Tuesday, December 6, 2004

Developer, City Agree on Plan To Fund Staples Hotel Project
By Andy Fixmer - Staff Reporter

The deal negotiated with Los Angeles city officials includes loans, subsidies and tax breaks – and is about $10 million higher than developers had discussed publicly in the past.

The moves represent an important milestone in the long-anticipated hotel project, a key ingredient in creating a vibrant district surrounding Staples Center. While it’s unclear how the full City Council might react to the plan, supporters say final passage could be put to a vote by February.

At that point, the development group can obtain private financing for the remainder of the $300 million hotel project. With financing in place, construction could begin as early as the middle part of next year.

“This is a project that will catapult downtown to an even higher level of economic development by bringing new jobs, not just in the construction phase, but with the operation of the hotel,” said Councilwoman Jan Perry, whose 9th District includes the site.

The development group, including hotelier Lew Wolff’s Wolff Urban Development Inc., Apollo Real Estate Advisors LP and Staples Center majority owner Anschutz Entertainment Group, ironed out details with Hilton and city officials over the past two weeks.

Hilton spokeswoman Kathy Shepard said the Beverly Hills-based chain will make a “significant loan” to the hotel, but would not discuss its details.

Hilton will also receive signage rights atop the 55-story building, which will be called the Los Angeles Hilton Convention Center Hotel. The hotel would instantly become Hilton’s flagship hotel on the West Coast, twice the size of its aging, 581-room Beverly Hilton.

The management contract had been aggressively sought by Starwood Hotels & Resorts Worldwide Inc. and Marriott Inc.

“We think Hilton’s a great company and we think they would do just fine managing that hotel,” Wolff said last week.

Entertainment district

To be located on Olympic Boulevard, the hotel is the cornerstone of a $1 billion retail and entertainment district planned for the roughly square mile of surface parking lots surrounding Staples Center.

The project also includes a proposed 7,000-seat live theater, restaurants, shops, a nightclub and broadcast facilities for television and radio stations. When complete, the complex is expected to create 19,000 jobs and produce $15 million in new annual sales tax revenue.

City officials believe they need the convention center hotel and surrounding district to make the struggling Los Angeles Convention Center a success. Currently, the convention center doesn’t generate enough business to pay for itself, draining the city’s general fund of $20 million annually.

To help spur development, Wolff and Apollo negotiated a set of public subsidies with representatives from the offices of Perry, Mayor James Hahn, former Chief Legislative Analyst Ron Deaton, City Administrative Officer William Fujioka and City Attorney Rocky Delgadillo, along with the Community Redevelopment Agency.

When the project was entitled by the City Council in 2001, AEG was seeking no more than $75 million in subsidies. But they also planned to form a non-profit partnership with the city to access tax-free public financing. That scheme was shot down in court after two downtown hotels challenged the legality of the city’s role.

More recently, Wolff has said that financing the hotel privately would be challenging because of the accumulated debt. The financial assistance outlined in a memorandum of understanding distributed to city council members is in the range of what Wolff requested when the project was announced five months ago. Since then, the city has kicked in another $10 million to offset improvements to the public infrastructure.

Central to the assistance package, expected to be released publicly this month, is allowing developers to skip paying taxes that would otherwise be collected on hotel rooms for 20 years. That money would instead be turned back to help pay for the hotel.

City-paid consultants calculated that the convention center hotel would likely have thrown off about $5.7 million annually in taxes, given present market conditions. Over a 20-year period, that comes to an estimated $114 million. But with average room rates and occupancy levels on the rise downtown, the amount of taxes foregone by the city could swell to a much larger number.

Wolff and Richard Ackerman, principal at Apollo Real Estate Advisors, a New York-based opportunity fund financing the convention center hotel, argue that providing a tax break isn’t the same as a subsidy because without the hotel the money wouldn’t exist in the first place. “All the money we’re asking for is generated by the project itself,” Ackerman has said.

The city and CRA are also proposing to loan developers $22 million to help finance the hotel and an adjacent grand ballroom to be built across Olympic Boulevard. The ballroom will also be used by the convention center.

This loan would be paid back over 30 years, but payments over the first 29 years would be calculated as if the loan were for a 40-year period, lowering its carrying costs. There would be a balloon payment in the final year, according to the memo.

The loan will be secured, and developers will reimburse the city for its costs in providing the loan, the memo states.

The city also agreed to pay $10 million to widen streets and sidewalks and install storm drains required by the hotel, according to the memo. And if developers create a certain number of jobs or meet other economic criteria, the city may waive construction permits and fees that could total $6 million.

In exchange for those concessions, plus access to some convention center parking lots, AEG and the hotel developers agreed to buy all their construction materials in Los Angeles so the city can capture the sales taxes, which could come to $10 million. They also agree to buy electricity from the city’s Department of Water & Power.

The council formed an ad-hoc committee in late November to review the proposed deal. It is expected to convene sometime this week or next, and could vote to pass the agreement on to the full city council at its first meeting.

“We tried to ask the city for realistic assistance and we think it’s well below what most cities have provided for similar convention center hotels,” Wolff said. “The city has been very cooperative, so we’re hoping everything goes well.”

In an e-mail, Ackerman said the public contribution to the overall financial package is an important piece of the puzzle. “The city contribution is just part of a complicated financing package we have put together,” he said. “We look forward to working with the city and AEG to get the hotel built.”

If the council makes no changes, a contract could be fleshed out within 90 days, and brought back to the council to be adopted. Council deputies said that barring any snags, the goal is to have the full agreement back before the council byMarch.

“Each of these pieces has to come together at their own pace,” Wolff said. “Right now we’re not spending large amounts of money. Before we spend the huge amounts to build everything we want to feel comfortable with the city’s part of the financing package.”

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