Miami-based developer Lennar Corp. is in discussions with the L.A. Community Redevelopment Agency to assemble as much as 25 contiguous city blocks near Staples Center, where it hopes to build a huge, primarily residential project.

To accommodate Lennar, as well as several other developers suddenly expressing interest in pursuing downtown projects, local redevelopment officials are contemplating the creation of a new CRA project area downtown, the Business Journal has learned.

The CRA is currently unable to provide developers with any significant subsidies because the agency is about to hit a court-mandated $750 million spending cap for the Central Business District project area. To get around the cap, the CRA is looking at closing out the existing project area and setting up a new one that would include large portions of the preexisting one.

If enacted, a new project area could spark more major projects downtown and generate hundreds of millions of dollars in additional revenues for the beleaguered agency.

"This is a terrific opportunity for the redevelopment agency to redirect its vision to those parts of downtown that actually need help," said O'Malley Miller, a real estate attorney at Munger, Tolles & Olson LLP.

CRA Deputy Administrator Don Spivack said the agency plans to propose setting aside funds in its 2000-01 budget for field surveys to determine the level of blight in various downtown districts a prerequisite for designating redevelopment project areas. A draft of the budget containing that proposal is due out later this week or early next week, Spivack said.

The prospect of a new downtown redevelopment area is being welcomed by downtown boosters.

"The establishment of a new redevelopment area would be a huge assist in this comeback and would spur much-needed investment," said Carol Schatz, president and chief executive of the Central City Association.

But redevelopment observers say there are substantial obstacles to setting up another new project area, including a deep skepticism among city officials that the CRA would be up to the task.

"This is an agency that is already short-staffed and has been through an internal shakeup and severe budget problems," said Glenn Gritzner, editor of the Planning Report newsletter. "Plus, the agency is trying to set up this huge 3,000-acre redevelopment area in the north San Fernando Valley."

While the exact boundaries of a new downtown redevelopment area have yet to be determined, CRA Administrator Jerry Scharlin said the area to the east of Bunker Hill, the South Park area (to the south and east of Staples Center) and other industrial and retail portions of downtown could be included.

The gleaming skyscrapers of Bunker Hill, the Civic Center area and the blocks immediately surrounding the Staples/Convention Center likely would not be part of any new redevelopment zone, he said.

The project area could be a bonanza for developers, who are now setting their sights on downtown. Besides Lennar, several developers have already approached the CRA about potential projects, only to be told that the CRA would be unable to provide funds due to the spending cap, Spivack said.

The central problem for these developers is that, while downtown remains a largely untapped market, it is believed that projects there wouldn't be profitable enough to make sense without some sort of public assistance.

"In general, the problem is rental rates," said Stan Michota, executive vice president of Forest City Residential West Inc., which is in exclusive negotiations with the CRA to build a 200-unit rental loft project at 11th and Flower streets on land already owned by the agency. "Downtown is not the Westside. It's easier to pencil projects if you have market rents (like those) in Santa Monica or the Marina."

Eminent domain power

There are other reasons it's helpful to have the CRA on your side, if you're a developer. Redevelopment agencies under state law have eminent domain power to force out existing property owners and tenants so a developer can aggregate large swaths of property. But the CRA's hands have been tied for years on major projects in the downtown area. That's because of a longstanding cap on the amount the CRA can spend on downtown redevelopment projects.

The cap was agreed to as part of a legal settlement to a lawsuit filed by former Councilman Ernie Bernardi and other private taxpayers in the mid-1970s. Bernardi and the other plaintiffs objected to what they saw as taxpayer subsidies for wealthy developers who were building the huge skyscrapers atop Bunker Hill, while other parts of the city received scant attention.

Under the court-supervised agreement, the CRA was limited to $750 million of tax increment dollars over the lifetime of the Central Business District redevelopment project area, and $75 million in tax increment dollars in any given year.

Tax increment dollars are the additional sales and property tax dollars generated by new development, over and above the amount that had been generated in the area prior to redevelopment efforts beginning. Most redevelopment project areas use tax increment dollars to subsidize future development within the boundaries of the project area.

The Central Business District project area consists of 1,549 acres roughly bounded by the Hollywood (101), Harbor (110), and Santa Monica (10) freeways, and Alameda Street. It does not now include Bunker Hill or Little Tokyo; it also excludes a portion of the garment district.

Spivack said the CRA will reach the $750 million cap either this fall or winter, meaning that any additional revenues from projects in the redevelopment area will go to the city and other government entities, not the CRA.

Doing the small stuff

The CRA has been near the cap for years, meaning it has not had enough available funds to attract any major projects. (Staples Center, which received $58 million in CRA money, was actually financed through the sale of bonds, which are being repaid with revenues generated by the arena. The arena did not receive any tax increment funding.)

Until now, Gritzner noted, the CRA has been able to use tax increment dollars for minor projects downtown, but as of this year, that too will cease.

Instead, the CRA has been working with Mayor Richard Riordan's Business Team, the Community Development Department and other city agencies to find alternative sources of funding for downtown projects. For example, to help pay for his conversion of three old bank buildings into loft-style apartments, developer Tom Gilmore is using federal funds, primarily from the Department of Housing and Urban Development.

Because hitting the downtown spending cap has been anticipated for years, the agency has taken steps to prepare. In the mid-1990s, the CRA refinanced several bond issues to create a series of escrow accounts. It also began setting aside much of the $50 million-plus in annual tax increment dollars it has been taking in.

"The moment the last dollar comes in under the cap, we are now in a position to repay all the bonds issued for Central Business District redevelopment projects," Spivack said. "Then we can officially close the redevelopment area down."

But Gritzner said closing out the Central Business District redevelopment project area is the easy part. Setting up a new one in its place will be much more difficult.

Gritzner pointed to the recent internal turmoil at the CRA. Last year, agency Administrator John Molloy resigned after a protracted dispute with the City Council over the role of and funding for the agency. The City Council has been debating for years the possibility of taking over the CRA itself or consolidating it into a single economic development entity. And after years of staff cuts, Molloy had been pushing for more funds. Council members balked, citing the agency's $8 million-a-year budget deficit.

New CRA Administrator Jerry Scharlin has won praise for stabilizing the agency, but nine months isn't long enough to establish a reliable track record, Gritzner said.

"It may be a good idea (to create a new downtown project area), but the question is, can they pull it off?" Gritzner said. "There are those on the council and elsewhere who will probably feel it is best not to have the CRA take on a huge new redevelopment project at this time, especially considering they will have their hands full with the north Valley project area."

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