Lack of Space Hampers Use of Tax-Incentive Zones

More than a year after the federal government announced it was establishing an empowerment zone here, officials can’t name a single business that has moved to the zone--or plans to do so--because of the federal incentives.

Los Angeles city officials, who fought hard to win the empowerment zone status, say the problem is the area’s tight commercial real estate market, which has stood at 3% since 1997.

“We have this space problem,” conceded Rocky Delgadillo, Los Angeles deputy mayor for economic development.

“We’ve been trying to encourage a number of developers to go in and create some space. Take down some of these older, smaller buildings and create state-of-the-art industrial parks,” Delgadillo said. “We cannot as a city continue to sprawl out and take away environmentally rich land and grow an ever more significant dark hole in the doughnut, leaving blighted land.”

Although the tax benefits don’t actually kick in until Jan. 1, city officials acknowledge that they would likely have seen relocations to Pacoima by now, in anticipation of the benefits, if land had been available.

Case in point: Managers at the La Brea Bakery in West Los Angeles inquired about moving to the zone last year after Vice President Al Gore, at a widely publicized news conference in Pacoima, announced the granting of empowerment zone status to a 2.2-square-mile area of the northeast San Fernando Valley.

The bakery had outgrown its 20,000-square-foot facility and was looking to lease another 60,000 to 70,000 square feet in Oxnard. But the chance to locate in the Pacoima empowerment zone, where the bakery would be eligible for business expense deductions and hiring tax credits, was too attractive to ignore.

Company officials called Los Angeles City Hall, and Mayor Richard Riordan’s aides scrambled to help. But a surprising thing happened on the way to Pacoima: There wasn’t a suitable site to be found. The bakery ended up in Van Nuys instead.

“As much as we were interested [in Pacoima], we couldn’t wait for space to become available,” said Philip Shaw, La Brea Bakery’s chief operating officer.

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And La Brea Bakery isn’t alone. Delgadillo says numerous companies have expressed interest in locating within the federal zone in the northeast San Fernando Valley, only to be forced elsewhere for lack of suitable warehouse or industrial sites.

Pacoima isn’t unique.

“All around Los Angeles County we’re finding good demand for blocks of space, say 50,000 square feet on up. That’s in very, very short supply,” said Jack Kyser, chief economist for Los Angeles’ Economic Development Corp.

“All the areas that are covered by the empowerment zone are older areas and you’re going to have this problem,” he said.

Yet, despite the shortage of commercial space--which has stood at a tight 3% since 1997--Pacoima still has problems of poverty and unemployment that the federal empowerment zone--and a state zone in effect since 1986--were intended to address.

Delgadillo says one solution would be construction of an industrial park with space available in the 50,000-to-100,000-square-foot range that employers are demanding.

Los Angeles real estate consultant Larry Kosmont described the region’s current commercial real estate marketplace as the tightest in a decade.

“I can’t think of an industrial area that’s running anything more than a 5% to 6% vacancy rate,” he said.

In the early ‘90s, during the dark days of the recession, it was a different story. At that time, Pacoima’s commercial vacancy rate was around 15% to 20%, according to Daniel Morales, program director, Valley Economic Development Center. That’s how it was in 1994, when Los Angeles sought full empowerment zone status for Pacoima, and other struggling area communities.

Yet, even though the empowerment zones were developed in reaction to the 1992 Los Angeles riots, the Clinton administration rebuffed Los Angeles, saying its application for an empowerment zone was vague and incomplete compared with those of other cities.

Los Angeles didn’t come up completely empty-handed, however. Although the Fed denied the city full empowerment zone benefits, it received a supplemental designation. That allowed for the formation of the Los Angeles Community Development Bank, a nonprofit lender that has provided capital to companies that might otherwise not be able to line up financing.

At least one Pacoima firm, Gold Graphics Manufacturing, a printer and fabricator with about 200 employees, says it owes its continuing existence to the $1-million loan it received from the nonprofit bank after the earthquake.

“It saved me,” Gold said.

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Oddly enough, it was an act of God, not the work of Uncle Sam or Sacramento, that helped pull Pacoima’s commercial real estate scene out of its doldrums. The 1994 Northridge earthquake destroyed or severely damaged many older commercial buildings throughout the Valley, but with a few exceptions, most of Pacoima’s then-empty warehouses came through in decent shape.

“We had an influx [of new companies] after the earthquake,” said Morales, of the Valley Economic Development Center. “Good quality industrial buildings had very little damage.”

Today, Pacoima has a thriving industrial base with several large employers, including Arc Machines, Foothill Auto Electric and Price-Pfister Brass Manufacturing Co.

“It’s the most vibrant industrial area in the Valley,” said John Rooney, president of the Valley Economic Development Center.

If that’s the case, who needs an empowerment zone?

City officials insist they are useful as a marketing tool. They also say they’ve always been realistic about what these incentives can--and cannot--do.

“We never thought of the empowerment zone designation as a silver bullet to solve all our problems,” Delgadillo said. Even if there were an inventory of available space, corporations wouldn’t base decisions on where to put their businesses on tax breaks alone, they acknowledge.

Kosmont, who represents clients in both the private and public sector (including the city of Los Angeles at times) said zone programs generally have mixed results. Start-ups don’t benefit because the incentives are typically provided as credits against income. No income, no credits. And many companies shy away from red tape connected with employee hiring practices, according to Kosmont.

“I tell companies that it’s definitely worth a look, but it has to be an intelligent look, with both eyes open because there are no freebies in life,” Kosmont said.

As a city official, Delgadillo faces a mission bigger than merely tackling Pacoima’s problems: His job is to promote business for all of Los Angeles. Even when a company’s desires to locate in a particular area can’t be fulfilled, as in the case of La Brea Bakery, the existence of the zones builds communication between companies and City Hall.

In the case of the bakery, Delgadillo’s staff helped the company find space in Van Nuys, keeping jobs in Los Angeles that might have gone to Ventura County.

“It gives us another reason to talk to businesses about locating in Los Angeles,” Delgadillo said.

The full empowerment zone designation in Pacoima is relatively new, but Pacoima has been part of the state’s Northeast Valley enterprise zone for more than a decade.

Last year, California expanded the Northeast Valley zone to 7.4 square miles from 6.7, adding parts of Van Nuys, Sun Valley and Panorama City, including the site of the new development where the former General Motors plant stood.

As with the empowerment zone, the enterprise zone designation extends hiring tax credits and business expense deductions, plus a 25% discount on electrical bills for a business’ first five years, among other incentives.

Clearly, the state designation has been a plus to some companies within the zone boundaries, but how many jobs have been created in Pacoima as a result? And how many are going to locals?

Precise numbers are hard to find. The state Franchise Tax Board doesn’t share information about the number of employees companies are claiming as part of their hiring tax credit because of confidentiality issues. But starting this year, the city of Los Angeles is making its own estimates based on information provided by companies that apply for benefits. The city reported that in 1998 companies within the Northeast Valley enterprise zone claimed 185 jobs under the hiring tax credit, or $1.8 million in total wages.

Historically, critics have taken issue with the zones, some questioning whether they create jobs. They say the business incentives are too small to have an impact. They’ve also argued that politicians promote the zones as a way to create the impression that they’re tackling issues such as unemployment and poverty.

Talk to the companies benefiting from the zones, and you hear a different story. George Gelinas, president of Foothill Auto Electric, a remanufacturer of car parts, said the state-backed incentives are what attracted him to Pacoima.

“We moved here because we heard about the enterprise zone,” said Gelinas, who employs 180.

High on his list is the financial support he’s received from the Los Angeles Community Development Bank.

“It’s very hard to get capital in our business,” Gelinas said.

Ricon Corp., a maker of wheelchair lifts, moved to Pacoima in 1989 from Sun Valley. At the time, the company didn’t know anything about the enterprise zone benefits. But it learned. It’s made use of the sales tax credit and utility rate breaks.

“It had to be saving us $100,000 a year,” said President Andy Loduha of the 25% discount on the company’s Department of Water & Power bills.

When the company, which now employs about 400, needed bigger space, Loduha tried in vain to find it in Pacoima. And so Loduha began to check out possibilities outside the city limits. Enter the business representatives at City Hall.

Delgadillo and his staff helped Ricon locate its new 205,000-square-foot plant at the old General Motors plant.

“When we went from Sun Valley to Pacoima, the enterprise zone didn’t have a lot of impact because we didn’t know enough about it,” Loduha said. “But when we moved from Pacoima to Panorama City, it definitely entered the equation. We knew about the benefits.”

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Open for Business

The state and federal governments have designated special zones in the Pacoima area to encourage business development.

* Empowerment Zone: This federally designated zone, which goes into full effect Jan. 1, allows companies a 20% tax credit for the first $15,000 of wages paid to employees who live in the zone for the years 2000-2004. Companies can also take a business expense deduction for manufacturing equipment and furnishings during those years.

* Enterprise Zone: This state-designated zone, created in 1986 and expanded last year, allows companies in the zone to claim a $26,895 tax credit for up to five years for each indivdual employed who lives in the zone or meets eligibility rules for federal job- training assistance. Companies can also fully deduct sales tax they pay on qualifying machinery and get a 25% discount on utility bills, among other benefits. Benefits are scheduled to expire in 2001, but state legislation may extend that date.

* Source: Los Angeles Community Development Bank