Business & Economy

In this sizzling hot real estate market, should a downtown developer get tax breaks?

The downtown Los Angeles real estate market is sizzling hot. Even so, the Los Angeles city council voted unanimously Friday to give almost $200 million worth of tax subsidies to a developer.
The downtown Los Angeles real estate market is sizzling hot. Even so, the Los Angeles city council voted unanimously Friday to give almost $200 million worth of tax subsidies to a developer.
Photo by Brendan Biele via Flickr Creative Commons

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Despite a sizzling hot real estate market in downtown Los Angeles, the L.A. City Council has voted to give almost $200 million worth of loans and tax subsidies to a developer building a four-star hotel complex on the long-stalled Grand Avenue project.

The beneficiary of the city’s largess is Related California, which as part of the deal will get to keep half of the sales tax revenue generated by the project over the next 25 years – tens of millions of dollars that would normally flow into the city’s general fund to pay for police, street maintenance and other services.

The council unanimously approved the package on Friday.

This sort of aid isn’t unusual, but that doesn’t mean it always works out for cities, according to Alan Reay, president of Irvine-based Atlas Hospitality Group.

"Typically it’s a great deal for the developer - I’m not sure it’s a great deal for the city," says Reay. "I’ve seen areas where it’s worked really well and I’ve seen areas where it’s worked terribly.”

The deal is also unfair to hotels that don’t get the subsidy, he says, arguing that not only do they not get the same tax break but they could lose guests to the new project.

"I think if you're going to offer it to one hotel, you should offer it everyone," says Reay.

But hospitality consultant Bruce Baltin, who analyzed this deal for the city, says taxpayers are getting a good deal because L.A. desperately needs more big hotels, and without the subsidy the project would never happen.

"The costs are such that it would never be financially feasible without the city participating in it," says Baltin, senior vice-president with PKF Consulting.

It's generally less profitable for developers to build large hotels than residential projects because rooms go for much less than other cities such as New York city, he says.

"Our room rates in L.A. are not high enough to justify the cost required to build and operate a hotel like that," says Baltin.

Anschutz Entertainment Group made similar arrangements with the city to keep as much as $270 million in city taxes through 2035 to build the J.W. Marriott at L.A. Live.