Court Challeges the Legitimacy of LA City BIDs

Estela, in early May, Los Angeles Superior Court Judge Robert H O’Brien ordered the City of Los Angeles’ Arts District Business Improvement District to dissolve, with operations closing by July 24. Give us the context for this dramatic change in the operations of the Arts District BID.

Estela Lopez: This actually is something that began two and a half years ago when the BID renewed in 2011 (it had been in place since 2007). As with most BID renewals, there were property owners who opposed the BID for a variety of reasons. The BID was renewed with nearly 70 percent of the vote. The three entities that ended up suing the BID included an owner whose property had been in the BID from its inception and the developer of two loft buildings that had been included as part of our renewal. We did expand the BID boundaries during the 2011 renewal by moving the BID boundary line across a narrow street to include the only two large live-work properties that were still outside the BID.

Those loft owners who were asking for our help and were frustrated that our services were being provided across the street from them but didn’t include them, started us on the road of thinking it was time to include those two buildings in the BID.

For our readers, tell us what a BID is and does.

Estela Lopez: I think the easiest way to describe a Business Improvement District in today’s vernacular is: “it fills the void.” When a community requires and wants services above what the city can provide, it is the BID that fills that void.

BIDs exist throughout the country; in fact there are 39 or 40 here in LA at the moment. They are a prime example of community’s commitment to self determination and self help because the private property owners voluntarily take it upon themselves to convince their fellow property owners that they should not just complain about what services are lacking but actually do something about it. If the city provides baseline services to all of its communities, but if your area needs more frequent street cleaning, a higher level of security, or advocacy that business professionals and residents don’t have the time to do themselves—these are the types of services that a BID helps to brings to a community.

Explain how a BID is chartered and certified and what must be done to involve everyone in the BID area.

Estela Lopez: You certainly have to conduct an exhaustive public outreach process because you don’t even get to the point of voting on whether or not to bring a BID into the community without having petitions that are signed and verified as representing at least 50 percent of the assessed value of that BID—in other words, for a BID with a projected revenue of one million dollars supporters of that BID would be required to turn in signatures on petitions representing at least $500,000 plus one dollar. It takes several months to reach out, have meetings, do one-on-ones, to make sure that you have reached as many people as possible to just to get that point. After reaching the petition goal and they are verified by the city, you have a second process by which all of the property owners in the proposed district are mailed a ballot from city hall where they vote yes or no. The entire process can take anywhere from 12 to 18 months to complete, and includes public hearings at City Council.

BIDs are established in accordance with state law and City ordinance. The requirements are very clearly spelled out. In every BID, there are people who say, “Why should I pay for something that the city ought to be doing?” It’s true many of the services that a typical BID provides are services that in past years the city would take care of such as tree trimming. In the City of LA, as the scale of problems either remain the same or increase, but the city budget decreases, BIDs fill the void.

BIDs began in small towns as a response to the encroachment of large shopping malls. When malls began cropping up in the 60s and 70s, they had the ability to outdo the small, downtown, commercial center by offering security, Disney-land style maintenance, free parking, and promotional events. The shopping center tenants fund those activities through their rents and fees. In a local downtown, by comparison, the local chambers of commerce were voluntary and had no mechanism to compare with what the malls were offering.

Getting right to the suit, there were two core issues that emerged that the judge ruled on. The first had to do with whether the Arts District BID in fact got 50 percent support because it relied on the signature of the Metropolitan Transit Agency to meet that obligation, and plaintiffs weren’t sure that that was properly done. The second was that your BID failed to properly distinguish between expenditures on general benefits and special benefits, the latter being inappropriate. Elaborate on both issues, please.

Estela Lopez: Absolutely. The court threw out the Metro complaint and found it to be unfounded. Metro had a process that permitted its director of real estate to sign for BID renewals. When we first established the BID, we went before the MTA Board of Commissioners, and asked for their support. They are the largest property owner in the Arts District. The Board of Commissioners voted to support the BID. The renewal did not require us to go before the BOC. The director of real estate was empowered to sign, and she did. After the issue was raised, we went back to the BOC, and they again ratified that support. So that was a moot issue, which the court correctly threw out.

Special versus general benefits regarding BIDs is an issue that is being examined statewide. Assessment districts must provide special benefits to each parcel within the district, and each parcel has to pay an amount that is in direct accordance with proposition to the benefit they receive, whether a lighting, sewer, or water district. BIDs are assessment districts.      

BIDs submit engineers’ reports that provide the assessment formula that was used to calculate the special benefit each parcel will receive. But there may be BIDs that also some level of general benefits.

The City of LA’s process for approving BID engineers reports did not require the BIDs to perform any methodology to examine the possibility of general benefits. This is what the court found to be a defect in the City’s process.

Once you determine that a district does indeed provide general benefits, that portion cannot be funded by assessment dollars from the property owners. In lighting districts in LA, for example, the city contributes an amount to pay the general benefit costs.

Now as a result of this court ruling the city is facing the possibility of having to become a financial participant in business improvement districts to the extent that they find general benefits, where before BIDs were solely using revenue from property owners within each district.

Would it be fair to say that Judge O’Brien found that about one third of the Arts District BID’s benefits were ‘General’ and two-thirds were ‘Special’?

Estela Lopez: No. His ruling that our Economic Development and Communications activities were entirely general benefit, which we do not agree with, referred to a category that represented nine percent of our budget. But that same category is significantly higher in other BIDs, especially here in Downtown where BIDs are doing an incredible job marketing and positioning Downtown for investment and new development.

In ours, for example, we provided newsletters and a website about our activities and accomplishments directly to the property owners. We conducted a real estate tour that brought in prospective tenants, investors, and developers.

If you read the state streets and highways code, it says economic development, along with services to enhance cleanliness and safety, are core that BIDs perform. So we emphatically disagree that economic development is not a special benefit.

Estela, what do you surmise Judge O’Brien’s decision will mean for the BIDs in Downtown LA and across the city?

Estela Lopez: In the wake of this ruling, the City is requiring all BIDs to examine and quantify the level of general benefits they provide and to include this in their engineer reports when they come up for their next renewal   (BIDs renew anywhere between every one to ten years, depending on the district). Right now there is no “approved” methodology by which you do that. In Long Beach, San Jose, San Francisco, and now here in LA BIDs are using pedestrian intercept surveys. It’s the best model out there at the moment, and the LA City Council just approved three BID renewals last week that used that methodology. So at the moment the city will continue to correct this defect one BID at a time, and BIDs will remain in business. The litigation against the City that focused on the Arts District BID did not allowed to do that by the court

I’m on the board of the California Downtown Association, and we have a special task force focusing on this issue and efforting to identify best practices. And although the court ruling that dissolved the Arts District BID is a lower court ruling and thereby not a precedent per se, its impact is already being felt among all the BIDs in Los Angeles, both because of this issue of special versus general benefits but also what the court said about BID economic development activities.Sidewalk cleanliness and safety make a tremendous difference to our districts, to be sure, but if we’re not going to be able to use our resources to market a district, to invite in the people who are going to transform and revitalize communities, then we are not living up to our core mission as Business Improvement Districts.

Will an appeal of the Judge’s decision be forthcoming?

Estela Lopez: You will need to ask the City Attorney but I don’t believe so.

So, how is life after the death of the Arts District BID? It is reported that the BID laid off 19 people last week, including 14 security guards, and that the collection of assessments has been halted. How are locals who benefited from the BID now reacting?

Estela Lopez: With now a full two weeks without a BID, the impact on the district is clear. There is already illegal dumping and graffiti; I’m hearing from people throughout the Arts District that they are extremely frustrated because their property values and businesses are going to suffer. There are people working very hard to see how they can bring services back, including the very people who throughout the last two and a half years said that a BID wasn’t needed in the area.

Estela, what might be the status of the Arts District Bid in a year?

Estela Lopez: I’d rather focus on the positive: there will no longer be an argument about whether a BID is needed in the Arts District. We’ll hopefully get some distance and perspective and focus on the reason why communities turn to BIDs to begin with.

There is no question that they play a role in today’s economy, in today’s budget-strapped Los Angeles. The city is unable to give your community everything you need at the level that you need it. Self-determination and self-help from communities themselves are going to be what will keep our communities safe, clean, and prosperous. The best instrument for that, at this juncture, is the Business Improvement District, and if you don’t believe that, you can talk to the people in the Arts District.