The Salem City Council rejected a proposal for a shopping center Monday night — including a 168,550-square-foot Costco Wholesale store — on the city’s southeast side, dealing a blow to developers who've already invested $3.7 million in the project.

The council shut down the proposal primarily because the Costco would draw customers from around the region, despite neighbors' preference that the shopping center be limited to local traffic.

Also debated was whether it was necessary to remove massive oak trees from the site.

The surprise decision was a setback for developers trying to transform the grassy field along Kuebler Boulevard SE into a shopping hub with Costco as its centerpiece.

Portland-based development firm PacTrust owns the land where the shopping center would be built and has other investment interests in the city — namely a set of pricey industrial buildings at the Mill Creek Corporate Center.

PacTrust had already invested approximately $3.7 million for improvements — such as the widening of Kuebler Boulevard SE — with plans to spend another $2.6 million for road upgrades, according to company officials.

David Ramus, a PacTrust vice president and chief operating officer, argued the council had approved the development of a shopping center on the site in 2007.

But that line of reason wasn't enough to sway today's councilors, many of whom weren't members of the 2007 cohort.

On Monday, they voted 5-3 to reverse an October decision by city planning staff that had paved the way for the 24-acre Kuebler Gateway Shopping Center.

"I know what a regional store is, and that's a regional store," said Councilor Steve McCoid, who worked in a grocery industry trade association in the 1980s and 1990s.

McCoid is a South Salem resident: "It doesn't belong in a neighborhood like that."

On Tuesday, Councilor Tom Andersen said Costco could appeal their decision with the Oregon Land Use Board of Appeals. "I believe it will, as is perfectly proper," he wrote in a social media post. "Stay tuned for further developments (pun intended!)."

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In an interview, Mayor Chuck Bennett worried the vote puts Salem's land-use decisions on shaky ground.

"I think it does scare people off. You don't know whether land-use decisions are real here right now," Bennett said. "They're situational, and I think that's concerning."

Shari Reed, a PacTrust vice president, told the Statesman Journal that they will have an internal discussion and determine what to do moving forward.

Peter Kahn, a Costco real estate official, said, “We need the dust to settle” before considering an alternate location.

Salem residents testified for about two hours, with most criticizing the shopping center plan, which, in addition to Costco, would have included four retail buildings and a fueling station with as many as 30 pumps.

Kuebler Boulevard SE, 27th Avenue SE, Boone Road SE and Battle Creek Road SE would have bounded the proposed development.

The public hearing came after the city of Salem in October approved a site plan for the proposed development, pinning 17 conditions onto that approval. For example, one condition required 16 Oregon White Oaks to be included in the development's landscaping.

However, the planning decision was appealed. Opponents’ argument hinged on whether the shopping center would attract customers from the local area or around the region.

On Monday, council chambers became so full — pushing up against the room’s 184-person capacity — that members of the public were redirected to overflow space inside the Salem Public Library, a rare sight for the meetings.

More than 50 people signed up to testify.

One of the appellants, the South Gateway Neighborhood Association, argued before councilors that the proposed development would draw customers from around Marion and Polk counties instead of having the smaller impacts of a neighborhood shopping center.

The association’s chairman, Glenn Baly, told councilors that what residents were promised was not what developers are trying to deliver. He referred to the Costco as a “massive warehouse.”

Baly also pointed to traffic impacts and concerns about the removal of large Oregon White Oaks on the site of the proposed development.

Baly said neighbors were not opposed to Costco coming to South Salem, or PacTrust developing the land. But, he contended, developers appeared to be attempting to park a semi-truck in a space for a compact car.

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Several audience members clapped after Baly’s testimony, prompting Bennett to threaten to shut the public hearing down.

Trevor Phillips, who lives near the proposed development, pointed to a Tree City USA banner hanging from the chamber wall near City Manager Steve Powers. He said he didn’t see the need to take the trees out.

In the run up to the meeting, Costco had sent out a letter, signed by Kahn, to members urging them to come to the council meeting and support the proposal.

On Monday, Kahn told councilors Costco prides itself on “being a good corporate citizen.” He said Costco has approximately 380 employees in Salem, with a yearly payroll of about $9 million.

“We have quite simply outgrown our current facility, a fact that most members in this room could easily attest to,” he said.

Costco considered expanding its current location on Hawthorne Avenue SE. But physical constraints around the site make doing so “impossible,” he said. They also looked to other locations inside and around the city.

“This proposed location is the only one that met all our needs, including the same zoning classification that applies to our current facility,” Kahn said. “We would not be here today if we were not satisfied that locating there complied with the law and met our own standards for safety and development.”

McCoid moved to reverse the city planning decision. He found support from Councilors Andersen, Chris Hoy, Matt Ausec and Sally Cook.

Bennett, as well as Councilors Brad Nanke and Jim Lewis, voted against McCoid’s motion. Councilor Cara Kaser was absent.

On news of the rejection, Rep. Bill Post, R-Keizer, said on social media the vote marked the third "anti-business" move by the Salem council, pointing to earlier decisions on blocking a third bridge and a recent plastic bag ban as examples.

"I am working behind the scenes with city, chamber and other officials to see what we can do to help Costco find Keizer!" Post wrote.

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Email jbach@statesmanjournal.com, call (503) 399-6714 or follow on Twitter @jonathanmbach.

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