City accused of undervaluing amount of hotel bed tax break.

Critics of a proposed convention center hotel maintain that city officials are using fuzzy accounting to sell the public on a large subsidy for the project.

Under a restructured deal, they say, developers of the downtown hotel could get nearly $100 million more than what city officials are saying publicly.

"They are trying to disguise the size of the future subsidy," said Christopher Sutton, an attorney representing Peter Zen, the owner of the Westin Bonaventure who is challenging the subsidy's validity. "They are trying to fool councilmembers from outside downtown L.A. that this commitment is not a big deal when it is a very big deal."

According to figures buried in a footnote of a CRA memo, the hotel's developers would forgo paying $6.3 million in bed taxes for 25 years--a total value of $157.5 million.

Yet the agency is referring publicly to the tax break as worth $62 million--a discounted sum called "Present Value" that city officials say more closely reflects the value of the developers' stream of future tax savings.

Bruce Ackerman, president and chief executive of the Economic Alliance of the San Fernando Valley, said he didn't understand why the CLA would change how it values the tax exemption.

"I'm grappling with what their rationale is," he said. "I'm curious why they are changing the amounts and terminology. We've got to look at what the impact to the city is over the long term."

Acting Chief Legislative Analyst Gerald Miller declined to comment, citing on-going negotiations with the developers, hotelier Lew Wolff and Apollo Advisors LP.

Councilwoman Jan Perry, whose 9th District includes the proposed hotel, said concerns regarding the tax break would be addressed when the proposal is taken up by the City Council. "All this will be explained and vetted publicly," she said.

Risky financing

"Present value" is widely used in corporate finance to measure the return on a capital investment project given that inflation reduces the value of money over time. However, the present value in this case, a 10 percent discount rate compounded annually, is considered more speculative.

That's because the city is basing its present value discount on hard-to-determine factors, such as inflation and hotel demand during the 25-year period of the hotel's subsidy.

Determining the amount of discount is "part science; part hunch," according to Carl Winston, director of the Hospitality and Tourism Management Program at San Diego State University. "You're trying to guess future inflation and figure out the riskiness of the deal," he said. "It's not fact. It simply reflects whoever came up with that value."

Bruce Baltin, senior vice president at PKF Consulting, which has been the city's advisor on the convention center hotel, came up with the 10 percent rate.

Baltin said the hotel developers need to borrow against the subsidy upfront to offset construction costs. This borrowing is based on the stream of payments stemming from the tax break. But hotel revenue is unpredictable; as the price of rooms fluctuates with market demand, so too will the amount of taxes collected.

"This is a strong source of income but it's not guaranteed," Baltin said. "Lenders are going to take that risk factor into account."

Wolff declined to comment. Messages seeking comment from Apollo Advisors weren't returned.

Ted Tanner, senior vice president of real estate at Ansehutz Entertainment Group, owner of the land underneath the proposed hotel, said his company hasn't been involved in negotiations with the city.

The public subsidy package is expected to go before the city council this month for a final decision. At that time, the council also will decide whether to approve a $16 million CRA loan to hotel developers to offset public infrastructure costs related to the hotel. (Payments on the 40-year loan, which carries a 4.25 percent interest rate, will be deferred for the first five years.)

While the council in February approved a draft benefits package 14-0, with then-councilman Antonio Villaraigosa absent, it's unclear how the council will receive the final proposal.

In an interview with the Daily News last week, Villaraigosa questioned the logic of buoying the city's flailing convention center, which is losing $30 million annually, by subsidizing a new hotel. Proponents believe more trade groups will use the convention center if there's a large number of hotel rooms nearby.

When the final proposal comes before the council, Council President Alex Padilla said he wanted the CLA to address a Brookings Institution study that found the amount of convention space across the country is growing while the number of conventions and trade shows are shrinking.

Padilla also asked CLA officials to find out whether it's possible to place a ceiling on the subsidy so the developers aren't able to recoup more than is necessary.

Padilla chairs a five-councilmember ad-hoc committee that will have the first say on a proposed subsidy package. Last week Padilla was unavailable for comment. His chief of staff, Felipe Fuentes, said the councilman had not yet been briefed on the details of the deal and had no further comment.