was targeted to build a Nordstrom department store at Fifth and Race streets last year.

        Then, administrators told Cincinnati council members that the city requires developers to make minimum payments so that the project pays for itself.

An upgraded Saks
        Mr. Riordan says the Saks deal is not the first time the city has picked up the costs of a bond when a project couldn't pay for itself. He cited the planned renovation of the vacant McAlpin's department store and two other vacant buildings into shops, restaurants and offices.

        Mr. Riordan says the Saks remodeling is a different kind of public improvement.

        “It's a capital improvement within Saks,” he says. “What you are going to see is a significantly improved and upgraded Saks. We're talking about the overall presentation of the whole store, upgrading and modernizing it.”

        To Downtown Cincinnati Inc., the deal is no different than what any private developer would offer a department store to anchor a suburban mall.

        “As a taxpayer, it would concern me if the city wasn't stepping up to the plate,” says David Ginsburg, executive vice president of Downtown Cincinnati Inc., an advocacy group funded by local businesses. “Retaining Saks Fifth Avenue is very important. The city has to take on the role of developer to create a viable downtown.”

        Furthermore, supporters of the subsidy say Saks pays $178,000 in property taxes and $67,000 in payroll taxes a year, plus $1.5 million in sales tax for the county.

        “Riddle me this, Batman — if we get rid of Saks, what would we use to replace what they give the city?” Mr. Monzel says. “If they left, that would leave us with a hole in downtown.”

A second subsidy
        This is not the first time Saks has gotten a subsidy from the city.

        In 1996, taxpayers gave Saks $1.5 million for improvements with the stipulation that the retailer remain open eight more years, or until 2004. It also forgave a loan of more than $600,000, which Saks took out when the store opened in 1984.

        Under the current deal, the city will forgive any penalties from the 1996 contract.

        There are 64 Saks Fifth Avenue stores in the United States. In the last year, Saks has shown steady losses.

        In the third quarter of this year, the company lost $21.75 million after losing $58 million the previous quarter. Saks' net sales also declined by more than $100 million compared to the same quarter last year.

        Mr. DeWine, along with council members Alicia Reece and John Cranley, voted against the deal. He says council should reject the Saks financial package because “it is not a good deal for the taxpayers.”

        Among his chief concerns are terms that allow Saks to bail out of downtown in five years, or sooner if the company sells its stores, without any penalty.

        “Then they can just walk away,” he says.

Terms of preliminary Saks deal
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