COLUMN ONE : REGIONAL REPORT : Pirating the Auto Retailers : Sales taxes on cars and trucks are a big portion of municipal revenues. So cities are luring dealerships with subsidies and cheap land.
Greg Penske, one of the most successful auto retailers in America, wanted to open a Honda dealership in the new Ontario Auto Center, and officials there responded with the kind of offer car dealers have come to expect from Southern California cities.
Ontario let Penske buy a piece of the mall for almost 40% less than the city had paid for the property.
If the deal with Penske seemed generous, however, it was downright stingy compared to the terms offered to the first nine dealers who bought into the Ontario auto mall. They “bought” their lots for $100 apiece, a virtual giveaway of land that had cost Ontario’s redevelopment agency several million dollars to acquire.
Opened for business in 1988, the auto center marked Ontario’s entry into the auto mall wars--a high stakes competition among a growing number of Southern California cities for auto dealerships and for the consumers and sales tax revenue that they attract. To woo the dealers, cities offer generous subsidies and wield their powers of condemnation to acquire land attractive to car sellers.
Cities’ courtship of auto dealers has left a bad taste with some officials. “We’ve gone awry,” said Fullerton Mayor Pro Tem Chris Norby. “With government-subsidized businesses, we are putting the seal of approval on unfair competition.”
However, most cities say they have no choice in the matter if they want to maintain a secure tax base.
For nearly a century, the automobile has played a central role in the growth of the region. Now, with cities starved for property tax revenue in the post-Proposition 13 era, auto malls--those sprawling, multi-dealer car supermarkets found near freeways--are emerging as crucial components of local economies.
More than 20% of the nation’s auto malls are located in California, and most of these are in the Los Angeles Basin. In 30 California cities, auto sales account for 20% or more of local sales tax revenue. In five of those cities, more than 40% of sales tax revenue comes from the sales of cars and trucks.
The appetite for auto sales tax revenue has pit city against city--like medieval duchies raiding one another’s treasuries. La Mirada spirits away three dealers from Buena Park, which then takes two from Fullerton, and so it goes.
“Cities have become pirates,” said auto dealer Lou Webb, who said he moved two franchises from Bellflower and Hawaiian Gardens to the Cerritos Auto Square after Cerritos offered him land at one-third of its market value.
Meanwhile, the auto dealers aren’t exactly languishing. City officials accuse auto dealers of playing cities against one another as they look for the best offer: “Dealers are whipsawing cities, always wanting you to sweeten the deal,” said Don Powell, Santa Fe Springs city manager.
Ever the salesmen, the dealers can display the same gift of gab with city officials that is familiar to the car-buying public.
“You know what it’s like,” said one frustrated city manager. “Just when you think you’ve got a deal, they bring up one more thing.”
Auto dealers are by no means the only beneficiaries of the inter-city competition for sales tax revenue. Similar battles are waged for a broad variety of retail commerce, from discount building supply houses, to hotels, to major department stores. This is because California cities have become more dependent on sales taxes; on average, sales taxes now account for about a third of their budgets, a 30% increase over the last decade.
Because of the region’s booming economy, the last decade produced more winners than losers among auto mall combatants. But experts warn that the auto retail business is on the verge of a shakeout that could reduce the number of dealers nationwide by as much as 60% by the end of the decade. A steep recession could accelerate the process and spell trouble for cities that have entrusted much of their financial health to auto dealers.
“A downturn in the economy of 15% to 20% is going to create real stress. The impact could be enormous,” said William Carlson, executive director of the California Redevelopment Assn.
Even in good times, there have been auto mall casualties--half empty malls and even bankruptcies--in at least three cities: Compton, Duarte and Claremont.
Yet, more cities than not appear willing to take whatever risks are involved. According to Carlson, 16 cities in California incurred $60 million in debt establishing auto malls over the last decade. Carlson lacked figures for a number of other cities that have been borrowing money to build auto malls and attract dealers.
Most cities say their malls begin paying for themselves in 10 years or less. The Ontario Auto Center, in business only two years, is reporting annual sales of $250 million, enough to account for 22% of the city’s sales tax revenue. With only half of the center’s 100-acre site developed, city officials are predicting that within three years their mall will be competitive with the region’s largest and most successful, the Cerritos Auto Square in Southeast Los Angeles County.
The first phase of that mall was developed in the early 1980s, and since then Cerritos has gained a reputation as the most aggressive participant in the auto dealer competition. After the nearby town of Lakewood lost three dealers and about $300,000 in sales tax revenue to Cerritos, Lakewood’s city administrator described Cerritos as the “Darth Vadar of cities.”
The rules of the auto mall wars are simple. Raid your neighbor’s dealers before he raids yours. Especially vulnerable are cities that have not developed a freeway fronting mall with a cluster of foreign and domestic cars, a combination which offers one-stop shopping for road weary consumers. The easiest pickings are cities whose dealers operate out of cramped lots behind chain-link fences along dingy industrial boulevards.
In Long Beach, an old fashioned auto row on an inner-city boulevard made it easier for neighboring Signal Hill to snare six dealers and a big chunk of the $8 million in sales tax revenue that Long Beach has been getting from auto sales.
Typically, when a city goes after a neighbor’s dealer, it will offer a better location--freeway frontage is a must. Or, it will agree to build, free of charge, access roads to the new site and install all necessary utilities. Clinching many deals is a commitment to slash the cost of the land. A 50% reduction is not unusual.
Doug La Belle, Signal Hill’s city manager, said that in some cases dealers willing to move there were asked to pay $9 million for land that cost the City Redevelopment Agency $30 million.
The deals are not completely one-sided. If auto sales tax revenue does not reimburse cities for their costs within five to seven years, dealers often are required to make up the difference.
One reason cities are willing to take the financial risks is that they see the auto mall as a magnet for much more than car buyers. Signal Hill, Oxnard and other cities building malls envision the auto center as a port of entry to vast new shopping districts. If that scenario comes to pass, as it has in Cerritos, it means the auto mall becomes just one anchor of a broadly diversified sales tax base.
Inspired by such dreams, a score of California towns have snatched dealers from nearby communities. The losers, equally numerous, often respond as Buena Park did, by planning malls and sending out raiding parties of their own. But sometimes the losses can’t be measured in sales tax dollars alone. When Tustin lured away Mike McLean Cadillac, Santa Ana said goodby to a former Chamber of Commerce president whose family-owned car business had been a mainstay of the local economy for 50 years.
Cities that have been victimized are often reluctant to criticize their predatory neighbors. “Complaining is sort of hypocritical when chances are you will be out there yourself trying to get someone to relocate in your town,” said one city official.
On the other hand, officials are not so hesitant to speak their minds about the courtship of auto dealers.
“The more you give them, the more they want,” said Tim Steinhaus, one of the guiding lights behind the Ontario Auto Center and now economic director for the city of Palm Springs. “They are a pain in the butt,” Steinhaus said. “These guys are multimillionaires who bitch about paying landscape assessments even after you’ve given them the land.”
Southern California’s dependence on the automobile has helped nurture some of the most formidable dealerships in the country.
Forbes Magazine estimates the Penske fortune at $300 million and ranks Roger Penske, ex-race car driver and family patriarch, among the 400 richest people in America. Son Greg says the Penskes’ retail auto business, based largely in Southern California, does $700 million a year in sales.
The nation’s largest volume dealerships for Honda, Mazda, Nissan, Acura, Mercedes, Buick, BMW and Jeep Eagle vehicles are all located in Los Angeles and Orange counties.
According to the National Automobile Dealers’ Assn., the average annual sales revenue for car dealers in California is $19 million, compared to $12 million nationally.
At the same time, industry experts argue that--given the high cost of land in Southern California and the cyclic, boom-and-bust nature of the auto business--only the largest dealerships are likely to survive in the region.
Car dealers’ average net profit (as a percentage of total dollar sales) was just 1% in 1989, according to the Auto Dealers Assn. Fifteen years ago, say local dealers, an auto franchise could get by selling 50 cars a month. These days, dealers say, the minimum is at least 100 cars a month.
“Ten, fifteen years ago a sales manager could save $50,000 and borrow $50,000 and be a dealer,” said Jim Lamparter, president of the Ontario Auto Center Dealers Assn. “Today, you better have half a million of your own money and the ability to borrow another half million to have any hope of making it.”
While a few of the largest dealers, such as Greg Penske, say they probably could pay market prices for prime freeway frontage, most dealers, such as Lou Webb at Cerritos Auto Square, insist they couldn’t move to the most desirable locations without the kind of financial help offered by cities.
Critics have no sympathy for dealers who plead poverty. Norby, of Fullerton and one of the state’s most vocal critics of the auto mall competition, believes that the raids, by moving auto tax dollars from one city to another, destabilize municipal budgets and do nothing for the regional economy.
Moreover, Norby and other critics view auto dealer subsidies as a perversion of the free enterprise system, in many instances forcing cities to offer subsidies to dealers just to keep them from moving to another town.
“It’s a sad situation,” Norby said, “when you have to give away public money in order to hold onto a business that would be happy to stay if it weren’t for some other city wanting to give away more money.”
Once a city has joined hands with a dealer, it may not be so easy to return to an arm’s length relationship. In a recession, cities may have to choose between giving more financial assistance to struggling dealers or losing an important source of tax revenue.
Said Lamparter at Ontario Auto Center: “A city better do anything it can do to protect its investment.” By anything, Lamparter said he meant helping to defray the cost of advertising, giving the dealer more time to meet the city’s sales tax goals, or even sharing the city’s sales tax revenue with the dealer.
“After all, when dealers and cities become partners--and that’s what they’re doing--it’s in nobody’s interest to see dealers go under,” said Lamparter.
Claremont, in the southeast corner of Los Angeles County, is one of a handful of cities that have felt the pinch when an auto mall falls on hard times.
With a population of 37,000, Claremont has been heavily reliant on its auto dealers--deriving more than 40% of its sales tax revenue from car dealers. After a disastrous 1989, the mall filed for bankruptcy last February. Among its creditors is the city, now owed more than $100,000 in back sales tax.
“The experience has caused us to tighten our belt,” said Glenn Southard, Claremont’s city manager. “As I have indicated to the City Council, we have been too dependent on auto sales.”
Still, that doesn’t mean Claremont is swearing off auto dealers as a revenue source. “If you can get dealerships, get ‘em,” Southard said. “You just shouldn’t design your whole budget around them.”
Even those experts who are predicting high attrition rate in the auto business during the coming decade say that the cities who build the big malls now likely will prosper.
“Cities that capture the business now will reap the benefits for years to come,” said Bob Fitzharris, an industry analyst with J.D. Powers and Associates, auto marketing consultants.
As for the practice of subsidizing some of the region’s major automotive retailers . . . grin and bear it, say the experts.
“It’s not equitable but it’s unavoidable,” said Jeff Chapman, a professor of public administration at USC’s School of Public Administration in Sacramento. “Sometimes you have to subsidize rich people.”
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