Grand Avenue Project Facing Another Delay

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Related Cos. is unlikely to break ground on the $2.7 billion Grand Avenue project in February, marking yet another delay for the downtown development that has already missed several start dates.

The likely postponement means the New York City developer for the first time would have to pay $250,000 fines for every month construction is not begun fines enacted in July by the joint powers authority overseeing Grand Avenue as a way to prod movement.

Related has had trouble securing a construction loan for the 3.6 million-square-foot mixed-use development near Walt Disney Concert Hall. And with the credit markets still locked down it appears unlikely that the loan can be secured in time.

“February would be a push under the best of circumstances. Nobody is even talking to people about making loans right now,” said Bill Witte, president of Related of California.

“I think the fact that we and many others are waiting for the capital markets to clear up is not a surprise to anybody.”

Even so, the delay would be a disappointment to county and city officials who have pushed Related hard to move forward on Grand Avenue, which in its first phase would include a luxury hotel, residences, retail space and a 16-acre civic park.

The postponement also dampens expectations that were raised last month when Related announced it had received a $100 million equity injection for the project from three South Korean insurance companies. That infusion came just six months after Related secured $100 million in equity financing from Istithmar, the investment vehicle of Dubai’s royal family.

The $1 billion initial phase was originally to have been completed by 2011 but a year of delays has pushed that back to 2012. But with the trouble in the credit markets it’s unclear whether Related could even meet the later target date.

“Until the credit markets unfreeze that project is going to be on hold,” said Mark Tarczynski, a senior vice president at CB Richard Ellis Group Inc. and prominent commercial real estate broker in downtown Los Angeles. “It is not the fault of the project or the market fundamentals. It is just a debt problem.”

Related has until February 2011 to start the project and would have to pay $250,000 for each month construction is not under way until then under the July action taken by the Los Angeles Grand Avenue Authority, an entity of the Los Angeles County and the L.A. Community Redevelopment Agency. After February 2011 the project would go back to the authority for reconsideration.

Related plans to submit 80 percent completed construction documents to the joint powers authority by Dec. 15. The 80 percent figure represents what Related believes is necessary in order to go out to bid for a construction loan.

“At that point we’d be ready to move toward a construction loan closing, but because of the continued uncertainty in the capital markets we really don’t know when the window will open,” Witte said. He added that after a loan is secured construction could begin in “a matter of months.”

But as Related waits for the capital markets to thaw, the payments to the joint powers authority will start to add up; the company could wind up forking over $6 million in a worst-case scenario.

The payments could be used to help fund the affordable housing component of the development’s second phase, said Martha Welborne, managing director of the Grand Avenue Committee, a citizens body that oversees and advises on the project.

“It will just play out as it plays out. They have every incentive to want to get going and I’m sure the $250,000 payment is additional incentive,” Welborne said.

Meanwhile, the design is continuing on the 16-acre park, which connects Grand Avenue to Los Angeles City Hall to the south. Welborne said construction of the park is slated to begin in first quarter 2010 with funding already secured by a $50 million ground rent payment Related has made for land.

That payment, along with Related’s ability to secure $200 million in funding from foreign investors, has calmed fears that Related will walk away from the project.

The chair of the Grand Avenue Authority is Gloria Molina, the Los Angeles County Supervisor. She could not be reached for comment. However, her policy director, Gerry Hertzberg, did speak.

“They are spending money as we speak,” said Hertzberg, who is also is a member of the Grand Avenue Committee, the citizens group. “There is every signal that they’ve tried to go forward. It is an international problem we are looking at.”

Indeed, the Grand Avenue project is in better shape than some other big urban redevelopment schemes cooked up around the nation during the real estate boom. For example, a multibillion dollar plan to build office towers, apartments and parks over rail yards in Manhattan collapsed in the spring.

The delay also could have one positive effect on the project a decrease in construction costs, which until this year had been escalating rapidly amid a shortage of construction workers and high worldwide demand for steel. Construction costs are 25 percent off last year’s high according to one estimate.

“I would not characterize this as a blow. We are holding our own downtown,” said Carol Schatz, president of the Central City Association, a downtown booster organization. “I don’t have any question that it is going forward, but the developer can’t self fund this project. They have to get financing somewhere.”

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