What the City Pays the Rich to Build

by Tony Chavira

After landing in Cuba, our awestruck FourStory staff stepped slowly through the open courtyard behind the Hotel Nacional and gazed agape at the dramatic landscape. Vibrant outdoor courtyards littered with quaint, clean bar spaces, immaculately landscaped greenspace, open areas with a view of the sea and the Malecón ... it was vibrant, luxurious, and almost gaudy, notwithstanding the hint of egalitarianism (read: communism) in the air. There was nothing I could say, I was dumbstruck by the elegance; so it was said for me by fellow FourStorian, Dr. Gilda (Pop) Haas: “Just think, if this were in Los Angeles, the city would have paid a developer to build it!”

The Hotel Nacional de Cuba was originally owned and operated by the corrupt pre-communist revolution government alongside private investment, and was eventually closed by Fidel Castro and his corrupt post-communist revolution government, only to re-open to accommodate foreign dignitaries and sexy Latin American celebrities. Last year it hosted us.

Citizens and officials alike know that United States city governments need a huge amount of investment to be inviting and livable. Some cities (Detroit, for example) were developed smartly and have fallen apart as years passed. Some weren’t developed smartly from the onset. (Exurbs in the middle of nowhere, for example). Los Angeles, of course, has both problems. In the early 1900s, we had a shockingly useful rail car system and right-of-ways that allowed those rails to go from one side of the county to the other with little to no hassle. There were hubs everywhere, and people traveled freely without the need for cars. Later that century, we sold those right-of-ways off to companies who build freeways we now struggle to maintain. The things we do to accommodate car culture.

And because we got rid of the railways early on, the rest of Los Angeles County developed stupidly, with an abundance of parking lots and a lack of close, walkable accomodations. Today we struggle with the same problems we did at the end of the last century: cars are too expensive to maintain, homes are too hard to manage, and living too far from your job is too difficult to do. The problem is that there are still too few dense, useful areas in Los Angeles County: places where your grocery store, work, and kid’s elementary school are all within a mile away, tops. Nothing’s easy to get to, and once you get there you still need to get back somehow.

Enter your local government, desperately trying to find a way to convince wealthy developers to stop building suburbs 100 miles away from economic hubs and instead focus on vibrant city centers. Officials have a few weapons against suburban blight in their arsenal, including planning, negotiation power, and certain kinds of building restrictions and zoning regulations. But restrictions never work as well as incentives, and ultimately the most powerful weapon a government can wield is the almighty tax dollar. And that means all kinds of subsidies.

Oh, and just to clear this up: “subsidies” are any kind of financial assistance the government gives to business. Oil companies that don’t pay all of their taxes, building owners who rent to the low-income, and tax breaks for churches are all subsidies. Some people don’t think tax breaks are subsidies, but they are wrong. Money is money. Some think that subsidies distort the real prices of things while others think they’re necessary to create equality. You can make up your own mind, but know that nothing is entirely good or bad.

First on the subsidy list, the city can outright pay for part of a building’s construction. The city of Los Angeles has been caught red-handed doing this by offering high end Gensler Architects $1 million to pay for plans for the proposed football stadium in downtown Los Angeles. It’s an arrangement they cut with the developer to make the deal more attractive and increase the chances something will get built. Subsidies can also come as direct payments for rent, leases, etc. to attract the right kinds of people. For example, the Housing Department will pay a developer a low-income renter’s monthly rent to attract other developers into providing low-income spaces as well. Since building owners want tenants and there are a lot of people with low incomes out there, this can be pretty alluring to cash-strapped landowners.

Another option is to provide some sort of tax relief. This comes in two forms: the tax credit and the tax deduction. It’s easy to confuse them when, upon hearing that businesses don’t have to pay their fair share in taxes, you are overcome with blind rage, but the difference is pretty simple: tax credits are taken dollar for dollar and tax deductions reduce your taxable income. The city of Los Angeles, for example, put in place a $400 million tax credit program to help small businesses hire new employees. If a small business hired a new worker, it could reduce its taxes by $3,000, whether they made a huge profit or none at all.

On the other hand, if you or a developer wanted to build something in an area that was a brownfield (i.e. land with ruined soil), you can get a deduction based on what you spent to clean that mess up. You might’ve spent more than $3,000, so a credit wouldn’t be enough. Or you might’ve spent nothing; then the credit would be too much. Usually credits are also specific numbers, while deductions range up to a maximum (so no bigtime developer tries to write off millions of dollars and get out of paying their taxes).

Naturally, the savvy developer is like a shrewd online customer: looking for any opportunity to stack as many subsidies as possible, and constantly negotiating to see how far they can push the envelope. In the case of the L.A. Live developments, Los Angeles residents are currently offering a tax deduction of $270 million per year to the J.W. Marriot’s developer, Anschultz Entertainment Group (AEG). Until the year 2035. To the Ritz-Carlton hotel, as well.

But they’re not the only developments that’ll get a sweet deal like that; the upcoming Mandarin Hotel on Bunker Hill and the new Wilshire Grand Hotel are in negotiations for similar subsidies. Those four projects alone should account for more than $30 million in city money in construction cash alone, not including the missing tax money. AEG is trying to lease the proposed downtown L.A. football stadium land for $1 per year, citing how much business they’d bring to the city (despite all the tax breaks they’re going to beg for). It wouldn’t be unprecedented. We’re already going to give prime downtown L.A. property to Eli Broad for 99 years at $1 per year to build his architecturally wondrous Broad Gallery. Why shouldn’t they get the same deal?

Worst of all, Eli Broad originally said he’d pay for his self-indulgent museum and now we’re helping him. Because that’s the kind of city we are, and developers know it: a city that so desperately needs public spaces that billionaires only need to lie about paying for their projects until they win public support. Then they can reveal that they’ve wanted our money all along, and our politicians will be too afraid of looking like chumps to tell them no. They don’t need honor, or promises, or contractual obligations. We’ll pay for everything. Because that’s what we do in L.A.: pay billionaires to make money at our expense.

Comments

Comments closed.