As auto dealers have gotten hammered by the recession and the troubles of General Motors and Chrysler, several local cities have come up with creative financial assistance packages to help struggling car lots stay afloat.

Carson and Montebello have bought up and leased back the land underneath two struggling dealerships in their cities, South Gate is helping one dealer renegotiate a loan and Lancaster has provided rebates to car buyers at its dealerships.

But even though auto dealers are major sources of municipal sales tax revenue, some cities have turned away repeated requests to lend a helping hand, citing legal restrictions and a lack of money in their shrinking budgets. One Culver City dealer shut down after trying in vain to get city aid.

“The desperation of car dealers is getting worse, and cities are only now coming to grips with the fact that this isn’t just another round of car dealers looking for a better deal,” said Michael Hastings, principal with Direct Point Advisors, which is helping several dealerships seek city financial assistance.

The desperation is spreading as new-car sales in California tumbled 42 percent to 232,000 units in the second quarter compared with 2008, according to the California New Car Dealers Association. At the current pace, fewer than 1 million new cars will be sold in the state this year, the first time that’s happened since 1975.

While the federal cash-for-clunkers program is injecting some life into auto sales, its effect is only expected to be temporary until the federal money runs out in two or three months.

What’s more, five Chrysler dealers in Los Angeles County and an undisclosed number of GM dealers have lost franchises as General Motors Corp. and Chrysler Corp. have downsized their dealer networks during the bankruptcy process. Some are closing, while others are scrambling to make or expand franchise agreements with other car manufacturers.

All this has put unprecedented strain on the region’s car dealers, and it couldn’t have come at a worse time. During the recent car-buying boom, many dealers began expansions and renovations; now they are struggling to line up financing or make loan payments.

‘Perfect storm’

One such dealer is Woodland Hills Audi, which had planned an $8 million expansion. But some of the private financing evaporated in last fall’s credit meltdown. Then sales plummeted as the recession hit with full force late in the year.

“It was a perfect storm,” said Hastings, who represents the Audi dealership in negotiations with the city.

Hastings and the owners approached Los Angeles seeking financial assistance. Mayor Antonio Villaraigosa’s business team has proposed offering reductions on water and power rates for the dealership and is pushing for expansion of a state enterprise zone to enable more tax breaks.

But the city can’t offer direct loans, because of restrictions in a state law enacted a decade ago to stem the auto-mall wars that had erupted between cities competing for dealerships and their sales tax benefits.

“In helping auto dealers, it can be very tricky,” said Bud Ovrom, L.A. deputy mayor for economic development. “A city can still help a dealership already in its city, but as long as it’s not with direct financial assistance.”

Other cities have come up with inventive ways of helping struggling auto dealerships without providing direct financing. Carson and Montebello have purchased the land underneath dealerships through their redevelopment agencies.

In February, Montebello paid $12 million for a 2.7-acre plot on Whittier Boulevard under the Ostrom Chevrolet dealer. Weeks later, Carson paid $8 million for the land under a Cormier Chevrolet dealer.

“We purchased the Cormier dealership, both the land and the structures, and have leased the land back to the dealer,” said Jeff Westbrook, Carson’s redevelopment director.

The terms of the lease are generous for the dealer: $1 for the first year, 0.25 percent of total vehicle sales for the second year and increasing up to 1 percent by the fifth year.

But Westbrook said the deal was not a bailout. The city had earlier made a loan to the dealership for a fa & #231;ade improvement, one of the few loans allowed under state law, and is still owed some money.

“Had we not purchased the property, there’s a very good chance the dealer would have gone out of business, and we would have been out the rest of our loan money,” Westbrook said. “Besides, the dealer had nowhere else to turn.”

Repeated calls to Cormier Chevrolet’s owner, John Peterson, were not returned.

Meanwhile, in South Gate, the decline in auto sales has made it nearly impossible for Llovio Ford to continue making payments on a loan the city made to the dealer in the mid-1990s, before the state law forbidding such loans. The city used funds from the U.S. Department of Housing and Urban Development’s Section 108 loan program, which targets projects that create jobs in blighted areas.

South Gate Community Development Director Steve LeFever said dealership owner Sergio Llovio approached the city last November seeking to delay or lower the payments.

“We did not have the financial wherewithal to grant the waiver ourselves, but we did seek to persuade HUD to grant a delay in payment,” LeFever said.

HUD did not grant the delay, but is negotiating with the city on reducing the loan’s interest rate.

Without the loan modification, Llovio said he will likely have to default.

“Our sales are one-third the amount of units they were just two years ago,” he said. “We simply cannot make the loan payments.”

Llovio also noted that he’s so far been unsuccessful in his attempt to secure a new Small Business Administration loan designed for car dealers.

Yet another creative approach has been taken by Lancaster. In March, the city launched a “Shop and Drive” program under which buyers of vehicles from local auto dealers received rebates of vehicle registration fees. The rebates were in the form of gift certificates to 400 participating retail and business establishments in the city.

By the time the program wrapped up in June, 800 vehicles were purchased in the city. When combined with people spending the rebates, Lancaster officials estimated a total of $21 million in economic activity had been generated, according to a news release.

City resistance

But some cities have not been as accommodating as Carson or South Gate. Take the case of Hooman Nissani, who owned Hooman Pontiac GMC in Culver City. Nissani’s dealership was slammed by last fall’s sudden plunge in auto sales and he approached the city seeking acceleration of payments the dealership was owed under a development agreement.

“They owed us $1.1 million and we were seeking an accelerated payment of $500,000,” Nissani said.

But he said the city refused, saying it couldn’t afford to make such a payment unless the business generated more sales tax. Unable to get financing to meet operating expenses, Nissani said he was forced to close the dealership in January.

Now, Nissani said, he’s approaching the city again seeking the accelerated development agreement payments.

“Maybe now that the land is vacant and not generating any sales tax revenue for the city, officials will be more willing to listen,” he said.

Culver City redevelopment officials did not respond to calls for comment.

Similarly, the Ed Butts Ford dealership in La Puente has so far met with resistance from city officials in its attempt to get financial relief. The dealer wants to renovate its service bay to accommodate a surge in service customers choosing to keep their existing cars rather than buy new ones. But private financing dried up amid last fall’s credit crunch.

“We were seeking a sales tax rebate from the city to help us with the renovation, but the city said no,” said Anthony Iannone, the general manager.

La Puente officials said they didn’t have the funds available for what they termed a loan of nearly $1 million, especially for the service bay, rather than the dealer showroom.

“We don’t have the funds, given that we’ve had to furlough people and make other budget cuts,” said Greg Yamachika, assistant city manager. “Even if we did have the money, the city doesn’t get as much back in sales tax revenues from expanding a service bay as it would by expanding a showroom, since most service charges are labor-related and are not taxable.”

Hastings, who represented the Ford dealership in the negotiations, said that while some cities are taking a hard line, he’s seen a recent increase in cities that want to take some steps.

“They realize now it’s all about survival,” Hastings said.

THE ISSUE:


Struggling car dealers are turning for financial assistance to city governments, which have budget problems of their own.

THE STAKES:


Dealerships are trying to stay in business, and cities are trying to preserve their lucrative sales tax streams.

POSSIBILITIES:


Cities can’t give direct loans, but are seeking creative solutions such as buying dealership land and leasing it back at a discount.