June 24, 2004 - From the February, 2001 issue

Redeveloping Obsolete Industrial Land: Region's Economy Impacted by Lack of Good Policy

Any California city that's had to balance a budget knows that "retail vs. manufacturing"is not an even scale when it comes to badly needed sales tax revenue. However, left out of that equation is the fact that manufacturing usually offers higher-paying jobs, more of them, and thus greater income tax revenue for the State. MIR is pleased to present the L.A. Economic Development Corporation's recent policy report: Redeveloping Obsolete Industrial Land with Modern Manufacturing Facilities, compiled by Gregory Freeman & Ken Ackbarali.

Introduction

Demand for modern, efficient industrial space is strong, particularly in key logistical and manufacturing hubs. Here in Los Angeles County the vacancy rate for manufacturing space has fallen steadily from 13.1% in 1993 to less than 3% in 1999. And in the tight Central Los Angeles market, the vacancy rate for manufacturing has dropped below 2%. This acute shortage of modern industrial facilities means demand has outstripped supply and the County is losing opportunities for new high wage jobs estimated to be worth in excess of $700 million annually in direct wages. These jobs, unlike low wage retail work, tend to pay well and typically include benefits such as medical insurance. Yet perverse incentives created by the tax system have largely kept local governments from ameliorating the industrial facilities shortage.

It is widely accepted that when faced with the decision between immediate revenue for their budgets (from sales tax revenue) and long-term, livable-wage jobs (from manufacturing), cities prefer big-box retailers, car dealerships or other large sales-tax generators. Less well understood, however, is the impact of redeveloping older industrial sites for retail instead of modern industrial uses in terms of the jobs, wages, and local and state tax revenue created.

This study uses a case study approach to compare industrial and retail redevelopment of obsolete industrial facilities and under-utilized land at two sites in Los Angeles County. Three alternatives-a baseline to capture current economic activity; a regional retail center; and a modern industrial park for high-value manufacturing-were studied for each site. The IMPLAN (IMpact analysis for PLANning) economic model was used to calculate the total jobs, wages, and sales for each scenario and these numbers were in turn used to derive the state and local taxes generated by each project.

As expected, the cities have a strong fiscal incentive to favor retail over industrial: they receive little direct financial benefit from manufacturing, while the sales tax from retail operations produces a substantial revenue stream. The state, on the other hand, receives roughly comparable revenue streams from retail or manufacturing operations-with the edge going to manufacturing on larger sites-because manufacturing generates far more income tax for the state than a retail operation would on the same site. Manufacturing produces more income tax for the state because it generates more wages: manufacturing workers are paid more than their retail counterparts, and each manufacturing job creates more supporting indirect and induced jobs than a retail job. Thus, manufacturing facilities are important for creating high-wage jobs and produce at least as much revenue for the state as retail (if not more), yet cities facing short term financial pressures have a strong incentive to trade these good jobs for low wage retail positions and the concomitant sales tax revenue.

Site Selection, Development Scenarios & Tenant Selection

Site Selection

The study focuses on the Gateway Cities region of Los Angeles County because cities in this region contain much of Los Angeles County's underutilized industrial land; are located near the Ports of Los Angeles and Long Beach; and are served by rail lines and the 110 and 710 freeways and have much of the manufacturing workforce. Many of these cities also have among the lowest average family incomes in the County and would benefit significantly from the addition of well-paid manufacturing jobs. To make the retail versus manufacturing comparison as fair as possible, large enough sites were sought that would be suitable for redevelopment with either use.

With the help of the Gateway City Economic Partnership, two sites were identified. The first site is an under-utilized property comprising thirty-one acres in the City of South Gate; the second is a collection of obsolete facilities on sixteen acres in the City of Huntington Park. Overall, both sites were found to be suitable for either industrial or retail development.

Development Scenarios

Kosmont Partners developed three scenarios for each site-a baseline (labor-intensive and relatively low wage manufacturing); a high-value industrial park (featuring capital-intensive manufacturing); and a regional retail center.

Tenant Selection

• Baseline Scenario: The garment industry was selected because it is the prototypical low-wage, underutilized industrial use. For the larger facility at South Gate, furniture manufacturing was added to the mix .

• High-Value (Capital-Intensive Manufacturing) Industrial Park: [I]ndustries such as biotechnology and computer chip manufacturing that require the highest educational and skill requirements (and not coincidentally have the highest pay scale among industrial workers) were eliminated from consideration. Environmentally unfriendly, i.e. "dirty" industries were also rejected since they would probably encounter local opposition. The finalists included food processing, commercial printing, lighting and wiring, fabricated metal products, and machinery and equipment manufacturing.

• Regional Retail Center: Kosmont Partners identified the following potential tenants: Value Plus, KV warehouse type Mart, Notricas Market (Latino super market), Super Gigante (Mexican chain grocery store), home improvement stores, junior department/general merchandise discount stores, and various local ethnic-related specialty tenants.

Research Methodology & Results

Methodology

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The IMPLAN model was used to calculate the employment, compensation and total sales for each development scenario. IMPLAN uses five region-specific modules (employment, value added, output, final demand and structural matrices), each with up to 528 industry sectors. The appropriate level of analysis here is the County of L.A., since it is expected that any economic activity will spill over local jurisdictional lines, particularly for the industrial operations.

Results

Selecting retail for redevelopment instead of manufacturing means an implicit tradeoff between better paying manufacturing jobs plus the numerous follow-on jobs they create, and fewer, lower paying retail jobs. The high value manufacturing facilities produce more direct jobs than retail at the smaller site (921 compared to 480) and at the larger site (2,092 vs. 820). The richer multiplier for manufacturing (roughly 2.0) compared to retail (1.3) helped the manufacturing facility creates 3 times as many total jobs as retail on the smaller 18-acre Huntington Park site (1,885 vs. 624) and almost 4 times as many at the larger 31-acre South Gate site (4,212 vs. 1,084).

The baseline for Huntington Park produces more jobs (partly because of the high square footage covered by buildings on the site which predate modern zoning laws) mainly owing to the labor intensity of the selected industries. Garment and furniture manufacturing, however, are among the industries most vulnerable to overseas competition (because they compete based on the wages of low skilled labor) and the jobs may not exist in L.A. in the not-too-distant future.

The wage totals reflect the manufacturing sector's advantage over retail in terms of number of jobs created, and the average salaries those jobs offer. The disparity is immediately apparent when comparing direct wages at the Huntington Park site where industrial wages ($36 million) dwarf retail wages ($8 million). There is a similar difference at the South Gate site, which supports direct manufacturing wages of $70 million compared to $14 million for retail. When the more numerous indirect and induced jobs are included, the modern industrial park redevelopment produces five and half times the total wages of the retail option at the Huntington Park site ($67 million vs. $12 million) and six times the total wages on the larger South Gate site ($138 million vs. $22 million).

The local government preference for retail operations can be readily understood by looking at city government sales tax column. The manufacturing businesses' sales tax revenue is so negligible for the cities that rounded to the nearest million (with two decimal places) their totals are zero. Even though manufacturers tend to pay more business and utility taxes than retailers-a finding reflected in the "Other Taxes" column in Table 3-the difference is not enough to offset the gap generated by the sales tax. At the smaller site, retail generated $690,000 in local taxes annually, while manufacturing contributed less than one-third as much at $220,000. Retail's advantage was even greater at the larger site in South Gate where the totals for city government were $910,000 for retail and $110,000 for the manufacturing park.

The retail advantage created by sales tax revenues for the cities is magnified at the state level since the state share of the sales tax is five times greater than the cities'. The state, however, also collects income taxes. Since the manufacturing facilities employ more and better-paid direct workers than retail, and because they generate more supporting jobs, manufacturing produces distinctly more state income tax. The income tax disparity is so large-the manufacturing facilities generate roughly six times more state income tax revenue than retail-that at the smaller site it helped produce $3.11 million in total annual revenue for the state, almost matching the sales tax-driven $3.24 million from retail. At the larger South Gate site, the income tax revenue helped make the manufacturing facilities more lucrative for the state ($6.23 million in total annual tax revenue) than the retail operation ($5.23 million).

For the obsolete Huntington Park site, both redevelopment alternatives produced more total tax revenue for the state than the baseline estimates-adding an annual gain to the state treasury of almost one half million dollars. At the underutilized South Gate site, the state would realize an even larger annual gain from redevelopment. The retail center produces roughly $5 million more annual state tax revenue than the baseline economic activity, while the industrial park generates an additional million beyond that, for an annual total of about $6 million in additional tax revenue. Given the optimistic nature of the baseline scenario (assumes light manufacturing-garment and furniture-at a site used to store pipe) the actual annual benefit to state coffers would certainly be higher than the estimates given here.

Caveats & Implications

Redevelopment of obsolete and under-utilized urban land has clear advantages. From a tax perspective, retail redevelopments help both the city and the state; while manufacturing operations primarily add to state revenues. Based on employment, however, manufacturing creates more, and better paying, jobs than retailing. Given the shortage of modern industrial space, and the strong demand for more facilities, one might expect the market to provide significant incentives for developers to redevelop obsolete and underutilized industrial properties. While job creation and tax revenue enhancement make the case for development with governments, however, they are not sufficient for developers.

New facilities will be built when developers can reasonably expect a positive rate of return on their investments, regardless of whether the end use is retail or manufacturing. There are two core obstacles to private sector redevelopment of obsolete and underutilized industrial properties: the often unknown levels of contamination and lack of clear remediation standards at older industrial sites; and the need to assemble the necessary parcels of land to create a viable massing for a successful project. These obstacles are described below.

Many of the older industrial sites prime for redevelopment are contaminated. While the potential cost of remediation is an obvious barrier, two often-overlooked issues also hinder redevelopment. First, developers are wary of acquiring land if it means also picking up the liability for existing (and often unknown) contamination. Second, cleanup standards may be prohibitive even when the extent of the problem is clear. Restoring land to pristine condition makes sense if the land is to be used for schools or houses, but this requirement may be unnecessarily strict for an industrial operation. States such as Pennsylvania allow for such distinction in end uses in terms of the stringency of cleanup standards, a move California could emulate. Until the contamination issue is addressed, much potentially valuable industrial land will remain underutilized.

Modern industrial facilities have a relatively large footprint. Industrial parks require significant acreage, but have the advantage of separating the manufacturing operations and any trucks from the surrounding community. Industrial sites are already in short supply, particularly larger properties of fifteen acres or more. Cobbling together smaller parcels of land in a process known as "assemblage" is time consuming, difficult and often expensive. Cities can expedite the process by exercising their powers of condemnation, but they have few monetary incentives to engage in such an arduous task-at least not for a manufacturing facility.

The state could help address the shortage of the modern industrial facilities within an up-front investment in redevelopment. Funds provided as an incentive to the cities-not industry-could be used to overcome some of the barriers created by brownfields and the land assemblage issues. Some of the funds, for example, could be used to help short-staffed smaller cities that lack the expertise and personnel to successfully apply for existing federal brownfields funds. The state's investment would be recouped and, over time, surpassed by the additional tax revenue generated by redevelopment. Simultaneously, the state would help create the type of well-paid "livable wage" jobs many of the areas with obsolete and underutilized industrial land desperately need.

By creating the opportunity for high value, middle-income jobs with benefits, an industrial redevelopment policy could be used to create a "move-up" strategy in the underserved urban core. The low wage industrial workforce could be trained for the new manufacturing jobs. As these workers leave their current jobs to move into better paying ones, the unemployed and underemployed could move into the resulting entry level job openings. Los Angeles County still has over 280,000 cases on general relief or CalWorks assistance at an annual cost of approximately $1.5 billion. With the current unemployment rate well under 6%, many of the new or vacant jobs created by the redevelopment policy could be filled by those on public assistance.

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