L.A. Officials Float Plan to Pay for Hotel Downtown

Unable to persuade a developer to build a hotel considered vital to the success of the city convention center, Los Angeles officials proposed Monday that they create a nonprofit corporation to pay for the $280-million project.

In a report to the City Council, Chief Legislative Analyst Ron Deaton proposed that the corporation issue tax-exempt bonds to finance construction and use revenue generated by the 1,200-room hotel to pay off the debt.

In a separate report recently delivered to the council, a consultant estimated that the City Redevelopment Agency would be required to pay about $67 million in subsidies if the hotel project is approved by the City Council. Others say the subsidies could reach $80 million. The money would come from hotel bed taxes, property taxes or sales taxes generated by the hotel.

The reports detailing the city’s potential involvement in the hotel project touched off a debate over its role in developing downtown.

The City Council considers the hotel vital to reversing the fortunes of the convention center, which has lost business because of a lack of hotels within walking distance. Some council members support the city taking a lead role in the project; others have expressed misgivings about public subsidies.

The hotel is part of a large redevelopment project that the council approved last week. It will come before the council again Wednesday for final approval. Separate actions would be needed to create the nonprofit corporation or to provide any subsidies to the hotel.

The proposed hotel would be built at the southeast corner of Olympic Boulevard and Georgia Street. Under Deaton’s plan, the new nonprofit would be called the Downtown Revitalization Corp. and would contract with a hotel firm to run the business on a day-to-day basis.

“The city believes that the lack of hotel accommodations within walking distance severely undermines efforts to attract conventions,” city representatives said in a letter to the Internal Revenue Service, asking for approval of the nonprofit.

A February 1999 report by PKF Consulting found that over a three-year period, 70 groups representing 1million hotel room nights did not choose Los Angeles because of the lack of a hotel adjacent to the convention center.

City officials, businesspeople and economists said a convention center hotel is key to rehabilitating blighted areas of downtown.

“It will take the revitalization of downtown to another level by bringing brand-new jobs for people who are unskilled into the downtown area,” said Councilwoman Jan Perry, whose district includes the hotel site. Without a private developer in sight, Perry said, the city ought to step up and get the hotel built. “If that was going to happen, it would have happened already,” she said. “Obviously, it’s not going to happen.”

Private developers have been uninterested in the project because convention center hotels are expensive to build and offer amenities, such as large conference rooms, that don’t provide a steady return on the investment. Also, the Los Angeles market has been soft, with existing hotels having trouble filling their rooms.

Mayor James K. Hahn declined to comment on Deaton’s plan, saying through a representative that his office needs to analyze the proposal. However, others questioned the wisdom of the city getting into the hotel business, even in an indirect way.

“It’s absurd,” said Jon Coupal, president of the Howard Jarvis Taxpayers Assn. “We have a situation where private capital has looked at a situation and decided not to invest, and now the public sector’s response to that is ‘Let’s have the public sector do it.’ ”

He was not moved by the argument that the hotel is necessary to stem the flow of red ink at the convention center. “Does the phrase ‘throwing good money after bad’ mean anything?” Coupal asked.

Others said the revitalization of downtown Los Angeles is a public good that justifies the city’s getting involved in a hotel project.

“The convention center has hemorrhaged money for a number of years, and that amounts to a loss of a lot of revenue that Los Angeles could use to fund all kinds of city services,” said Mara Marks, associate director of the Center for the Study of Los Angeles at Loyola Marymount University.

The hotel would be built as part of a sports and entertainment district that the City Council tentatively approved in September for the developers of Staples Center. When they outlined their plans for restaurants, theaters and other attractions, the developers told the council they had no interest in building the hotel.

The proposed hotel site is on 2.7 acres that the City Redevelopment Agency helped purchase as part of the Staples Center project and gave to the Staples builders. It is currently being used for parking.

With the Staples developers and other private firms unwilling to build the hotel alone, Deaton has proposed that a nonprofit corporation be set up and run by a board including city representatives.

Unlike a private developer, a nonprofit board can issue tax-exempt bonds for construction, which can save up to 2% on financing charges, or millions of dollars over the life of the project.

The City Charter prohibits the city from directly issuing tax-exempt bonds, as other cities have done, for construction of a hotel, Deaton wrote to the council, explaining why a nonprofit corporation is proposed. That would also protect the city general fund from liability if the hotel goes bust, officials said. The corporation will own the hotel until the bonds are paid off, possibly 25 years, and can sell it afterward.

Although Deaton’s report says that setting up the corporation does not commit the city to any subsidies, the accompanying letter to the IRS said one analysis found that the hotel might generate $77million in revenue the first year against $60million in expenses. The $17million in profit would not be enough to cover the $31.9-million debt service payment the first year, although the gap shrinks in later years.

The PKF report estimated that the project would require a total of $67 million in subsidies, although some city officials said privately this week it might require $80 million. The report was sent to the council last week as part of the new redevelopment proposal.

PKF indicated that potential sources of the subsidies include the hotel’s property tax, which will be about $2.8 million a year; its hotel bed tax, which would be $6.3 million annually; the sales tax it generates, which would be $2.2 million; and the parking tax of $196,600.

Officials in several other cities, including Austin, Texas; Houston; Myrtle Beach, S.C.; and Chicago, have used public financing on convention center hotels.

Councilman Jack Weiss said he is opposed to subsidies for the hotel and needs to hear more details about the corporation to make sure the city is fully protected. “My overall concern is that such a project not cost the city any money,” Weiss said. “I don’t want it to cost the city money upfront, and I don’t want to set up a scenario where, if we hit hard economic times, the city is left holding the bag.”