Judge Blocks L.A. Subsidy for New Hotel

A Superior Court judge has blocked plans by Los Angeles city officials to subsidize construction of a hotel next to the Convention Center, ruling that the proposal represents “an unlawful gift of public funds for a private purpose.”

Finding in favor of two existing downtown hotels, Superior Court Judge James C. Chalfant also said that owning and operating a for-profit hotel is not a traditional responsibility for the city, but left open the possibility that the city might be able to play some role in assisting a private entity.

The ruling is a setback for city efforts to revitalize downtown and specifically for bolstering the Convention Center, which has not booked enough conventions to cover $525 million in debt issued for its expansion.

City officials have said that the absence of a major hotel nearby is to blame, and extensive market studies concluded that no private investor could be expected to build one in the economically distressed downtown without a public subsidy.

Chalfant said the city’s goal of making the Convention Center more competitive is laudable.

“Its purpose, however, is to aid a private entity in building a private hotel,” the judge wrote. “This is not a public purpose. The use of public money to subsidize the hotel does not serve a public purpose any more than it would for the city to issue bonds and give them to private businesses to entice them to relocate within city limits and increase the city’s tax base.”

Downtown hotel operators applauded the decision.

“It is unfair competition particularly because some of the subsidy would come from a tax on our hotel’s guests,” said Christopher Sutton, an attorney for Westin Bonaventure Hotel, which had challenged the plan.

Ron Deaton, the city’s chief legislative analyst, said he will review the judge’s ruling and explore other ways to set up the project that would address the judge’s concerns.

Deaton said the city asked the court for a decision before pursuing the project precisely to help identify legal issues that need to be addressed before entering such a large financial arrangement.

“That’s why we asked for the validation,” Deaton said.

Other officials, including Mayor James K. Hahn, would not comment because they had not yet seen the ruling.

The City Council approved a plan a year ago that would create a nonprofit entity called the Downtown Revitalization Corp., which would include city officials on its board, to issue tax-exempt bonds to build a $280-million hotel and then contract with a private hotel chain to run the business. One city study estimated that the city might have to provide subsidies of $67 million to $80 million in hotel bed tax and sales tax money to make such a project work.

The city had proposed to allocate $50,000 in city funds to get the Downtown Revitalization Corp. started and to provide staff assistance.

Before proceeding with the financing scheme, the city asked the court to validate the proposal and the agreement with the nonprofit entity as legal.

The judge ruled in a decision received by attorneys Wednesday that the DRC has not signed a specific financing agreement yet and few details have been made public, so it is premature to make a final ruling on whether such an agreement would be valid.

Sutton said that city officials had initiated the legal process without committing specific funds beyond the $50,000 to avoid the political debate of providing subsidies at a time when the city budget is in trouble.