File photo | The Roanoke Times

The Ukrop's building in Roanoke was specially designed for the Richmond-based grocery chain. For a tax agreement to remain viable, the next tenant cannot already have a Roanoke location.

A retailer that's not in the city of Roanoke must land in the soon-to-be vacant Ukrop's Super Market building or a tax incentives deal crafted between the city and a local developer will crumble.

Five years ago, the city council promised Bland Painter that it would grant his Troutville company, IMD Investment Group, up to $600,000 annually in tax incentives for 15 years, based on tax revenue generated by Ukrop's and a neighboring Walgreens drug store. Both stores would make up the Ivy Market retail center, estimated to be a $20 million project.

But Ukrop's said on Friday that it will shut its doors Oct. 24, after more than two years doing business inside a structure that was specifically designed for the Richmond-based grocer.

The store's closing leaves many questions, including what will happen to its 58,000-square-foot structure, its underground parking garage and a city tax incentives deal with the developer. The deal is based on tax revenue generated from Ivy Market.

IMD can find a new retailer to fill the Ukrop's building under the agreement, but that store cannot already have a city location. This would discourage IMD from landing established area grocery chains, such as Kroger or Food Lion, at the Ukrop's site.

During a city council meeting on Monday afternoon, Councilman Court Rosen asked if the city could change the contract.

"I just worry about the site sitting empty," he said. "It really took a piece of property that wasn't very nice ... and redeveloped it into something that is very nice."

City Manager Darlene Burcham said some retailers have scouted locations in the city in the past, and the exit of Ukrop's opens up some possibilities. Still, Roanoke officials do not have specific prospects for the Ukrop's space, said Brian Townsend, assistant city manager.

Ukrop's must break its 15-year lease with Painter before he can move on with the project.

It's unclear how much money his company could lose if a new store does not move into the Ukrop's space. The Ivy Market site was assessed at $15.7 million this year, according city property records.

Painter took risks up front, Townsend said, and he's likely to "take a significant financial hit." Townsend said Painter likely is banking on tax incentives to repay his loans for the project.

IMD has until Sept. 1 to find a new tenant for the space and still be eligible for tax incentives. That's in time for the city's review of the next grant year, and a requirement of the contract, Townsend said.

This year, IMD received $522,542 from the city, based on revenue generated by Ukrop's during its first grant year. Walgreens opened last month.

The city now is reviewing IMD's grant request for fiscal 2009, which will be about $500,000, Townsend said.

It's not likely that IMD would receive close to that amount from tax revenue generated only by Walgreens, because a grocer's average sales are much higher than a drugstore's, Townsend said.

"It's in his [Painter's] interest to try to re-tenant the building as soon as possible with a significant revenue generator," he said.

But in a tough economic environment and a tight credit market, "the probability of finding another grocery store is very small," said Millie Moore, a broker with Retail Real Estate in Roanoke.

Consider other local retail centers, such as Keagy Village in Roanoke County, that still have not successfully landed new grocery tenants in the past several years, she said.

Beyond finding another supermarket, it's difficult and expensive to renovate a grocery space for another retailer, because it involves tearing out underground refrigeration systems, Moore said.

And even in good times, it has not been easy for the Roanoke Valley to land national retailers, because the area is considered a tertiary market, Moore added.

The closing of Ukrop's will add to the Roanoke Valley's mounting footprint of vacant retail spaces, but the building's newness could present another challenge.

If a national retailer is looking for sites, "they have a choice of just about any building in town," Moore said. "The Ukrop's building's going to be more expensive, because it's newer."

Staff writer Mason Adams contributed to this report.