The reason is that some very big dollars are for the most part not being taxed and it’s like opening Pandora’s box. If the developer had to pay taxes on the value of the subsidy from their Redevelopment Agency, the projects would not be economically viable. This is an aspect of Redevelopment that no one wants to talk about.
When money or land is given to a developer as a subsidy, its value is just ignored or added to the asset base to be handled later, if ever. The payments under question are the money from subsidies such as shown below.
1) Write-down on land. This happens when the land is bought by the Agency, may even be cleaned up at city expense, and then is sold to the developer for much less. The developer just carries the value on their books as what they paid for it, whether it’s half price or even one dollar if that is what it was. Would IRS think those hidden dollars were taxable? They have increased the worth of the development without cost to the developer. Two examples in Downey are Carwash USA & Cardono Square.
2) Direct gift of land. This happens when land is added to a project without cost to the developer. One example is the inclusion of the adjoining New Street on the west and 2nd Street on the north into the Cardono project.
3) Direct gift of money. Some rationalization will be used to justify this, such as refurbishment of buildings. This was the case with the Toyota agreement.
4) Infrastructure subsidy. For the Stonewood remodeling, street widening roadwork was done on Woodruff to enhance traffic flow and a new signal was put on Lakewood Blvd. at Stonewood St. Both were requirements for the project, expenses which would normally fall to the developer. Street, curb & sidewalk work was done for Acura. Once again, these increased the value of the project at no cost to the developer.
5) Sales tax rebate. This one was very popular and was a part of many projects; to name a few in Downey: Acura, Toyota and Stonewood. This one is particularly pervasive because it comes directly out of the General Fund instead of out of the Redevelopment pot.
6) Interest-free loans. This is just like finding money out in the street. In our case, it was the Embassy Suites. 1.2 million dollars for 10 years paid back $120,000 per year with no interest, a gift worth at least a half million dollars.
7) Tax increment rebate. It is a direct annual rebate of property taxes paid above the base year. After the gift of land, this was to have been the cornerstone of the Krikorian subsidy.
With the diverse paths that subsidy money can travel, it is easy to understand how this kind of wealth transfer can take place without falling under scrutiny from IRS. It is also easy to understand why the CRA was staying as far away from the question as they could. It is a question whose answer could ultimately be the death knell for Redevelopment under the Health and Safety Code.