The Intricate Courtship of Taco Bell : Relocation: O.C. firm’s review of a new site tried the nerves and provoked the tempers of politicians, executives and its own employees.

This was urgent, Controller Gray Davis insisted to Assembly Speaker Willie Brown. A conference call had to be set up as soon as possible.

Yet another 1,000 jobs were about to leave California with the imminent announcement by Taco Bell Corp. that it was moving its Irvine headquarters to the north Dallas suburb of Plano, Tex. Yet another blow to California’s image was about to land.

Company executives still maintained that staying in Southern California was their preference--if only state lawmakers would give them a sign that it made sense to stick around.

Finally, there would be a sign--actually, dollar signs in the form of proposed tax benefits. The conference call March 25 by Davis, an ambitious state capital veteran and champion political fund-raiser, and Brown, perhaps Sacramento’s most powerful and controversial politician, would be critical in shaping legislation of immense symbolic importance.

The conversation was frank. Company executives griped about city and toll-road development fees. Sorry, Brown said, the state couldn’t do much about that. The businessmen complained about rules governing tax credits for rebuilding in riot-torn areas of Los Angeles. That, Brown said, could be fixed.

The effort to lure the Mexican-style fast-food chain away from the seemingly unbeatable attraction of Texas’ cheap land, cheap labor, low taxes and financial handouts had begun in earnest.

Before it was over, the company’s slow, deliberate, exhausting review would try the nerves and provoke the tempers of political and business leaders, builders and developers and its own employees, who seemed anything but eager to go to a place like Plano. The decision process seemed to waver so much--local construction sites excluded promptly became sites reconsidered--that one developer would confess to wondering “who is driving the ship” at Taco Bell.

Appeals to Taco Bell’s corporate elite at times would take a personal, offbeat turn.

Hank Adler, a partner at the Deloitte & Touche accounting firm in Costa Mesa, sent friend John E. Martin, Taco Bell’s chief executive, a missive every couple of days by fax.

“I threatened to sing, ‘Stay, just a little bit longer,’ ” says Adler, breaking into song at the recollection. “I sent him the temperatures in Dallas when it’s been real cold there.”

Through it all, Taco Bell may have been the ultimate poker player, hoping to wring every concession possible from builders, developers and politicians. And the poker game doesn’t seem over yet--because real financial concessions from state and local government have yet to materialize.

Taco Bell decided three weeks ago to stay put, but for just how long remains uncertain. Government and business leaders assembled into an emergency “red team” eschew the term “done deal” when describing Taco Bell and say there’s more work ahead. Martin last week, reserving the right to do whatever is “best or most practical,” noted the escape hatches in the company’s new office lease and didn’t rule out moving later to another state.

But keeping Taco Bell, if even for a few years until something permanent can be arranged, was an important battle victory. How California emerged on top is now viewed as a lesson in waging what is certain to be a decades-long war between the states for prized assembly lines, machine shops, research labs and headquarters.

A CHAT WITH THE GOVERNOR

By March, Martin and his top aides already had spoken with the governors of Texas, Georgia and North Carolina, but efforts to get California Gov. Pete Wilson and Taco Bell’s Martin together had proved futile. The state’s red team was working with Taco Bell. But where, wondered executives, were California’s top political leaders? Were they concerned? Would they really do anything?

With a self-imposed March 31 deadline for announcing its relocation decision, executives became resigned to the likely move to Texas.

But the red team had set a meeting for March 28 to give Taco Bell executives its final presentation on reasons to stay in California, and state economic aide Julie Meier Wright was working hard at setting up a meeting between Wilson and Martin.

On March 24, Wright, who heads the state Trade and Commerce Agency, drove through a blustery arctic storm from San Diego to Taco Bell’s Irvine headquarters for the long anticipated conversation. Traffic on local freeways was a stop-and-go nightmare. Volunteers eyed the fire-scarred Laguna hills for possible mudslides; Malibu homes already were mired in muck.

Inside the 12th-floor executive library, a quiet, windowless room with deep oversized leather chairs, artworks of glass, crystal and ceramics, paintings and bookcases filled with an eclectic array of books, Wright called Wilson while the company’s top managers filed in.

For 45 minutes late that rainy afternoon, Wilson and Martin talked about high costs in California and the state’s attitude toward business.

Martin and aides Charlie Rogers, Rudy Pollak and Jonathan Blum were impressed that Wilson had done his homework. The governor understood such local issues as development fees and air quality rules that required the company to provide inducements for employees to share rides to work.

Wilson probed more deeply into the company’s costs. Was Taco Bell simply paying more for top management and its creative talent, Wilson wanted to know, or were wages and salaries abnormally high throughout the organization, from executives on the top floor to food servers in the cafeteria on the bottom floor?

Martin assured him that costs were much higher throughout the work force than they would be in Texas. And the Lone Star State, he noted, doesn’t assess income tax, so workers could move there and increase their take-home pay without a wage hike.

But the governor countered that property taxes were lower here and the overall cost of doing business wasn’t much different, especially if the company included the $40-million cost of relocating and the disruption to its operations.

Wilson also noted the state’s fiscal bind, making it difficult to grant concessions to business.

Martin told the governor that Taco Bell wasn’t trying to squeeze the last dollar out of the people of California. If Taco Bell stays, Martin argued, it will mean more jobs, more taxes collected and more investment in the community.

“We’re not really fighting each other here,” Martin said. “We’re really trying to work with each other.”

MORE ENCOURAGEMENT FROM SACRAMENTO

Controller Davis learned about Taco Bell’s plans during a reception March 16 at Antonello’s restaurant in Santa Ana. He spoke that night and the next day with Chris Townsend, a government relations executive at the company.

After his staff and corporate officers talked further, Davis recognized the issues as universal concerns for business in the state--and it was evident something would have to be done quickly.

He called Willie Brown to set up the conference call for 10 a.m. Friday, the 25th. A Taco Bell group headed by Charlie Rogers, the senior vice president, assembled in the 12th-floor library. Davis was in his office.

Brown was late. He had been taping his weekly television show and couldn’t get back to his office in time. When he finally arrived at 10:15, he apologized and then, to the pleasant surprise of Rogers and his aides, devoted more than an hour to a frank, businesslike discussion of Taco Bell’s problems and what the state could and couldn’t do.

A new headquarters would cost nearly $100 million, executives said, and fees imposed by the city, a toll-road agency and others would run the bill up at least another $3.5 million.

Brown was pessimistic. There was little, he said, that the state could do to get those fees waived.

Rogers objected to laws governing tax credits the company received for rebuilding stores in areas damaged by the 1992 Los Angeles riots. Not only were the credits applied to the earnings of Taco Bell’s parent company, PepsiCo Inc. in Purchase, N.Y., but they also were subject to rules and conditions that made them all but useless.

Now Brown could be optimistic. Changes could be adopted quickly, he suggested.

Brown was upbeat and curious. What were Texas and the other states, he asked, doing about relocation programs, retraining efforts and educational programs? What were they doing with tax credits?

Rogers, with a $10-million package of incentives offered by Texas, didn’t need much more encouragement. He urged the assemblyman to advocate some kind of tax relief. Expanding companies, he rationalized, ought to get some tax benefits for creating construction jobs, buying materials and furnishings and adding to the property tax rolls.

Brown and Davis already had been working on bills aimed at retaining business in California. Brown had a narrow bill giving credits to manufacturers that had passed the Assembly and was sitting in a Senate committee. Perhaps, he suggested, something could be added or changed in that bill.

Davis said any tax credits would have to come with some obligation to stay in California, maintain job levels and add some value, such as building a new office or buying new equipment.

After all, Davis said, “if the corporation isn’t paying people, then the state is,” referring to unemployment and welfare payments.

Soon, Robert Girvin, Taco Bell tax director, and his staff were working by telephone and over facsimile machines with Brown’s aides and Davis’ legal department to go over the language for a bill that would help growing companies. Aides to Brown and Davis came up with the final proposal.

For the first time, Taco Bell executives saw a breakthrough, a bipartisan effort by the Democratic Assembly leader and Republican governor to pass some meaningful pro-business laws.

“That call was pivotal,” Rogers later told Davis.

AN ENORMOUS AMOUNT OF POSITIVE ENERGY

The following Monday, March 28, the red team was encamped in a large conference room at Irvine City Hall. All morning, city officials, county staff members, state workers and executives from regional agencies like the South Coast Air Quality Management District plotted strategy for their afternoon meeting with Taco Bell.

Paul Reed, with the Irvine Unified School District, stopped by to explain the school lunch pilot program the district was about to announce. Taco Bell didn’t know it yet, but the district had agreed to let the company sell its food in Woodbridge High School during May and June. It would be part of a plan to encourage students to remain on campus during lunchtime.

Reed couldn’t stay for the afternoon meeting with Taco Bell. But 22 red team members, led by H. Fred Mickelson, a Southern California Edison executive, were there to greet Rogers, Rudy Pollak and other corporate officers for the last and biggest red team meeting.

Julie Wright of the Commerce and Trade Agency brought along her top regional aide, Judy Jarvis. Irvine Mayor Michael Ward, City Manager Paul O. Brady Jr. and top aide Larry Larsen attended, as did Orange County Supervisor Thomas F. Riley, aide Ken Bruner and John Sibley of the county’s Environmental Management Agency.

Jim Wisley from Willie Brown’s office rounded out the bipartisan effort for the 90-minute session.

“There was an enormous amount of positive energy,” Wright said later. “There was a real appreciation on the part of Taco Bell executives that we were making good progress.”

With a projector showing color photos and charts, Mickelson, Jarvis and Ward talked about life in Southern California. They explained how they could help Taco Bell: fast processing of building permits, training and education incentives, clearer rules on using the revitalization zone tax credits, cooperation from air quality officials on the mandated ride-share plan for employees, support for any legislation offering tax credits for expansion in California.

Those were the carrots, and there was an effort to display a modest stick. Jarvis pointed out that California and other government agencies such as school districts like to do business with companies located in the state. She raised the Irvine school district pilot project. That was an important issue for Taco Bell, which now is in some 3,000 schools nationwide and wants to get into thousands more.

But much of the work already had been done the previous week. Mickelson had kept in close contact with the governor’s office and with Brown’s office. The effort had been one of the most well-coordinated and complete attempts to woo a company heading for the exit.

THE MOVING TARGET

With Willie Brown drawing up legislation to give large companies a 6% tax credit for investing in plants and people in California, Taco Bell executives renewed their search for another Orange County headquarters site.

Some locations, like the Irvine Spectrum and a UC Irvine parcel, had long been considered. But new sites came up as well, including Rancho Santa Margarita property and the now-vacant Loral Aeronutronics plant--formerly Ford Aerospace--in Newport Beach.

At one point in mid-April, the Irvine Co. thought it was about to sign a deal with Taco Bell, but the fast-food chain started looking at other sites. Developers were irked that Taco Bell often reconsidered sites that it had rejected earlier. The UCI site, for instance, was reconsidered at least three times.

“We’ve danced through hoops on this thing, and you begin to wonder if there is a moving target and who is driving the ship over there,” said one officer of a major developer who asked to remain anonymous. “One thing’s for sure: They’re not real estate people.”

But Taco Bell executives were frustrated with the deals being offered. The recession may have hurt a lot of businesses, but landowners and builders still wanted a premium for building in the Golden State.

Taco Bell was looking for bargains and incentives, just as it had in its previous cross-country search for a new home.

CALIFORNIA’S TRIO OF CHALLENGERS

Through John Cushman of Cushman Realty Corp. in Los Angeles, the company approached cities in Texas and Georgia last summer to see if they could meet its needs for open space with access to a major international airport. North Carolina was added to potential sites after officials there learned about Taco Bell’s search and asked to be considered.

During the week of Nov. 1, as fires ravaged the Southland, a Taco Bell team headed by administrative vice president Pollak toured the three states. The team also included Cushman and architects David Gensler and Ed Friedrich.

In Texas, the first stop, the financial allure was powerful.

Taco Bell’s sister company, Frito-Lay, already had moved its corporate headquarters to Legacy, a 2,665-acre business park in the fast-growing North Dallas suburb of Plano. And there was plenty of room for Taco Bell in the same complex. Last year, Taco Bell had consolidated some computer operations there with Frito-Lay.

Texas could deal like no other state. Besides its regular advantages--no personal or corporate state income taxes--Texas could offer tax credits, property tax abatements and low-interest loans. Taco Bell ultimately would be offered $10 million in tax relief and training funds.

In telephone calls and letters, Texas’ tough but folksy governor, Ann Richards, sang the virtues of her state.

But developers there were not certain Taco Bell would move. Some said they thought the trip east was mostly an effort to squeeze concessions out of California or the company’s landlord.

After two days in Texas, Pollak and his team flew to Georgia, where economic development officials were ready for courtship. Utility company executives, Atlanta and Georgia officials and business leaders needed to find out one thing first before they could start a full-fledged romance.

Coke and Atlanta were almost synonymous, they noted, while Taco Bell was a unit of archrival PepsiCo. “We wanted to know what they thought about moving into the land of Coca-Cola,” said developer John Murphy. “They addressed that, and it really wasn’t an issue with them.”

Martin, it turned out, was born in Atlanta and loved the area.

In a welcoming breakfast, Gov. Zell Miller urged Taco Bell to keep an open mind about Georgia. Roy Cooper, vice president for economic development at the Atlanta Chamber of Commerce, hammered home such Georgia virtues as “stable and moderate” taxes.

“Two-thirds of the population lives east of the Mississippi,” he told the executives, “and Atlanta is in the center of that market with unmatched livability, a world-class city and better access to Europe. We’re as good as Dallas and better than L.A.”

Driving around Atlanta in a minibus to look at sites, Taco Bell executives made time for a side trip. Pollak wanted to stop at a local Kroger grocery store to see if it was carrying the new Taco Bell brand products--including tortilla chips, taco shells, salsa and cheese--that the company was rolling out as part of a cooperative effort with Frito-Lay.

So thrilled were executives to see the products on the shelves that architect Friedrich took pictures.

But in early March, the company sent its regrets to Georgia. The location, building costs and relocation costs proved to be too much.

North Carolina has been recruiting California companies for 15 years and set up a permanent office in the Bay Area last fall. Martin, who once worked for the Hardee’s fast-food chain in Raleigh, thought the Carolinas would be a great place for Taco Bell.

While Pollak’s group was in Charlotte looking at sites, North Carolina Gov. James B. Hunt Jr. was in California, and he stopped in at Taco Bell headquarters for a brief chat-cum-sales pitch.

North Carolina and Charlotte promised to put in roads or any other infrastructure that might be needed. The state couldn’t get into a bidding war, but it could offer $1,000 for each new job to make capital improvements. Like other states, it also offered tax credits for training.

Hunt also had a $5-million competitive recruitment fund he could use at his discretion to bring in companies. The hitch, though, was that Charlotte would have to come up with a matching amount, and it was able to provide only $500,000. The total, though, paled in comparison with what a state like Texas could do.

Charlotte was scratched from the list at the same time as Atlanta.

NO PLACE LIKE HOME

To John Martin, the numbers only told one side of the story. He describes business as both a science and an art, with the art too often ignored. California, he observes, still offers more energy and creativity, a greater degree of racial and ethnic diversity and a closer view of the expanding Asian market than any other state.

So when Willie Brown’s tax credit measure was narrowly defeated in May, Martin took a longer view. Since his company’s needs were evolving, he decided that a new lease--a flexible one that offered the company a chance to cancel it early--would most benefit the company.

The landlord, Shuwa Investments Corp., had offered most of the basic terms of a new lease last August, part of its strategy to take its best shot first. But back then, Taco Bell executives had only started looking at other states and didn’t know what they wanted to do. They used the offer as a benchmark to compare alternatives.

By May of this year, Martin was ready to negotiate in earnest, and he told Rogers and Pollak to build flexibility into the new lease. When the deal is ready, he told them, call me in Hawaii.

Martin and his girlfriend of two years, Stefanie Mayer, 28, flew to the island of Hawaii on June 4 for a two-week vacation. They also were married June 16 in a ceremony at Mauna Lani Point resort north of the Kona coast. It was the third marriage for Martin, 48.

The final deal was struck in quick fashion with little haggling but enormous amounts of lawyer time to draw up a lease that ran 70 legal-size pages long, without attachments.

“The building is part of a larger project, Koll Center Irvine North, and there are many documents on file that affect how Taco Bell can use its building,” Shuwa attorney Anton N. Natsis explained to his counterparts. “We need to read about 20 documents to understand how to put this lease together.”

Pollak and Shuwa’s Chris Mahon found they could agree quickly to some new terms, but putting it all on paper was another matter. Learning that one change would take a week to review and write, Pollak’s jaw dropped in disbelief.

Shuwa still ended up with the $41-million deal it had offered 10 months earlier, but it agreed to other changes, including Taco Bell’s right to cancel the deal in the fifth and 10th years by paying a fee of up to $3 million. Shuwa also agreed to pay up to $4.1 million for tenant improvements. Rent was cut from $2.85 a square foot, negotiated during the high-priced 1980s, to $1.50 a square foot, about the middle of the market range today.

Just after Martin and Mayer were married, Pollak called him in Hawaii to report that the company got the flexible lease it wanted. “We’ll do the deal as soon as I get home,” Martin told him, “and we’ll announce it.”

IT’S NOT OVER ‘TIL IT’S OVER

Taco Bell’s long search provided it with a great deal of information as it ponders what to do in the future. If could take up an offer by the Koll Co. to build a structure next to its current quarters or it could follow up on any one of the proposals it received to build elsewhere in Orange County or in Texas.

Assembly Leader Brown’s legislative effort is expected to be resurrected next month with a state Senate bill sponsored by Sen. Bill Lockyer (D-Hayward). Controller Davis says California has much more to do to compete with such aggressive states as Texas.

Meanwhile, to judge from his comments last week, Martin aims to keep California nervous. “If the climate in California were to go south from a business perspective,” he warned, “then we’d look at our other options.”