This is Part Two of a two-part series. Part One is here.

March 29, 2013

By Wayne Lusvardi

Los Angeles-based redevelopment expert Larry Kosmont is marketing his Redevelopment 2.0 idea as a way to compete with other states that currently are out-competing California for industries.  As Kosmont puts it:

“The reason no one is buying up these old buildings is because they are too expensive for any company to retrofit them for handicap access and just to make it work.  So they export those jobs to Texas or Glendale, Arizona where they can buy a cheap building.”  

But this doesn’t explain the hot e-commerce market where e-tailers must have warehouses close to Los Angeles’ consumer markets.  And if part of the problem is obsolescent buildings, why does Kosmont’s bill replace “blight” with “unemployment” as the criterion for redevelopment?

Under the previous system the state eliminated in 2011, “blight” commonly was used to justify redevelopment. But that idea generally has been discredited.

The main effect of Kosmont’s Redevelopment 2.0 would be to try to divert e-tailing warehouse and distribution facilities from new, state-of-the-art facilities in the Inland Empire to old, obsolescent industrial districts in Los Angeles County. Kosmont’s Redevelopment 2.0 effectively would steer development from politically Red to Blue areas.

But even with Redevelopment 2.0, Los Angeles can’t compete with the much cheaper land prices in the Inland Empire.  Indeed, Los Angeles property prices could be going higher. A forecasted tight industrial building market for 2013 will result in the market finding the best sites for e-tailing warehouses in close-in areas to Los Angeles consumer markets.  Location is so critical in e-commerce that one source said:

“Location-sensitive industrial users will either need to pay more for high-end space, or lease in buildings with less-than-optimal operational efficiency potential.” 

This may mean re-using older industrial facilities in some cases.

e-Commerce competition is also inside L.A. market

Los Angeles County industrial real estate markets are not competing for e-commerce with Texas or Arizona, but mainly with each city within their own market area.  All that would happen from Kosmont’s proposed bill, AB 690, would be an unnecessary wild scramble for each city to capture e-tailers with tax increment financing.   It would be better to just even the playing field by not using redevelopment at all.

Kosmont’s Redevelopment 2.0 would issue bonds to fund vague jobs programs.  Using bonds to fund social programs is risky and is what almost bankrupted New York City back in the 1970s.

What government does best is help facilitate new infrastructure.  The infrastructure is already mostly in place in the older “factory belt” areas of Los Angeles County.  The current federal low interest rate policy makes tax-exempt bonds and tax-increment financing to retrofit old industrial buildings mostly superfluous.

Building  “parks, libraries, and bike lanes,” as Kosmont’s bill also proposes, would only create more jobs that have no economic multiplier effect.  And financing such jobs would end up costing about 50 percent more because of bond interest.

Blue Jobs Model Failing

AB 690 is just a way for depressed communities to tax themselves to create more jobs that would be taken out of the private sector and shifted into the public union sector.  A good example of this already happening is El Monte, where the Blue Jobs Model — high taxes and many government jobs — is failing. In El Monte, seven out of the top 12 employers are governmental.  Of the five remaining large private employers, two have gone out of business.

El Monte needs to bring more private sector jobs into its economy.  AB 690 would add a lot of redevelopment agency jobs and costly makeshift private-sector jobs.  It wouldn’t guarantee bringing an e-commerce industrial user into El Monte more than what might occur without AB 690.  

AB 690 Unneeded

A flaw in Kosmont’s bill — and in the old model of redevelopment as well — is that local voters will always vote to capture business away from more competitive perceived communities.  Redevelopment creates the psychology of a competitive jobs “horserace” that ends up robbing school districts of needed property tax revenues.

As the California Legislative Analyst’s Office has concluded, redevelopment doesn’t create new jobs, it just shifts them around.  Most jobs created by redevelopment would have been created by the private sector in the same communities in the same time frame anyway without it.

This is Part One of a two-part series. Part Two is here.

March 28, 2013

By Wayne Lusvardi

Redevelopment 1.0 died statewide in 2011 when Gov. Jerry Brown phased it out, mainly because it was robbing local school districts of needed property tax revenues.

Now Los Angeles-based redevelopment expert Larry Kosmont has written a bill, AB 690, to bring “Redevelopment 2.0,” supposedly to rejuvenate “old factory belts” in former industrial areas.  The bill will be sponsored by Assemblymember Nora Campos, D-San Jose. The Southern California Association of Governments and the Los Angeles County Business Federation have signed on to support it.

But would it bring back jobs in “old factory belt” areas, especially areas with closed aerospace plants that Kosmont is targeting in such cities as as El Monte, South Gate, Montebello and Huntington Park?

The problem in those areas is not the lack of “tax increment financing,” which under Redevelopment 1.0 uses “hypothetical future gains in taxes to subsidize current improvements.” Instead, the lack of jobs and economic growth is due to the new market realities of e-commerce.

Tax increment financing is a tool used by redevelopment agencies to “upzone” older commercial and industrial properties for a higher use, but freezes the property tax assessments at the old levels.  The increase or “increment” in newly created taxes then is used to repay bonds to assemble land and build infrastructure such as roads, utility lines and rail service to develop shopping malls and industrial parks.

L.A. County’s old factory belt

In Los Angeles County’s “old factory belt,” the land for industrial use has mostly already been assembled, the infrastructure is in place, and rail service is already available from the Alameda Rail Corridor that links the ports with wholesale distribution hubs.

In Los Angeles County, the Alameda Corridor East already is in the process of being upgraded with 22 new grade separations at a cost of nearly a half billion dollars —  $498.5 million — to reduce vehicular congestion along local truck routes.  The Alameda Corridor created traffic congestion that is frustrating truck shipping times to and from local warehouses and end customers.

Kosmont’s AB 690 does not propose to use the old criteria for redevelopment — the elimination of “blight” — for his proposed “Job and Infrastructure Districts” that would have to be approved by 55 percent of the voters.  Instead of blight, Kosmont’s bill proposes to substitute unemployment as the criterion for redevelopment instead.  But what apparently has gone unrecognized by Kosmont is that what is mostly inhibiting job growth in Los Angeles County’s “old factory belt” is industrial building obsolescence or “blight” caused by the retail market shift to e-commerce.

e-Tailing changing industrial real estate

e-Tailing — the buying of retail goods online — has changed the industrial real estate market.   One third of all large industrial building space in the United States in 2012 was for “e-tailers” and e-commerce.  This has been called the shift from “bricks and mortar” retail outlets to “bricks and clicks” online retailing.

The shift has resulted in increased demand for big-box industrial warehouses, defined as those more than over 400,000 square feet. That’s the equivalent to nine football fields in floor space, with 36-foot high ceilings, mezzanines and sprinkler systems. The space accommodates state-of-the-art storage racking and logistics automation and robotics systems.  Kosmont’s bill is being advertised as a way “to bring a city and a developer together to remake an abandoned warehouse into a supermarket or a modern industrial facility.” But the website, “Area Redevelopment,” aptly summarizes the prospects for re-using old industrial buildings for e-tailing is infeasible:

“New-generation industrial is five times more labor intensive than traditional retail distribution facilities, requiring more parking, mezzanine build-outs, increased building automation, and other features that are difficult or impossible to retrofit in older buildings.” 

Showcase property for proposed AB 690

Proponents of the new bill are directing newspaper reporters to the former Crown City Plating facility at 4350 Temple City Boulevard in El Monte (see photo here) as a prime candidate for Kosmont’s version of redevelopment-lite.  According to the State Employment Development Department, the unemployment rate in El Monte is 12.6 percent, with 6,500 people jobless, compared to 9.8 unemployment for all of California.

This 1956-built, 179,948 square foot building on a 7.3-acre site is too small and its ceiling height too low for e-tailing.  And rehabilitation always costs more than new construction. Newspaper reports also fail to mention that this vacant facility is located on a former Superfund site.  Crown City Plating went bankrupt in 2008.

Kosmont’s proposal would likely end up subsidizing new industrial building construction at a time when interest rates are so low that no public subsidy would be needed.  The Federal Reserve’s “Zero Interest Rate Policy” (ZIRP) has rendered tax-exempt bond financing superfluous.

What the “old factory belt” in Eastern San Gabriel Valley and Los Angeles Industrial core has going for it is Class I rail access.  This already provides what is called intermodal methods of transporting goods from ships to rail to trucks to UPS or Fed-Ex delivery to customers’ doors.

Part Two of this two-part series is about e-tailing competition.