Sears when it’s down

It has been painful to watch Sears, the retailer, fall apart before our eyes for many years. Sears was not able to adapt well to changes in its environment and has paid a heavy price. While WalMart and Best Buy have found their own roles, Sears is still not there.
How the great have fallen. Sears, one of Chicago’s largest operations, moved its headquarters to a large office building in a suburb 30 minutes from downtown Chicago. McDonald’s did the exact same thing, but it moved to a different suburb. However, many corporate headquarters are returning to downtown locations to attract and retain employees.
What if Sears had moved downtown? Would it have been able to take advantage of an environment that is more creative than the suburban suburbs to make the moves that would have kept it afloat? It would be ironic if Amazon Headquarters 2 was located downtown Chicago and supplanted Sears in a physical way.
Sears, like other companies, negotiated large tax concessions and incentives as part of its move into suburbia. This is done by allowing the target company to be located in a Tax Incremental Financing district or another quasi-jurisdiction. [1] In Sears’ example, Hoffman Estates IL sells bonds to benefit TIF. This funds are used to purchase land and make improvements such as roads, utilities, interchanges and the like.
The bonds are usually paid off in a very short time period, often less than twenty years. The debt service is funded by the property taxes that the target pays. [2] This allows the target, instead of sharing the taxes with the rest of its suburb, to use the bonds to control the area’s design and architecture and to make frequent improvements to its infrastructure. [3]
Sears received incentives from Hoffman Estates worth at least $250 million. They now make about $10 million annually. The corporate campus was home to office and light manufacturing facilities for other entities. It also included a medium-sized sports arena, parkland with water features, other amenities, and almost one thousand acres. The TIF agreement was to pay off all Hoffman Estate bonds in approximately twenty years. After that, the property taxes paid for the development would be returned in full to the suburb’s coffers. The TIF’s earmarking period would allow the development growth, largely by keeping and utilizing its own tax payments[4]. After which the business park would become a strong neighbor, benefiting the entire suburb through its tax revenues.
These plans didn’t work out for Sears, at least not for them. Sears is currently taking downsizing and layoffs, and many of its buildings are almost vacant. The office park’s other tenants are doing well and Hoffman Estates may be able to find new tenants for the space Sears is leaving behind. Hoffman Estates School District is a different story.
Sears is being sued by the school district, among others, to recover property taxes it claims were diverted from general usage to the TIF area. [5] The suburb is using the terminology of the incentives industry to say that it wants to “claw back” the incentives because Sears has failed to be the strong, property taxing neighbor it promised it would be and to provide the approximately five thousand jobs that were planned for the development.
Many tax incentives packages include a formal clawback provision. It works in this way: “The suburb will provide X dollars for your business development, but you must repay Y percent if you do not create Z full time jobs at market wage levels within Q years.” Sears was not subject to such a specific formula, but the school district wants the public to see how it was affected by the TIF earmarking.
This case study will help your students understand how tax incentives work and what their functions are. It is possible to make a career out of tax consulting and tax credits.
Sears was talking about moving its headquarters out-of-state or out of country during the negotiation period before they moved to Hoffman Estates.