Grand Avenue project needs help, report says

The tax breaks sought by developers of the massive Grand Avenue project are indispensable for getting the high-rise development off the ground, a long-awaited city report found, but could end up costing the city more than originally believed.

The developer, Related Cos., is asking the City Council for hotel and parking tax rebates for the project, on city and county land near the Walt Disney Concert Hall.

Related says the $2-billion project, conceived by billionaire philanthropist Eli Broad and designed by Frank Gehry, is financially unfeasible without them.

Early estimates put the tax rebates at $40 million over 20 years, but the legislative analyst’s report Friday estimated the rebates could cost as much as $66 million.

While the tax breaks must still be approved by the City Council, the legislative analyst’s report is a strong indication that the city will greenlight the project, which backers say would create an urban hub in the heart of the city.

The request for tax breaks has been controversial, coming as the downtown development boom is showing signs of cooling.

Related has spent months negotiating behind the scenes for the tax breaks, an increasingly common incentive used by cities to attract catalytic projects.

The city conducted an independent audit, according to the report, which concluded that “the funding to support the project would be ‘net new’ revenues generated by the project itself, and that public participation is essential to make the project economically feasible.”

The largest tax break would be in the 14% city hotel tax, a maximum of $60.5 million over 20 years.

In an interview Friday, the chief legislative analyst, Gerry Miller, said that the $60.5-million figure was based on a current estimate of how much extra financing Related needs to complete the hotel.

Related announced last week that a five-star Mandarin Oriental hotel would be part of Grand Avenue.

That hotel chain’s room rates are significantly higher than average. A double room at the Mandarin Oriental in San Francisco, for example, runs from $400 to $700 a night, depending on amenities and views.

Miller said that his office’s estimates are that the hotel tax would generate only $45 million over 20 years, in which case the public subsidy would be significantly less.

He said that an audit will be completed once hotel construction is completed to determine exactly how much financing Related needed, and would adjust the cap on the hotel tax rebate accordingly: lower, but not higher. “We will only let them keep the hotel tax to the extent they need it to finance the hotel,” he said.

While the project has attracted mostly praise at recent public meetings, the request for tax breaks does have its detractors.

Some have argued that by granting the subsidies, the city is not getting the best possible deal for itself. Others have complained that the hotel could have an unfair advantage downtown.

The legislative analyst’s report disputed the latter claim, saying that the Grand Avenue hotel “would not draw business from other hotels in the downtown area because there currently are no hotels of this caliber in that market.”

The fact that Grand Avenue snagged a high-end hotel is one possible explanation for the increase in the projected hotel tax rebate.

Councilwoman Jan Perry said that she would ask the legislative analyst for clarification about the increase, which she said was not adequately addressed in the report.

“If the prior information had indicated one figure, then it’s important to clarify that, to give the analysis as to why,” said Perry, who represents the area where the Grand Avenue project would be built.

Perry and other backers of the project cheered the report Friday.

“What we are happy about is that the city, who did their own independent analysis, recognized the importance of the project,” said Martha Welborne, Grand Avenue’s managing director. “They saw the overall benefits of the project.”

The project includes a number of public benefits. From the start, the deal has mandated a 16-acre park from the Music Center to City Hall, which Related will build at cost for the public agencies, and that 20% of the homes will be affordable for low-income residents. In the last few months, Related has agreed to a number of other requirements, including the condition that all construction and permanent jobs in the development meet either “prevailing” or “living” wage requirements for the city. It also will fund a job training program and a revolving loan program for housing for the needy.

The Community Redevelopment Agency approved the deal Thursday, including about $24.4 million for streetscape improvements and affordable housing subsidies, among other things, that the agency will fund. The county must still authorize about $4.6 million in public improvements in and around the project, as part of its approval of the plan.

The city and county are scheduled to vote on the plan Feb. 13.

If all moves forward as expected, the Grand Avenue project will break ground late this year, with the first phase -- two high-rise residential towers, one with the hotel, and 285,000 square feet of retail space -- scheduled to be completed in 2011.

Two more phases -- which would include residential, retail and office space -- are still in the planning stages.

Bill Witte, president of Related Cos.’ California operations, said that while the developer expected to seek some reimbursement for the cost of building affordable housing in the second and third phases, he expected that there would be no further commitments of subsidies for the project.

“Everybody I think recognizes that the first phase is by far the riskiest,” Witte said. “We really have tried to do the right thing, and the right mix, in the first phase, not just the most development-intensive.... This is about creating a critical mass, anchoring the district. I think there is a recognition that this package of assistance is not only needed for public benefits, but for helping to engender a really good urban scheme, as opposed to what would happen if you left it to the open market.”

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cara.dimassa@latimes.com