Public Private

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Elected officials in Dallas, grappling over how to pay for a large hotel adjacent to the city’s convention center, are looking to Los Angeles for answers.


Last month, leaders in the cash-strapped Texas city contacted developers of L.A.’s proposed $350 million convention center hotel, asking them to duplicate the feat in the Lone Star state using the same financial structure, which relies on tax abatements instead of an outlay of municipal funds.


“I told them no way,” said Lew Wolff, one of the L.A. hotel project’s developers. “I said I’d be happy to explain how we put everything together, but I’m only doing this one because it’s in my hometown.”


While Dallas, Houston and Chicago have shelled out millions of dollars in public money to help pay for and attract large developments and sports stadiums, Los Angeles has so far been able to get private developers to foot most of the bills.


It may seem rare that other cities consider Los Angeles a model. But L.A. has a history of attracting private participation on projects that elsewhere would be publicly financed. From the Olympic Games of 1984 to the current efforts at revitalizing downtown’s Grand Avenue, the city often finds a way to get much of the cost borne by the private sector.


One reason: Taxpayers won’t stand for it. If a project doesn’t throw off enough revenue to attract financing from Wall Street or private investors, the city has learned that it shouldn’t step forward either. Deputy Mayor Doane Liu said that credible projects attract money on their own.


“The public has made it clear they don’t support using public funds for things like stadiums,” he said. “The failures of other cities have made Los Angeles more hesitant.”



Tax breaks


Though the Los Angeles Convention Center hotel will receive a public benefits package worth as much as $177 million, most of that comes from 20 years of taxes the developers would otherwise have to pay on hotel rooms.


Similar hotels in Houston, Chicago and Baltimore have been 100 percent financed with bonds either backed by city taxes or by revenues collected from the developments. If revenues don’t meet projections, the cities or their insurance providers could be on the hook for the balance.


The same goes for large urban revitalization projects. Last month, New York-based Related Cos. got a first step in the approval process for its $1.8 billion redevelopment of Grand Avenue.


The project, which includes a 16-acre public park, is being paid for by Related, backed by the pension fund of the California State Teachers Retirement System.


A similar project in Chicago, the 24.5-acre Millennium Park, cost $475 million more than half from public coffers for the transformation of old rail yards and surface parking lots into a cultural center.


While New York is pledging $300 million in public money for a new Jets stadium in Manhattan, the National Football League has all but conceded that any arena in the L.A. market would have to be paid for without public funds.


The NFL plans to lend the new owner of a Los Angeles football franchise between $500 million and $600 million to build a stadium once the league determines which site the Los Angeles Memorial Coliseum, Pasadena’s Rose Bowl or a space next to Angel Stadium in Anaheim is the best location.


“It comes down to the size of the city and the surroundings but also the demographics,” said Brian McCarthy, an NFL spokesman. “Ultimately we want to solidify our position on the West Coast by having a team in Los Angeles.”



Pay to play?


Los Angeles hasn’t always gotten a free ride. To attract the Dodgers from Brooklyn in the late 1950s, L.A. gave the team’s owner, Walter O’Malley, 185 acres in Chavez Ravine that the city already owned, and $2 million toward the project. (Even so, Dodger Stadium is one of the first examples of a privately financed pro sports stadium, since O’Malley bore the rest of the construction costs.)


The tide turned 30 years later when Peter Ueberroth concocted a privately financed bid to bring the 1984 Olympics to Los Angeles, which was the first time the Olympic games didn’t result in a large expenditure of public funds. Moreover, Ueberroth’s financial plan resulted in a $222 million surplus.


That mindset has remained. While the Community Redevelopment Agency of Los Angeles acquired and cleared land downtown for the construction of Staples Center, developers had to purchase the real estate and pay back city loans.


Even Walt Disney Concert Hall, which has quickly become one of L.A.’s defining landmarks, was 93 percent funded by donations and private sources.


“There really has to be a compelling reason for a public investment,” said Bruce Baltin, a senior vice president at PKF Consultants, which focuses on the hospitality industry. “There seems to be an inclination not to do it whereas in other cities the political culture is such that they are more inclined to be aggressive with public investment in sports arenas and hotels.”


Eli Broad, the billionaire philanthropist who worked to make the Grand Avenue plan a reality, said the unwillingness stems from L.A.’s system of government and a maze of overlapping jurisdictions.


“There’s no political will,” he said. “We have fragmented leadership between the City Council, the mayor and the (L.A. County) Board of Supervisors.”


Broad said there could also be a downside to L.A.’s lack of public investment. “With all we’ve done here, all we have managed to do is lose major corporate headquarters,” he said. “These other cities have been able to retain them.”


Unlike projects in other cities, Grand Avenue was planned from the outset as a private effort that would be profitable for the developer.


Related Cos. is paying $50 million up-front in rent on long-term leases for city and county sites to develop 3.5 million square feet of shops, restaurants, offices and residences both market-rate and subsidized. The $50 million payment will be used to construct the 16-acre Civic Center Mall.



Adding conditions


Baltin said other cities have a tendency to tack on conditions and public benefits to civic projects that make them nearly unfeasible without a large infusion of public money.


“With Grand Avenue, the public started with the premise that we want a project that is economically justified because in L.A., more than other cities, there seems to be a predilection to not have public involvement where it’s not absolutely required,” Baltin said. “The stronger the economy and the destination and the project, the more chance there is for the private sector to want to do it.”


Carl Winston, director of the hospitality and tourism management program at San Diego State University, said developers would rather not have to ask for public assistance, which can be a long and costly process. “It’s sort of like a beauty contest,” he said. “Some projects are natural beauties, others some need cosmetic assistance.”


At the same time, Winston said some projects are worthy from a public standpoint but produce returns too small for private investors. In those cases, public investment in convention center hotels or urban redevelopment projects can be justified. While this may not be a popular notion with California voters, it’s something the state may increasingly have to do to stay competitive.


“The Golden State has long-believed people had to pay us for the privilege of doing business here, but those days are pretty much gone,” Winston said. “Times have changed. California is not in the driver’s seat anymore and we’re going to have to do like the other 49 states and invest our public money into attracting business and development.”

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