An agreement backed by the Burbank Redevelopment Agency could enable the developer of the city's largest hotel to borrow as much as $3 million in taxpayer money and then void its obligation to repay, The Times has learned.
Developer Lew Wolff, head of a general partnership group that expanded the Burbank Airport Hilton and built an adjacent conference center, can choose to not repay the loan because of the wording of a contract approved by the agency in 1988, city officials acknowledged in interviews.
Although Wolff said in an interview that "our intent is to pay it back," Burbank officials were so concerned about the possibility that they spent more than a month studying the contract and proposing solutions.
The power to cancel the debt depends in part on the Hilton's profitability. Based on the contract's complex formula, officials now project that the Wolff partners will obtain the right to cancel the debt by April, 1996, when it will have reached $1.2 million.
The deal was designed to encourage the developer to add 220 hotel rooms and a conference center by ensuring the Hilton's profitability. The agency allowed the group, known as Burbank Partners, to borrow up to $6 million to cover any operating losses, including a built-in 12% profit on the cost of the expansion, public records show.
But as written, the contract also allows Burbank Partners to keep up to $3 million in loan proceeds without repayment by giving up the right to borrow the remaining $3 million in the future.
"We certainly don't want to get a reputation for tricky things," said Wolff. "We've generated a lot. We've been pretty good citizens of the community."
The provision in the agreement--drafted by Wolff's attorney and reviewed by the city attorney's office--states that the developer's debt to the agency and the amount he has a right to borrow in the future "be mutually offset and canceled to the extent that they equal each other" and "shall be marked 'paid and canceled.' "
City Atty. Joe Fletcher defended the clause, saying the agency clearly gained from it. "The agency obtained the benefit, and that was the consideration that we don't have to advance (Wolff and his partners) the other $3 million."
But the deal was identified as a "problem" in a confidential memo to the Redevelopment Agency's executive director, Robert (Bud) Ovrom, who also serves as city manager. In it, Bob Tague, another redevelopment official, wrote that the agency had never expected Wolff and his partners to be able to keep the money.
Wolff is president of the Wolff Sesnon Buttery Development Co. The firm has received $1.1 million in loans to date under that section of the redevelopment agreement. The developer is entitled to borrow up to a total of $6 million, with the amount of monthly borrowing based on the amount of property and bed taxes generated by the Hilton expansion. Under the complicated deal, the city also acquired and assembled the land for Wolff and set up another fund that has provided an additional $1.1 million in subsidies to Wolff.
Seven years ago, both sides expected benefits from the deal, which is so complex the city's own auditor has said it generates "ambiguities" and "misinterpretations."
Wolff--who wanted to beat growing hotel competition in Glendale and Pasadena--sought the agency's help in expanding the 280-room Burbank Airport Hilton to 500 rooms. Agency officials wanted Wolff and his partners to build a new conference center, considered by some to be an important civic asset.
Then-Mayor Al Dossin cast the council's only dissenting vote. "It was a great project, but not at taxpayers' expense," he said in a recent interview. "Look at what the taxpayer was picking up."
City officials ultimately agreed to support a new hotel tower and 40,000-square-foot conference center by:
* Buying 7.8 acres for the hotel expansion and conference center at $1 million an acre and selling the land to the Burbank Partners at the same price. The developers were given 10 years to pay, and still owe the agency $3.8 million.
* Guaranteeing Wolff a continual source of revenue with the right to borrow monthly up to a total of $6 million to cover the Hilton's operating deficits.
The loans are to be paid back only after the Hilton reaches 65% occupancy and $10 million in gross receipts during a 12-month period.
Since the hotel tower and conference center opened in 1991, Wolff and his partners have borrowed $1.1 million and repaid nothing. Though the Hilton reached 70% occupancy in December, Wolff said the hotel has not yet reached levels of profitability that would trigger the requirement to begin repayments.
City records show the Hilton expansion has generated about $2 million in bed taxes from August, 1992, to November, 1994, according to the Redevelopment Agency.
* Subsidizing Hilton operations further by payment of interest, at 8% yearly, on an amount equivalent to the balance of the loan still available to Wolff. That amount, legally a debt from the agency to Wolff, is presently almost $4.9 million. Interest averages about $250,000 a year so far. According to the city's Finance Department, this part of the agreement has provided the Burbank Partners with more than $1 million. No repayment is required.
The redevelopment deal, in many ways, reflects the mission behind all redevelopment agencies: Remove blight and encourage economic growth with incentives to developers that will pay off in the long run.
The land used for the Hilton's second hotel tower and convention center was once the site of a World War II-era warehouse owned by Lockheed.
Before the California economy gave way to recession, some say, the agency's expensive deals with Wolff and his partners made sense.
In the aftermath of the state's crippling economic downturn, however, the Burbank Redevelopment Agency is saddled with a project that is only "marginally profitable," according to the memo from Tague to Ovrom.
"A lot of cities and agencies were making projections on future income. Everyone was," said Bill Kelly, the agency's former assistant executive director.
"Agencies and cities at that time were wrong on hotels and convention centers. I don't think anyone could have expected it. We weren't the only city gambling."
The Burbank Redevelopment Agency gambled that the Hilton would only need financial assistance for the first three to five years before Burbank Partners could turn a profit and begin to repay, according to city records obtained under the California Public Records Act. According to the latest city projections, Wolff will not show a profit until 1996. It took Burbank Partners only two years to hit $6 million in accumulated operating losses.
Concern about the agreement's wording was raised in 1992, when the city's auditor, Bob Elliot, warned in a staff memo that the agency needed to rectify the provision quickly to avoid "potential legal discrepancies" with Wolff and his partners.
The solution to the "problem" presented to the City Council last November was a proposal to accelerate payment of the remaining principal to Wolff and his partners, amounting to nearly $4.9 million. By giving it all to Wolff immediately, rather than waiting for him to accumulate the right to borrow it in the future, the developer's legal right to avoid repayment would be wiped out.
Burbank Partners would be allowed to use the $4.9 million to pay off the $3.8 million it still owes the city for the land for the expansion and conference center. This, effectively, would have enabled the developers to replace interest-bearing loans from private lenders with a Redevelopment Agency loan.
The agency, meanwhile, would obtain a key benefit as well. It would obtain relief from making any further interest payments to Wolff and his partners, as well as peace of mind knowing that the developers were under the obligation to repay the entire loan amounts, according to city officials and the memo outlining Tague's proposal.
A source familiar with the talks said the council--meeting as the board of the Burbank Redevelopment Agency--rejected the idea because it did not seem to benefit the agency.
Nonetheless, city officials insist they still have one way to avoid losing up to $3 million in taxpayers' money: Give Wolff and his partners the remaining $4.9 million in loans in one lump sum, forcing the developers to pay all of it back according to terms of the agreement.
Wolff's lawyer, Herbert Weiser, declined to comment on the closed-door sessions. Chief Assistant City Atty. Juli Scott, who signed the 1988 agreement for the city, did not return telephone calls.
Times staff writer Doug Smith contributed to this story.