Incentive Agreements: Tax Breaks and Subvention Deals

DATE: August 10, 2018

TO: Honorable Members of the City Council

FROM: Ron Galperin, Los Angeles City Controller

SUBJECT: Incentive Agreements (Tax Abatements/Subvention Agreements, CF# 15-0850-S2)

SUMMARY

Motion (Blumenfield – Price, CF #15-0850-S2) was previously introduced to request the City Controller to report to the Ad Hoc Committee on Comprehensive Job Creation Plan on the efficacy of the Incentive Agreements entered into by the City of Los Angeles, and to provide recommendations for the development of standards consistent with recently approved Governmental Accounting Standards Board (GASB) Statement 77 reporting requirements. The requested report is consistent with a review for which this Office was previously preparing.

In order to examine the process for which Incentive Agreements are identified, evaluated, and approved, the Office of the City Controller reviewed five Incentive Agreements approved between 2005 and 2015. The agreements provide financial assistance to project developers totaling up to $654 million ($202 million Net Present Value (NPV)). The five projects include: the Headquarters Hotel (now a J.W. Marriott and Ritz Carlton); the Wilshire Grand Hotel (now an InterContinental); the Olympic North Hotel (now a Courtyard Marriott and Residence Inn); the Metropolis Hotel (now a Hotel Indigo); and the Village at Westfield Topanga.

The City has committed a total of up to $654 million in assistance for the aforementioned projects. Within the last 2 years, the City has further approved up to $345 million in tax Incentive Agreements, including financial support for: the Grand Avenue project ($198.4 million – CF# 13-1694); Cambria ($43.2 million – CF# 16-1128) and Pico-Figueroa Hotels ($103.3 million – CF# 16-0073). Incentives for all eight projects total up to $999 million.

Further, the City has requested evaluation of additional proposed hotel projects for consideration of Incentive Agreements, as follows: 3900 Figueroa Street (CF# 18-0367); 3240 Wilshire Boulevard (CF# 18-0238); Olive Street Hotel (CF# 18-0399); and the proposed expansion of the JW Marriott Hotel (CF# 18-0532).

Using the Block Grant Investment Fund Policy (BGIF) as a framework to evaluate the first of the five projects, the City Council approved financial assistance due to the stated existence of a “feasibility gap.” A feasibility gap, per the practice of the City, is defined as the difference between the estimated development costs of a project vs. what investors would theoretically be willing to pay for the business investment, based on the project’s expected value. The assurance of the City’s financial assistance is intended to offer an incentive for developers and investors to provide the capital needed for the projects to be developed. It has been argued that absent this incentive, certain projects would not be viable, thus the City would not otherwise realize net new revenues projected 2 as a result of said new project(s). There has not in all cases been adequate evidence to necessarily support these arguments.

As outlined in each Incentive Agreement, the City is to provide financial assistance payments to developers after the project is completed and in operation over a set period of time. During the term of an Incentive Agreement, the City’s payments represent the amount the project owner/operator actually remits to a specified taxing authority (e.g., Transient Occupancy Taxes to the City’s Office of Finance or the City’s share of property taxes paid to the County). However, the total financial assistance paid is capped at 50 percent of the anticipated cumulative net new tax revenue the City is expected to receive from all sources attributed to the project, or until a specified number of years have been reached. In addition, the City anticipates that the projects will each generate additional jobs and broader economic and other public benefits. For the Downtown hotel projects this Office reviewed, the City’s expectation was that they would also support the attraction of additional and larger scale conventions to the Los Angeles Convention Center (LACC) while increasing the number of hotel rooms within walking distance to the LACC.

Given the significant financial assistance already committed by the City for the five reviewed, and three subsequently approved projects, this report offers recommendations that are intended to provide perspective for possible future agreements. The background and analysis section provides an overview of the five Incentive Agreements reviewed, an analysis of processes used for approving and implementing the Incentive Agreements, and an update on the City’s implementation of new reporting requirements mandated by GASB 77.