Parking lot operator Tony Policella takes pride in running a law-abiding business that pays its city taxes.
That’s why he’s particularly galled by a proposed ordinance that would require parking lot operators to pay money up front each year to ensure they pay their city taxes. As co-managing partner of Valet Parking Service in Los Angeles, Policella calculates the ordinance would force him to pay roughly $40,000 a year to buy bond insurance for the 23 lots his company operates in the city.
The bond would guarantee that the city receives its parking tax payments. In the event the lot operator doesn’t turn over the taxes, the city could claim its money from the bond company.
The city says the bond underwriters would refuse to insure unreliable lot operators, and that would shut down companies that don’t pay all their parking taxes to the city or skip off without paying any. City officials estimate they fail to collect $20 million in owed parking taxes each year. In fact, parking lot operators often top the city’s list of tax deadbeats.
But Policella and some other parking lot operators said the city is making the good operators pay extra because of the sins of a few.
“They are punishing us for the bad operators,” Policella said. “This is a huge hit on our business and for what? It’s just money going to insurance companies – a complete waste.”
The ordinance is due to come back before the City Council’s government efficiency committee in coming weeks; if approved, it would move on to the full council.
The Los Angeles Parking Association, a business group that represents most of the major parking lot operators, is opposed to the ordinance, saying there should be better ways of shutting down bad operators rather than making honest companies pay.
“They need to be more aggressive in going after the operators that they know owe the taxes,” said Robert Hindle, vice president at the L.A. office of Parking Concepts Inc. in Irvine – which has 60 lots in Los Angeles – and chairman of the Parking Association.
Smaller parking lot operators would likely be hit the hardest. Many might not meet collateral requirements of insurance underwriters.
“The big issue with this proposal is being big enough to qualify,” said Kathy Phillips, a Thousand Oaks broker for Newport Beach-based Alliant Insurance who specializes in parking bond insurance. “You have to have the financial assets to pay back the bond … and many of the (honest), small, independent operators in the city simply don’t have that kind of collateral.”
Phillips said those operators would either have to get much more expensive insurance or, failing that, simply get out of their agreements.
Payment problems
The city has long required parking lot operators with multiple lots in the city to post a $50,000 bond. This was meant to verify that the operators were creditworthy and that they agreed to pass on the city’s 10 percent parking tax they collect from drivers parking in their lots.
But the roughly $1,250 annual insurance premium required to post that bond apparently hasn’t been enough to deter some parking lot operators from underpaying their taxes or not paying at all. So the proposed ordinance would replace the current bond; the belief is that higher bond requirements will weed out weak companies that are most likely to underpay their taxes or skip payment altogether.
Ed Cabrera, assistant director of the city’s Office of Finance, said about 14 percent of the 2,000-plus parking lot locations in the city have been referred to collections for failure to pay some or all of their taxes. Cumulatively, city officials estimate they are failing to collect roughly $20 million a year in parking taxes.
Several times in recent years, parking lot operators have appeared on the list of biggest deadbeats in the city. In one high-profile case three years ago, the city claimed downtown L.A.’s Prestige Parking Inc. owed $65 million in current and back parking taxes. Prestige Parking owner Sohrab Sahab told the Business Journal that he was being wrongly targeted and that many of the locations the city was claiming were his were actually operated by others or were no longer parking lots. But in September 2009, Sahab was sentenced to 18 months in jail and 10 years of probation for failure to pay the taxes. The company filed for bankruptcy.
City officials allege scores of other parking lot operators are fly-by-night enterprises. Some are completely under the radar and don’t register with the city; others do not pass on any of the parking taxes they collect. Still others allegedly set up shell companies in an effort to avoid paying the taxes. Before city auditors can move in, they shut down and move on.
Requiring the operators to post a more substantial bond would weed out many of the problems, according to city officials.
“The bond requirement is a best practice that will … establish a mechanism to collect delinquent taxes from parking lot operators that change their business ownership structure, form a new company or simply cease operations in an effort to avoid payment of tax,” said Cabrera at the Office of Finance.
The program is based on one that started last year in San Francisco. It requires parking lot operators to post bonds of up to $800,000 for each lot, depending on the lot’s revenue.
San Francisco officials say that the bond insurance requirements have been successful in preventing some problems.
“Anecdotally, the bonding requirement has kept scofflaw operators out of the industry either through higher premiums or an inability to obtain underwriting,” said Greg Kato, policy and legislative manager with the Treasurer & Tax Collector’s office in San Francisco. “This has allowed operators who follow the law to be more competitive and successful.”
The proposed L.A. ordinance essentially copies the San Francisco one, but with slightly higher bond requirements, ranging from $5,000 for parking lots that generate less than $50,000 in annual revenue to $800,000 for lots generating more than $6 million in annual revenue.
Typically, a bond insurance underwriter charges 2.5 percent of the bond requirement. For a lot that generates $900,000 in annual revenue, the city bond requirement would be $100,000, which translates to a bond premium of $2,500.
A sticking point with the parking lot operators is that a bond must be posted for each individual parking facility, which ends up costing more for those who operate multiple lots. For example, a lot that has $1.5 million in revenues would fall into a category requiring $200,000 worth of bond insurance costing $5,000. So if a parking lot operator has 50 lots in the city, each generating $1.5 million a year in gross receipts, the operator must pay annual premiums totaling $250,000. If the operator could consolidate his revenues from all 50 lots, his bond insurance would cost only $187,500.
Cabrera said requiring a bond for each parking facility is necessary to avoid under-reporting of parking revenue for individual lots.
But parking lot operators say this approach is especially punitive and will also create a paperwork burden.
“If there must be a bond, we would much prefer a single master bond with the requirement that all lots be listed,” said the Parking Association’s Hindle.
Hindle and Policella also say this approach won’t stop the fly-by-night operators who don’t register with the city. They said they would not oppose the levy of an additional fee on parking lot operators that would go to hiring more auditors to ferret out deadbeat and fly-by-night operators.
“That’s far better than sending the money to insurance companies,” Policella said.
Another concern: The city is contemplating a March ballot measure that would increase the parking tax from the current 10 percent to 15 percent as a way to raise $45 million more in annual revenue to close the city’s structural deficit, now estimated at $200 million per year. Parking lot operators would be responsible for passing on the increased tax to the city from money paid by drivers parking in their lots.
If the tax increase gets on the March ballot and receives voter approval, it would drive up the gross receipts for parking lot operators, which would mean significantly higher bond premiums if the ordinance passes.
“This would be a double hit,” Policella said.
