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News
City Council Is Asked By Staff to OK Giving Up Part of Future Sales Tax Otherwise Due LB Taxpayers to Retain & Expand Circle Auto Group ELB Car Dealerships Using 1992 "Sales Tax Incentive Program"
(Sept. 28, 2002) -- At its October 1 meeting, the City Council is being asked by City Hall staff to give up part of future sales taxes that would otherwise be due LB taxpayers in order to retain and expand Circle Automotive Group ("Circle"), which manages dealerships in ELB's 4th Council district.
A city staff memo argues that the Council should allow Circle, which manages a Mitsubishi dealership at 4400 Los Coyotes Diagonal and a VW, Audi and Porsche dealership at 1919 Lakewood Blvd., to benefit from the "Sales Tax Incentive Program" created by the Council in 1992.
In economic effect, the "Sales Tax Incentive Program" is arguably a local taxpayer subsidy made available to certain large LB businesses by voted action of the City Council, justified for asserted net economic benefits as a Council decided policy matter.
The program was created by voted action of a former Council over a decade ago that subsequent Councils have left on the books. Invoking it inevitably sparks debate on both sides of a policy divide.
"New retail businesses or existing businesses planning to expand, which generate or are projected to generate more than $5 million in annual sales, may be eligible for the program," city staff's memo tells Councilmembers. It adds, "The proposed application of this program to Circle Automotive Group (Circle) will serve to retain these auto dealerships in the City of Long Beach, protect the jobs in the community, and as a result of significant expansion, enhance the City's sales tax base."
As explained by city staff:
To retain these franchises, the manufacturers are again requiring substantial capital improvements and new equipment. Porsche and Audi are requiring separate facilities.
To satisfy these requirements, Circle has acquired and intends to remodel its existing
leased location on Lakewood Boulevard for the Volkswagen dealership and expand its
operations by acquiring and remodeling the buildings on the 1.44-acre property across
the street, for the separate Porsche and Audi dealerships. Circle acquired the existing
facility for $3.8 million and paid $2.8 million for the 1.44-acre expansion property. The
cost of remodeling the buildings for dealership use is estimated at $2.75 million for a
total of $9.35 million. Circle has requested financial assistance using the Sales Tax
Incentive Program to help defer the cost of expansion and development.
The city staff memo says a City Hall fiscal advisor, Keyser Marston Associates, Inc., determined that Circle does not have the ability to finance certain capital improvements without the assistance provided by the Sales Tax Incentive Program. City staff advises the Council to approve entering into a "15-year lease agreement with Circle Automotive Group for 50% of the sales tax generated above a base of $294,465 [the amount of sales tax generated by the VW, Audi & Porsche dealerships in the four quarters ending June 30/02], not to exceed $3 million."
The memo states, "Circle is requesting sales tax sharing, in the aggregate, up to $3 million, over a 15-year period. Based on sales projections, the proposed assistance has a present value of $1.52 million. The amount the City will receive over 15 years, including the base tax, is projected to be $9.32 million, with a present value of $4.24 million."
A request that the Council apply the "Sales Tax Incentive Program" inevitably triggers debate on a matter of city policy.
Supporters justify handing back sales tax dollars to large businesses on grounds the net taxpayer benefit exceeds the taxpayer cost. If a large business went elsewhere, the argument goes, LB taxpayers would get zero net sales tax. Supporters often note LB City Hall continues to be regularly lambasted for letting some (now former) LB car dealerships leave for Signal Hill years ago, costing LB taxpayers millions since then. They argue the program is both business friendly and taxpayer friendly.
These justifications leave other taxpayers (and some smaller LB businesses) fuming. They call the Council enacted sales tax rebate policy a double-standard, a City Hall perk available to big businesses but not smaller ones, a form of corporate welfare. Some argue it is bad policy to force other LB taxpayers to help pay a large business' costs, and some smaller LB businesses argue that making them pay another business' costs is not "business friendly" to them. Others say the sales tax rebate program creates the illusion that LB is thriving when some of its big businesses are taxpayer subsidized and produce less revenue than taxpayers might otherwise expect.
These are ultimately City Council policy decisions.
City staff's memo to Councilmembers argues for approving the sales tax rebate. We quote at length in pertinent part:
Circle manages a Mitsubishi dealership at 4400 Los Coyotes Diagonal and Volkswagen,
Audi, and Porsche dealerships at 1919 Lakewood Boulevard. On May 12, 1992 [less than two months after the Council enacted the Sales Tax Incentive Program], the
City Council approved a Sales Tax Incentive Agreement with Circle to provide financial
assistance for capital improvements required by the manufacturers to retain the
franchises and for additional equipment and specialized tools. Under this agreement,
the City is required to pay Circle 100% of the sales tax generated over a $122,000 base
for the first five years, 50% for the next five years (through the second quarter of 2002),
and 0% for the remaining five years (through the second quarter of 2007). This
averages 50% over the life of the agreement. The City also provided collateral for a
$240,000, five-year bank loan to Circle, which was subsequently paid off in 1997.
To retain these franchises, the manufacturers are again requiring substantial capital
improvements and new equipment. Porsche and Audi are requiring separate facilities.
To satisfy these requirements, Circle has acquired and intends to remodel its existing
leased location on Lakewood Boulevard for the Volkswagen dealership and expand its
operations by acquiring and remodeling the buildings on the 1.44-acre property across
the street, for the separate Porsche and Audi dealerships. Circle acquired the existing
facility for $3.8 million and paid $2.8 million for the 1.44-acre expansion property. The
cost of remodeling the buildings for dealership use is estimated at $2.75 million for a
total of $9.35 million. Circle has requested financial assistance using the Sales Tax
Incentive Program to help defer the cost of expansion and development.
Keyser Marston Associates, Inc., the City’s fiscal advisor, determined that Circle does
not have the ability to finance the capital improvements without the assistance provided
by the Sales Tax Incentive Program. Based on their analysis, the excess cost is $3.35
million. Circle is requesting sales tax sharing, in the aggregate, up to $3 million, over a
15-year period. Based on sales projections, the proposed assistance has a present
value of $1.52 million. The amount the City will receive over 15 years, including the
base tax, is projected to be $9.32 million, with a present value of $4.24 million.
The proposed agreement will provide for terminating the existing agreement after
paying the tax sharing due to Circle for the second quarter of 2002, the last quarter in
which the City is required to make a payment. The City will pay Circle 50% of the sales
tax revenue generated by sales and leases for the Volkswagen, Audi, and Porsche
dealerships in excess of a new base, which is $294,465. By setting a new, higher base,
the proposed agreement will preserve the intent of the existing agreement. The new
base is the amount of sales tax generated by the aforementioned dealerships during the
four quarters ending June 30, 2002. Payments will start in the third quarter of 2002 and
will terminate in 15 years or upon paying $3 million, whichever comes first.
To implement this agreement, the City will lease Circle’s property for the sales tax
sharing amount and sub-lease it back to Circle for $1 per year...
TIMING CONSIDERATIONS
Circle has committed to the expansion by purchasing the 1.44-acre property. An
agreement with the City will facilitate the dealership’s ability to secure adequate
financing for the improvements. Timely execution of the Agreement will accelerate the
proposed construction and, commensurately, the increased revenue to the City.
FISCAL IMPACT
Annual sales tax the four quarters revenue is expected to grow significantly from a total of $294,465 for ending June 2002 to a projected $712,000 in 2006 as a result of the proposed remodeling and expansion. The aggregate amount retained by the City over 15 years is projected to be $9.32 million, which has a present value of $4.24 million. This amount will accrue to the General Fund.
IT IS RECOMMENDED THAT THE CITY COUNCIL:
1. Authorize the City Manager to terminate the existing agreement .with Alant
Corporation (Circle Imports) and enter into a 15-year lease agreement with Circle Automotive Group for 50% of the sales tax generated above a base of $294,465, not to exceed $3 million.
2. Authorize the City Manager to enter into a sublease agreement with Circle
Automotive Group for $1 per year.
Respectfully submitted,
ELANIE S. FALLON
DIRECTOR OF COMMUNITY DEVELOPMENT
APPROVED:
HENRY TABOADA
CITY MANAGER
The Council has left the Sales Tax Incentive Program, enacted in 1992 in grim economic times, on the books where it has since been used even in brighter times. In the mid 1990s, City Hall used it to help attract Beach City Chevrolet to the former Los Altos drive in site on Bellflower Blvd. That generated controversy which a former Council brushed off.
This time, the city staff proposal comes just days after the Council approved a budget balanced with one time revenue sources to span a multi million dollar gap between revenue and spending.
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