Underwritten by a successful $43 billion bond issue, California now has the means to embark on an extensive refurbishment of the State’s tarnished freeways, ports, and educational system. We are finally getting used to borrowing money—as yet with little concern about how it gets paid back.  Voters overwhelmingly rejected a proposed increase in property tax last year to fund education by 77%-23%.

In addition to the State bonds, $6.5 billion in local bonds—mostly for schools—were approved in November.

The state bonds will push debt service well beyond the generally accepted 6 percent of the budget.  Whatever one feels about these mammoth additions to California’s red ink, they will certainly spark a boom in public works, redevelopment, and transit-oriented construction.

About 10 percent of the bond proceeds will go for quick & significant relief of freeway congestion—about half in the LA area alone, but also for numerous projects in Riverside and San Bernardino Counties. We can expect progress on an East Alameda Corridor and possibly a High Desert Corridor and an Inland Port. All are intended to mitigate congestion of our two ports.  

While port congestion, pollution, and security are widely debated, the importance of our harbors is better known. For example:

•  25 percent of foreign trade and 44% of all container traffic for the entire United States goes through Los Angeles & Long Beach.

• 40-50% of goods coming into the ports stay in the five-county Los Angeles region

Impressive as these figures are, they are merely a measure of where we stand now.  It is estimated that the ports—and airports—will require billions in additional investment in the next decade or two as trade and production continue to grow here and abroad. We cannot afford to be complacent.

Of course all this infrastructure spending comes from borrowed sources, and how we pay it back is the looming dilemma we must eventually resolve.  California has three main revenue streams, all tax-based: property, sales, and income taxes. The question remains, how much taxation can the state get taxpayers to accept?  Past efforts to raise any or all of these from the citizenry have been so unpopular over the past three decades that the state has increasingly turned California businesses as a source of income.

Not surprisingly, California has a poor reputation with the business sector. The increasingly evident reality is that local governments must look elsewhere and redevelop land to generate new businesses, new jobs, and new taxes in order to provide badly needed services to their constituents.  The infrastructure bond package will provide a long-overdue injection of public enhancements and economic development, both for the State and for local governments.  However, the effectiveness of the bonds may very well rest on the future of eminent domain.

Eminent domain is a valuable and often essential tool for economic growth as it allows local governments to redevelop blighted areas that no longer serve the needs of the people, by stimulating economic development and creating better jobs and housing. However, it is also an increasingly controversial tool.  Proposition 90 was an attempt to reign in the relatively rare cases of eminent domain abuse, however, it would have sidelined any meaningful eminent domain and redevelopment statewide by prohibitively raising the costs for public works projects.  It was only narrowly defeated last year despite opponents outspending supporters by an 11 to 1 margin.  Prop 90 supporters immediately filed follow-up legislation that stands a better chance of success than its predecessor, so the fate of redevelopment will continue to be on unsteady ground in the years ahead.  Economic development in California cannot advance meaningfully without eminent domain as a tool, but a distorted public image and overreaching legislation unfortunately leave too few supporters.

What can we expect in 2007 for real estate development in California?

Public/Private projects will flourish as private developers collaborate directly on transportation, housing, flood control, and harbor and airport expansion & upgrades. With the possible exception of housing, real estate growth will center in The Inland Empire and in North LA County. These region are leading the Coast, and in some segments, the nation, in retail, office, and industrial expansion. It is driving much of the traffic through the local ports.

Lenders have come to better accommodate the unique financing needs of mixed-use, which has recently become the dominant form of redevelopment.  Local governments are offering more incentives as part of ‘smart growth’ and downtown revitalization.

New “Lifestyle Centers.” With their pedestrian avenues, and focus on entertainment and restaurants are challenging traditional malls. Existing and new shopping centers are increasingly geared towards specific ethnic groups.

Los Angeles is gaining status as a “World City.” Despite being years behind, our transit system was recently rated “Best in the US.” However Las Vegas is aggressively & successfully competing as “Southern California’s Weekend.”

This article is based on Mr. Kosmont’s tenth annual Forecast for the Southern California Development Forum. His complete presentation is online at Kosmont.com.

Mr. Kosmont is President and CEO of Kosmont Companies