The High--and Low--Cost of Doing Business

By JEAN MERL

Jan. 25, 1998 12 AM PT

TIMES STAFF WRITER

Looking for a place to do business in Southern California?

You’ll pay through the nose in Los Angeles and Santa Monica but find bargains from Santa Clarita to Diamond Bar, according to an extensive survey to be released Monday.

Local jurisdictions vary widely in the costs they impose on their corporate citizens and some high-cost cities provide lucrative incentives to businesses they want most.

The variations are laid out in the latest editions of the annual “Cost of Doing Business Survey,” which has been compiled for the past four years by Kosmont & Associates, a Los Angeles-based real estate consulting firm.

Conceived as a way to help its corporate clients make location decisions, Kosmont’s survey, which comes in thick Northern and Southern California versions, also underscores some facts of life for local governments in the state.

The survey has implications for residents as well--they are less likely to be asked to pay higher taxes or make do with fewer police officers or library services if their city reaps strong revenues from business activity.

The quest for business revenues sometimes pits one city against another, raising questions about whether such competition ultimately hurts the region as a whole and whether favored businesses, rather than taxpayers, benefit more. But the need for the money is likely to fan the fires of competition for the near future, according to the survey’s founder.

“Poaching companies from a neighbor is a way of life for some cities,” said Larry J. Kosmont, head of the consulting firm and a former city manager. “We have a tax system that fosters competition, and to the extent that taxpayers are unwilling to vote for increases, or elected officials reluctant to ask, the business climate becomes even more important.”

“It takes tax income from business to support all city services. Residential income just doesn’t pay the bills,” said Burbank City Manager Bud Ovrum, who has made a fine art of the practice of attracting business to his town.

In examining nearly 200 cities in California and in key competitive areas in the West, along with the taxes and economic incentives they hold, the Kosmont report turns up some wide-ranging findings on the municipal environment for commerce. Among them:

* Due in large part to the constraints imposed by Proposition 13, which in 1978 slashed and all but froze California’s notoriously high property taxes, the state is no longer among the most expensive places in the West to do business.

“Property taxes have continued to grow in Phoenix, Portland, Seattle and several other cities outside California,” Kosmont said in an interview last week. “So, contrary to popular belief, cost for business in these cities is higher than in many California locales.”

* In general, overall business costs are less in Southern California than in the northern and central parts of the state. (San Francisco continues to be the most expensive city in the state, with Los Angeles a close second.) In Los Angeles County, 47 of the 54 cities surveyed earned “very low” or “low” cost ratings. Five others earned “medium” ratings while only two--Los Angeles and Santa Monica--were deemed “high.”

To arrive at its ratings, the report took into account a community’s taxes in four key areas--business, electricity, telephone and property. The eight locales that earned “top spot” designations impose neither business nor utility user taxes.

* California’s additional constraints on municipal taxing power--Proposition 62 in 1986 and Proposition 218 in 1996, which together require voter approval for most local tax and fee increases--have not resulted in wholesale rejections at the ballot box.

In fact, out of 150 local tax issues submitted to voters last year because of Proposition 218 requirements, 70% won approval, the survey found. However, most of these involved permission to continue taxes that were already in place or were to pay for police, fire and other popular public services. Therefore, those outcomes may not be a good indication of what voters will do when asked to dig deeper into their pockets for big-ticket, and not necessarily popular, items, Kosmont noted.

* Costs vary not only by locale but also by the type of business. For example, the builder of a typical 60,000-square-foot office project in Southern California would incur the highest development costs in Irvine (where the tab could be as high as $874,000), San Diego, Los Angeles, Santa Monica and Santa Ana. Or, for a law firm occupying 30,000 square feet, the most expensive locales are Los Angeles and Santa Monica, where the firm would typically pay $111,230 and $95,680, respectively, in annual business and utility taxes. The firm would pay nothing in Santa Clarita and $130 in Lancaster. (Twenty-six locales were studied for this part of the survey.)

To be sure, cost is hardly the only factor in choosing a business location. Considerations ranging from crime rates to housing costs to proximity to major amenities and even prestige sometimes weigh more heavily.

Irvine’s many advantages, including the availability of a large, highly educated labor pool, outweigh costs for the many firms that have fanned its commercial building boom. Its location next to Los Angeles International Airport makes El Segundo a popular location despite its relatively high business taxes. And it is a safe bet that Los Angeles’ big law firms are not going to be pulling out of downtown or Century City for digs in distant Lancaster any time soon.

Nonetheless, cities are increasingly having to pay attention to their business climate, including taxes. More and more cities are hiring economic development czars and offering a smorgasbord of incentives to lure firms that will yield jobs--and tax revenues.

Los Angeles, despite its high cost and the heretofore slow pace in overhauling its complicated tax code, has attracted new businesses and kept some important industries from leaving by offering incentives to key economic players.

Mayor Richard Riordan formed the L.A. Business Team during his first term. The City Council last year changed the tax code to help keep health maintenance organizations in town and took similar action for multimedia companies, a fast-growing, lucrative--and easily mobile--segment of the entertainment industry.

Besides Los Angeles, 16 other local entities were singled out as most likely to provide economic incentives for attractive business propositions. They are Alhambra, Arcadia, Azusa, Burbank, Carson, Covina, El Monte, Glendale, Long Beach, Monterey Park, Palmdale, Paramount, Pomona, Torrance, Whittier and Los Angeles County, which governs development in unincorporated areas.

Burbank could have written the book on attracting business. Hit hard in the early 1990s by the closure of aerospace giant Lockheed Corp., Burbank has made a strong comeback because of an aggressive play for retail and entertainment businesses.

Ovrum, the city manager, said Burbank offers access to public officials and timely processing of permits, factors he said are often at least as important as financial incentives.

“Probably the most important thing is our frame of mind,” he said, “A developer, homeowner or businessman can get in to see the City Council, city manager or department head almost at will.”

Entertainment giants Disney, Warner Bros. and NBC call Burbank home. But the city also boasts millions of square feet of new retail space from shops in the bustling Media District to a recently approved plan to offer $12.5 million in incentives to prominent businessman Bert Boeckmann and the Ford Motor Co. for construction of a large auto dealership.

The Boeckmann deal was criticized as a giveaway of taxpayer dollars by the lone dissenting council member and by the head of the local Chevrolet agency, who noted that his dealership has had no such offerings of taxpayer-funded help.

Ovrum defended the incentives deal as a good--and necessary--investment in the city’s fiscal future.

“The sales tax is now the largest single source of revenue for the city, and naturally we are going to try and maximize what we get,” he said.

Times staff writer Andrew Blankstein contributed to this story.

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Rating the Cities

An extensive survey by a Los Angeles-based real estate consulting firm included 54 of 88 cities in Los Angeles County among the nearly 200 jurisdictions rated on the basis of the cost of doing business there. Cost ratings were derived by combining a jurisdiction’s business, electric, telephone and property tax levels.

Ratings

Very Low Cost

Low Cost

Medium Cost

High Cost

Sample Ratings in Other Jurisdictions:

Eugene, Ore.

San Diego

San Jose

Las Vegas

Sacramento

Santa Barbara