To fill California’s gaping budget deficit, the government may squeeze retailers and retail real estate owners
Aug 26, 2009 1:44 PM, By Brad Berton
As if conditions aren’t tough enough for California retail property developers—particularly those seeking tenants amid so much vacant space—a troubling specter looms. As lawmakers struggle to rectify the state government’s gaping $26 billion budget deficit, they are setting their sights on potentially raising taxes on commercial property while at the same time gutting the budgets of local economic development agencies.
As it stands, legislators and Gov. Arnold Schwarzenegger have already opted to divert 31 percent of California’s redevelopment property tax revenues from local economic development efforts. Most of that money is going to the state’s education system—a priority few would quibble with. After all, the situation in California got so bad that the state was issuing IOUs from early July to early September. As of mid-August, it had dished out more than 325,000 IOUs totaling $2 billion to vendors, service providers and taxpayers awaiting refunds.
The state has also instituted cuts that border on the draconian. California cut spending by $15 billion, including $6 billion from schools, $3 billion from colleges, and $1.2 billion from prisons. (Schools are to be repaid $11 billion if and when the state’s economy turns around.) Medi-Cal, the state’s health program for the poor, was cut by $1.3 billion.
And the budget cutting may not be over. The state is already projecting a $7 billion to $8 billion deficit for the 2010–11 fiscal year that starts next July.
The net result of this for commercial real estate sector is that more than 350 redevelopment authorities are losing $1.7 billion in tax dollars that would otherwise help fund city and county investments during the 2009-10 fiscal year. Another $350 million will be diverted the following fiscal year. Much of that would have been aimed at revitalizing commercial districts. That’s a problem because redevelopment agencies are the primary economic development drivers in the state.
For example, the Community Redevelopment Agency of Los Angeles is losing $85 million in the 2009-10 fiscal year, estimates CEO Cecilia Estolano. Other large redevelopment bodies will likewise lose big bucks: the California Redevelopment Association estimates San Jose is set to see $62.2 million diverted in 2009-10, San Diego $55.6 million.
Mary Jane Ohlasso, Ontario, Calif.’s economic development director, can’t say yet how the nearly $20 million loss her Inland Empire city’s redevelopment agency faces over the coming two years will impact ongoing projects. But as a longtime economic development official and licensed CPA, Ohlasso calls the state budget strategy downright “incomprehensible.”
“Going forward it’s going to affect our ability to fund and assist with infrastructure for projects that create jobs,” Ohlasso explains. “And if we’re not bringing in new jobs, we won’t see a pickup in residential or commercial development.”
If that’s not enough to worry about, the state could look to raise revenues through new taxes. A high-level state panel is now considering whether California’s 30-year-old landmark “sacred cow” property tax limitation statute (Proposition 13) should be revised to bring in more revenue from retail and other commercial properties (See sidebar).
The climate is dire enough to make retailers and retail estate firms nervous about how the situation is playing out. On one hand there will be fewer incentives coming from municipalities. On the other, higher sales taxes or property taxes would be painful at a time when retail sales continue to suffer, net occupancy income is down and property values are plummeting.
Even before the latest crisis, California’s notorious business climate scared off businesses. In a recent CNBC survey, California ranked last in “cost of business” and 49th in “business friendliness.”
“We’ve been told by tenant rep brokers for years that they have clients who just won’t come to California” due to ever-volatile budget matters, Ohlasso says. “The corporate world wants a stable political environment, which is something we can offer on the local level,” she says. But the state’s all-too-frequent fiscal nightmares give decision-makers cause for pause, “and that’s a difficult objection to overcome.”
Next page: Sudden impact?
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