22 January 2014
Hotel Developer Forum in Los Angeles
With hotel development beginning to blossom in many national markets where the cost to buy a hotel substantially exceeds the cost to build one, JMBM’s hotel lawyers recently held a Hotel Developer Forum focused on the City of Los Angeles. The program was moderated by Jim Butler, Ben Reznik and Guy Maisnik. Bud Ovrom and Michael Santana were guest speakers.
Bud Ovrom is the General Manager of the LA Convention Center and is charged with figuring out how to get 4,000 more hotel rooms to support the Convention Center, which is at the heart of the remaking of Downtown Los Angeles. Santana was appointed as the Chief Administrative Officer for the City by former Mayor Antonio Villaraigosa in 2009, and recently agreed to continue in that position at the request of newly elected Mayor Eric Garcetti. Santana is the Budget Chief for Los Angeles and has negotiated all the development incentive deals made by the City since he took office.
There were a number of interesting take aways for the developers attending this gathering. One is that the City of Los Angeles wants to see 4,000 new hotel rooms developed in the downtown area serving the Los Angeles Convention Center — and the City is willing to provide economic incentives to make it happen (up to 50% of the property specific revenues from transient occupancy taxes, sales takes, property taxes and the like).
But these City incentives come with strings attached, which developers will have to weigh against the benefits of the incentives. Read on for the details.
Surge of investment and development in downtown Los Angeles
Late last year, 88 new development projects were identified in downtown Los Angeles. Construction downtown has been increasing for several years, but this represents a new surge.
Ben Reznik, a senior member of the Global Hospitality Group® and head of JMBM’s land use and entitlement practice has seen this surge reflected particularly in the mixed use and multifamily sectors where developers “want their entitlements done by tomorrow.” Ben says that developer clients are afraid they will miss this window of opportunity and are rushing everything.
Ben notes that, in addition to the entitlements, today’s hotel developers are also looking for financial assistance from the local jurisdictions, and his team helps them navigate that complex web.
His advice to developers? Bring on a land use lawyer at the very beginning of the development process to avoid having to bring him or her on midstream in order to solve problems that could have been prevented altogether.
Background: The remaking of Los Angeles
Ovrom and Santana described how much growth and progress Los Angeles has made in the last 15 years. Downtown has become a place where your professionals and upwardly mobile middle class people want to live and work. There has been a renaissance downtown as lofts, restaurants, retail and entertainment is flourishing. Los Angeles has developed a very strong brand and is serious about continuing to build it.
In the 10 years prior to the recession, Santana observed that robust development “remade” downtown Los Angeles. And “I think the next 10 years will be even bigger for us,” he said.
According to Santana, the City now has a budget of $175 million. Los Angeles is recording record visitation (exceeding pre-recession levels), and it “wants to treat tourism and hospitality the way we have treated our airport and our port. These are at the heart of the local economy.”
A few years ago, Los Angeles decided to make tourism a major industry that the City encourages. At the heart of this is the Convention Center. And, Convention Center debt service is $50 million per year so the City needed a plan to make this work.
The City recently contracted to have the Convention Center managed by AEG, developer of Staples Arena and LA Live. AEG and the City are working on plans to continue the growth of downtown with an additional million square feet of convention space and by building a football stadium downtown for a new NFL team to be brought to Los Angeles.
Bud Ovrom says, “I am charged with getting more hotels within walking distance of the Convention Center. We want 4,000 more rooms by 2020 and we think it can be done.”
What is the hotel market like downtown? Ovrom reports, “The JW Marriott is running 95% occupancy, with a lot of days turning away business.” And of course the ongoing developments are projected to be new demand generators for the market.
What are the incentives? What are the strings?
A lot of developers are coming to the City and saying that they cannot make a hotel development pencil unless the City helps with rebates on transient occupancy taxes or other economic subsidies.
Santana says that in this area of incentives, his office plays several roles. According to Santana, “We want development, and think it is a good thing as long as it is consistent with the needs of the community. If we ended up doing this for everyone, then our revenues would stay stagnant. These taxes are what pay for our safety and sidewalks. We are reconciling desire for economic development with desire for increasing revenues to pay for services.”
The other thing Santana points out is that “if you take our money, there will be strings attached.” Los Angeles is a union town, and the City wants a union workforce, minimum wages, a voice in design and other involvement. In other words, Santana says “We come with a ‘price,’ so you have to evaluate this.”
In the right situation, the City is willing to use incentives to promote hotel development. It is willing to help with up to 50% of site-specific revenues (TOT, property taxes, sales taxes and other charges).
When developers say that the living wage, union construction and other strings basically use up all the incentives that the City provides, Santana says that in a union town, that is the reality of the situation. The fact that AEG and other developers have found a way to make this work effectively overwhelms arguments to the contrary.
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who’s your hotel lawyer?
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