Hotel Seen as Convention Center Savior

Despite assurances a decade ago that a major expansion of the Los Angeles Convention Center would pay for itself, the super-sized structure has bled red ink, forcing city officials each year to dig deeper into the treasury to keep it afloat.

The city has been unable to pay off the debt on the $525-million expansion with revenue the center generates and the portion of the citywide hotel bed tax dedicated to the project. As a result, city officials have been forced to bail out the sprawling glass and steel structure with funds that otherwise could go to hiring more police officers and firefighters.

“This is really a white elephant,” said Mayor James K. Hahn. “We are not getting the conventions we need to fill the rooms there and to fill local hotels.”

Last year, the city had to provide a general fund subsidy of $13.6 million to help pay the expansion debt, up from $11.7 million the year before. Next year, if convention center projections come true, the subsidy will top $15 million. Many factors contribute to the center’s poor financial health. Some say mismanagement. Others say hard luck, an economic slump and stiff competition are to blame.

But most everyone agrees that the convention center suffers from the lack of quality hotel rooms within walking distance. As a result, many city officials are eager to move ahead with a 1,200-room hotel that would be built next to the convention center using public subsidies available through the council’s newly approved redevelopment area.

Indeed, that proposal, though largely overshadowed by the plan for a new football stadium in the redevelopment area, is a key reason some council members say they backed creation of the special tax zone.

“A hotel will bootstrap our convention center, which has been a drain upon this city for years,” Councilman Hal Bernson told his colleagues during the debate on redevelopment last week. “Not only will it no longer be a drain on the public treasury, but it will pay dividends to our city for years.”

Others, complaining that they have been misled before, remain skeptical.

“I’m not optimistic for the taxpayers,” said former City Councilman Ernani Bernardi, a leading critic of downtown redevelopment efforts. “The taxpayers are being taken, and on a big scale.”

City officials promise no general fund drain by the hotel project, but the same promise was made in the 1980s, when Los Angeles officials were contemplating the convention center expansion, according to officials including City Controller Laura Chick.

When the expansion was completed in 1993, the convention center had more than doubled in size, with 805,000 square feet of meeting and exhibit halls.

The expansion was launched after a consultant hired by the city estimated that it would increase use of the convention center from 1.47 million attendees and 123 events in the 1984-85 fiscal year to 3.7 million attendees and 270 events within three years of completion, in 1996.

But in the fiscal year ending June 20, 1995, only 1.3 million people attended 129 events, and the next year there were 1.83 million people at 121 events, according to a report released this month by Los Angeles County, which is a partner in the authority that owns the land under the center.

“Instead of doubling attendance as predicted in the feasibility study, actual attendance has remained at pre-expansion levels,” said the report by county Chief Administrative Officer David E. Janssen.

Last year, the convention center attracted about 1.9 million people, still well below the 3.7 million projected before the expansion.

The county report, based partly on research by a University of Texas economist, was written to oppose the creation of a redevelopment project area. County officials fear it will divert tax dollars from county coffers to private redevelopment projects. The report also casts serious doubts on whether a new hotel will solve the convention center’s problems.

County officials say the market for hotels downtown is weak, that such a hotel will have trouble filling its rooms, and that it may not solve the convention center’s problems because there is a glut of convention center space nationwide.

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Center Plagued by Problems

The convention center expansion, billed at the time as the most expensive publicly financed building in the city’s history, from the beginning has been plagued by problems.

In 1985, city officials said the expansion would cost $225 million, but construction and planning costs skyrocketed to $399 million after major alterations were made to put parking under the new South Hall.

The Community Redevelopment Agency spent an additional $125 million buying the land and relocating 1,400 residents and 128 businesses.

The annual debt payment on the expansion is about $41.5 million. Most of it was supposed to be paid through a share of the citywide hotel bed taxes and convention center operating revenue. But the dearth of conventions and the economic slump of the 1990s have kept that tax revenue and operating revenue below what is needed to pay on the bonds.

Last year, $27.8 million in hotel bed tax went toward the debt payment, leaving a $13.6 million gap that had to be filled by the general fund.

Since the expansion was completed, such unanticipated general fund subsidies have totaled $50 million. That’s beyond the $5 million in general funds the City Council agreed to pay every year to cover the loss of money when discounts are offered to attract conventions.

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Discounts Failed to Deliver Revenue Stream

The council made that commitment in 1992 after it approved a change in the convention center’s booking policy to encourage officials to offer discounted rates to attract large “out-of-town” conventions that would bring dollars to the local economy.

In a recent audit, Controller Chick said those discounts have come at the expense of convention center operating revenue.

About $25 million in rental discounts had been given since 1994, Chick said, and $5.8 million appeared to violate city rules limiting the size of discounts.

Some hotel owners and city officials have expressed dissatisfaction with the performance of the Los Angeles Convention and Visitors Bureau, which has a city contract to draw large conventions that must be booked at least two years in advance.

In particular, they have complained that the bureau appears to have inflated bookings to meet performance goals and win bonuses, only to have many of the conventions cancel later. Bureau officials deny bookings were deliberately inflated, but acknowledge the center has experienced an unprecedented number of cancellations in the last three years.

Chick, who has launched an audit of the bureau, said she believes city mismanagement and poor planning are also partly to blame for the convention center’s financial problems.

The controller faults city officials in the 1980s for approving the convention center expansion without looking at worst-case scenarios.

For instance, the expansion was approved based on the assumption that several new hotels would be built nearby, providing 4,000 rooms.

However, after the recession hit, only two of the hotels were built. As a result, Los Angeles has just 650 hotel rooms within a half a mile of its convention center, compared with 9,400 in Las Vegas, 4,500 in Anaheim and 5,000 in San Francisco.

“The marketability of the city in attracting conventions has been primarily hampered by the lack of hotel rooms in the downtown area,” said George Rakis, general manager of the convention center.

PKF Consulting issued a report for the redevelopment agency in 1999 that estimated during a three-year period, 70 groups decided against going to Los Angeles because of the lack of a nearby hotel.

With the council last week approving a downtown redevelopment district, city officials say financial help may be available to get a hotel built.

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No Developer Showed Interest

Because no private developer has shown interest in building the hotel, Ron Deaton, the council’s top advisor, proposed that the city create a nonprofit corporation to issue tax exempt bonds to build it. The city would contract with a hotel firm to run the business on a day-to-day basis.

Most of the hotel debt would be retired with hotel revenue, Deaton proposed. Redevelopment studies indicate that up to $80 million in subsidies would be required. Much of that could come from taxes generated by the hotel, but studies indicate more subsidies would likely be required to make the hotel work.

Deaton said he will not recommend that the general fund be tapped for subsidies.

A report commissioned last month by the county from the private consulting firm Sedway Group casts doubts on whether the proposed hotel can succeed.

Intense competition from other cities, a greatly expanded supply of convention center space throughout the country and a leveling off of demand because of economic factors are likely to hamper efforts to increase use of the Los Angeles Convention Center, the study found.

Based on current business at the center, an adjacent hotel would be used by conventioneers only 100 days a year, with only 35% of its demand coming from convention visitors, according to the study.

“The Los Angeles hotel market is weak,” wrote Thomas R. Jirovsky, senior managing director for Sedway. “Despite no new hotels having been built in downtown in almost a decade, occupancy rates have remained depressed, averaging only 60% or less.”

Deaton believes the nearby Staples Center and a $1-billion sports and entertainment district proposed by the Staples owners, will make the hotel more feasible.

Mayor Hahn said he wants to examine Deaton’s hotel proposal before committing to it, but believes something needs to be done to stop the convention center drain on the city general fund.

“If you do nothing, the bleeding will continue,” Hahn said. “It’s extremely frustrating. I’d rather be hiring more police officers or extending library hours than paying off debt.”