Ambassador Hotel Owners Offer Bankruptcy Plan:

George, in the February 2000 issue of TPR, Ken Bernstein, Director of Preservation Issues for the L.A. Conservancy, wrote an article entitled "Is the Ambassador Hotel LAUSD's Next Belmont? Maybe!" That article began, "LAUSD is moving to seal the fate of the historic Ambassador Hotel, one of our City's most important historic sites, seeking demolition for a new school. The District's decision on this issue will speak volumes about whether LAUSD is truly adopting a new, creative approach to facilities planning or whether it remains business as usual at the District." Put in context why this wasn't resolved in February. What's the current status? And what leads you to propose this new plan?

George Host, Vice President
S.D. Malkin Properties, Inc.

Last June, we participated in a symposium at the Ambassador Hotel. That meeting concluded with a request that the Ambassador owners and the LAUSD School Board suspend litigation and instead try structured mediation to reconcile the community needs for redevelopment, educational facilities and historic preservation-and resolve the dispute over the Ambassador once and for all. The owners accepted the mediation proposal, but the School Board rejected it, instead issuing a notice of foreclosure sale for the property-a move that directly violated the Board's previous undertaking not to foreclose while the inverse condemnation case was in progress.

That foreclosure forced us to file for protection under Chapter 11 of the Bankruptcy Code last August. Chapter 11 isn't structured mediation; it's about allowing us to repay the District and develop the site. We tried to engage LAUSD in a 90-day structured settlement, but were told that the children of Los Angeles didn't have 90-days. And now here we are almost a year later-still with no resolution.

What constraints does Chapter 11 bankruptcy reorganization put on the kind of proposals eligible for approval? What kinds of constraints and parameters does it put on the design options you develop?

George Host

Any proposal must be feasible from a financial and development standpoint, and that feasibility will be tested by the Court.

What is the extent of the financial obligations currently under review?

George Host

The School District has stated that they have a combination of a judgment and accrued interest totaling more than $70 million. And that is on appeal both in terms of the judgment amount and the associated interest.

Jeremy, let's turn to you. Give our readers an overview of the current development plan for the Ambassador Hotel site?

Jeremy Cohen, Vice President
S.D. Malkin Properties, Inc.

The project is a 2.3-million square foot, mixed-use residential development. We are envisioning approximately 270,000 square feet of retail and 2,100 units of housing-including a variety of market-rate, senior, and corporate apartment units. The housing element is very large, which we hope will both create a significant revitalization of the area's residential community as well as blend with the current neighborhood. In addition, WCM will offer a mix of community-oriented retail, apparel, housewares, and restaurant venues to create an attractive gathering place for the surrounding neighborhoods.

Let's talk specifically about the elements of that plan. First, what indication do you have that there the necessary demand exists for your proposal? How do you justify $1.94/square foot for rents? And what makes it marketable?

Jeremy Cohen

When looking at a project of this magnitude, you have to realize that this will have a seminal effect on the entire perception of Wilshire Center. This project will bring critical mass to the area and offer amenities that aren't currently present.

However, we did complete a standard market study surveying not only the immediate area, but greater Los Angeles as well. And that study showed a tremendous imbalance between the current supply and demand for apartment units. From that data, we determined that those rental rates were consistent with the current market for quality residential development.

While it may be difficult to imagine a project of this scale and size garnering such rates, projects like the Medici in Downtown L.A. (a similarly transitional area) prove that you can have tremendous success. Furthermore, Sares Regis Property's new 90-unit apartment project across the street from the Ambassador is presently getting very comparable rental rates.

The Ambassador site is located in the middle of a Redevelopment Area, between two Metro Red Line stations. Give us a sense of how the project fits in with the rest of the plans for the area. What interface will this project have with other city and regional entities? Will it receive any incentives? And what, if any, conversation has gone on between you and the MTA regarding the portal?

Jeremy Cohen

WCM offers another housing alternative for people who work Downtown, so we're clearly trying to take advantage of the mass transit linkages and have oriented the project so that it creates a pedestrian and transit friendly environment.

In terms of working with specific groups, we've worked extensively with the Los Angeles Chamber of Commerce and Councilman Nate Holden's Office, both of whom seem to like our plan.

But in terms of really taking this project to another level, it's important that we have some direction from the Bankruptcy Court. We need to have the latitude to advance this project with clarity-and not worry about its future with LAUSD.

Well, let's jump into that. How do you get clarity and certainty regarding the Ambassador site given the forces involved: the School District, yourselves and the Conservancy? Is it possible to reconcile the divergent agendas of each?

George Host

Our reorganization plan outlines a series of steps to give us certainty-the most important of which is an injunction against the School Board's condemnation of the property for five years from the date of plan approval.

An alternative in the plan-that we hope the Court doesn't choose, though it well might-is to give the School Board an opportunity to condemn the property immediately. Either way, we should have certainty; they'll either take the property or give us time to build the project.

As for the L.A. Conservancy, our plan allows them to propose an alternate solution. The reorganization is about being able to repay the School Board and our creditors. If the Conservancy has the level of capital, commitment and income necessary to provide the same returns that our design does, we're open to it. On the other hand, if their plan involves substantial subsidies and delays, obviously that has to be aired and resolved.

What kind of support from the larger Mid-Wilshire area community is this proposal getting?

Jeremy Cohen

Until the Court approves our direction, it doesn't make sense to begin asking people to focus on this proposal. However, we formulated the current plan based on the previous round of development and community meetings. And again, the preliminary feedback has been supportive.

The project will help create the kind of environment that will strengthen activities along Wilshire Boulevard, provide a good stock of housing, and fortify the 8 million square feet of office space in the area.

George, in the New Schools • Better Neighborhoods symposium with the Larchmont Chronicle, LAUSD and State authorities, School Board member Caprice Young said, "I'm really confident that we're going to have a school here. I think we'll know within 90 days and won't need any further discussions." What's gone wrong with respect to the leadership here in finding a resolution that takes account of all the stakeholders? What's the missing element that's kept this from being resolved in a constructive way?

George Host

Frankly, the School Board has simply not come to the table. They have refused to put aside the threat of immediate foreclosure and try to resolve these issues. For whatever reasons, there has been an ongoing lack of direction, authority, accountability and communication, making it very difficult to advance or conclude any discussion with them. And several times, we've offered to settle at a huge loss to the owners.

You've developed projects all across the country. What lesson have you learned from this Ambassador saga? What should other developers glean from WCM's plight?

I've learned that California has a fine Constitution, which can apparently be ignored by both LAUSD and the Court to the enormous detriment of the children and the community.

I say children first because they are the School Board's constituents. LAUSD is given an enormous amount of power-and a fabulous opportunity-to build the schools needed to keep up with educational requirements. In turn, it has completely abused them. And it's not just neglect; it's abuse. That's a very disappointing lesson.

We acceded to their condemnation 10 years ago, and they've had all that time to take the site. In my eyes, if they really wanted a school, it would have been built by now. How many classes could have graduated from a school on the Ambassador site? Los Angeles had the opportunity to build a school that people could have looked at with pride. But it hasn't happened-and at this point, it may never.

Let's end with this, give us a timeline for decision points in the near future that our readers ought to be paying attention to.

The next bankruptcy hearing is scheduled for February 14. Once that portion of the case is completed, the plan will be sent to creditors. Then the approval process begins, which should take three to six months, maybe longer. But we're hoping for a resolution before the end of 2001.