CFL delivers high-quality name brand petroleum products and services throughout Southern California, and Garden Grove is CFL’s point-of-sale for sales tax purposes.  CFL was founded in Garden Grove September 2004 with only 2 employees. Today, the company employs 44 people and is one of the City’s top ten (10) highest sales tax producers.  In August 2013, the City and CFL entered into an Operating Covenant Agreement (the “Original Agreement”) pursuant to which the City agreed to share 50% of all incremental additional sales tax revenues generated by CFL above those then being generated, up to a maximum of $2,000,000, for a period of 10 years, and CFL agreed to make an additional $2,000,000 capital investment to expand its business and provide certain operating covenants to ensure CFL remained in Garden Grove.  To date, CFL has received a total of $12,045.88 under the terms of the Original Agreement.

In 2015, CFL approached the City requesting to renegotiate the Original Agreement to be more competitive in the fuel industry.  On May 12, 2015, the City Council received information pertaining to CFL’s request, directed staff to negotiate an amendment to the Original Agreement with CFL for the Council’s consideration, and approved a contract with Tierra West Advisors, Inc. to prepare an economic analysis of the amended agreement pursuant to Government Code 53083).  

City staff has negotiated the attached proposed Amended and Restated Operating Covenant Agreement ("Amended Agreement") with CFL for the City Council’s consideration.  Pursuant to the proposed Amended Agreement, the City would keep the first $200,000 in sales tax revenues generated by CFL each year for the next approximately 20 years  (until June 30, 2036), and would share annual sales tax revenues above $200,000 with CFL according to the following revised structure:

In exchange, CFL would agree to continue to keep its business in Garden Grove and designate Garden Grove as its point-of-sale until at least June 30, 2036, and to make an additional $8,000,000 near-term investment in the business to further expand its operations in Garden Grove.

CFL anticipates that the proposed additional $8 Million capital investment will help it to significantly increase its sales, which would result in a corresponding significant increase in sales tax revenues to the City.  According to the analysis performed by the City’s consultant Tierra West Advisors, it is estimated that the Amended Agreement will provide CFL with approximately $6.6 million and the City $6.9 million over a twenty (20) year period.  CFL also projects the addition of approximately 130 to 235 new jobs over a period of twenty (20) years. New jobs are anticipated to include drivers, dispatchers, logistics office staff, accounting and IT positions.

City Benefits

The purpose of the proposed Amended Agreement is to induce CFL to remain in Garden Grove for the next 20 years and to make a significant additional capital investment of its own funds in its business in order to increase the volume of sales in Garden Grove. If the anticipated expansion and sales growth occurs as a result of CFL's capital investment, the Agreement will result in the generation of significant additional sales tax revenues to the City’s General Fund, the creation of additional employment opportunities for residents of the City, the long-term maintenance of the Site in a first class condition, and other tangible and intangible benefits to the City. The projected benefits to the City from the proposed Amended Agreement are described more fully in the attached report prepared by Tierra West Advisors.

If CFL’s revenue growth projections are realized, the City would receive approximately $6.8 million in sales tax revenues from CFL’s business over the next 20 years under the sales tax sharing structure in the proposed Amended Agreement.  Without the Amended Agreement, there is a risk CFL would choose to relocate, in which case the City would receive no sales tax revenues attributable to the Business. The City has appropriated $32,000 in the City’s 2015-2016 FY budget which will be used to fund the anticipated tax rebate payments made to CFL from March 1, 2016 to June 30, 2016.

Staff recommends that:

• A Public Hearing be conducted;
  
  

• Adopt the attached Resolution making certain findings and approving the Amended and Restated Operating Covenant Agreement with AAA Oil, Inc. dba California Fuels and Lubricants; and
  
  

• Authorize the City Manager to execute the Amended and Restated Operating Covenant Agreement, including any minor modifications as appropriate, and any other pertinent documents necessary to effectuate and/or implement the Agreement.