June 30, 1989 - From the June, 1989 issue

The County's Money Maker: Its Asset Development Program

William Jordan Lewis, the Lease Administrator of the Los Angeles County Asset Development Division, outlines how the County of Los Angeles has responded to recent legislation in state funding. Prior Assembly Bill 912, the County was severly limited in funding. With the passing of the Bill, the County now has the "legal ability to develop land through negotiation of a ground lease with private developers." William Lewis develops the implications of this bill on future development. 

With the passage of Proposition 13 in 1978, and subsequent decreases in state aid to Counties, the need to meet critical annual revenue shortages and to identify additional revenue sources for the provision of basic and essential public service became critical. At the same time, the loss of County staff and reduction in programs resulted in a slowing of the capital project programs on land already acquired, the underutilization of developed properties, and a reduced provision of public services in the County.

By 1983, Counties in California were severely limited in their ability to develop publicly-owned property to its maximum economic potential. For instance, at that time, we were only able to sell or lease property to the highest bidder with no control over the type of development that would be placed on the site. Thus, instead of a high-revenue producing commercial office building, we could end up with a low producing storage warehouse, affording us no revenue producing advantage. There were no legal ways for us to negotiate the highest and best economic use for our land to give a long-term stable source of revenue.

To cure this limitation, Assembly Bill 912 was sponsored by the Los Angeles County Board of Supervisors and introduced in the 1983 California Legislature. This bill was passed and became law in January 1984.

Now we have the legal ability to develop land through negotiation of a ground lease with private developers. This lets us achieve a higher rate of return on our asset than we ever had before. Also, through the RFP process, we can define exactly what we are looking for in lease terms and rental income objectives as well as the type of development we prefer to see on the site. We can state up front in our RFP that we are not only seeking the highest economic return, but just as important, a project that has the strength and market viability to be successful for a long period of time.

AB 912 also has other important spin-off advantages that are now available to us. In addition to commercial development of County property, we can accommodate residential, industrial and cultural uses. In Marina Del Rey for instance, we have renegotiated existing leases which had low 60-year returns to as much as 99 year terms at substantially increased revenues.

Our world famous Otis Art Institute is a beneficiary of lease extension. By moving from a 40-year term to 99 years, a successful fund raising venture has been possible which permits full amortization of the investment which encourages donors to contribute.

The leasehold can extend up to 99 years. This arrangement permits development which is fully marketable and can be financed. The State Legislature has recognized such development and the receipt of rental income by Counties as being a valid public purpose. The County must retain ownership of the property to fulfill its need at a future date for locations for public facilities. In the meantime, the property can be developed by the private sector in a manner consistent with the development and income objectives of the County which receives an economic return equal to or greater than the appraised value of the site.

In fact, in order to approve each such transaction, the State law requires that the County Board of Supervisors must find that the value of the economic benefits of the proposed lease exceeds that which would be realized from the sale of the properly and that the Board of Supervisors must further find that a reasonable expectation exists that a future public need justifies retention of the fee ownership of the property.

The County receives the economic benefit of owning the property, receiving rent, receiving property taxes where none have been previously generated, and a share of the net proceeds of the developer's sale or refinancing of its interests in the property. Most important, the County receives the value of the reversion upon completion of the lease term.

In our current efforts to ground lease our properties (see examples), the most important issue has become the question of jurisdiction. The County has never waived its right to challenge the jurisdiction and regulations of the City of Los Angeles. The County's need to maximize its revenues has at times not squared with the City's land-use decisions, and simply cannot tolerate the City's unilateral authority over land-use decisions. The County doesn't want favoritism, only equity, and that is what must prevail.

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It is hoped that the current collaborative planning of our downtown sites will bear fruit in terms of the realization of our individual and mutual objectives. Certainly we each have our own individual objectives, and legitimate differences exist at the staff level about the appropriate density of the civic center; the questions about what is the focal point of downtown; the FAR, building height and land uses for our projects; and the relationship between code required parking and off-site parking.

But we will be able to resolve these questions since we ultimately agree on the objective of creating a regional center at Bunker Hill.

Perhaps these differences arise because of confusion over the purpose of the County's real property asset development program. The County does not redevelop, nor is it a developer. However, the program is an investment to provide desperately needed revenues for the County's paltry coffers.

The County's Asset Management: A Few Examples

First Street Properties: Proposed development: 4,087,200 sq. ft. of office, hotel, retail space within the Bunker Hill Urban Renewal project. The development is expected to generate $4.3 billion in revenue to the County over the 66-year term of the lease. Status: Received two proposals covering 1.455 million square feet of office/retail/day-care center space.

First and Broadway: Proposed development: 606,000 square feet of office, retail, restaurants, banking, and a tri-level subterranean parking for 1,600 autos. Included in the plan is development of a child-care center. The development is expected to generate $1.7 billion in revenue to the County over the 66-year term of the lease. Status: Board recently approved Ground Lease with developer and EIR.

Long Beach/Signal Hill: Proposed development almost 1,000,000 sq. ft of commercial and industrial development on 26 acres. The County anticipates $470 million in revenue over the 66-year term of the lease. Status: Completed Phase I retail distribution center tenant improvements; fully leased 450,000 square feet.

El Pueblo Development: Historic rehabilitation of three buildings and adaptive commercial reuse of five buildings; construction of new commercial buildings and parking structures. The site is located within the ultimate boundaries of El Pueblo de Los Angeles Stale Historic Park. Status: Completed Option Agreement for acquisition of City-owned property.

Rancho Los Amigos: Proposed development of property in two stages located in the City of Downey. Phase I- 140,000 sq. ft of office and light industrial land use; Phase II- 452,000 sq. ft of light industrial and distribution land uses. Status: Issued second RFP on Phase I development; evaluated three proposals and selected a developer.

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