Hotel tax deal offering dollars and uncertainty.

THE city of Los Angeles is wagering close to $300 million that within the next couple of years the now-vacant expanse just off Olympic Boulevard next to Staples Center will become downtown's version of Times Square.

The money is helping finance the long-discussed convention center hotel, "part of an entertainment complex called L.A. Live that will include a 7,000-seat theater, ESPN studios, nightclubs, restaurants and shops. It's all supposed to provide the economic engine that will finally persuade conventioneers that L.A. has caught up with Vegas, Chicago and Atlanta as a great place to party.

Very little of this is clear-cut and the numbers offered up by developers have been downright wacky at times, which perhaps explains why L.A. City Councilwoman Janice Hahn calls it "kind of a leap of faith" that the plan will actually work. Meanwhile, the owner of the Westin Bonaventure Hotel, hardly a disinterested party given the business he's certain to lose, is trying to block the proposal, both in court and through an initiative he wants to get on the ballot.

Big-time developments that combine several commercial elements--in this case, entertainment, retail and lodging--are always a risk because the puzzle parts are very large and must somehow complement each other. Figuring out the right mix is tricky business. There's also the matter of whether people will actually show up to the party, hardly an incidental matter for a part of downtown that's a good deal bleaker after hours than the boosters would have you believe.

On a much smaller scale, the Grove at Farmers Market has offered up a feel-good mix of music, waterfalls, movies, shops, restaurants and lots of people--all carefully laid out on a tract that's intimate enough to capture a small town feeling (admittedly contrived and all of it based on the almighty credit card). Just a few miles to the north, Hollywood & Highland, partially subsidized with city dollars, offered many of those same features, but in a confused, uninviting complex that no one would want to visit a second time (though there are indications that the new owners, CIM Group, have been turning that around).

One works, the other doesn't. When it comes to these huge mixed-use projects, developers invariably roll the dice until the place is up and running--and, of course, by then it's too late to back out. Hence, Hahn's "leap of faith" remark when the City Council voted unanimously to provide $290 million worth of subsidies and loans for the 55-story hotel. Even John Roberts didn't do that well on his vote the other week.

The white elephant 

It's easy to be convinced that having a massive mixed-used development is a good idea. On many days, the convention center looks far removed from the rest of downtown, even though it's just a few blocks. Gloomy would be too strong a word (Detroit gets that all to itself), but compared with Las Vegas or San Francisco, it's hardly the place where the National Association of Whatevers would want to hold an annual convention.

In a burst of candor, Mayor Antonio Villaraigosa was quoted by the Daily News as calling the convention center "L.A.'s big white elephant" and wanting to be rid of annual debt burdens on the city that last year totaled $34 million. "What we have now is killing us," he told the newspaper.

Even convention refugees from New Orleans, desperately trying to line up alternative locations while the Crescent City is being rebuilt, show little interest in coming to Los Angeles. As we reported last week, much of the action is going to Atlanta and Chicago.

Michael Krouse, vice president of convention sales at L.A. Inc., the city's convention and visitors bureau, gamely told our reporter Rachel Brown that the relocations are being made more out of geographic considerations, with Midwestern cities just closer to New Orleans. "It has nothing to do with L.A.," he claimed.

Yet how come the National Black MBA Association is moving its convention from New Orleans to San Diego, bringing with it 15,000 attendees and more than $1 million in taxes to the city? Turns out that the San Diego convention folks are in talks with 15 other organizations, but unlike Los Angeles, there's no big marketing push. There doesn't have to be--San Diego is already a sought-after venue.

Let's be honest, L.A. is one stinker of a convention town. Having a high-rise hotel located next to the convention center would obviously help, though whether to the extent necessary to get past all the other downsides (traffic, sprawl, limited attractions, no casinos, an indifferent citizenry) is the more fundamental question.

Little of this would have made much difference had the developers been willing to shell out the entire $400 million for their hotel. But when the city is asked to help leverage nearly three-quarters of that cost by excusing the hotel's bed tax over 25 years, well, that's worthy of more interrogation than the council or the mayor have provided, at least publicly.

Is an incentive needed?

To be fair, this is not a straight-shot subsidy. The city is forfeiting an estimated $6.3 million each year, although supporters point out that it wouldn't have received any of that money if the hotel hadn't been built in the first place. Except what's to stop the new operators from under-pricing the other downtown properties by virtue of the waived tax? That's the argument being made by Peter Zen, owner of the Bonaventure and chief opponent of the convention hotel.

More fundamentally, what is the basis for this very generous incentive, other than it being part of the overblown downtown "vision"? Why do these developers, led by Apollo Advisors and Wolff Urban Management, with an assist from Anschutz Entertainment Group, get a break that otherwise would be unavailable? They'll tell you that the subsidy is necessary to pencil out the deal, but that's what all real estate guys say. They'll always try to get someone else to bankroll a project, regardless of whether they have the financial wherewithal to do it themselves.

Would the deal really have died without the city kicking in $290 million? Perhaps, but no one chose to call the developers' bluff. No one like Joel Wachs, who single-handedly provided Los Angeles with a better financing package on Staples Center after threatening to scotch the whole plan through a citywide referendum. And Staples, with its dedicated customer base, was practically a slam-dunk investment compared with the L.A. Live development.

Wachs is long gone from the council--and it shows. When you're rolling the dice, Angelenos deserve better odds.

Mark Lacter is editor of the Business Journal. He can be heard ever3, Tuesday morning at 6:55 and 9:55 on KPCC-FM (89.3).