Friday, May 17, 2013

Are you kidding me? A ruling by a California judge ruling defies basic economic logic

I could barely believe what I was reading the other an unprecedented move, a California judge has ordered the dissolution of the Arts District Business Improvement District in downtown Los Angeles. Why, you ask? Basically the legal argument is that economic development services do not benefit property owners. Huh? Forgive me, but I'm having a really hard time understanding this, so I decided to pick apart the issues one by one. ["Judge Orders Arts District BID to Dissolve", 5/16/13, LA Downtown News].  And if you don't think this argument is coming to a community near you, believe me, it is...
ACCORDING TO THE NEWS ARTICLE, the order centered on the judge's finding that the "BID spent tax dollars on economic development services that did not provide a special benefit to area property owners." 
RESPONSE: To suggest that economic development services are not a special benefit to area property owners reflects a fundamental misunderstanding of how markets work. Property value is a function of use. The more revenue a use generates, the more the user can afford to pay in rent. As any economist can tell you, this means that the more rent the higher the land value. It's common sense. So let's take this a step further. This means that activities that are associated with improving the underlying economic and business environment (which is what economic development activities are) ultimately improve the cash flow of businesses and help area property owners. OK Judge, so how is it that economic development services are not a special benefit? I don't follow.  
ACCORDING TO THE ARTICLE apparently "State law says that cities can only use assessment districts to pay for services that constitute special benefits for the people who pay the taxes. Services that benefit the general public, or those that function generally to raise property values, are not covered."
RESPONSE: Maybe the State law if flawed, but if I owned property, I would be quite happy if my investment in the Downtown District resulted in an increase in my property value. Wouldn't you? That would be called a "return on investment" or "ROI" by most people. So explain to me how a positive ROI is not a benefit to participating property owners? This rationale defies understanding. Any business school grad should be scratching her head right now.   
ACCORDING TO THE ARTICLE, the judge questioned whether "economic development efforts, such as distributing marketing materials to attract investment to the area or touring the neighborhood with real estate investors, constitute what are known as “special benefits.”
RESPONSE: Marketing material that serve to attract investment are fundamental activities that improve a downtown environment. Ask anyone in the commercial real estate industry. What developer, broker, or property owner sits around *hoping* that investment and improvements will find them? Ludicrous, right? Those in the real estate industry know that promotion, communication of market information, taking site selectors to visit your site...these are all critical tasks that lead to signed deals, that in turn lead to investments that improve a downtown area. 
What is missing is a fundamental understanding that improving the mix of uses in a downtown - which is what real estate investment does - improves the overall business environment. Economic research bears this out clearly. Consumers are drawn to communities that offer both retail density and great store mix. If a community does NOT offer density and mix, corridor performance, as measured by property values, retail sales and customer preference all take a nose dive. A comprehensive 2009 study of commercial corridors completed by Econsult,  a econometrix research firm based in Philadelphia states this clearly. They found that, "a good store mix is very strongly (italics mine) associated with good corridor performance. A good store mix can help draw a wide spectrum of shoppers ..It is no surprising that store mix is important, as single-owner shopping centers and malls place great importance on seeking a good store mix for their centers." So let me see if I get this right. Downtown's are facing fierce competition from malls and traditional single owner shopping centers - yet promotion and marketing for the purposes of investment that ensures a level playing field is being outlawed. Tell me how this makes any sense?  
ACCORDING TO THE ARTICLE, “The court looked at the BID’s activities and said you can’t charge property owners for what is essentially a PR campaign,” said Geoff Stover of the law firm Steinbrecher & Span, who represented the property owners in the complaint. 
RESPONSE: When communities need to attract investment, sometimes a marketing campaign is exactly what they need. Tenants in malls are used to paying CAM charges - called Common Area Maintenance. Many times, these charges include marketing the mall or shopping center. BID assessments are effectively the same thing as CAM charges, yet BID opponents posit that you "can't charge property owners" for marketing services. OK, this makes no sense. 
SO, WHAT IS THE OUTCOME IF THIS RULING IS ALLOWED TO STAND?!? Sure, the streets won't be cleaned and there will likely be an uptick in quality of life crimes, but more significantly, if you keep BIDs from engaging in economic development activities and attracting investment, and DISSOLVE them, you effectively kill the one of the most effective public policy tool that property owners have to collectively influence the destiny of their asset. What a shame. 

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