Los Angeles City Comptroller Recommends Limits on Corporate Tax Abatements

August 13, 2018; Curbed

As NPQ covered earlier this year, homelessness in Los Angeles County has surged by 75 percent over the past six years “with three out of four living in cars, campers, tents, and other makeshift shelters.” Countywide estimates suggest that homeless population has increased from 32,000 in 2012 to over 55,000 in 2017. In response, backed by funds from a voter-approved bond measure, the city has more than doubled its budget for combatting homelessness from $180 million in 2017-2018 to $430 million this fiscal year.

But, as Bianca Barragan details in Curbed, the city has also dedicated considerable public funds for a different sort of housing—namely, hotel lodging. Beneficiaries over the past 13 years include the J.W. Marriott and Ritz Carlton at LA Live; the InterContinental Hotel in the Wilshire Grand; the Courtyard Marriott and Residence Inn north of LA Live; the Hotel Indigo in Metropolis; and the Village at Westfield Topanga, a shopping center in Woodland Hills. The first five projects received a combined $654 million in City backing. Subtracting out the $47.7 million that subsidized the shopping mall, the remaining $600-plus million has resulted in approximately 2,500 hotel rooms, so the subsidy works out to about $240,000 per hotel room.

In the last two years, the City has committed $345 million to three more projects—the Frank Gehry-designed Grand Avenue Project, the Cambria hotel near LA Live, and the Fig + Pico hotel. Add these to the others and you’re close to $1 billion in subsidy over the past 13 years. Doing the math, it turns out that $345 million over two years is nearly as much as the city had been spending on homelessness before the housing bond measure was approved.

And there is no reason to believe these hotel beneficiaries will be the last. Indeed, Barragan points out that four more under consideration “are a hotel at 3900 Figueroa Street in Exposition Park; a mixed-use development at 3240 Wilshire Boulevard in Koreatown; a hotel at Olive and 12th Street in South Park; and the possible expansion of the JW Marriott at LA Live.”

Yet city comptroller Ron Galperin, in a report released last week, finds that the city has spent this money on hotels “without having a broader comprehensive economic development strategy.”

“We need a clear road map to ensure consistency, fairness and value for those we serve,” Galperin says.

In his report, Galperin recommends that the city adopt a policy that:

1. Requires that any tax Incentive Agreements align with a comprehensive City plan for economic development …[with] clear goals for industry specific growth, job creation, maximization of tax revenue, etc. The strategy should also include goals for specific neighborhoods where development may not otherwise be occurring;
2. Identify the types of businesses and industries that merit consideration for an Incentive Agreement, pursuant to the identified goals described above;
3. Consider an overall limitation on tax incentives that the City might want to establish over a 1- to 5-year period;
4. Evaluate and negotiate any tax Incentive Agreements, as detailed herein; and
5. Include follow-up, enforcement and incentive adjustment provisions in any Incentive

Additionally, Galperin calls for the city to hire staff or retain consultants “with the requisite practical and legal experience in proposal evaluations and negotiations with developers and their counselors” to assist in negotiations and to scrutinize the purported benefits of corporate tax abatement requests. Galperin’s report further recommends annual project-specific reporting and “clawback” terms [i.e., where the city can reclaim the subsidy dollars if promised economic benefits fail to materialize], as well as an overall annual report. In his report, Galperin cites the state of Arizona; Austin, Texas; and Orlando, Florida as jurisdictions with stronger requirements.

“Better methods exist for the City to ensure it is receiving the most accurate and consistent information about the potential public benefits,” Galperin writes.

Prior to approving an Incentive Agreement, the City should confirm whether the economic and financial impacts cited in the proposed Incentive Agreement, corresponding study, and any development agreement reconcile with one another and examine why any differences may exist. Doing so could provide the Council and Mayor with more complete information about the potential economic impacts in order to make a decision about a project’s merits, while facilitating the City’s future evaluation of a project’s actual economic and financial impacts.

And, of course, if the city cuts its tax abatement expenditures, it might find that it has more resources to meet the lodging needs of not just tourists, but its own residents.—Steve Dubb