DOWNTOWN — With his own architectural design firm and asset management company, Sheldon D. Liber knows what it costs to do business in Santa Monica, and it isn’t cheap.
From increased fees and taxes to high rents, expensive restaurants and the proverbial red tape at City Hall, it can be difficult to open up shop in the city by the sea, Liber said. And he isn’t the only one.
A recent survey of over 400 cities across the U.S. by Claremont McKenna College’s Rose Institute and Kosmont Companies found that Santa Monica is one of the most expensive cities in the nation in which to do business. Santa Monica, which has been dubbed Silicon Beach for its collection of high-tech start-ups, was ranked 19 out of 20 on the Cost of Doing Business Survey, sandwiched between San Francisco and Toledo, Ohio. Los Angeles, Beverly Hills and Culver City were also on the list.
The survey looked solely at sales taxes, fees and incentives offered and did not take into account rents for commercial and retail space. If so, Santa Monica may have been higher on the list.
“I think Santa Monica is a more expensive place to live and work because the taxes are higher and they keep increasing them,” said Liber, who mentioned the half-cent sales tax increase approved by voters last year and parcel taxes to fund public schools, all of which take their toll on the pocketbook.
But it’s those taxes and bonds that help fund the amenities — bike lanes, clean streets, reliable public transit — that make Santa Monica so attractive to CEOs like Liber, who has lived in Santa Monica for 30 years and has no plans to relocate. Other enticements are a talented labor pool, recreational opportunities and popular retail stores.
“Managers want to live in places that are clean, safe, attractive and fun. Santa Monica ranks high in all of those criteria,” said City Manager Rod Gould, who has worked in cities that have ranked both high and low on the Cost of Doing Business Survey, which he called a “blunt instrument” that does not take into account other critical factors.
“To remain competitive in all those categories, we need to provide the highest level of services and to provide those services we need to pay for them through things like taxes and fees,” Gould added. “We are not going to beat someone in the Inland Empire when it comes to the tax rate, but you are going to come to Santa Monica because you want to tap into the market that is here and be part of a vibrant local economy and have that high level of services that residents and businesses both expect and deserve.”
When video game developer Activision was contemplating a move to El Segundo, Gould said an important factor that kept the creators of the wildly-popular “Call of Duty” franchise was the level of services offered by City Hall, including faster response times by police and fire fighters, and a connection to City Hall’s dark fiber network that promises faster Internet speeds at a lower cost.
It also helps that Santa Monica has the “cool factor” going for it, Liber said. Santa Monica is home to the Third Street Promenade and the iconic Santa Monica Pier, as well as some of the nation’s key creative businesses, including the Grammy Foundation, Jerry Bruckheimer Studios, MTV Networks, Universal Music and Yahoo.
“I call it the party principle,” Liber said. “If you call someone and invite them to a party at your house … the first thing that comes out of your friend’s mouth isn’t ‘Thank you, that’s really nice of you.’ It’s most likely going to be, ‘Who’s going to be there?’”
The same thing happens when entrepreneurs are searching for a home base for their operations. They want to be where the big names in their particular industry are, and Santa Monica happens to be home to some of Hollywood’s most notable, as well as some of the brightest minds in software engineering and social media.
“Santa Monica has created the best party, and they’ve done it accidentally,” said Liber, who serves on the Santa Monica Chamber of Commerce’s Government Affairs and Land Use committees. “It started with people moving out of Hollywood and into Malibu and the Westside and looking at Santa Monica to open their offices. They wanted to avoid all that noise and traffic, and it’s just cooler to be by the beach.”
But being cool often fades with time. Traffic congestion has increased over the last decade and there’s growing concern that demand for commercial and retail space will further drive up rents, enticing companies to look elsewhere. With strict building codes and a reputation for being cumbersome, City Hall has contributed to a lack of new office space available as developers are hesitant to invest if they won’t see a relatively quick return.
That paves the way for property owners to command rents as high as $3.50 per square foot, on average, for commercial spaces. Liber, who co-owns his own commercial building on Colorado Avenue said he has heard of some premium commercial space charging as much as $8 per square foot, while retail spaces on the Third Street Promenade can command rents in the $15 range.
“It’s hard to stay in Santa Monica unless you are one of those larger companies that take in a lot of revenue. The only way you can, really, is to own your own property,” said John Bourget of Bourget Bros., a Santa Monica staple that supplies contractors with building materials. “Santa Monica is very expensive compared to other areas and you can’t expand in Santa Monica because there’s very little land available. In other areas you can buy your neighbor out for a decent price. But in Santa Monica a decent price is three times that.
“But we’ve been here for so many years we’ve gotten used to it,” he said of the increased fees and taxes. “I had a lot of chances to move to Malibu or the valley where land is much cheaper, but Santa Monica is our home. I was born and raised here and I love it. That doesn’t mean I love everything about it.”
One area that could be improved is the relationship merchants have with City Hall. In a meeting with the City Council in November, representatives from the city’s business improvement districts said they would like restrictions on outdoor signage removed to help with advertising so they can draw more customers in. Others said the development process can be streamlined or some steps eliminated altogether to accelerate construction, therefore decreasing costs for property owners.
Just having the meeting was progress. It was the first time in recent memory that representatives from all of the business improvement districts organized and presented their suggestions to the council and city manager in a public forum.
Pat Barrett of Barrett’s Appliances, which has served Santa Monicans for over 64 years, said he placed a banner in the window of his store on Lincoln Boulevard to advertise a sale. Two days later he received a letter from City Hall demanding he take it down or face fines.
“They didn’t bother to call us and talk about it,” he said. “We just received a generic, threatening letter.”
Brian Chase, director of governmental affairs for the Chamber of Commerce, said Barrett’s complaint is common. The primary concern for his members is how City Hall can better interact with businesses. Another is finding the right office space that meets a company’s needs.
City Hall and the chamber are working together on both issues through the Santa Monica Alliance, a collaborative effort meant to attract and retain quality businesses. By using contacts within the chamber, Chase said the alliance was able to help some companies stay in Santa Monica, and its next goal is to make things more predictable for those looking to open a business, go through remodels or build from the ground up.
“We are making great headway in that regard,” he said. “We are working closely with Building and Safety and the Office of Planning and Community Development, who have been very supportive.”
Gould has hired a planning director in David Martin who is familiar with the needs of the business community and is working on a development process that Gould said should reduce the time it takes for approval by 20 percent. Now that’s not to say City Hall is lowering its standards.
“We ask a lot of new development and even more so under the new (Land Use and Circulation Element), but we are trying to make the process much more consistent and timely,” he said. “With the alliance we are seeking out businesses who want to move to us, and those that want to expand but can’t. We are getting with them to figure out how we can help them with some of those challenges.”
City Hall’s willingness to work more closely with businesses could be a sign of the times. As municipalities across the state struggle with increased pension and health care costs for employees as well as less funds from the state, bringing in revenue is a top priority.
Larry Kosmont of Kosmont Companies, which helped produce the Cost of Doing Business Survey, said despite the dire situation of local government, there are several potentially positive opportunities to be had in the midst of the crisis. The down economy and resultant economic pressures on city governments can help business owners to find advantageous deals at City Hall.
“If you’re in business right now,” Kosmont said, “there are good deals to be struck with cities.”
With its high sales and income taxes, California remains an expensive state in which to do business. California is home to one third of the 40 most expensive cities, while only three of the 40 least expensive cities are in the state.
“California puts its own cities in a difficult spot,” said Kosmont. “If a municipality succeeds in attracting a new or expanding firm, that new employer is inevitably squeezed by increasing local fees and the underlying cost of the state’s high tax schedule.”
Even so, Kosmont affirms that firms still want to locate in California citing the Golden State’s world class weather, amenities, diverse workforce, and strategic Pacific Rim location.
Again, location rules the day and is a significant reason why Santa Monica has been able to remain a hotbed of innovation and development.
But being by the beach doesn’t guarantee success. Investment has to be made.
“Many of the things that make Santa Monica a popular destination for tourists are the same things that make it a popular destination for employers,” Chase said. “Businesses also like Santa Monica because they want to be a part of an intimate community with a global brand. It’s not just an address.”