Aid but No Subsidy for Grand Ave.

When a proposal was unveiled to develop 25 acres of public land around Disney Concert Hall into a cluster of high-rise towers, parks, shopping centers and entertainment venues, civic leaders touted the public-private partnership as a model for getting things accomplished without costing taxpayers a dime.

Philanthropist Eli Broad boasted that the $1.8-billion project could be completed “without using one dollar of general fund money from the city or the county.”

With the Los Angeles County Board of Supervisors set to vote on the Grand Avenue project today, a close examination of the financing suggests that statement, while literally true, may understate the complexity of the deal.

If the project goes forward, the city and county governments will be doing much to help the development along, especially in the early stages. How much, if anything, taxpayers will receive in return depends heavily on whether the downtown Los Angeles real estate boom continues: The money that would flow back to the city and county is tied to how well the project does.

The Grand Avenue project will be built on land already owned by the county and the city’s Community Redevelopment Agency. In that regard, the project differs from others -- Hollywood & Highland, for example -- that were built on private land with public subsidies. Under the terms of the deal negotiated by the county, the city and the developer, Related Cos., the government entities would lease the land for 99 years.

Related and its investment partners plan to immediately give the government agencies $50 million as a down payment on the lease.

But the $50 million would not stay in government coffers. Rather, the city and county plan to pour all of the initial lease proceeds back into the development, funding traffic improvements, renovated streetscapes and the 16-acre terraced park that would run from Grand Avenue to the Civic Center.

In effect, the county and city would be allowing the developer to use a valuable public asset -- the land -- and would use the rent from the land to make the developer’s lease more valuable.

County officials may help the developer in another way. While not part of the development agreement, top county officials have talked about moving some county offices into new buildings that are slated to be part of the Grand Avenue project. The offices in question are now in the Hall of Administration and Stanley Mosk Courthouse -- buildings that were damaged in the 1994 Northridge earthquake.

Critics of the project have seized on that prospect in particular, saying that the public needs a much clearer understanding of what public agencies would ultimately gain and give for the project before moving forward.

“There seem to be a lot of questions about what this is,” said Joel Kotkin, an Irvine senior fellow at the New America Foundation who has been critical of the project.

The possibility that the one office tower proposed under the development, a 15- to 20-story building on Hill and 1st streets, could ultimately house government workers seems like a backdoor way for the county government to prop up the project, he said.

“I don’t know whether this scale is necessary. And I wonder, what are we getting at the end of the day? And is there money going into this that could have gone elsewhere?”

Backers of the project say that critics are missing the larger point. Getting a project as large as Grand Avenue off the ground without direct public subsidies is something of a triumph, they say. And, they add, in the long run, the public will benefit from more shopping downtown and from the new park.

“That’s the portion that will have the most dramatic, sweeping impact,” said City Councilwoman Jan Perry, the vice chair of the joint city-county Grand Avenue Authority, “to benefit not just downtown, but the entire city: an open space for everyone to enjoy.”

Since its beginnings more than five years ago, the Grand Avenue project has been the pet of a handful of civic leaders, including Broad. They dreamed aloud of remaking the area, which includes the Colburn School, the Music Center and the Museum of Contemporary Art, into a sort of center for a city that has long been without one.

Last summer, Related beat seven other major firms to win the right to negotiate a deal with the city and county. Related, which had just finished work on the Time Warner Center in New York City, was chosen in large part because of its ability to raise the large amount of money needed to complete the three-phase project. MacFarlane Partners, a Bay Area-real estate investment firm, is raising much of the funding on Related’s behalf.

Related spent nearly a year negotiating the terms of the deal with Broad and real estate mogul Jim Thomas -- who has since stepped down from the leadership of the Grand Avenue Committee, the group shepherding the deal on behalf of the city and county.

It was clear from the beginning that city and county officials believed the entire Grand Avenue project had to pay for itself, said Bill Witte, president of the Related Cos. of California. “That was very important in selling the concept to the city and particularly the county,” he said.

Public subsidies have long been a vehicle used by local government to revive struggling areas, from New York’s Times Square to Hollywood Boulevard. But it’s difficult to compare the Grand Avenue project to other recent developers because it is so much larger and is being built on several different plots of public land.

The exact terms of the Grand Avenue plan won’t be complete until a final development agreement is signed. But a term sheet that resulted from the negotiations so far, a copy of which was obtained by The Times, details the general terms of the deal, which already has been approved by the Grand Avenue Authority, the city and the CRA.

The county Board of Supervisors votes on the deal today.

Once those agencies have OKd the project, Related will issue a letter of credit for $50 million. That nonrefundable deposit represents the projected rent for the land on which Phase 1 of the project and part of Phase 2 would be built. Phase 1 covers the block just east of the Walt Disney Concert Hall, between Grand Avenue and Olive Street -- included with the park. Phase 2 is now planned as the block immediately south of the concert hall.

In addition, Related has said it plans to buy, at its own cost, a private parking lot along 2nd Street between Hill and Olive streets that would become part of the third phase of development. Under the current plan, that property would house a 35- to 40-story residential tower.

As part of the first phase, Related will build some of the residential units as low- and moderate-income housing. The current plan calls for 20% of the project’s 2,100 to 2,600 housing units to be in one of those two categories. In keeping with common practice, the city’s Community Redevelopment Agency will reimburse Related $100,000 to $200,000 for each housing unit that is designated as affordable housing.

Once the developer begins selling condominium units and getting money from the planned hotel and shops, the rent that taxpayers would receive will depend on how well things go. The government bodies and Related have agreed on so-called incentive rents, which would take effect if property values continue to climb after the deal is approved.

For example, if a 1,200-square-foot condo in the development sells for more than $690,000, then 5% of the sale price would go to the city. (Condominiums selling in the downtown area currently go for slightly under that figure.) And after the retail area’s fourth year of operations, 2% of all rents would go to the governments. Those incentive rents would be renegotiated after 20 years to bring them into line with prevailing market conditions.

The rent payments would be divided between the agencies based on the percent of total land value each agency owns. Each entity owns two parcels; while the land still must be appraised, the county parcels are larger than the CRA land.

The city and county plan to spend about $9 million for streetscape improvements to Grand Avenue between 5th Street and Cesar Chavez Avenue and an additional $12 million for other upgrades in and around the development. Those improvements would not be paid for out of the city or county general fund. The money could come from additional revenue from the project or from money the governments would borrow using the expected tax revenue from the project as collateral.

The term sheet calls for Related to build the project’s required parking facilities “at its own cost without any public assistance.” But officials say that if public money is left from the project after other improvements are made, they hope to partially fund construction of the parking lots. The public money would keep parking rates lower, they say.

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., said he is troubled by the lack of specific details on the deals so far.

“This is one of these deals where the devil is in the details,” Coupal said. “We are always suspicious ... particularly when there is a politically active player involved.... It would not surprise me if there wasn’t a better deal for the taxpayers out there.”

Broad strongly disagreed. Negotiations between the public agencies and Related produced “a great deal for the people,” he said.

Related’s Witte offered a more ambiguous response. Asked whether the Grand Avenue project is a good deal for his company, he paused for a moment before he responded: “I think ultimately, it’s a fair deal for both sides. But you have to be willing to take a long view.”