Troubling Signs in Real Estate
From the Los Angeles Business Journal, Monday, June 23, 2014
California lawmakers must act to shore up commercial properties by boosting Hollywood production.
By LEE S. SEGAL
Higher taxes, the high cost of commercial real estate and a lack of government subsidies are moving jobs to other states and preventing lucrative companies from doing business in California.
Over the past few years, one of California’s top industries, entertainment, as well as many others have packed up and left the state, creating regional high unemployment rates and vacant commercial real estate buildings.
Los Angeles is known as the entertainment capital of the world; however, the entertainment business is moving to states with lucrative tax incentives.
Louisiana ranked first in the most live-action films made in 2013, while California came in fourth, based on a study by FilmL.A., a non-profit film office in Los Angeles. Entertainment workers now call the Bayou State “Hollywood South,” with more than 300 film and TV productions shot there since 2006.
Fifteen years ago, Hollywood was responsible for making 64 percent of the top 25 live-action films; however, California’s share of the same had fallen in 2013 to just 8 percent, according to FilmL.A.
Louisiana has a tax incentive program that offers a base incentive rate of 30 percent with no annual cap on the amount spent on filming in the state; in addition, the state has an extra 5 percent tax credit on each resident’s salary.
In contrast, California has an annual cap of $100 million. Film projects in excess of $75 million are completely ineligible for tax incentives. However, a bill, AB1839, in the state Senate would increase the budget and raise the annual cap to more than $100 million.
Louisiana and Georgia are the only states with no cap on their tax film incentive programs, according to the Economic Impact of Louisiana’s Entertainment Tax Credit Programs report. The programs that have no overall caps in place tend to be the most successful, the report said.
From 2010 to 2013, 77 films with a combined budget of $108 billion applied for California film tax incentives unsuccessfully, according to FilmL.A. Most of them filmed outside California where film tax incentives were available.
As a result, L.A.’s entertainment businesses are closing.
“Some companies are staying in business by opening satellite offices operating in other states,” according to Philip Sokoloski, vice president of integrated communications at FilmL.A.
Burbank is the home of a thousand entertainment businesses, according to the Burbank Records Department. The Media District in Burbank has a Class A office vacancy rate of more than 26 percent, according to Cushman & Wakefield.
The Walt Disney Co. vacated almost 500,000 square feet at 3900 W. Alameda Ave. in the Media District in 2013. “They vacated almost an entire building, which drove the vacancy rate up overnight,” said Ruth Davidson Guerra, assistant community development director at Burbank City Hall.
NBC Studios completely moved out of Burbank’s Media District earlier this year, according to Mary Hamzoian, the city’s economic development manager. NBC’s late-night talk show “The Tonight Show,” which was produced in California for 42 years, moved to New York this year, taking advantage of relocation tax credits. They’re receiving 30 percent off of qualified costs, said Jason Conwall, press secretary of Empire State Development. New York state has an annual cap of $420 million on film tax incentives.
The state is developing a hub focusing on the use of nanotechnology in animation, motion-capture technology and computer-generated imagery used in film production, Conwall said. The Film House, a Marina del Rey film company, will be the first to move its headquarters to the Syracuse, N.Y., development and receive tax incentives.
California is also losing corporate business. Toyota Motor Corp. announced in April that it will move its North American headquarters from Torrance to Plano, Texas. Toyota will vacate 100 acres of California commercial real estate and relocate 3,000 jobs by 2017.
Government policy is not helping California’s economy. Gov. Jerry Brown announced last year that the state for the first time in years has a surplus and its fiscal health has improved. I do not want to get political, but is the governor referring to a surplus of unemployed and underutilized real estate?
Tax incentive enterprise zones in 42 economically distressed areas throughout California designed to encourage business investment and create jobs ended in January.
In conclusion, government has a major role to play in stimulating the commercial real estate business. Losing business to states with better tax incentives is a travesty. The implementation of government tax incentives has to be reactivated and encouraged. The only way to make our commercial real estate landscape a place of vibrancy is to get Sacramento working for us.
Lee S. Segal is president of Segal Commercial Properties in West Los Angeles and an expert witness advising commercial real estate litigation attorneys.