Tax Reform May Damper Southland Building Boom
The national tax-reform bill awaiting a vote in the Senate could have a profound impact on development in America’s cities and suburbs, and is particularly relevant to the Southland, now in a building boom from Ventura County south to San Diego and east into Riverside and San Bernardino counties.
The measure, approved by the Senate Finance Committee, could reduce development by sharply limiting so-called tax shelters that have tempted real estate syndicators to invest billions in office buildings and shopping centers.
In many ways, that provision could have as much impact on development as a well-publicized local measure on the November ballot that has become the focus of an escalating battle between developers and neighborhood groups. The initiative, by Los Angeles City Councilmen Marvin Braude and Zev Yaroslavsky, would limit commercial construction in residential areas.
Opposing forces are already clashing over the Braude-Yaroslavsky initiative. Before the fight is over, it could be one of the most important U.S. planning battles. If Los Angeles, a symbol of boom-town development and sprawl, votes these controls, it will be national news.
Potential limits in the tax bill have not been the subject of such intensive local attention. Real-estate interests lost the first round in the Senate Finance Committee and seem overpowered by tax-reform advocates resisting amendments on the Senate floor.
If the bill becomes law, the investment provisions will affect tax-shelter partnerships popular among investors. They no longer could deduct real-estate investment losses from their overall income.
That could have a tremendous impact. At present, investors can profit if they invest in an office building planned for an overbuilt area, even if the structure has little hope of making a profit. That is because they can deduct losses from their real-estate partnerships from their overall incomes. The Senate bill would eliminate that shelter provision and reduce depreciation benefits for investors.
“People will be forced to enter transactions that actually produce a profit,” said H. Randall Stoke, a Los Angeles attorney who lobbies for major Los Angeles development interests at City Hall.
Stoke said he believed the provisions would reduce construction of many smaller office buildings, financed by syndicates of investors looking for tax shelters, rather than high rises and big shopping centers put up with money from major financial institutions.
Investors in the smaller buildings often make their money from tax benefits of the deal. The deal is everything, and it is unimportant to the investors whether anyone ever moves into the building. That is why so many of these buildings go up in areas where they do not seem needed.
The proliferation of office buildings in residential areas, along with construction of shopping malls, has provoked a revolt of neighborhood organizations in Los Angeles. These organizations have been political forces at various times in the city’s history, rising to action whenever something occurs that threatens the ambiance of an area. They were highly active in the late 1960s and early 1970s when developers, in strong control of the City Council, pushed through mountain subdivisions. This period also saw the rise of one of the city’s most famous neighborhood groups, No Oil, formed to fight Occidental Petroleum Co.’s plan to drill on the beach under the Pacific Palisades.
With the exception of No Oil, most of these organizations faded in the late 1970s. But a 1981 change in the federal tax law helped revive them. The Reagan Administration’s tax revision that year eased investment rules, created the tax-shelter boom and touched off a wave of office building construction in residential areas, including the Westside areas represented by Braude and Yaroslavsky. The building boom spurred the groups into action and leaders of various organizations began talking about forming a citywide anti-development coalition.
As neighborhood organizations became more militant, Braude and Yaroslavsky fought projects in their districts--although both men have over the years approved major construction adjacent to residential areas. The majority of their council colleagues opposed the two Westsiders, siding with developers. Fighting back, Yaroslavsky and Braude first supported Michael Woo’s successful campaign last year against pro-developer Councilwoman Peggy Stevenson, then mounted their initiative campaign, qualifying it for the November ballot early this month.
A question arises: With the development limiting provisions of tax-reform bill heading toward Senate passage, and with a good chance of becoming law, why is the Braude-Yaroslavsky limitation initiative needed?
“The real-estate lobby has not quit yet,” said attorney Daniel Garcia, a member of the Los Angeles City Planning Commission and a backer of the initiative. “The tax laws will provide some shelters.”
Garcia agreed that construction of smaller buildings would be limited by the tax-reform bill, but only “until the market figures the law out.” Anyway, he said, the city’s needs should shape city law--not speculation on the impact of pending tax legislation or “what we think may happen in the market place.”
There is another reason for the initiative being on the ballot. It will send a message to City Hall about the kind of growth that Los Angeles wants in the future. Both sides on the City Council have been claiming popular support in their fights over development. The initiative election will help settle that argument.
