South Coast AQMD measure draws fire from the logistics industry

The proposed Warehouse Indirect Source Rule is a tax that will hurt Southern California’s warehouse-distribution operations, according to industry officials. It will do nothing of the sort, says the AQMD.

 

A proposed measure by Southern California’s state-sanctioned clean air agency has the region’s logistics industry crying foul.

The Warehouse Indirect Source Rule, which the South Coast Air Quality Management District board will vote on next month, would require warehouse owners and operators to reduce truck emissions or pay substantial fees to the district.

Those fees would be based on a point system that would vary depending on the size of the truck and the number miles it traveled in one year, according to a district staff report.

NAIOP, a national trade organization that represents owners of industrial and office projects, maintains that California’s logistics industry would have to switch to electric vehicles en masse to avoid those fees.

The cleanest diesel-powered vehicles on the market could not meet those standards, according to NAIOP.

However, it’s the other half of the proposed clean-air regulation that has the logistics industry preparing for battle: if passed, the warehouse indirect source rule would place permanent costs on warehouse owners and operators of about 90 cents per square foot, based on the size of their building.

That rule would apply to warehouses in Southern California that are 100,000 square feet or larger, according to the staff report.

But NAIOP, which represents more than 7,000 commercial real estate development firms in greater Los Angeles, believes the management district doesn’t have the authority to levy the tax because it’s prohibited from taxing “mobile sources,” i.e. trucks.

Its jurisdiction is limited to “stationary sources,” meaning warehouses.

The 13-member district board is scheduled to vote on the proposal May 7, its next regularly scheduled meeting. It needs a majority vote to pass.

In the meantime, NAIOP is gearing up for a fight. The proposed tax is particularly relevant in the Inland Empire because so much of the region’s economy depends on logistics, said Peter Herzog, a government affairs consultant in Laguna Hills.

Herzog was hired by NAIOP to plan strategy and lead its effort against the tax. He does not hold back when asked his opinion of the proposal.

“The cost of this tax ultimately will be passed on to the consumer, like it is with every tax,” Herzog said.

Herzog, who called the measure “problematic” in a number of ways.

Many of those problems are spelled out in a 10-page letter dated March 2 that was sent to the management district offices in Diamond Bar by Timothy Jemal, chief executive officer of NAIOP Southern California, and Robert Evans, executive director of NAIOP’s Inland Empire chapter. After praising the management district’s efforts to provide clean air, Jemal and Evans proceed to dismantle the proposal, which they call unworkable and unnecessary.

“The SCAQMD does not have the legal authority to adopt [the measure] on existing facilities. Furthermore, the mitigation fee constitutes an illegal tax. The rule has numerous infeasible, as well as arbitrary and capricious provisions,” the letter reads. “The potential for emissions and ozone reductions …  is unknown at best, and most likely the rule cannot achieve any such results.

“Additionally, warehouses have no control over the marketplace for heavy duty trucks, and most have no control over which trucks may come to a warehouse.”

One broker who has been closing industrial deals in the Inland Empire for more than 25 years described the proposed warehouse tax in much stronger terms.

“It’s just another money grab by one of the most bloated, out-of-control bureaucracies in the state,” said Paul Earnhart, principal and senior vice president with Lee & Associates Ontario. “All of the cost will be passed on to the consumer, and even more businesses will be driven out of the state. All it will do is make certain everyone’s rent goes up ninety cents a square foot.”

Because so many goods pass through warehouses, and because the economy is “sitting on a pretty large bubble right now,” the proposed tax could cause serious inflation, Earnhart said.

It could also cause some developers to reconsider building a warehouse-distribution project in Southern California, because the environmental standards would be so difficult to meet.

And, if it does force industrial warehouses out of California, it will do little to help the environment, according to Earnhart.

“If you end up in Phoenix, you’re probably still going to have to deliver goods back to California,” Earnhart said. “When that happens, the pollution from the trucks just goes back into California.”

If Earnhart is right about the proposal driving planned industrial projects out of the South Coast AQMD’s jurisdiction, the High Desert – which is governed by the Mojave Air Quality Management District – would figure to be a main beneficiary.

One broker in that market says he doesn’t want that to happen.

“I don’t think one market should benefit from another market’s misfortune,” said Joseph W. Brady, owner and president The Bradco Cos., a commercial real estate brokerage in Victorville. “I don’t ever want to see that happen.”

Brady was also harsh in his assessment of the proposal, calling it a “multi-million dollar shakedown” that will kill jobs in Southern California.

But in a lengthy statement, Nahal Mogharabi, the SCAQMD’s communications director, said the proposal is “definitely not a tax, but a regulation aimed at reducing air pollution associated with warehouses.”

In development for four years, the proposed warehouse indirect source rule is based on information gathered from the public and the industrial sector.

Southern California continues to have the worst smog in the United States, about half of which is caused by diesel trucks moving goods in and out of the region, according to Mogharabi.

“Our region has hard deadlines coming up in the next few years to meet federal air quality standards,” Mogharabi said in the statement. “If those standards aren’t met in time, it could potentially result in significant sanctions by the federal government. The South Coast AQMD can’t wait any longer to take action to reduce emissions from this sector.

“This proposed rule could be a key measure to help reduce emissions in order to meet those federal standards.”

Also, the proposal is intended to eliminate no more than 10 to 15 percent of all emissions created by warehouses, and it will not levy a 90-cent-per-square-foot fee on all warehouses that can’t meet its standards.

The proposed rule provides “many options”, and its highest cost will be about 83 cents per square foot, or roughly three percent of total yearly operating costs. The proposed regulation contains “lower cost options” that could lower a warehouse’s annual operating cost to about 0.5 percent, Mogharabi wrote.

No matter what it’s called, the warehouse indirect source rule appears to have all the makings of a lengthy court battle, but the man hired by NAIOP to fight the proposal isn’t tipping his hand.

“We’re looking all of our options,” Herzog said. “Obviously, I can’t tell you what we’re planning, but nothing is off the table at this point.”