Troubled Hotel Becomes Symbol to Critics : Redevelopment: City’s aid to developers, to brighten Huntington Beach’s image, has been generous.

When this funky beach city tried to do a municipal make-over, the Waterfront Hilton was one of the shiny new baubles it dressed up in.

Forget that low-rent, surfer image the place had--from now on, Huntington Beach’s new symbol would be this tall, elegant hotel.

The hotel developer also promised to build three more hotels, a shopping center, an athletic club and 600 condos.

A mobile-home park and run-down motel--or what is left of them--that now occupy potentially valuable city land facing the beach would be things of the past.

By the year 2004, what had once been a grungy oil town would have turned a stretch of its long, wide beach into an upscale resort.

Reality, however, hasn’t turned out to be quite so rosy.

The hotel has become the biggest symbol of an ambitious city redevelopment program that in some cases has fallen short of its goals.

The Hilton opened just in time for the Persian Gulf War and the recession of 1990. It was soon apparent that the developers had been too optimistic.

The hotel is pulling in a respectable amount of guests--the developers say the rooms are occupied 73% of the time.

But like other upscale hotels, it could not command high enough room rates in the recession to even keep up with the interest payments on its $55-million construction loan. (The hotel says it charges from $125 to $180 a night, but won’t disclose what it gets on the average for each room; and that’s the key number, because various special rates like group discounts can push the average down, even when many of the rooms are full.)

And room rates were not its only problem.

Even before the hotel opened in 1990, construction defects began popping up: A grand staircase sprouted cracks; expensive palm trees started dying soon after they had been planted; part of the pool sank a few inches on what turned out to be poorly compacted soil.

The hotel sued the contractor. The judge said some of the defects were the fault of the contractor; some the result of the hotel making last-minute changes in the plans.

The upshot: The hotel wound up owing the contractor about $800,000--plus an undetermined amount of lawyers’ fees that could add hundreds of thousands of dollars more.

Then in January, the hotel’s short-term construction loan came due. But the developers couldn’t find another lender who wanted to step in and risk lending $50 million or so long-term on a hotel so heavily laden with debt that it was already running in the red trying to make interest payments.

The original lender, Tokyo’s Dai-Ichi Kangyo Bank, began proceedings to get a receiver appointed to run the hotel. In April the hotel filed for bankruptcy to forestall losing control of the hotel to the bank.

Despite a sizable subsidy the city had given the developers--all to offset the risk of building a snazzy hotel in a run-down part of Huntington Beach--the city was now embarrassed to find its single largest redevelopment project in bankruptcy.

Help from the city included an agreement to extend a road and relocate some of the residents of the mobile-home park.

The city borrowed about $6.3 million, with interest, from the developers to do this, and was repaying them by rebating the hotel’s property taxes and the 10% bed tax the hotel collects from guests and pays to the city.

Then last year, when the developers fell behind on their payments to the bank, the city stepped in and issued a bond to help them out; the city gave $2.8 million of the proceeds to the bank. It took the rest--$1.5 million--and set up an account to pay the contractor in the construction-defect case.

The hotel was already leasing the city land on which it sits at below-market rates.

And the developers were promised additional rebates on property and occupancy taxes--and the chance to build lucrative condos--if they build more hotels.

When it filed for bankruptcy, the hotel owed the city $93,000 in guest taxes that may not get paid now until the hotel emerges from bankruptcy. (It also owes $400,000 in property taxes and late penalties from last year, according to the county tax collector.)

That’s why lawyers for the city were irked when the developers went into bankruptcy court and asked the judge whether they could continue paying themselves a fee for managing the place.

The developers, Robert Mayer Corp. and Stephen K. Bone, a former corporate lawyer, receive a management fee of 3% of the hotel’s revenue. That would have been about $400,000 of the $13.3 million the hotel pulled in last year from its rooms and restaurants.

The city lawyers said it seemed a little unfair that the developers were paying themselves while they still owed the city taxes.

The developers argued that they deserved the fees because they had done such a good job, cutting the hotel’s losses--from $337,000 in the first quarter of last year to $30,000 in this year’s first quarter.

The two sides finally worked out a deal, and the developers continue to pay themselves the 3% rate.

What will happen in the bankruptcy is anybody’s guess. Among the possibilities: The bank could agree to extend the loan; or it could demand that the hotel be sold to pay off its debts. If that happens, though, it is unlikely that the bank will get all its $55 million back--the 290-room hotel is only worth $30 million now, according to the county assessor.

What is clear, though, is that the hotel has become a symbol to critics of the city’s redevelopment program, just like the $1 sale of city land to the builders of the Pierside Pavilion shopping complex a few blocks north on Pacific Coast Highway.

“The amount of assistance given the Waterfront Hilton,” says new City Council member Ralph Bauer, “I thought was excessive.”

What’s more, those subsidies were predicated on the developers building three more hotels by 2004, including what was to be the tallest building on the beach between Los Angeles and San Diego--a giant 20-story hotel with 500 rooms.

Getting all three hotels built in the next 10 years doesn’t seem very likely now, even the developers concede.

“The plan for the Waterfront was fabulous--with the capital available in the 1980s,” says Stephen K. Bone, one of the developers.

Now that real estate has crashed and the banks are leery of lending to developers, though, “the plan,” says Bone, “will probably have to be rethought.

“At least one other substantial hotel will be built. But we’re really concentrating our efforts on the Hilton at this point.”