AEG’s $1.25 Billion Convention Center Proposal: Big Win for LA

LA WATCHDOG--Anschutz Entertainment Group’s proposal to invest $1.25 billion in the expansion of the Los Angeles Convention Center and the development of a convention hotel will create significant controversy. 

Selected interest groups will be vocal about the increased privatization of the Convention Center as well as the granting of subsidies for the 40 story, 850 room hotel.  

But before the critics go wild, they need to realize that this deal will save our cash strapped City over $500 million while adding billions to the City’s economy. 

The expansion of the Convention Center has been on the City’s wish list for years, in large part because the undersized and disjointed Los Angeles Convention Center has been unable to compete with other larger and more modern venues in San Francisco, Anaheim, and San Diego.  Adding to the problem has been a shortage of hotel rooms that are within walking distance of the Convention Center. 

As a result, the City believes that our local economy has lost billions in economic activity to other venues. 

Over the past few years, almost 4,000 hotel rooms have been or are planned to be built in DTLA, helped along by almost $1 billion in subsidies (also known as giveaways) for the developers of these DTLA hotels.  

While there have been numerous reports over the years discussing alternatives and the positive economic impact of the $500 million expansion, there has been very little progress because of the City’s bureaucracy, the City’s lack of financial flexibility, and most of all, the parochial interests of Councilman Curren Price. 

If the City continues its current path, we would be lucky to see the expansion of the Convention Center completed by the 2028 Olympics.  

On the other hand, AEG believes that under its auspices, the expanded Convention Center would be operational by the end of 2021.  This is a reasonable assumption as AEG, the successful operator of the Convention Center since 2013 and the owner of LA Live, has the management capability to complete the expansion project on time and on budget.  

It also has the resources to finance the expansion.  

The new and improved Convention Center is expected to attract an additional 100,000 to 200,000 visitors a year, resulting in an extra $1 billion a year in economic activity beginning in 2022 according to City sources. 

The City is also saving money by working with AEG.  If the City were running the show, there would be delays and massive cost overruns, bumping the cost by 50%, from $500 million to $750 million, and that is if we are lucky.  On the other hand, if AEG experiences cost overruns, it would have to absorb the hit, not the City. 

Furthermore, with AEG, the City does not need to borrow any money to finance this expansion, giving our cash strapped City the flexibility it might not otherwise have to incur debt to finance the expansion of the Civic Center ($300-500 million) and the revitalization of the Los Angeles River ($1.2 billion). 

The City will need to provide AEG with “availability payments” in an amount to be determined to offset its cost of this public facility that is a loss leader.  But these customary availability payments in public private partnerships will be offset, in part, by profits from the operations of Convention Center, signage revenue, and increased parking revenues.  

AEG is also asking for financial incentives in the development of its 850-room, four-star convention hotel that is expected to cost $700 million.  While the amount of the subsidy is not known, it will probably be in the range of $100 million, representing less than 50% of the revenue the City will derive from the hotel and other taxes.  While these giveaways are very controversial, in AEG’s case, it is contributing significantly more to the Convention Center and the City than other free loading developers who are building three-star hotels without the many amenities of a convention hotel. 

While the details of any deal between the City and AEG need to be worked out, the City appears to be getting an excellent deal.  The increased contributions to the City’s economy from the early completion of the expansion of the Convention Center and the savings of not having to invest in the Convention Center more than offset the public private partnership “availability payments” and the subsidies for the convention hotel. 

There are some who rightfully question why AEG is willing to finance this $1.25 billion investment with subpar returns and at the same time deal with the City’s stifling bureaucracy, the numerous interest groups who are looking for handouts or unrealistic concessions, and its self-serving politicians who are more concerned about their personal fiefdoms than the overall interests of the City. 

The City would be well served by entering into a transaction with AEG to finance the expansion of the Convention Center and the development of a four-star convention hotel.  And sooner is better than later.    

 

(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee and is the Budget and DWP representative for the Greater Wilshire Neighborhood Council.  He is a Neighborhood Council Budget Advocate.  He can be reached at:  lajack@gmail.com.)

-cw