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By LARRY KANTER

Staff Reporter

A little-noticed proposal tentatively approved by the L.A. City Council could revolutionize the way neighborhood merchants organize themselves into increasingly popular business improvement districts, or BIDs.

The proposal would allow business-owners to subtract their BID assessments from their business license fees enabling merchants to keep a portion of their tax dollars in the neighborhood, rather than paying into the city’s general fund.

The tax credit, sponsored by City Councilman Mike Hernandez and approved in concept by the council March 14, would apply only to a proposed business improvement district in the struggling, East L.A. enclave of Lincoln Heights.

But small-business owners and BID consultants throughout the city are watching the proposed legislation with interest.

“It sets a precedent,” said Marco LiMandri, a San Diego-based consultant who has been working on the Lincoln Heights BID and is consulting on similar districts in Chatsworth, Leimert Park Village and Highland Park. “Businesses finally can get a direct return on what they pay into the city’s general fund.”

Business improvement districts are self-assessment zones in which business- and/or property-owners agree to tax themselves to pay for local improvements.

In an era of declining government resources, BIDs have become an increasingly popular tool for neighborhood shopping districts to fund such services as street maintenance, parking and private security, as well as marketing campaigns.

The City of Los Angeles is actively encouraging such districts. More than 20 neighborhoods have received as much as $75,000 from the City Clerk’s Office and have hired consultants to study the feasibility of actually forming a BID.

Whether those districts actually will make it out of the study phase remains an open question. City officials acknowledge that convincing merchants or property-owners to voluntarily add to their tax burdens is the biggest obstacle to forming a BID.

While business improvement districts often begin with a burst of enthusiasm, they can quickly disintegrate if merchants fail to see adequate returns from their self-imposed assessments.

The city’s first experiment with BIDs the so-called “Miracle on Broadway” in downtown L.A. failed for that very reason last year.

The Lincoln Heights proposal aims to ensure that does not happen again.

Steve Kasten, president of the Lincoln Heights Chamber of Commerce and owner of Kasten Properties, said the business tax credit “means the difference between the community accepting (the BID) and not accepting it.”

Kasten said that most local merchants who have been steadily losing shoppers to areas such as Glendale and Pasadena would likely reject any BID that requires them to pay an additional assessment.

Under the proposed legislation, about 600 merchants in Lincoln Heights would be entitled to deduct 100 percent of their BID assessments from their city business license fee during the district’s first year of existence.

When the BID comes up for renewal after one year, the tax credit would apply to 75 percent of the assessment; the year after that, 50 percent. After five years, the Lincoln Heights BID which has a proposed annual budget of about $130,000 would be self-supporting.

“Lincoln Heights is hurting,” said Hernandez. “We need to stimulate activity there.”

The business license tax credit, he added, “allows those business corridors that are hurting to compete with the ones that are more affluent.”

Hernandez said the policy would apply only to struggling low-income areas such as those located in revitalization zones, empowerment zones or CRA areas and would not comprise a city-wide BID policy.

The City Council, he said, would decide whether to grant the tax credit to business improvement districts on a case-by-case basis.

But BID organizers around the city are likely to seek the same deal, said Walter Prince, who is helping organize a Northridge BID.

“It’s a gift from heaven,” said Prince, who is working to form a BID along Reseda Boulevard.

He said Reseda Boulevard would qualify for the credit because of damage sustained in the 1994 earthquake.

“There’s no question that the neighborhood needs help,” Prince said.

The question for city policy-makers will be how widely to apply the credit. If it is granted throughout the city, the policy could take a considerable chunk out of the city’s general fund at a time when L.A. is as cash-strapped as ever.

The Lincoln Heights tax credit was tentatively approved by the council last month. It still must be drafted as a formal ordinance by the City Attorney and formally adopted by the council, according to Mike Vitkievicz, special assessments manager for the City Clerk’s Office.

Mayor Richard Riordan must also sign off on the proposal in order for it to become law.

The Mayor’s Office, which has long encouraged BIDs as a means of neighborhood empowerment, is currently studying the impact the tax credit could have on city’s general fund, said Gary Mendoza, deputy mayor for economic development.

But backers of the proposal say that if the city is going to grant millions of dollars in tax credits to developments such as the downtown sports arena or the proposed Dreamworks SKG studio at Playa Vista, they can do the same for struggling business districts like Lincoln Heights.

In those cases, “the city realized it had to provide economic incentives,” said LiMandri. “Small business districts are not the same as Dreamworks. But the economic impact they can have on the city in terms of jobs and sales tax revenues is just as dramatic.”