Convention Center hotel approved for $103 million tax break

Artists rendering of the proposed Fig+Pico Convention Center Hotels. The palm trees are part of a proposed $14 million installation of LED lights that wrap around the buildings and face the Convention Center.
Artists rendering of the proposed Fig+Pico Convention Center Hotels. The palm trees are part of a proposed $14 million installation of LED lights that wrap around the buildings and face the Convention Center.
City of Los Angeles

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The Los Angeles City Council on Friday approved giving tax breaks worth more than $100 million to the developer of a new hotel complex across the street from the Los Angeles Convention Center.

The Fig+Pico Convention Center Hotels would rise above land that's now a parking lot used by Convention Center and L.A. Live visitors. The project still requires additional approval from the council and the Citywide Planning Commission. If greenlit, construction could begin in late 2018, with openings in 2020.

The project's two towers of 42 and 25 stories would house three hotels and more than 1,100 rooms in the mid-$200 price range. The $103 million in tax breaks amount to about one-fifth of the $494 million in tax revenue that would have gone to city over the next 25 years if the incentives weren't in place. 

Friday's vote on the tax breaks was taken without public or council comment. It followed a hearing Tuesday in the Economic Development Committee, at which no opposition was voiced.

Proponents of the tax breaks include the Central City Association, the South Park Business Improvement District and construction-related unions. They say the incentives will create jobs and economic development.

The project is expected to employ about 3,000 temporary construction workers and about 800 permanent workers once the hotels open their doors. The deal requires the builders to pay livable wages and provide job training.

L.A. lags behind other cities in hotel rooms

City officials say the incentives are necessary to boost the number of hotel rooms near the convention center. They say at least 8,000 rooms are needed within walking distance to make L.A. a magnet for big conventions and the money they bring in. Officials also say new hotels are necessary to accommodate visitors expected during the 2028 Olympic Games. 

More visitors translate into more revenue from taxes on hotel stays. 

Los Angeles officials say the city has lagged behind other large California cities in the number of hotel rooms adjacent to their convention centers. San Francisco has about 20,000 hotel rooms, Anaheim has 13,000 and San Diego has 10,000 within walking distance of their centers, said John Wickham, division head in the City Legislative Analyst office, which analyzed the  Fig+Pico tax breaks.

Los Angeles, before it began giving tax breaks to new downtown hotel projects, had just 1,800 rooms within walking distance of its convention center. With the completion of the Fig+Pico project, the city will have about 6,500 rooms.

City planners have been trying to increase the downtown hotel room inventory to 8,000 rooms, and it's provided similar tax breaks to other hotel projects, including the  Metropolis, Wilshire Grand and hotels at L.A. Live.

The city charges a 14 percent tax on hotel stays. The hotels project would produce about $409 million just in hotel taxes over the next 25 years, and it comes mostly from people who live outside the city. Rooms at the hotel would be priced in the mid $200 range per night, according to a financial analysis submitted to the city.

Altogether, the project is expected to produce about $494 million over a quarter century. That includes revenue from other taxes collected such as the city's share of property tax, business tax, utility taxes and parking taxes collected. 

The center column estimates the $494.5 million in taxes the Fig+Pico project would pay to the city of Los Angeles over its first 25 years. A deal with the city would let the developer keep $103 million of the taxes.
The center column estimates the $494.5 million in taxes the Fig+Pico project would pay to the city of Los Angeles over its first 25 years. A deal with the city would let the developer keep $103 million of the taxes.
City of Los Angeles

 

The developer, The Lightstone Group, has a $2 billion dollar portfolio of properties in 21 states, according to the company website.

Subsidy deals like this can be a windfall for  developers because the projects would likely get built without the tax breaks, said Greg LeRoy of Good Jobs First, a nonprofit that tracks public subsidies to private companies and is sometimes critical of them.

"If you accept that most of them are windfalls, what it means is that the deals would have occurred anyway, but somebody is paying fewer taxes," LeRoy said. "If I want my schools to be as good as they are today and my roads and my police and my sanitation to maintain a constant quality of public services, everybody else has got to pay a little bit more to make up for the difference."

LeRoy said some projects that get subsidies don’t produce the promised numbers of jobs. Further, he said state and local taxes generally add up to only about two percent of a business’s costs, so the savings to the developer aren’t that much.

On the other hand, LeRoy praised the the city's conditions that the developer to provide job training and livable wages. He also supported the role of hotels in the city's larger economic development plan for area around the convention center. 

"If you're intentional about it and there's a consensus that this is a this is a promising sector that we can grow and have a comparative advantage and then it makes sense to invest," LeRoy said.

The city's subsidy program calculates the tax break to equal the smaller of two numbers: either the shortfall the developer would suffer if it built the project without a subsidy or 50 percent of the tax revenue due to the city. In this case, the city's economic analysis concluded the shortfall, or "feasibility gap" would be 67.4million in today's dollars, and with inflation, about $103 million over 25 years.

Here is the language that sets out the formula for the tax subsidy the city is offering the developer of the Fig+Pico hotel project.
Here is the language that sets out the formula for the tax subsidy the city is offering the developer of the Fig+Pico hotel project.
City of Los Angeles

The city would agree to sell its land to the developer for $9.6 million, and the developer is in escrow to buy the two remaining parcels on either side of the city's parcel.

The building will have $14 million worth of digital LED signage that wraps around two sides of the building. The developer expects to earn $2.6 million on the sign each year.