A look inside Costco’s multi-million-dollar pitch for new Tri-Cities store at Queensgate
Costco Wholesale revealed a rare glimpse into how big real estate deals are made when it submitted an offer this month to lease state-owned land in Richland’s Queensgate area.
It would be the chain’s second Tri-City store.
The Issaquah-based warehouse club wants to lease 28 acres at the northwest corner of Kennedy Road and Truman Avenue, in the June 1 letter of interest signed by Bruce Coffey, corporate counsel.
The letter was obtained by the Tri-City Herald under Washington’s Public Records Act.
The Washington Department of Natural Resources previously confirmed negotiations with Costco after public documents obtained from the city of Richland this month showed it assessed potential traffic impact fees last fall for a Costco at Queensgate.
The state agency received Costco’s offer letter on June 6 and negotiations are ongoing, Kenny Ocker, communications manager told the Herald.
A Costco spokeswoman declined to comment on the offer, citing the company’s policy of not sharing details about new locations until about two to three months before they open.
The offer letter confirms Costco intends to build and operate a membership warehouse club and “last mile” delivery facility, as well as gas station at the Richland site.
Financial terms
Costco offered annual lease payments of $400,000 in the first five years of the proposed 55-year deal, rising to about $585,600 in Years 21 through 25.
As currently proposed, the offer would generate $12.2 million for Department of Natural Resources in the first 25 years.
A new lease rate would be set in Year 26 based on a new appraisal of the property’s value, followed by 10% increases in Years 36, 41, 46 and 51.
The “triple net” lease would make Costco responsible for all expenses, including maintenance and other costs such as leasehold excise taxes, which are paid in lieu of property taxes. At the current rate of 12.84%, it would generate about $1.6 million in taxes.
Costco requested the option to buy the property if Washington state law is changed to allow DNR to sell it.
The Benton County assessor values the property at $5.5 million, though as a public entity the state does not pay property taxes.
The Costco deal could be a significant source of revenue for DNR, which manages state-owned lands to benefit public schools.
Timber sales account for the majority of its revenue, but leasing commercial real estate brought in nearly $11.3 million in 2021, according to its most recent annual report. Total revenue topped $373 million.
Vinter Square retail strip
Costco proposes a 55-year deal for the property, which is behind Vintner Square, the retail strip mall anchored by Target on one end and Grocery Outlet on the other.
Proposed terms include an initial term of 25 years, with the option to renew for one 10-year term followed by four consecutive five-year terms.
Once a lease is negotiated, Costco will have a due diligence period to assess the site’s suitability.
That could lead to additional negotiations beyond the current ones. Notably, the letter indicates Costco will upgrade area roads and seek city help with that.
Costco will “seek financial assistance from the City of Richland for the construction and/or improvement of the (roads),” it said in its offer. If the city declines, it said it will preserve the right to recover its investment from future tenants who benefit from the infrastructure it builds.
The city released a short statement in response to a Tri-City Herald request for comment on its willingness to support road construction: “The city does not know what Costco’s plans are and we’ve not had discussions with them on this subject,” it said.
Costco’s Tri-Cities history
Costco operates a single store in the Tri-Cities, in Kennewick. It has long been rumored to be scouting for a second site to relieve pressure. It was expected to buy land in Pasco’s Broadmoor development area before talks reportedly broke down.
The city of Pasco is investing $40 million to bring utilities, roads and other infrastructure to the area, financed through taxes on the new development that will happen later.
A city official said Pasco still hopes to secure the second store, but is confident Broadmoor can succeed without it.
Costco has never commented on a second Tri-City store, but that hasn’t stopped rumors from circulating about potential locations.
Its preferred location at Queensgate is the site of a former orchard, which was removed after the lease expired.
Richland rezoned the area that includes the “Costco” site for commercial, residential and public use in 2018. DNR advertised it to prospective tenants in 2020.
Richland’s transportation impact fee estimate contemplated a 160,000-square-foot store and a 50,000-square-foot warehouse, along with a gas station and car wash.
Costco did not mention a car wash in the offer letter though it indicated it could build “other commercial uses” beyond the store.
Costco would generate an estimated 652 vehicle trips during peak hours.
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