Developers of downtown L.A. hotel short of funds despite city pledge.

Despite a pledge of up to $177 million in public assistance for a 1,200-room downtown hotel, developers continue to scramble for more money.

The package approved by the Los Angeles City Council is made up mostly of an estimated $110 million to $140 million in bed-tax revenue that would be generated during the first 20 years. Construction of the hotel is still expected to begin early next year.

But hotelier Lew Wolff and financial partner Richard Ackerman, a principal at Apollo Real Estate Advisors, said last week that more revenue must be generated in order to cover its future loan payments on the $350 million project.

"We are scraping every possible revenue source so that if something goes wrong in the next couple of years we'll be able to ride out any storm," Ackerman said. "We're trying to hedge our risk on an immense project by being very cautious."

To that end, the developers have retained Anschutz Entertainment Group, majority owners of the Staples Center, to help fill the 55-story hotel with lucrative corporate sponsorships.

The marketing deals, ranging from whose furniture will decorate the rooms to which company gets building-top signage, are expected to generate a total of between $5 million and $10 million.

The corporate sponsorship dollars would be in addition to the public benefits the council approved two weeks ago on a 14-0 vote, with Councilman Antonio Villaraigosa absent. City officials and the hotel's developers are ironing out the details and a final agreement is expected to return for council approval in 90 days.

Besides the bed-tax provision, the deal would loan the developers $22 million, have the city pay for $10 million in infrastructure improvements and exempt the hotel from building permit lees, which could total about $5 million.

A convention center hotel long has been considered key to reviving L.A.'s beleaguered convention business--and a public subsidy of some sort was deemed necessary to set in motion private development efforts. Getting support from the City Council was a crucial requirement for getting the hotel financed and built.

"You don't get anything this size done without city support," said Steve Gold, president of Beverly Hills-based Hotel Financial Strategies LLC. "It's just too big."

Wolff notes that the bed-tax estimate is hard to quantify for prospective lenders because the amounts could fluctuate widely, and come up short of projections by far.

"It's not like (the city council is) writing me a check for $177 million," he said. "For all we know the hotel industry could go into the toilet and the whole thing would be worth only $50 million."

Funding sources

Among other sources of funding for the hotel's construction: Hilton Hotels Corp., which is contributing $30 million to the developers; and AEG, which is working out a deal to sell the land and entitlements for the hotel to Wolff and Ackerman at below market value.

"We're in a heavily subordinated position with our land and we're selling at a reduced value to help facilitate the hotel," said Ted Tanner, an AEG senior vice president who expects a deal to be completed by May. Tanner said would not reveal the value of AEG's contribution.

The hotel developers have also been allowed to buy entitlements that AEG holds for 100 condominiums at a "significant discount," Ackerman said. The developers have said that without the 100 condos on top of the hotel, financing would have been near impossible. The developers expect corporations to buy the condominiums in the same manner companies buy arena skyboxes.

"The biggest contributor has been the Anschutz Group," Ackerman said. "If you look at dollars that are hard money, their contribution for the hotel has made all this possible."

The hotel is the centerpiece to a $1 billion entertainment district AEG is building to ring its arena. The complex includes a 7,100-seat live theater, a large nightclub, shops and restaurants, a 15-screen Regent Cinema and a radio and television broadcast facility.

When it was built in 1999, AEG inked a $100 million, 20-year naming rights deal for the arena with Staples Inc. It signed another expansive naming rights deal with Nokia Corp. last year for its live theater and other aspects of the proposed entertainment complex.

Even with numerous revenue sources and subsidies, Gold said there is still risk for the developers. If the hotel doesn't spur business and can't make its debt payments, the developers will be on the hook--not the city or the hotel operator.

"It's riskier than a lot of deals," Gold said. "They are on the hook until the hotel is generating enough cash flow to cover everything."

Complicating matters is that unlike in competing cities like San Diego, San Francisco and Las Vegas, the convention market in Los Angeles doesn't support construction of a large convention center hotel.

Last year, downtown L.A.'s business-class hotels saw occupancy improve 18 percent and average daily room rates increase nearly 3 percent from a year earlier, according to tracking firm PKF Consulting.

In December, the average occupancy was 48 percent and rates were $117.38 a night. But those figures for downtown hotels are still far below what lenders require before financing new hotel construction.

Despite those hurdles. Wolff said the project's prospective lenders aren't concerned as long as the city benefits package materializes.

"We're not worried (about getting the loans) but just papering over the deal so it all fits together," Wolff said. "That's where the complexity comes from, but the finances are coming."