LA WATCHDOG--Investment Incentives, Controller Ron Galperin’s excellent report on Tax Abatements and Subvention Agreements, outlines the $1.3 billion in subsidies and giveaways for 11 DTLA hotels with 5,732 rooms that have been approved by Mayor Eric Garcetti and the Herb Wesson-led City Council or are in the pipeline waiting the pro forma blessing of City Hall.
However, only about $500 million (38%) for two convention hotels with 1,850 rooms are legitimate subsidies. They have been developed or are being developed by the Anschutz Entertainment Group in connection with its pioneering $3 to $4 billion investment that revitalized the area north of the Convention Center and its proposed $1.25 billion investment to finance the long overdue expansion of the Convention Center and an adjacent four-star convention hotel with 850 rooms.
The other nine hotels with almost 3,900 rooms were granted or are asking for giveaways of almost $800 million from the round heeled occupants of City Hall. However, preliminary due diligence confirms that the developers of these three-star hotels have above average returns on their investments without the benefit of the City’s giveaways because of the positive impact of the AEG investment in the LA Live and the Convention Center.
Galperin made several reasonable, easy to implement recommendations, including one that the City develop a comprehensive economic development plan that incorporates the use of incentives, including those for hotels that are within walking distance of the Convention Center.
He also recommended that the City hire experienced professionals who have a thorough understanding of the hotel business; are able to do an in-depth business and financial analysis of the transaction and the need for, if any, incentives; develop reasonable alternatives; and negotiate favorable deals for the City.
Finally, Galperin recommended that the City develop a process to review the individual transactions after their completion to see if the deals are meeting expectations. This post completion review would allow for “clawback” provisions if the developer fails to honor his commitments.
[I would add that if the deal exceeds expectations, the City should be entitled to the return of its subsidy, interest on that subsidy, and a small equity kicker, similar to what occurs in the private sector.]
The implicit message is that the City should not participate in any more giveaways for service hotels, especially those sponsored by Councilmen Herb Wesson and Curren Price that are not within two miles of the Convention Center.
[We$$on, Price Doling Out Another $100 Million of Your $$ to Hotel Developers]
Galperin’s recommendations also apply to the “incentives” that the City is proposing to offer Amazon in its quest to be the Company’s second headquarters city.
While the odds of the Los Angeles being chosen to be Amazon’s HQ2 are remote, especially given Amazon’s concern about the high building costs caused by the required project labor agreements, we must have a reasonable amount of time to review, analyze, and comment on the terms and conditions of any “incentives” before any transaction is consummated.
We also need a better understanding of how Amazon fits into the City’s long term plans and the impact on various sectors of the economy. What is the impact on housing and housing prices? Is the City’s infrastructure (water, power, sewer, sanitation, police, fire) able to serve 50,000 employees? What is the impact on our streets, traffic, congestion, and mass transit? What is the impact on Silicon Beach and its startup companies and small companies throughout the City and County?
And what is the impact of HQ2 on City revenue, its ability to provide services, its unbalanced budget, and its Structural Deficit that is running at the rate of $1 billion a year.
Who are the seasoned financial advisors and lawyers that are advising Mayor Garcetti, and City Council President Wesson? And who is negotiating the potential agreement with Amazon?
What are the follow up mechanisms to make sure that Amazon is living up to its end of the deal?
And maybe HQ2 is not right for LA.
Mayor Garcetti and City Council President Herb Wesson need to have an open and transparent discussion with Angelenos about incentives they are offering developers of hotels and Amazon. After all, it is our City and our money, and we Angelenos do not like being treated like mushrooms, in the dark with tons of manure spread all over us.
(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: firstname.lastname@example.org.)