The tradition in real estate development in recent years has gone something like this: Developer proposes mega-project, developer claims project will transform city into something great, city gives developer millions in tax abatements and other handouts to make the deal happen.
Beverly Hills may just have turned the payout spigot the other way. In a tentative deal announced late last week, the Chinese firm Wanda Group agreed to increase its fees to the city by more than a half-billion dollars over 30 years to win approval of a luxury condo-hotel project near the corner of Wilshire and Santa Monica boulevards.
Everyone involved in the negotiations expresses satisfaction with the terms. "This is by far the best development agreement ever negotiated for Beverly Hills, and possibly the richest development agreement per square foot negotiated anywhere by a municipality," said Mayor John Mirisch, who reached the agreement as one of two members of the city's ad hoc committee examining the project.
His colleague on the committee, Councilwoman Lili Bosse, agrees. And Rohan a'Beckett, Wanda's manager at the project, calls the deal "an agreement on the numbers that works for both of us."
But it still has local real estate observers scratching their heads. "This is the first time anything like this has ever been done," Alan X. Reay, president of the Irvine hotel brokerage Atlas Hospitality, told me. "It's unprecedented."
It also involves a project embroiled in controversy. The Wanda development is a neighbor of a hotel and condo proposal at the site of the Beverly Hilton Hotel, which is the focus of a measure on the Nov. 8 city ballot. The measure was placed on the ballot by Beny Alagem, the Hilton's owner, in order to bypass the city planning process by appealing directly to voters for their approval.
Wanda has funded the opposition campaign. Mirisch has been critical of Alagem for attempting to circumvent city planners and the council, but he has said he's "neutral" on the Wanda project.
The terms are still subject to approval by the Beverly Hills City Council, which will launch a three-day round of hearings on the development Monday. The terms include a doubling of the up-front payment from Wanda to the city from $30 million to $60 million; a near-trebling of environmental mitigation and sustainability fees to 1.25% from 0.45% of the sale of any portion of the development, including the condos, and an additional 2% of any subsequent sale; and hotel occupancy surcharge of 5%, on top of the city's statutory transient occupancy tax of 14%.
The city says it expects the terms to yield $820 million in revenue over 30 years, an increase of $560 million over the previous terms. The 5% occupancy surcharge, according to Mirisch, isn't mandated by city ordinance but has been applied by negotiation to two recent hotel projects, the Montage and the Waldorf Astoria, which will open early next year as part of the Hilton development.
Wanda already had city approval for an earlier version of its project, but opted to build a luxury hotel in place of some condos. The revision won the approval of the city's Planning Commission earlier this month, but still required approval by the City Council.
Mirisch has been a critic of municipalities that offer lucrative tax abatements and other handouts to attract real estate developers. In July, Anaheim approved a lavish 20-year rebate of city taxes to Walt Disney Co. and other developers for luxury hotels to serve Disneyland, despite a lack of evidence that Disneyland hotels could be built anywhere else or needed subsidies.
Beverly Hills may be one of the few cities in California that can demand concessions from builders.
"We're lucky that we don't have to seek people out to come here," Bosse says. "Beverly Hills is still a city where people want to do business."
Whether the stiff terms will harbor unanticipated costs for the Wanda project is difficult to gauge. The transfer fee will raise the price of the development condos above what comparable units might fetch. The higher hotel occupancy fee will also force room rates above older competing hotels that charge guests only the statutory 14%.
"You could argue that it's a competitive disadvantage," Reay says, though that might not matter much as long as the economy thrives and demand for Beverly Hills lodgings remains strong. "What if we get into a market where things slow down and people look more closely at rates?" Individual rates may not matter much, he says, but "it will definitely add up if you're doing a major event, like a wedding."