New construction is springing up all over Downtown LA, and developers are creating assets that promise high rates of return on their investment. Why, then, is City Hall giving away huge tax breaks on projects that look to be extremely profitable? Earlier this month, UN4LA sent the following letter to LA's elected officials.
Dear Mayor Garcetti and Members of the City Council,
The Board of United Neighborhoods for Los Angeles (UN4LA) wishes to express its deep concern over the scale of tax breaks that the City is offering to real estate developers. While tax breaks can be a useful tool to encourage investment and produce benefits to the City, they must be used judiciously. CityWatch has published a series of articles on this issue by Jack Humphreville, and the details he reveals have led us to the conclusion that City Hall is abusing this practice.
The City’s Annual Report shows that in 2017 alone Los Angeles entered into six Development Incentive Agreements that waived a total of $850 million in revenue. Recently the City entered into two additional agreements for another $126 million in tax breaks, increasing the grand total of lost revenue to the City to the tune of nearly $1 billion.
We are concerned that, rather than using tax breaks judiciously to spur development and create jobs, the City is giving away badly needed tax dollars to increase the developers’ profit margins on projects that are extremely profitable without incentives.
To give an example, let's look at the proposed Fig + Pico hotel complex that will rise directly across from the Convention Center. While adding hotel rooms to this area is certainly a desirable goal, it is hard to imagine how the City can justify subsidizing this project with $103 million in front-end loaded tax breaks. Even without the tax incentives, an analysis of the information provided to the City by developer Lightstone Group makes it look like the project will be extremely profitable. With no additional tax incentives, Lightstone would realize an annual cash return of around 14%. If the property is sold or recapitalized within the next seven years, the return on equity would be over 100%.
How, then, does the City justify offering the for-profit developer tax incentives totaling $103 million? This puts the developer’s annual cash return in the range of 20%, and, if the property is sold or recapitalized, the return on equity would exceed 200%. As if this weren't enough, the agreement includes the sale of a City-owned parcel on Figueroa for a paltry $9.6 million, which is less than half of the property's current fair market value. It is laughable that, as part of the deal, Lightstone has agreed to pay $1 million to the City for projects to improve the neighborhood. This only highlights the ridiculous imbalance we see in comparing the benefits received by the developer to the benefits received by the people of Los Angeles.
While City Hall’s generosity is troubling in itself, this trend becomes truly disturbing when placed against the backdrop of the City’s Structural Budget Deficit. The Mayor and the City Council have been using accounting sleight-of-hand to patch together a “balanced” budget, but in reality rising pension contributions and other personnel costs are an ever-increasing and unsustainable burden on City coffers. Even with revenue as high as it is, the City is struggling to cover its costs. Why, then, are we giving away enormous sums of tax revenue to subsidize projects that are already profitable?
UN4LA believes that the City should put a stop to this unconscionable practice immediately. It is an irresponsible giveaway that puts the interests of real estate developers over those of Angelenos. Tax incentives should be used judiciously to spur development that might not otherwise happen. They should not be used to increase developer profits at the expense of the people of Los Angeles.