The billion-dollar project proposed by developers Ed Roski Jr. and billionaire Philip Anschutz next to their Staples Center could generate $12 million to $16 million in annual revenue for city coffers and several million dollars more in spillover taxes, according to a Business Journal analysis.
But that may not be enough to satisfy critics like City Councilman Joel Wachs when the developers come seeking city subsidies for the project. Such critics contend the project could make money for Roski and Anschutz, even without city dollars.
How much the city stands to reap from the project will be a critical focus of the fierce debate that’s expected over whether taxpayer subsidies should be approved. Along with generating revenue, the project is being billed as a cornerstone of downtown revitalization.
“When looking at subsidies, there are questions the city must ask: Is this the type of project we want? Is there really a financing gap and, if so, how big is it? And what does the city get in return?” said Cal Hollis, a principal in the L.A. real estate consulting firm of Keyser Marsten Associates.
The possibility of city subsidies for the project already came under fire from Councilman Joel Wachs, a candidate for mayor, when it was first announced earlier this month. Such opposition is not new for Wachs. When the city agreed to provide $70 million for the Staples Center arena several years ago, he fought successfully to ensure the city would not be on the hook if the project didn’t generate sufficient revenues to repay those funds.
Wachs and Councilwoman Jackie Goldberg did not respond to requests for comment last week, but staff members and other City Hall insiders expressed many reservations about providing subsidies for the latest project even if it were to generate the estimated $12 million to $16 million a year.
As with Staples Center itself, a key issue will be protecting the city from any debt repayment shortfalls.
“If there is no personal guarantee, then the city itself is the party of last resort to cover any debt payments if the revenues fall short of projections,” said Roxana Tynan, economic development aide to Councilwoman Jackie Goldberg.
The 3.6 million-square-foot L.A. Sports and Entertainment District, as the proposed project is dubbed, has been designed to include a 1,200-room Convention Center headquarters hotel and another 600-room hotel. Also planned are a 5,000- to 6,000-seat live theater, a 300,000-square-foot office/sports medicine complex, 800 residential units and a parking structure with 4,700 spaces.
It would be built in two phases over 10 years on what is now a series of surface parking lots on 27 acres around the Staples Center.
So far, L.A. Arena Co., the development firm owned by Roski and Anschutz, has remained mum on the project’s financial details, making it difficult to gauge whether or not a funding gap exists. But in unveiling their project two weeks ago, the developers did lay out a case for seeking public funds for the hotels, citing public investments in other convention hotel projects around the country.
It is that push for subsidies that is likely to generate the most heat as the project goes through various city approval hoops.
“We absolutely should ask why we should put any money into this project when the developers are so wealthy,” said one high-ranking City Council aide. “The question is whether the developer would come in anyway without our help.”
Some critics insist that, rather than give away tax dollars, the city should invest its money in assets like parking structures that will be part of the project. That’s what the city did when it paid $90 million to own a parking structure and a stake in the Academy Awards theater at TrizecHahn Corp.’s Hollywood & Highland project.
Along with owning these assets and taking in parking revenues, the city is also slated to receive between $7 million and $12 million a year in tax revenues from the Hollywood project starting in 2003.
“The city should really consider becoming more of a venture capitalist in these projects, taking an equity stake instead of just giving away tax dollars,” said Dan Rosenfeld, a principal at Urban Partners LLC and former city of L.A. real estate director under Mayor Richard Riordan.
Wachs’ top deputy still believes the city gave away too much of the store to TrizecHahn.
“Despite our warning that it could become a bad precedent, the city agreed to divert its business tax, utility tax and parking tax into paying off the project’s debt,” said Greg Nelson, chief of staff to Wachs. “We are now very concerned that Roski and Anschutz are going to demand the same treatment, whether they need it or not.”
Lucrative hotels
While retail and parking are expected to be the major tax generators at Hollywood & Highland, it’s the hotels that will bring the most dollars to city coffers in the upcoming Staples-adjacent project.
Although L.A. Arena Co. officials said it is too early in the process to project revenues, private-sector consultants estimate that the two hotels could together bring in around $10 million a year in hotel bed taxes. The 1,200-room headquarters hotel to be built as part of the first phase could bring in a little over $6 million a year, while the 600-room hotel slated for the second phase could bring in just over $3 million a year.
That figure does not include upwards of $1 million a year that could be generated in sales tax revenues from the two hotels, according to hotel consultant Alan X. Reay, president of Orange County-based Atlas Hospitality Group.
Hotels are among the most lucrative revenue sources for L.A. because of the city’s 14 percent tax on room revenues, called a bed tax. What’s more, the tax would have minimal impact on L.A. residents and businesses because it’s mostly paid by out-of-town visitors.
After the hotels, the next biggest source of revenue is expected to be the property tax generated by the entire project. Assuming the stated project value of $1 billion holds up, then 1 percent or $10 million would be paid each year in property tax. That would be distributed to the county, the city and various special districts, like the Los Angeles Unified School District. The city’s take would be 20 percent, or about $2 million a year.
(Even though Staples Center and environs are in a redevelopment project area, the L.A. Community Redevelopment Agency would not be entitled to its customary 80 percent take of the property tax because the project would fall under the so-called Central Business District cap. That lid was passed 20 years ago by the L.A. City Council as hugely profitable high-rises began to go up in the downtown area.)
Retail tally
The retail portion of the project would also generate substantial tax revenues for the city. L.A. Arena Co. has said it plans about 525,000 square feet of retail development. Hollis said, given that range, the city could expect to reap about $1.5 million a year in sales tax revenues.
The city would also receive revenues adding up to hundreds of thousands of dollars annually from the residential and parking portions of the project. While the project calls for a new 4,700-space parking structure, it would take away about 4,000 existing surface parking spaces, resulting in a net gain of 700 spaces.
But despite that relatively slight gain in spaces, the amount of revenues generated by the new parking structure would conceivably be far greater due to much higher occupancy, as many more vehicles would be attracted by the new attractions.
All parking spaces are subject to a 10 percent tax that goes directly into the city’s general fund.
Of course, those are just the direct funds. The project could also bring in several million dollars a year in indirect funds, most notably from higher hotel occupancies around the downtown area and by drawing more tourists to spend money in downtown shops.
“This Convention Center headquarters hotel will enable us to draw several larger conventions that until now we’ve had to pass on,” said Michael Collins, executive vice president of the L.A. Convention and Visitors Bureau. “These types of conventions usually involve anywhere from 2,000 to 5,000 hotel rooms, which means that many of those people would have to find rooms elsewhere in the downtown area.”
And those conventioneers, of course, would be spending plenty more at various establishments throughout the downtown area.
