The L.A. Arena Co. will have to pay as much as $30 million more than originally anticipated to acquire land surrounding Staples Center, where it hopes to build a major entertainment complex, according to sources familiar with the situation.

The financial hit comes as a result of recent court rulings and negotiations that came about after property owners contested the price offered by the Community Redevelopment Agency during a process that included use of eminent domain power in some instances.

In one case, an L.A. Superior Court jury last month awarded $14 million to the owners of a three-acre parcel at the southwest corner of Olympic Boulevard and Figueroa Street. That amount represents an $8.4-million increase over the CRA's offer.

CRA officials said that whatever increases occur in the cost of land will have to be picked up by L.A. Arena Co., the developer of Staples Center. The company is a partnership of Majestic Realty Co. President Ed Roski Jr. and Denver billionaire Philip Anschutz.

"As the settlements come down, they will have to be paid, and the balance of the obligations is on the (the L.A. Arena Co.)," said Don Spivack, deputy administrator for the CRA.

The CRA is acquiring the land on behalf of L.A. Arena Co. and, together with the city, provided $70 million for its purchase. But that total now appears to be closer to $100 million.

Officials with L.A. Arena Co. declined to comment on the situation.

CRA officials do not expect the increased land prices to directly impact the size of the coming hotel/entertainment project. However, other observers speculated that the added costs could increase financing costs and result in the L.A. Arena Co. asking for more financial support from the city.

"The higher land prices are likely going to result in a larger equity requirement, and more public subsidy from the redevelopment agency," said Larry Kosmont, president of Kosmont Partners Inc., a real estate consulting firm that specializes in public-private partnerships. "My sense is that city leaders are going to be reluctant to subsidize a hotel. This is the part of the deal that, if we don't do it, we really set downtown back."

Thus far, the properties in question have been used mostly for event parking. But future plans call for much of the land to accommodate the proposed 1.7 million-square-foot L.A. Sports Entertainment District project, which is designed to consist of a 1,200-room Convention Center headquarters hotel, another 600-room hotel, a 525,000-square-foot entertainment complex with retail, office space and a live theater.

Another case in court

The CRA is currently awaiting a court date in its effort to acquire the last of the property needed for the second phase of the development.

That case involves more than 130,000 square feet of property owned by Obayashi Corp. The CRA is offering $5 million while Obayashi is after $17 million.

In the recently settled case, CRA officials contended that land at Olympic and Figueroa was worth about $5.6 million. Meanwhile, owner 3L Olympic Limited Partnership argued that it was worth at least $24 million. A jury split the difference last month and awarded the owners $14 million. That translates to $109 per square foot, compared with the $43 the CRA had offered.

In land acquisitions thus far, the CRA improperly pegged its appraisals on one transaction that was not representative of land values in the area, says Roger Sullivan, senior partner at Sullivan, Workman & Dee LLP, which represents 11 property owners in the block north of Staples Center. But Spivack said CRA estimates were based on fair-market value, not on what owners thought it should be sold for. For the most part, the CRA acquired Staples Center-adjacent properties through negotiations, not through use of eminent domain powers, he said.

With most cases already decided in court or settled through negotiations, attorneys for the property owners say their clients have been getting more than double the CRA's original offers.

That may add up to $30 million onto the price tag for land acquisition, estimated Sullivan. He said his clients have received on average more than double the $43 per square foot the CRA had been offering.

CRA officials confirmed the cost of acquiring the properties have been higher than expected, but said they had not yet tabulated an overall cost figure. Though the cost of the land has come in higher than expected, some expenses such as relocation costs for businesses have been lower than expected. That may offset somewhat the overall impact of the land cost overruns, according to Spivack.

Debating public subsidy

The total cost of the first phase was about $300 million, according to CRA officials. Included in that cost are not only the Staples Center arena and land on which it sits, but also the land on which the second phase is to be built. That land is currently being used as surface parking lots. The city kicked in $70 million of that $300-million cost, split between a $58-million guaranteed loan and a $12-million contribution from the CRA. Whether the city will provide any further funding remains a controversial question at City Hall.

A hotel finance expert at PricewaterhouseCoopers recently said the proposed downtown hotel could not be built without some kind of government support. Kosmont agreed that the project is likely to need one or more infusions of public money, as is the case with almost all such projects of that magnitude.

Even if the project is scaled back, he said, the city needs to keep the 1,200-room hotel in its sights. "That's worth hanging in for," Kosmont said.

Still, one property owner whose land was taken by eminent domain said the city's ambitious plan to revitalize downtown left him feeling "shafted" so the developer could benefit.

Howard Lee and his partners bought 5.6 acres south of Olympic Boulevard in the early 1990s with plans to develop it, but the recession forced them to wait. Then the CRA came in and bought the properties at a time when Lee and his partners really didn't want to sell.

"What can you do?" Lee said. "The CRA is taking advantage."

For reprint and licensing requests for this article, CLICK HERE.