Driving the Profits Home : Auto Dealerships Mean Income for Cities Still Hurting From Prop. 13’s Dent in Tax Revenues

In Hermosa Beach, city officials want to close portions of a street and two alleys to accommodate expansion of two auto dealerships, the owner being the largest taxpayer in the city.

The city expects the move to nearly triple its annual sales tax revenues from the two expanded dealerships, to $500,000 from $185,000.

Carson city officials recently used state redevelopment law to loan auto dealer Don Kott $750,000 for 10 years to build two auto dealerships on a site vacated by another dealer. Instead of a lot that could have remained empty for years, city officials expect the new dealerships to generate about $600,000 in tax revenues this year.

Meanwhile, Torrance is enjoying the tax benefits of two “auto rows” and, unlike other South Bay cities, it has room for more. By the end of the year there will be 17 auto dealerships--selling everything from Volkswagens and Hondas to Mercedes-Benzes and Maseratis--that could provide city coffers nearly $3 million in 1985 sales tax. In 1984 Torrance had 14 dealerships that generated $2.3 million in sales tax.

Auto dealerships are big business for local governments, many still reeling from Proposition 13 slashes in property tax revenues. In Hermosa Beach, for example, property tax revenues are about equal to sales tax revenues, yet businesses use only 3% of the city’s land, according to the city Planning Department. The situation is similar in other South Bay cities except Torrance, which has more industry and commerce and realizes about twice as much in property taxes as in sales taxes.

Looking for Tax Sources

Keith Julian, manager of economic planning and development for the Southern California Assn. of Governments, said cities are looking for other revenue sources. In many cases, he said, cities are reevaluating land-use plans for better economic benefits, including creation of auto centers where five or six dealers sit near each other.

“Cities have begun to reexamine their economic needs and sources,” Julian said. “One of the things they identified was sales taxes. The sales tax has always been there, but now it has become that much more important because of the cuts in property taxes.”

Many cities have turned to sales tax revenues and developed pro-business stances. City councils in Redondo Beach, Hermosa Beach and Manhattan Beach have recently approved construction of hotels; Redondo Beach officials are looking eagerly for the opening of the remodeled and renamed South Bay Center as an enclosed mall that will be called the Galleria; and Hermosa Beach officials are excited about the opening last week of a shopping center that is expected to produce as much as $600,000 a year in sales tax for the city.

But none of those businesses can affect a city’s take in sales tax like an auto dealership. Various city officials say a single dealership can provide more sales tax than any restaurant or grocery, that a dealership with medium-priced cars will match a major department store and that a dealer of expensive autos will exceed the department store’s sales tax revenue. All businesses provide cities with one percentage point of the 6.5% Los Angeles County sales tax. For an auto dealership, that means that for every $15,000 car sold, a city gets $150 in taxes.

Advantages Claimed

“Auto dealerships generate low traffic flows,” said Hermosa Beach Councilman Jack Wood. “They have compatible hours with adjoining residential neighborhoods and relatively small buildings with a small number of employees.”

There are no central auto centers in the South Bay, but along La Brea Avenue in Inglewood, Sepulveda Boulevard in Manhattan Beach, Pacific Coast Highway in Hermosa Beach and Redondo Beach and on Hawthorne Boulevard and Pacific Coast Highway in Torrance, rows of new- and used-car dealerships line the streets, separated by a block here, two blocks there.

Auto dealers know they are wanted and often use that to get concessions like more space, as in Hermosa Beach, or financial considerations, as in Carson.

“They are obviously important to any city’s tax revenue base,” said Inglewood City Manager Paul Eckles. Inglewood has 10 dealerships that contribute about $1 million a year, or 20% of the city’s sales tax revenues.

In small cities such as Hermosa Beach, where sales tax from auto dealers makes up about a third of the city’s sales tax revenues, dealerships tend to be more important. Losing an auto dealership there could mean a cut in public services.

But for larger cities like Carson and Torrance where land is still available, the rich just seem to get richer.

In Carson, where five dealerships have ample room to store and display hundreds of cars, auto sales tax revenues are higher by almost $500,000 than in Inglewood, where the 10 dealerships are crowded into smaller spaces.

The deal between Carson and Don Kott, who has been in the auto business for about 40 years, will be mutually beneficial, both sides agree.

“We expect the two new dealerships to provide $600,000 a year to the city in taxes,” Kott said of the deal that will allow him to take over the lot vacated by Dean Corbett Chrysler, which moved to Orange County. “At that kind of return, the city has to do something to retain that income.”

‘Ensuring Tax Flow’

Carson City Administrator John Dangleis agrees: “We are ensuring that we have a good sales tax flow. We have no way of knowing how long that property would have remained empty if the city had not got involved.”

In Torrance, the city is looking to get a return beyond auto sales tax revenues, which make up less than 15% of its total sales tax revenues of nearly $19 million. Unlike most South Bay cities, Torrance has five dealers on city-owned property, which allows the city to collect rent as well as taxes on sales.

Many South Bay cities have almost given up on attracting auto dealerships because there is no available land, or what is available is too expensive for a car lot.

“It has been so long since we had an auto dealership that I don’t know how to comment on them,” said El Segundo City Manager Nick Romaniello, whose city is experiencing a jump in commercial property values. “It’s just too expensive here now, especially on the west side, for an auto dealer.” El Segundo’s last dealership left about four years ago.

Other Major Tax Sources

Fortunately for El Segundo, the city does not have to rely on auto dealerships because of the large amount of sales taxes paid by Chevron USA Inc., which refines and distributes oil and gasoline from the city, and major aerospace industries.

One dealer who paid the high price of land along Hawthorne Boulevard in Torrance was Jim Clark. Clark recently opened a Chrysler-Plymouth dealership about a block from a Dodge dealership he has had since 1968. He would not say how much he is paying to lease the 2.5-acre lot for the new dealership, but it is believed to be about $20,000 a month, according to other auto dealers who inquired about the site.

“Quite simply, this is still the best automobile street in the South Bay,” Clark said, adding that he expects his annual sales there to equal that of his Dodge dealership, which he said had $60 million in sales last year.

Two other dealerships that will open this year in Torrance on city-owned property along Pacific Coast Highway probably will pay less rent than Clark, but if the dealers have a good year, they could end up paying nearly as much. The city’s fee is a monthly rent between $10,000 to $15,000, depending on the amount of land. But if a dealer’s sales exceed his projections for the year--about $8 million for a Mitsubishi dealer and about $20 million for a Mercedes-Benz dealer--the dealer pays an additional 0.5% of the additional sales.

Inflation Protection

“We have developed a formula to protect the city from the inflationary factor,” said Albert Ng, assistant city manager for Torrance and the city’s chief land negotiator. “We try to get the best return for the people of Torrance. It’s good for the dealers, too, because during down years they won’t suffer for paying exorbitant rents.”

Bill Adkins, who owns dealerships in Manhattan Beach, Redondo Beach and Torrance, said he is moving his Mercedes-Benz business to Torrance after 20 years in Hermosa Beach, primarily because of the available land.

“Hermosa Beach was very good to us, we’re kind of sorry to be leaving,” Adkins said. “But Torrance had the available land and with more space I can increase my allocation (of cars) 100%.”

With an increase in sales of the $40,000 and $50,000 luxury cars, sales tax revenues for Torrance will also increase. The 1% of the sales price the city gets means $400 for every $40,000 car sold.

One dealer recently left Torrance because land became too expensive. John Harrison, who sells AMC-Renault and Jeep, had his lot on two acres at 190th Street and Hawthorne Boulevard for six years but left this year after the property owners decided to sell the land. The asking price was more than $2.5 million.

Couldn’t Afford Price

Harrison said he could not afford that and began negotiations with Torrance city officials to lease city-owned property on Crenshaw Boulevard near Pacific Coast Highway. Harrison backed out of the deal after nearly two years of discussions when AMC corporate officials balked at paying for construction of the new facility.

Without the financial help from AMC, Harrison said, he could not afford to stay in Torrance and is relocating to Hermosa Beach on, ironically, the lot vacated by the Mercedes-Benz dealership.

Harrison said moving from heavily traveled Hawthorne Boulevard to Hermosa Beach will decrease business.

“It will affect it adversely,” Harrison said. “We are not going to have the traffic, but we hope to make it up in advertising.”

Harrison said he is opposed to the 0.5% fee attached to the rents of city-owned land in Torrance because his profit is about 2.5% of the sales price and “it’s like the city becomes a one-fifth partner without participating in the losses. Torrance is kind of holding the cards if you want a dealership in there.”

Hermosa Wooed Dealer

Meanwhile, Hermosa Beach city officials just want to stay in the game. The departure of the Mercedes-Benz dealership, together with a contemplated move--again to Torrance--of high-priced BMW and Porsche-Audi dealerships owned by Vasek Polak, prompted Hermosa Beach officials to take action.

“We approached Vasek and asked him what the city could do to keep him here,” said Hermosa Beach Councilman Wood. “That’s when we came up with a development agreement that would be beneficial to both of us.”

That agreement--which is still at least three months away from final approval--basically says that if Polak agrees to stay in the city for 15 years, the city will close 140 feet of 1st Place near Pacific Coast Highway for expansion of his Porsche-Audi dealership, and portions of two alleys near 30th Street and Pacific Coast Highway for expansion of his BMW dealership.

“If I can get more space I can get a larger allocation of cars,” Polak said. “That will mean more money for the city. I think the city will try its best, because it is in its best interest.”

The city Planning Department estimates that over the life of the agreement, Polak could contribute nearly $8 million, nearly $500,000 a year, in taxes to the city. In 1983, the most recent year statistics from the state Board of Equalization are available, Hermosa Beach received a total of $314,000 from 22 auto dealers and suppliers.

“Our concessions, if you will, are very small compared to the gains,” said Councilman Wood. City officials say the concessions do not involve money, just the closures on 1st Place and the alleys.

However, many of Polak’s neighbors off Pacific Coast Highway are opposed to giving the concessions. During a recent Planning Commission public hearing on the closures, about 40 people filled the small council chamber and angrily complained that the tranquility of their neighborhood was being traded for a single business.

“I for one will do everything to campaign against anyone who supports this project,” said Ron Warner, who lives near the Porsche-Audi dealership. “It’s a vote for big business against the small resident.”

When one commissioner tried to explain that the city needs to protect its revenues because it is near bankruptcy, he was shouted down by another resident who yelled, “Is that the fault of the people?”

But Councilman Tony DeBellis says the city has few options because redevelopment is a bad word in Hermosa Beach. (Voters have defeated various developments in recent years, expressing fears of excessive population and traffic.) “We’re fighting this battle with one hand tied behind our backs,” DeBellis said. “The city is financially strapped and this is a feeble attempt to try to keep him here. We’re in the bad position of knowing that Torrance can tell him, ‘How many acres do you want?’ ” AUTOMOTIVE BUSINESSES This chart shows sales tax revenues from auto dealers and auto supply businesses. It covers 1983--the latest year for which figures are available.

Number of Dealers, Total City City Suppliers Sales Tax Sales Tax Carson 44 $1.49 million $7.42 million El Segundo 8* 6,360 2.48 million Gardena 21 590,000 3.54 million Hawthorne 29 284,000 4.72 million Hermosa Beach 22 314,000 954,000 Inglewood 53 994,000 4.85 million Lawndale 26* 112,080 1.20 million Manhattan Beach 11 459,000 2.25 million Redondo Beach 21 262,000 3.06 million Torrance 63 1.98 million 14.3 million

* This figure does not include any new car dealerships, only auto supply business. Avalon, Lomita, Palos Verdes Estates, Rancho Palos Verdes, Rolling Hills and Rolling Hills Estates do not have new car dealerships. San Pedro, Harbor City, Harbor Gateway, Wilmington and Westchester were not included in the survey because they are part of city of Los Angeles. Unincorporated Los Angeles County areas also were ommitted. Source: State Board of Equalization 1983 Annual Report of Taxable Sales in California, Sales and Use Tax.