City Working on Hotel Financing

Project next to Staples Center seen as catalyst for conventions.

Staff Reporters

In order to attract more business and conventions to L.A., the city may end up owning a new hotel.

A slew of city officials and attorneys are trying to figure out a way to help build a 1,200-room hotel near Staples Center and the L.A. Convention Center without doling out a $75 million public subsidy that would raise the ire of taxpayers.

Specifically under discussion by the City Attorney's Office is the legality of two financial plans that either would have the city owning all or part of a hotel, or using redevelopment funds not general fund dollars for development.

The hotel is key in what would be the next phase of Staples Center, called Staples II. The $1 billion second-phase project, which includes a 7,000-seat theater, 800 housing units, and retail and office space, was approved by the City Council in early September and developers are eager to break ground. But no action was taken on the hotel portion of the project.

Though a hotel won't be ready before at least 2005, L.A. Arena Land Co., which owns the 2.5 acres where the hotel would be built next to Staples Center, is talking to at least two hotel companies: Starwood Hotels & Resorts Worldwide Inc. and Hilton Hotels Corp.

"We would be the land lessor," said Ted Tanner, senior vice president of real estate for L.A. Arena. "But we would want to make sure the hotel is designed to be integrated with the planned entertainment district."

Yet the political somersaults of orchestrating a major downtown development are considerable, especially with San Fernando Valley secession heating up.

"When it comes to the hotel, we are operating under the following guidelines: The hotel has to pay for itself and no general fund dollars can go to the hotel," said Jonathan Kevles, head of the mayor's L.A. Business Team, which works to bring more business to the area.

Just how that happens is under review within several city departments.

Under one scenario, the city would create a non-profit corporation that either could own 100 percent of the hotel or enter into a partnership with a private company to build the hotel. Non-profit corporation status allows the city to sell tax-exempt revenue bonds that could be repaid from hotel revenues and funds coming from a 14 percent bed tax.

The downside to this plan is that if the hotel doesn't make enough money to pay off the revenue bonds, the city is responsible for making the bond payments.

CRA involvement

The second scenario would have the Community Redevelopment Agency owning part of the hotel. The CRA also could sell tax-free revenue bonds and repay them from hotel revenues, as well as from the funds generated by increased property tax assessments, sales taxes and other taxes that would materialize in the improved area.

"It's not that there can be absolutely no public assistance at all. It's just that it must be done in such a way that the city is not ultimately on the hook," said one source.

Once the City Attorney's Office determines the legal and financial parameters, a working group comprised of the City Council, Chief Legislative Analyst, CRA and the developers would map out a plan that could take up to six months to craft, according to City Councilwoman Jan Perry, whose district encompasses Staples. Depending on what plan is crafted, it would take several more months to reach the City Council.

"I think the city should provide some kind of (financial) support so this project gets built and creates employment for both skilled and unskilled workers," Perry said.

City officials are mindful of what happened when city aid was proposed to help pay for construction of the Staples Center in 1997 and 1998. In that deal, the CRA was to have contributed $58 million in bond financing, with another $12 million coming from the city itself. But then-City Councilman Joel Wachs, who had a reputation as a fiscal watchdog, threatened to scuttle the deal, calling it a giveaway to "gazillionaire" developers. He even prepared an initiative that he was going to take to the voters that would have banned city aid for privately owned sports ventures.

City officials scrambled to save the deal, persuading arena developers Ed Roski and Philip Anschutz to submit personal letters of credit guaranteeing that they would personally repay the bonds if the arena fell behind revenue projections. With those letters of credit in hand, Wachs claimed victory and withdrew his opposition to the deal.

Municipally owned hotels are nothing new. Last year, city officials in Austin, Texas sold $180 million in tax-free revenue bonds to finance an 800-room hotel near the Austin Convention Center. Once the bonds are repaid, the city of Austin will own the hotel, which is being developed by H.L. Hotels LLC, a venture of Hilton Hotels and Austin-based Landmark Organization Inc. Houston and Sacramento have done similar deals to build hotels near their convention centers.

L.A. could do a similar bond deal, allowing it to own the 45-story hotel outright or form a partnership to own part of the property, which would cost an estimated $275 million to $290 million to build.

Recapturing lost business

Officials of the Los Angeles Convention and Visitors Bureau long have cited the need for a new large hotel next to the convention center to re-capture business that has been going to Anaheim and San Diego, which have large hotels near their convention halls. There are only three hotels with 686 rooms within a half-mile radius of the L.A. Convention Center.

Already Staples II developers are trying to woo the Emmy Awards show away from the Shrine Auditorium to the soon-to-be-built theater, which would be the largest in L.A. But Emmy organizers are adamant that there needs to be a hotel and ballroom nearby for the awards' after-show Governor's Ball gala dinner.

"It's possible to structure a deal that uses what I would call 'advantage financing' for a project without having it being labeled a direct public subsidy," said economic development consultant Larry Kosmont. "The key is making sure that whatever financing arrangement is made, the city gets paid back. Because if it's not paid back, then it becomes a public subsidy."

City Councilman Nick Pacheco, who chairs the council's Budget and Finance Committee, said the council might support a relatively small amount of direct public assistance spread out over a long period of time.

"If it's a nominal amount, say $10 million, and it's spread out over 30 years, then I don't see a huge problem with that," he said. "An annual amount of $300,000 or $400,000 would not greatly jeopardize other city services."

Kevles said any decision by Mayor James Hahn to support any hotel deal would come only after a plan is worked out. The mayor has said he is opposed to the use of any public money to build a hotel.

Some hoteliers are against a new hotel, perhaps for competitive reasons.

"The LACVB has convinced many clients that L.A. cannot meet their needs until new facilities are built," said Brian Fitzgerald, general manager of the 1,354-room Westin Bonaventure Hotel and Suites, the largest hotel in L.A. "The existing facilities are overlooked."

Staff Reporter David Greenberg contributed to this story.

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