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City Made Bad Real Estate Investments, Report Shows

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TIMES STAFF WRITER

Los Angeles made some unwise investments in private commercial real estate projects in the 1990s, partly because officials paid too little attention to whether tens of millions of dollars in tax subsidies would lead to creation of quality jobs, a cost-benefit analysis of redevelopment has concluded.

The subsidies yielded many jobs paying $6.50 per hour or less.

The redevelopment programs were intended to help private developers undertake risky projects that, typically, were expected to generate a lot of new taxes if they succeeded.

Over-optimism ruled in some cases and the new taxes did not equal the subsidies.

The study found that the city’s two largest losses, totaling $65 million, were incurred at Baldwin Hills Crenshaw Plaza, a struggling mall whose developer unilaterally cut out the city as his partner, and at a mixed-use project centered on downtown’s Grand Central Market, whose developer defaulted on repaying public bonds but remains contractually entitled to an annual management fee that has been running in the low six figures.

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The cost-benefit analysis of these and other commercial investments of public funds made by the city’s Community Redevelopment Agency recommends that city leaders rethink priorities to emphasize projects that will create better jobs, not just higher taxes.

It suggests, for example, that the city emphasize investing in industrial rather than retail projects, although industrial redevelopments generate relatively little in taxes that the city can retain. Because of quirks and incentives in state and local laws, retail projects generate higher retainable taxes, mainly in the form of sales taxes. But they also tend to yield poorer-paying jobs.

The analysis, which is being made public today,was a joint project of the UCLA Center for Labor Research and Education and the Los Angeles Alliance for a New Economy, a foundation- and organized labor-funded group that studies issues affecting the working poor and is best known for its leadership role in the living wage movement.

The study was directed by UCLA economist David Runsten, and its $200,000 cost was borne by the Ford Foundation and the San Francisco-based Rosenberg Foundation.

CRA board Chairwoman Peggy Moore characterized the report as “very focused . . . looking at wages in given areas. No one is going to disagree that industrial wages are higher than retail wages,” she said. But she defended the agency as a planter of seeds, saying: “The building that goes on around the seedling projects [provides] . . . more jobs, more opportunities for growth.”

Focusing on nine projects that accounted for most of $193 million that the CRA invested in private commercial developments opening in the 1990s, the study found that the projects are likely to lose a combined total of $20 million in public funds over 30 years. Massive losses in some projects are expected to be partly offset by large gains in others, including a hotel and office building that have been enormously profitable to the city in terms of new taxes generated, but of questionable benefit as catalysts for additional, privately financed growth.

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All of the projects combined created 3,400 jobs, but, primarily because of the retail emphasis, most of the jobs are low-paying. Half pay less than $8 per hour; one-third pay less than $6.50 per hour. Many are part time.

Tenants in some of the subsidized projects are not faring well. At some projects that are struggling despite subsidies, such as downtown’s Grand Central Market, tenants told the study’s authors that they have been squeezed by higher rents.

The analysis did not attempt to trace in detail who exercised political influence in deciding which projects to fund. But Runsten, the economist who directed the study, said the CRA did not make its investment choices in a vacuum. “Everybody’s pretty clear that the CRA does what the mayor and the City Council want [it] to do,” he said.

Only two projects were launched during the Richard Riordan administration and both of these were portrayed in a favorable light. The rest originated during the era of former Mayor Tom Bradley.

Although the study did not assign political blame for unwise acts, it illuminated heavy but obscure pressures on city officials to make what it called “perverse” redevelopment decisions. These were made, the study suggested, to maximize certain types of tax revenues that, in California’s complex fiscal schemes, can be retained by local governments.

For example, the CRA decided to subsidize a luxury hotel in San Pedro although there was a hotel glut in nearby Long Beach, in part because city officials craved the high room taxes they can retain from tourists and in part because they wanted to satisfy “local business and council leaders” who have long sought to develop San Pedro as a tourist destination.

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The Sheraton hotel was built with the help of a $3-million subsidy, but has performed poorly since it opened in 1991, with developers and their financiers selling it at a $20-million loss. In the sale, employees lost a union contract and reportedly some of their wages. But because of high room and other taxes, the city is still expected to make a handsome $23-million profit over 30 years.

In the most expensive project, renovation of Baldwin Hills Crenshaw Plaza, the CRA got involved partly to assuage African American critics of then-Mayor Bradley who wanted better shopping facilities in their neighborhood and were angry at him for neglecting it at the expense of downtown.

Public subsidies for the mall have totaled almost $70 million.

As part of its effort to recoup its investment, the city cut a deal with the private developer to split any profits on a sale of the mall. But the city received nothing when Haagen Development Co. consolidated the struggling mall, along with the rest of its commercial properties, into a publicly traded holding company in 1993. The company contended that the transfer constituted a sale for no profit--and, therefore, no split with the city was due.

For a while, the city apparently did not know that it had been cut out. “The developer had removed the public agencies as equity partners without bothering to notify them,” the report said, attributing the information to CRA Chief Financial Officer Pierre Lorenger.

This might have actually saved the city additional bailout money in the long run as, by some reports, the mall continues to struggle. But in any event the city sued and settled for a $1.4-million return on its equity investment.

Because the city also can expect $44 million in CRA property tax increments and sales, business and utility taxes from the mall over 30 years, it will then be only $25 million in the hole.

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Asked for comment, Ned Fox, president of the holding company’s successor, Center Trust, said Monday that “nobody got rich on [the mall]--that’s for sure. But it is a very viable retail center today, which it would not have been. . . . It is a strong performing asset for the community.”

The Grand Central Square project got redevelopment funds only after private investors had poured $20 million into an attempt to revive a block on upper Broadway downtown and were in trouble.

From the outset, Grand Central Square was viewed as a risky investment by the developer [Ira Yellin] as well as by the bankers who refused to fund it,” the report said. “Nevertheless the CRA’s commissioners voted to finance the project unanimously.”

Grand Central subsidies are estimated at $46 million, while projected tax returns to the city over 30 years are estimated at $6 million, leaving taxpayers with a so-far unrevived block and a projected loss of about $40 million.

Yellin could not be reached for comment Monday afternoon. But Anne Mueller, vice president of the Yellin Co., which is the general partner in the development, said she did not believe the investment was a bad one. “Grand Central is an anchor on its block,” she said, and provides not only a market for the area but a livelihood for 42 tenants, many of them long-term. The development also has provided 121 occupied apartments and an office for the city attorney in converted warehouse space.

Mueller disputed the study’s estimate that the developer received a $220,000 management fee in 1997, saying that the fee, which is calculated at 4% of revenues, was $158,000 that year and is likely to be less than $120,000 this year.

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Among its wise choices, the study found, the CRA subsidized two small industrial developments in Wilmington that created jobs paying average wages of $11 to $14 per hour. It also subsidized a small-scale community shopping center with a unionized supermarket at Adams Boulevard and Vermont Avenue. Residents in that area had clamored for years for a good supermarket.

However, the CRA’s $6-million subsidy to encourage the building of a similar shopping center at Vineland Avenue and Magnolia Boulevard in North Hollywood may have been unnecessary.

The analysis concluded that developers probably would have built shopping facilities nearby on their own.

The study suggested that some high-rise office projects were selected in part for the parochial reason that they were expected to be profitable for the semiautonomous CRA.

Under state law, the CRA generally gets to use any increase in property taxes generated by new projects in designated redevelopment zones. High-rise construction generates far more of this property tax increment than low-rise. And the CRA is particularly hungry for tax increments these days, because it is already obligated to use most of the tax increment it gets to pay off bonds that it used to help finance high-rises downtown in the 1980s. It needs more to fulfill its other obligations, including paying administrative overhead, the report said.

The CRA’s Moore acknowledged a “rolling deficit in administrative funding,” but noted the CRA is in no danger of defaulting on any bonds.

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