In a few days, Lawndale will be rich.
The financially troubled city, which in 1987 lost $1.68 million in a speculative securities investment, soon will add $10 million to its coffers from the sale of its stake in the Galleria at South Bay.
That’s more than small, blue-collar Lawndale spends all year to run the city. Its annual budget is $7 million.
“This is one of the best things that has ever happened to this city,” said Mayor Sarann Kruse. The city plans to preserve the $10-million principal and spend only a portion of the interest income. Those expenditures will go for long-deferred projects such as the renovation of the city’s commercial district, she said.
In a 4-1 vote, the City Council late Thursday approved the $10-million buyout, with the council majority citing the long-range benefits and financial security the funds will provide.
The council soon will have to decide whether to hire a treasurer to manage the windfall. For the time being, the funds will be placed in the Los Angeles County investment fund while the city forms an advisory committee to formulate a five-year expenditure plan. Under the plan, at least one-third of the interest income would be added to the principal so the principal would continue to grow.
Councilman Harold E. Hoffman voted against the buyout, saying that it violated a pledge the council made in 1984 to hold the Galleria investment for 10 years. Kruse, who also served on the council at the time the investment was made, denied that the council made such a pledge.
During a 2 1/2-hour debate Thursday, six Lawndale residents urged the council to reject the buyout, noting that the 1987 investment fiasco has raised questions about the city’s ability to manage money.
They also criticized the council for not providing more notice and asked that the matter be delayed to allow for a formal public hearing.
One of the principal negotiators and proponents of the buyout is City Atty. David J. Aleshire, who in a report to the council predicted that the city’s involvement in the Galleria will prove to be “the most significant undertaking in the history of Lawndale.”
The city entered into this unusual investment in 1984, when it obtained an $8-million federal grant and loaned it to the Galleria developer, South Bay Associates, a division of the Cleveland-based Forest City Enterprises.
The Galleria is located just south of Lawndale in Redondo Beach. That more affluent beach city would not have been eligible for the economic development grant that was used to help build the $70-million mall.
The Galleria agreement provided a special recruitment program to give Lawndale residents jobs when the mall opened in 1985. According to city officials, 500 to 600 Lawndale residents were hired.
Paid $1.25 Million
The contract also gave Lawndale 6% interest on the loan, due in monthly payments of $48,000. So far, the city has been paid $1.25 million. Half of that amount can be used only for federally designated community development projects. The rest can be used for any purpose the city chooses. The loan was to be repaid by 2004.
The agreement called for Lawndale to receive a share of the mall profits once a certain level of profits was achieved by the developer. The city also was to share in the proceeds should the mall be sold or refinanced.
Of all the complex provisions, it is the profit-sharing that has proved to be the crux of the disagreement between the city and the developer. The key question is when Lawndale would begin to share in mall profits.
So far, the city has not received any share of the profits. The contract provided that the city would not be eligible until the developer repaid his original $7-million investment and then recouped the additional sums he has invested to keep the mall running until it began to show a profit.
Prospects for the city’s profit-sharing dimmed further when South Bay Associates announced the firm’s intention between now and 1994 to invest an additional $12.5 million to boost sales at the Galleria. The developer plans to add a high-fashion retailer as a fourth anchor to the mall, which also features Nordstrom, May Co. and Mervyn’s.
Lawndale’s contention is that the city’s share should come before the developer makes any further capital improvements in the mall, Aleshire said.
But Galleria developer Brian Ratner told the council Thursday that his company believes Lawndale would not be eligible for profits until after the firm recoups the additional $12.5 million.
Ratner said that Mitsubishi Bank will not make the additional $12.5-million loan for the Galleria until the developer settles the issue with Lawndale. The company has just completed eight years of litigation over another project and wishes to avoid further court disputes, Ratner said.
Higher Offer ‘Unlikely’
A financial analysis prepared for the city by the consulting firm of Natelson-Levander-Whitney Inc. concluded that the city should accept the $10 million.
The consulting firm set the “total present value” of Lawndale’s investment at $9,078,585, and noted that “the developer is unlikely to make a higher offer” than $10 million.
The report added that because of the loan’s 6% interest, which is well below the prevailing rate of about 11%, it would be worth only about $5 million to a private-sector investor.
Continuing the investment in the Galleria could be risky for the city, the consultants said. They said that the Galleria has a fairly high vacancy rate of 7.2%, with sales figures that are “acceptable but not exceptional.” Also, the Galleria faces stiff competition from the Del Amo Fashion Square and a new mall to be built in the Culver City-Marina del Rey area, they said.
All these factors make holding the Galleria a riskier venture than taking the $10 million and making carefully controlled investments that could pay for city improvements for many years, the consultants said.
Critics of the deal included Virginia Rhodes and Nancy Marthens, who late last year submitted a voluminous document to federal officials asking for a formal inquiry into Lawndale’s handling of the $8-million federal grant.
Rhodes and Marthens were serving on city advisory panels when they asked for the inquiry. The council reacted by removing them from their posts.
Aleshire said he has made a formal response to the inquiry, and the matter is pending.
Marthens and others cited the possible long-range benefits of holding onto the Galleria investment in hopes of sharing in future profits.
Marthens noted that Redondo Beach has had substantial increases in sales and business license tax revenues since the Galleria opened in 1985, and said Lawndale, too, should share in the financial benefits of the mall. She and others said they are worried that if the city has money in hand it will spend it frivolously. “The money will burn a hole in their pocket,” she said.
But Councilman Larry Rudolph hailed the buyout as “a once-in-a-lifetime opportunity that will bring about a richer city. . . . We owe it to the city and the residents to accept.”