Wednesday, October 20, 2021

Feel-good policies can have unintended consequences


The difficulty of making decisions as an elected official is the tension between one party versus the other. There can be religious posts on either side. One solution may be nice and obvious but may also be to the detriment of others. Some win, while others lose.

I’m sure in the 1940s it must have been painful to approve interchanges for a connecting freeway in the Boyle Heights area of ​​Los Angeles. Transportation demands would require many people to be moved from their homes to make way for the project. I’m sure the air was thick with stress on this difficult transition to accommodate growth.

Other decisions are more subtle at the local level. In a desire to help individuals deal with housing costs, the city of Santa Ana has just implemented rent controls. One constituency, in helping renters, has negatively affected apartment owners. This can force owners of older apartment buildings to convert units into condominiums when they decide to cash out. Rent controls have historically had negative unintended consequences. But struggling tenant tensions persisted.

The city of Costa Mesa is considering some proposals that will create winners and losers. Project labor agreements are required on public works projects. This requires the retention of federated construction contractors. Unfortunately, experience has shown that when it comes to municipal projects the bids for union shops are much higher than those for open shops. There are winners and losers in this case, but the decision will be made by taxpayers with higher taxes or less projects subsidized.

Providing affordable housing for city workers can be a perfect “feel good” opportunity. Costa Mesa is considering converting a 250-unit apartment complex near South Coast Plaza into low-income workforce housing. This would provide below-market rental opportunities, but for the takeover pencils out, the government would have to defray some of the costs. The casualty is the real estate tax, as the newly formed ownership would be exempt from this expense.

Under Proposition 13, real estate owners pay 1 percent of the acquisition price plus an annual inflation adjustment of 2 percent each year. The $170 million project will pay out $1.7 million per year. Broadly speaking, taxes are allocated to county (6%), city (11%), Newport-Mesa Unified School District (NMUSD) (63%) and other districts (20%).

According to city employees, the apartment complex currently has an appraised value of $82.5 million, which means the city will shrink $124,000 a year and NMUSD $328,000 a year. But a sale price of $170 million would double these amounts.

Efforts to provide housing to the workforce is a good sign, but the school district will be negatively affected. If both municipalities were floating in cash, there would be no such enigma. Federal relief funding has provided the NMUSD with somewhat of a cushion for this historically cash-strapped district. A loss of about $750,000 per year will be felt in its budget, and its balance sheet ranks near the bottom of the rankings in Orange County. But Costa Mesa has the worst balance sheets in Orange County and California. Neither are in a position to be overly generous.

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As the proposal stands, the city of Costa Mesa will be the landlord, thus bearing all the costs and benefits of managing a major real estate project. However, it is usually dangerous for municipalities to deviate from their original mission.

From a broader perspective, real estate prices are at all-time highs and interest rates are at all-time lows. Believing that there will be additional appreciation in the future is a call for speculation. If units are vacant or general maintenance requirements exceed estimates for this old facility, the city will have to dip into its very thin stockpile to get this investment pencil out.

In an attempt to find out more, I attempted to attend a public finance committee meeting via Zoom. Unfortunately, I was informed that I could not sign in. What a sad commentary on a city claiming about transparency.

With such a unique offer, there would be a lot of losses, with minimal upside and a lot of downside risk. City. School District. Residents who may have to receive more money in the future through potential sales tax increases and then through potential parcel taxes.

Only the winner will be the current owner of the apartment complex and the coordinator of the financing arrangement. As a former county supervisor and member of the Executive Board of the California State Association of Counties (CSAC), I must state that I fully appreciate that the California Statewide Communities Development Authority is a profit-making subsidiary of the CSAC and as such. would benefit from the transaction. But I am also a resident of the city of Costa Mesa and am very concerned about its current financial size and financial direction.

Getting out on top of the market would be a lovely deal for the current owners. Being able to sell an asset to a buyer at or near the top of the market is known in this industry as the “big sucker principle”. And this needs to be avoided, as the resultant stress of a transaction made with a good intention but at the wrong time will last for years to follow.


John Moorlach is a former Orange County observer who most recently served as a state senator. He previously spent 12 years as Orange County’s treasurer-tax collector, and pulled the county out of bankruptcy.


This News Originally From – The Epoch Times

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