California Community Economic

Development Association

LARRY J. KOSMONT, CREPresident & CEO, Kosmont Companies

www.kosmont.com

1. The State of the State

The Box Office Numbers are In

2. Economic Development 2.0

Hope for a Profitable Sequel

3. What’s Hot! What’s Not!

Blockbusters and Duds

4. Kosmont Looks Forward

The Future Is Here

Synopsis

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Trump Days of Summer

Less regulation for Small Business

• Executive order (not legislation) to roll back compliance burdens, less filings/paperwork

• No relief from tax reduction on horizon, corporate rate to remain highest in world (35%)

Reductions in Clean Power and Water Rules

• Elimination of rules helpful to coal industry & other energy providers outside California

• CA likely to extend Cap & trade & continue mandates for reduced tailpipe emissions

Overall, tale of two Political approaches to taxes & regulations with

California having upper hand on businesses having to stay in State

Threat of federal funding losses due to sanctuary politics will likely

be the biggest impact in the California vs. U.S. policy showdown

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The State of the State

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JOB GAIN STILL LEADS THE NATION

Certain job markets on fire (SF, Bay Area)

LA County job gains mostly minimum wage

BUT NOT WITHOUT COSTS AND STRUGGLE

Poverty rate rising (~1 in 5 living in poverty)

Pensions, Retiree Health & Welfare costs mounting (~$191 billion)

Education levels lapsing with skills gap increasing

High Taxes going higher (Jan. 2018, gas tax up by $.12/gallon, registration fees up)

Aging Infrastructure is breaking down

Housing prices escalate but affordability gap impact workers

Stance on “Sanctuary Cities” threatens critical Federal funding

California’s Mixed Bag :

Short Term Gains vs. Structural Weakness

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Can’t Stay in La La Land Forever

Brown’s revised State budget improved but anticipates harder times:

“In two more years, in June, if we’re not in a recession, it will be a

historic first since World War Two.”

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• Potential federal initiatives to defund healthcare and eliminate state tax

deduction threatens State budget health; CDBG also threatened

• State economy expanding for 8th year; Brown says recession is inevitable

Source: CA Revised May 2017-18 Budget; Sacramento Bee

State Budget balanced but too dependent on unstable $$ sources

• Top 1% earners provide ~50% of total income tax receipts

• Sales tax prone to dramatic shifts in customer spending

• Property Tax, the most stable source, is distant third

Cities must decide: Raise More Taxes or Induce Private Investment?

50 Shades of Ways to Lose Green in California

Sources: California Legislative Analyst; CA Department of Finance 7

427 Tax & Bond Measures

Statewide - November 2016

• local revenue & tax ballot measures

increasing

• More passed than ever before

• 39 to tax cannabis

California High On Taxes & Taxes on High

Local Measures due to:

• Local gov. regulatory response to statewide initiatives (marijuana)

• Online sales & tech activity requires new legislation (retail transactions)

• Expiring local sales tax & parcel tax measures

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Statewide PROP 55 Passed – Extends Income Tax, for 12 more years

Sales Tax increase from 2012’s Prop 90 is over

Two Challenges: Housing Affordability and Affordable Housing:

Unaffordable Housing: threat to job creation, companies challenged to attract

workers that can’t afford homes

Population growing: not enough units to meet demand

Affordable housing hurt: Housing Tax Credits priced lower due to expected tax cuts

Red Tape: front-end housing project approval times longer

Prevailing Wage?: proposed on residential projects may push per unit costs higher

Housing Shortage Limits Economic Growth

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To Build or Not to Build Hamlets?

VOTERS/LEGISLATURE TORE DOWN WALLS TO BUILDING

Measure S rejected by 70% of votes cast

Measure M passed - $120 Billion over 40 years to expand LA’s Rail Network

Measures H and HHH passed, putting dollars down to relieve homelessness

…AND THEN, “ELECTED” BARRIERS TO DEVELOPMENT

Measure JJJ passed in Nov – projects of 10+ units seeking zone changes exposed to

higher costs by requiring 11-25% affordable housing plus prevailing wage

Measure C passed- Redondo Beach voters placed limits on waterfront development

…AND NOW, LEGISLATORS PROPOSINGS NEW COSTS ON DEVELOPMENT

LA Linkage Fee on development to pay into Affordable Housing Trust Fund – raising cost

of real estate in an attempt to make it more affordable ???

AB199 (Chu) would mandate Prevailing Wages on private residential projects

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• Modest increase in minimum wage can boost business revenues & economy

• But Business wrangles with paying living wages & CA’s high tax costs

• Per 2016 Kosmont Rose Institute Cost of Doing Business, California cities led by

LA & SF have highest business taxes in U.S.

• And State on a mission to reduce carbon footprint; imposing cap & trade fees

• How to induce private investment in an expensive State and City?

1. Tone down taxes

2. Expand use of P3 tools & programs

3. Beef up economic development & use zoning strategically

California’s Business Dilemma

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SB32:

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Acceleration of GHG Reduction

CALIFORNIA: LEADING THE FIGHT AGAINST CLIMATE CHANGE

• Requires State to reduce greenhouse gas

emissions 40% below 1990 levels by 2030.

• Expected to affect real estate and agriculture

• How will California fund its Green Initiatives?

AN EARTH WARS STORY

Economic Development:

Public Money for Green Investment

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Private Sector Opportunity: Cities Need Investment for Jobs & Taxes

• Retail (sales tax)

• Relocation/ Expansion(business taxes & jobs)

• Rooms (hotel tax & jobs)

• Real Estate Development(property tax)

• Residential

(workforce and affordable)

Economic Development: Priority for local cities

City

Hall

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SB 628 (Beall) & AB 313 (Atkins)

Enhanced Infrastructure Financing Districts

SB 614 (Wolk) & AB 229 (Perez)

Special Districts, Annex Area & Former Military

Bases for Infrastructure Financing & Revitalization

AB 2 (Alejo)

Housing/Community Revitalization Authority

AB 1471 (Proposition 1; Rendon)

Financing Water Quality, Supply &

Infrastructure Improvement: Bond Issuance

AB 2660 (Aguiar)

Infrastructure Financing Act: User Fees and P3s

Local & Regional Infrastructure

New Tax Districts & Inducements

Economic Development Sustainable Policy

AB 32 (Perez)

Cap and Trade: reduced emissions

SB 375 (Steinberg)

GHG Reductions: Sustainable Comm. Strategy

SB 1168 (Pavley)

Groundwater Sustainability Plans

SB 535 (De Leon)

Greenhouse Gas Reduction Fund:

Benefits to Disadvantaged Communities

SB 350 (De Leon & Leno)

Accelerated emissions standards

Regional Sustainability

More Compliance & Mandates

State OKs Tax Increment AND Mandates Sustainability

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California’s New Project Financing Tools

Proliferation of special districts using tax increment for private projects

• Enhanced Infrastructure Financing Districts (“EIFDs”):

• Fund infrastructure and public/private transactions

• Community Revitalization & Investment Authorities (“CRIAs”):

• Fund infrastructure and affordable housing

• Tax Increment Districts have priority for state financing programs: Cap &

Trade, PACE, Greenhouse Gas Reduction Funds

• Cities, counties & special districts can pool tax increment

Types of Projects EIFDs & CRIAs Can Fund

Brownfield RemediationChildcare FacilitiesParks & Open Space

Light / High Speed Rail Civic Infrastructure

Transit Priority / RTP / SCS ProjectsAff. Housing / Mixed UseIndustrial Structures

Wastewater/Groundwater

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What’s Hot? What’s Not?

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HOT – Urban Rail & Mass Transit

Existing Lines

M-Funded or In-Progress (26 new lines!)

Source: LA County MTA

LAXMETRO Long-

Range Plan

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70% of Voters approved Measure M to double rail network

$120 B. over 40 years expected

No expiration date

HOT – Connecting LAX…Finally

• 2020 – Metro train station platforms will open (estimated)

• 2022 – Consolidated Rental Car Facility opens

• 2023 – Intermodal Transportation Facility & People Mover opening

est. $4-6 Billion Project (LAWA + Other Public Agencies)

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HOT – The “Purple Medal” Line

Source: LA Times

• Metro vows to finish Purple Line by 2024: if LA hosts summer

Olympics visitors could ride train between UCLA and DTLA

• International Olympic Committee to choose between L.A. and

Paris -- September 2017

• . 21

HOT – LA River Transformation

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• LA’s “backwater” becoming its

front yard

• $7 B. cost for LA’s 11 miles

• EIFD Tax District to fund

Projects?

• Real estate opportunities could

pay for local improvements

HOT – LA’s Throne of Games70% of Voters approved Measure M to double rail network

$860 Mil / year for 40 years expected

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Blazin’ Up – “Joint” Ventures

Serving a Higher Purpose – Dude, it’s like, taxable, man

• Prop 64 passed – allows adults 21+ to use, possess or transport up to 1 oz

of marijuana for non-medical purposes and grow up to 6 plants at home

• BUT–You can’t buy recreational yet! CA yet to legalize non-Rx dispensaries

• Expected $1B in annual revenue per State Legislative Analyst

• LA Voters passed Measure M to regulate and tax locally

• Cautionary advice from Colorado:

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• 15% pot sales + cultivation tax

imposes overall 25%+ State rate

• Add local taxes up to 15% in 37

counties and cities

• Black market here to stay

HOT Retail Transforming: Finding the Right Mix

Residential

Entertainment/Fitness

Grocery/Restaurant

Medical/Office

Civic

Mixed-Use/Community Retail

Delivering Retail Mix based on Trip Generation is Key Opportunity

• Internet is primary driver of changes in shopping patterns

• Trip generators can sustain centers: entertainment, education, medical, events,

& specialty retailers; these are the new anchors

• Despite increases in digital market,

Brick & Mortar is in demand

• Resized “Urban” formats –going smaller

• Pop-Ups popping up everywhere

• Internet + Brick & Mortar blending…“staying

together for the kids”

# of shoppers nationwide lower last Black Friday

while online shopping was up 22%

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SCALDING – The 47% of the Future

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The 47% - Mitt Romney had the right number, but it really

represents something different…and more life-changing

Technology expected to replace 47% of existing jobs.

McKinsey Global Institute estimates even close to 60%

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Kosmont Looks ForwardTHE FUTURE IS HERE

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TECH IS CHANGING JOBS – First with Food

Robots Revolutionizing Retail and Limiting Labor

The “47%” is already on its way…

• Dining at “Eatsa” – No visible workers

• Momentum Machines – Burgers made by robots

• Amazon Go: grocery stores with no checkout (in 2017)

• Drone shipments

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Wheels next – AUTOBOTS EXPECTED TO ROLL-OUT

Self-driving cars are no longer a futuristic idea

• Estimated 10 million self-driving cars on road by 2020

• Mercedes, BMW, and Tesla already selling self driving features

• Tech companies also pioneering self-driving cars; Google, now

APPLE testing driverless cars on CA roads

• Hurdles to driverless cars are regulations, cost and fear

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Port of Los Angeles'

TraPac Terminal

mostly automated

by next year

Already Here – AT LA’S BIGGEST ECONOMIC ENGINE

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Is World Class Greatness Coming to LA?

Banc of CA Stadium

2018; under construction

~$350 Million

Rams/Chargers Stadium

2019; in progress

~$2.6 Billion

Olympics in LA?

2024

Investment = TBD

Redondo Beach Waterfront

2023? – legal challenges

~$400 Million

Downtown Development

Ongoing

~$6-8 Billion

George Lucas Museum

2021; announced

~$1 Billion, announced

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Politics, Economics or Environment – What Trumps?

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• Cities need private sector $$ to create jobs & tax revenue

• California shift to a reduced carbon footprint “green” economy continues

• Private Investment that fulfill mandates will receive tax incentives

• Housing shortage hurts State’s competitiveness- State looking to induce

• Retail formats shifting as internet changes social patterns; tenant mix adjusting,

trip generators key, bricks & clicks blending

• Tech (driverless cars, big data, robots) modifying way we live: interaction and

connectivity changing fast

• Automation requires unprecedented commitment to “continuous” education

For California to thrive thru Technological, Economical & Ecological shifts

Public & Private sectors must fully engage the Local, Social, Crowd & Cloud

Read the Paper & Invest Online

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It’s a new day!#?

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Bright Future. Big Challenges.