FEATURE ARTICLE, OCTOBER 2011

UNDER THE MICROSCOPE: CALIFORNIA’S ECONOMIC DEVELOPMENT ACTIVITY

Public and private entities have been working together since the spawn of modern-day cities. Sometimes their relationships are mutually beneficial and fruitful. Other times, the two can be perceived as opposing forces, especially when small businesses and commercial developments are involved.

In today’s challenging economic climate, however, it behooves all entities – public or private – to work toward common goals. Below are two California case studies that illustrate just what can be accomplished when cities and the people who build them work together to create a more favorable environment for the larger community.

COUNTY CASE STUDY: SAN BERNARDINO
SAVING JOBS AND MONEY — HOW PUBLIC AGENCIES HELP EASE BUSINESSES’ BOTTOM LINES
By Mary Jane Olhasso, economic development agency administrator, County of San Bernardino

Olhasso

There is no denying that this economy has created a challenging environment for business. Manufacturing has been hit especially hard, particularly in California. Now more than ever, businesses need a stable and predictable environment to operate successfully. They need the right physical location with access to markets and a solid, dependable transportation infrastructure. Most important, business needs a government it can trust.

Programs delivered at the state, county and city levels, such as Enterprise Zones, Local Agency Military Base Recovery Areas (LAMBRA) and Foreign Trade Zones, are all examples of programs that provide beneficial incentives and credits to businesses. Another example is San Bernardino County’s Workforce Investment Board, an organization committed to helping companies keep manufacturing jobs in California.

In fact, the San Bernardino County Board of Supervisors recently approved the addition of 1,252 acres of county unincorporated area to the San Bernardino Valley Enterprise Zone (SBVEZ), an area that encompasses 42 square miles in the cities of San Bernardino, Colton and unincorporated portions of the county. This was done to extend the Enterprise Zone tax credits and benefits to more businesses that are considering a county location.

Erik Wanland of CB Richard Ellis recently represented Simpson Strong-Tie, one such manufacturer that recently consolidated and relocated its operation from Brea, Calif., to the SBVEZ. Wanland noted that many large industrial occupiers are increasingly looking at opportunities to consolidate product, reduce costs and improve efficiencies.

A major manufacturer of structural products for the building industry, Simpson Strong-Tie will now streamline its operations into an existing 396,600-square-foot industrial building in the Agua Mansa redevelopment area. The building suits the company’s goals to increase plant capacity and improve efficiency, while providing the manufacturer with the financial benefits of locating in the SBVEZ. These benefits include hiring tax credits and sales or use tax credits, among others.

Hayden Industrial Products, a manufacturer of mobile and stationary heat exchangers for the power generation, construction, fluid power and agriculture industries, also relocated to a 109,000-square-foot industrial building in the SBVEZ.

“The company has been actively searching for a site that suited our production requirements and provided us the opportunity to consolidate and grow,” said Shannon Riley, Hayden’s human resources manager. “San Bernardino met our expectations and the enterprise zone was an added incentive that we will most certainly use to expand our workforce and product lines.”

According to reports, Hayden Industrial Products currently has 66 employees. The company is in the process of completing hiring tax vouchers for several of its employees. It also has plans to hire more local workers as business grows.

Businesses that locate within a California Enterprise Zone are eligible for substantial state tax credits and benefits, which may include:

• Hiring Tax Credits — state tax credits of up to $37,440 over 5 years for each qualified employee hired.

• Sales or Use Tax Credits — state tax credits for sales and use taxes paid, up to $20 million per year, on qualified machinery and machinery parts purchases.

• Increased Expense Deduction — accelerated expense deductions for certain depreciable property.

• Net Operating Loss Carry-Forward — up to 100 percent net operating loss (NOL) carry-forward. NOL may be carried forward 15 years.

• Net Interest Deduction for Lenders — net interest deductions for lenders on loans made to firms within an Enterprise Zone.

• State Preference Points — Enterprise Zone companies can earn preference points on state contracts. Unused tax credits can be applied to future tax years.

The County has also found through its Workforce Investment Board that sometimes the greatest business support it can provide to a business is helping it keep its doors open and workers employed. Six months after utilizing the Lean Manufacturing Program, funded by the Workforce Investment Board, local employer A&R Tarpaulins added three employees, including one inventory manager and two entry-level engineers. Today, the company is still growing.

“We are grateful for the free expert assistance we received from the Workforce Investment Board’s business support team,” said Bud Weisbart, A&R’s vice president. “One year ago, we were facing the challenges every business owner faces in a down economy: trying to keep all our staff employed and maintain a profit.”

A&R, a manufacturer of fabric products for the trucking, aerospace and architectural industries, is now better aligned for sustainable growth since implementing process improvements recommended by California Manufacturing Technology Consulting (CMTC). The Lean Process Training identified where A&R could use its staff more effectively and reduced waste in its processes.

The Workforce Investment Board’s partnership with CMTC, and others like it, is federally funded and free to employers who participate. Its resource team brings funding to businesses for employee training. It can be utilized to upgrade the skills of existing employees or hire and train new employees through subsidized and on-the-job training programs. The program also offers assistance in recruiting qualified employees, business consulting, job fairs, market research and business workshops.

Creating an environment where businesses can succeed is crucial not just to a county’s economy, but to all levels of government. Anyone involved in the site selection process, especially business owners struggling to keep their workforce intact or remain competitive, should look to the public sector as a partner.

CITY CASE STUDY: ALHAMBRA
PUBLIC-PRIVATE PARTNERSHIPS – HOW ONE COUNCIL IS CHANGING THE DEVELOPMENT INDUSTRY
By John Finke, senior managing director, National Development Council’s public-private partnerships division

Finke

The Gateway at Alhambra, a three-story, 120,000-square-foot facility that will serve as the administrative offices of the Community Development Commission of Los Angeles County (LACDC) and the Housing Authority, broke ground in September 2011. The project will house about 550 employees, reducing the agency’s expenses, transportation costs and need for multiple facilities.

What is really groundbreaking about the Gateway at Alhambra, however, is how this project is getting built. At a time when California’s municipalities are facing serious financial deficits, Los Angeles County partnered with the National Development Council (NDC), a non-profit economic development organization, on an innovative public-private approach that had never before been tried in California. Once this partnership is complete, it will deliver a facility that significantly reduces costs and increases efficiencies for the county and its taxpayers.

NDC’s 63-20 bonding process, which is named after a 1963 IRS ruling, has successfully built nearly 20 public projects in Washington State since 2000. Through this process, Washington municipalities and state government have been able to leverage the skills and efficiencies of private developers and minimize financial risk by barring cost overruns and delivering on-time projects. This has resulted in a savings of 15 percent to 50 percent of the total project cost.

Gateway at Alhambra, Los Angeles County

Typically, California’s municipalities rely on the design-bid-build or design-build process. Both afford their own benefits, but ultimately they leave the public on the hook for project cost overruns, delays and uncertain outcomes. Additionally, they allow the private development partners to pocket lucrative project savings that should accrue to the public’s benefit.

As a non-profit, NDC is committed to the public benefit from the outset. NDC oversees the 63-20 process, reaching early agreements between the government agency and the developer to ensure reduced risks to taxpayers and increased efficiencies and cost savings. Of the 23 public projects NDC has been involved with, not a single NDC 63-20 project has ever cost the government money.

Typically, with a 63-20 lease, a non-profit entity issues the bonds and contracts with private firms to construct the project. This bypasses the lengthy, often costly and highly regimented public development process.

In the case of the Alhambra project, NDC created the non-profit entity Community Development Properties Los Angeles (CDPLA), which secured $45 million to finance the acquisition of the land, the demolition of an existing building, the construction of the Gateway building and the renovation of an existing parking facility.

CDPLA will lease the property to LACDC for an affordable fixed annual rent that is lower than their current occupancy costs for a 30-year period. After this, ownership will be handed over to LACDC at no additional cost. The 63-20 process allows CDPLA to require their development partners to guarantee the project cost and delivery date, yet capture any saving from early delivery or development savings for the benefit of LACDC. In a typical public development process, these savings remain with the private development partners. 

For too long California has viewed the public development process as wholly public or wholly private, and therefore not achieved the true benefits that can come from a more balanced approach. At a time when municipalities across the nation are facing a stark reality of too many obligations and demands and too few resources, the 63-20 model may provide a timely solution to some of California’s public building needs.

By focusing on what they do best and supporting a financing model that allows them to leverage the skills and know-how of the private sector to construct facilities, California’s municipalities can build better buildings in less time and for less money.

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