Sunday, March 02, 2008

Grand Avenue Dead Horse Kicking!

Below is my latest CITYWATCH essay:

Grand Ave Project: Usual Suspects Looking for Dead Horses to Kick
Dubai or Not Dubai
By Brady Westwater

When the Grand Avenue Project obtained equity financing from Dubai two weeks ago, all the usual suspects quickly took to their hobby horses to exhume dead horses to kick. And, as expected, the easiest expired equine to batter was the claim Los Angeles taxpayers are giving away hundreds of millions of their tax dollars to the developers – which now include the Royal Family of Dubai.

Unfortunately, the people making these claims are either not familiar with the complicated financial aspects of the project – or, if they do understand them, they choose to ignore them for their own political benefit.

The reality is that not one cent you or I are currently paying is being given any developers – royal or commoner - to enrich themselves. Instead, in an increasingly risky financial market, and despite the increasing cost to the developer, and the daily more difficult real estate market – Related (the developer) is still going ahead without asking for any changes in the development agreement.

As far as the current agreement, let's look at the supposed 'hundreds of millions' of dollars being given to developers, to quote Walter Moore, among others.

Exactly as before, the only direct subsides the developers are getting is an rebate of future tax revenues from the project– about $66 million - $60 million from the future hotel tax and the $6 million future parking tax for 20 and 5 years respectively. That's right. The only direct subsidy is coming from money that would only happen if the project is built.

Not one dime being given to the developers is coming from existing revenues. And the only reason there is a parking tax rebate, is because the City/County have mandated that the public parking – but not the condo or hotel parking – be subsidized at below market rates. And, as for the hotel, the only other major hotel being built Downtown - at LA Live - is also getting a temporary rebate on its hotel tax, which the city agreed to in order to get enough new hotel rooms built to stop the flow of red ink from the convention center; a rebate, I might add, that is far less than all the sales, property and other taxes the hotel will generate for LA.

So whether you agree – or disagree –with that strategy – (and there are very legitimate reasons to disagree with it and I would have structured it somewhat differently myself) that is a policy precedent the city made prior to the approval process of Grand Avenue so the LA LIVE hotel could be competitive with existing hotels – many of which are non-union with lower operating costs - that have long since amortized their development costs.

What most people forget though is that to get to the point where those two subsidies kick in- the developer also had to grant a massive public benefits package to get the approvals to build. Union jobs at the hotel and 100% unionized construction crews, requiring Related to pay far higher salaries than most other LA developers, job training programs, and other community benefits; costs that add far more to the project than the subsidies they are receiving. The biggest public benefit is the requirement that 20% of all the units in the project will be rented at not just far below market value – but, in some cases, likely below even the cost of maintaining those units. And as with much housing of this type – it will be financed though tax increment funds that are restricted to affordable housing – and cannot be used anything else, along with the sale of bonds.

So that is money that will eventually flow through to the residents of those units – and not the developer.

Additionally - there are two things no one ever discusses about this project.

First, should it cost more to build these affordable units – or it costs more to maintain them over the years – 100% of that overage will come not from us – but from the developer. Second, the only thing that will make serious money on this project is the sale of condos and the rental of market rate units. But 20% of those units will either not make the developer a dime - or might even cost them money.

Now to put that in perspective - imagine you own a store – and you had to sell 20% of everything in it at no profit – or even a loss; or suppose you work at a factory and 20% of the hours you work – you don't get paid. And just as a store only has so much shelf space to sell from and you have only so many hours a day in which you can work – Related is only allowed to build so many condos.

So would you agree to those terms?

Of course not.

Or, at least, not unless you were given other incentives to enable you to afford to do so.

And one thing no one ever talks about. In 99 years – the taxpayers of Los Angeles – will own the land free and clear.

Lastly, Waller Moore says that the city and the county should use an upcoming meeting where they have to approve the new financing package – to bail out of the project; that we should withdraw from the project based on the reasons why CALPERS pulled out. Well, CALPERS pulled out because pension funds have to demonstrate they can meet their short term ongoing needs; so their investments need to demonstrate they will be secure in the short term – and not just – the long run. A country such as Dubai (which will be only a minority limited partner) is the perfect passive investor. They are looking at the long term – just as the city and county are - financial benefits of the project.

And since Related has already paid for the property – even before getting their final approvals - the only way the city/county can terminate the deal is if they can prove that the new lender is financially incapable of funding their part of the project. So if the city and county lawyers can't prove that, the developer will win a law suit that will dwarf any money we are putting into this project.

But to know that, of course, one would have to have actually read – and understood – the financial documents about the Grand Avenue project. (Brady Westwater is a writer, community activist and a regular contributor to CityWatch. )

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