While real estate companies, developers, and banks have gone into hiding all over Southern California, AEG's Ritz-Carlton hotel has risen conspicuously over the L.A. Live development Downtown. In order to detail the financial health of the L.A. Live mega development, its role in the regional economy, and AEG's next steps, TPR is pleased to present the following speech given by AEG President Tim Leiweke at the 2009 Benjamin S. Crocker Symposium, which was held at the Los Angeles Convention Center, one of the entities that stands to benefit most by the hotel's opening.
Tim Leiweke
I'd like to tell you about the unique prospects and the process we went through to successfully create a public-private partnership in the city of Los Angeles, and share how these projects work today, how they will work going forward, and what our vision is for the future of Downtown Los Angeles and L.A. Live...
...L.A. Live is a $2.5 billion investment. $1 billion of that was for the hotel. This is the largest bet ever made by Phil Anschutz.
Despite the spin from the media, the public sector assistance was the reinvestment of the room tax from the Ritz-Carlton back into the project. We had to go through the public process.
What we have learned about Los Angeles is that we are dysfunctional. We are a community of communities. We are not a city. We have 15 city council people. We have a mayor. We don't even have a city manager. It is a very unique form of government.
On top of that, we have a whole other set of politicians called the supervisors. They are voted in for life, with no term limits. We have to deal with both of these different bodies to figure out the political process of making this project work. Imagine going to them and saying, "Here is what we are going to do. We are going to build The Staples Center. We're going to spend over $400 million. We are going to privatize it. We're not asking any money from the taxpayers and all we want you to do is two things: One, a $50 million investment in the land around it, to make it a more desirable place to come, to park, and to entertain. Secondly, if we build a hotel, put the reinvestment of the tax generated from that hotel back into that hotel, because no one has been able to do this for 25 years."
We ran into a guy named Joel Wachs. This is my favorite story. I told Joel one day, "You're going to have about three months where you get to kick us, everyday. You should have a lot of fun, because for the next 30 years I am going to tell this story and let everyone know about the great vision of Joel Wachs." Joel Wachs went out and fought it. He fought the project; he fought the concept. He didn't like it. He said that we shouldn't be using taxpayer dollars for this. I said, "Joel, we're not. We are going to privatize it." He said, "You should be doing more. We should get more out of you because these things aren't important." Joel brought in a professor from Chicago, who came in and testified before the council and before the paper-front page news-that these sports facilities never generate economic impact, ever. He gave a case study of five facilities and how they never rejuvenated a community, created jobs, or ultimately created other development around the facility. Today when I look across the street and I see $2.5 billion, what I learn very quickly is that Joel Wachs was wrong... As we see across the street, he was absolutely incorrect. He almost cost this city, not only a $2.5 billion project, but a company that is headquartered here with 15,000 employees. We persevered. We plowed through. He threatened to make it a ballot initiative. We ultimately told him that was fine and that we would spend the money necessary to win because this project stands on its own two feet.
Eventually, due to the leadership of John Ferraro-who was at the time the council president, and is singularly the man responsible for this project across the street-the day we voted on the project John waited for Nate Holden and Joel Wachs to go to the bathroom and then called the vote and we won 13 to zip. Sometimes you have to find the right politicians, with the right visions, to know how to follow through at the right time. From there, believe it or not, we entitled this project and everything you see today, right off the bat. We had a vision, a direction and a focus for trying to build a brilliant destination in L.A.
A lot of people say, "Why?" There are a couple of reasons. They are the obvious ones that we all know: We are the second largest marketplace in the United States and the sixth largest economy in the world. We didn't have a world-class venue. The Lakers, the Clippers, and the Kings all played in the two oldest arenas in the NBA and the NHL, the Forum and the Sport's Arena, respectively. It's amazing that both of those buildings are up today, still. We knew that it would work from a sports standpoint.
What we knew about the entertainment district are a couple of facts that are absolutely mind-boggling about L.A. Today you are sitting in a convention center that has almost one million square feet. We carry an annual debt on the books of this city with bonds that require us to spend somewhere between $25 million and $35 million a year to underwrite this massive facility. In spite of that, almost one million square feet and a number two market in the United States and the sixth largest economy in the world, we rank behind Omaha in conventions. We ranked 27th.
When we built the headquarter hotel we knew that if we built enough rooms next to this million square feet, in a city that has a great convention center, transportation hubs, good infrastructure, and corporate headquarters, that the conventions would come. And sure enough, in this past year L.A. Inc booked 56 conventions for the future-after the hotel opens. Today, the hotel-even though it won't open until February 15-has 190,000 rooms already block-booked for conventions and business functions.
We realized that there was great infrastructure and great opportunity here. The problem with L.A. sometimes is that we don't get fired up about these things. We definitely got everybody fired up: We asked how we could be behind Omaha in conventions booked. How could we be behind Omaha when it comes to bringing people to our city? We have the airlines and the transportation system. We have the hotel rooms, the golf courses, the weather, the restaurants, and the theme parks. We just had to get people in L.A. focused.
When that hotel opens across the street, we believe the economic impact to Los Angeles will be twice what Staples Center created. You're going to see other hotels built in Downtown Los Angeles because the Ritz Carlton and the JW Marriott, by our estimates, will be well over 75 percent occupied during this first year with a rate of almost $220 a night. What we have learned about the hotel business is...that if one is having that kind of success, other hotel operators will follow.
We are already working on phase two. What we have learned from our first process with Joel Wachs is not to go to the council and negotiate with the politicians. When we finished the entitlements for L.A. Live, the second time through the council, we pre-negotiated with everybody in the community-the unions, the neighborhood groups, the environmentalists, everybody. We went into the council with a commitment for 20 percent affordable housing for every condo we built. We went in with a job commitment and a minority contractor commitment. We were so focused that we already had a requirement, before we went to the council, that 40 percent of the workforce employed within this district come within three miles of this project. We did no negotiation with the City Council the second time through. They took it; they approved it. It was unanimous, there was no debate, and the entitlement was done.
Now we are working on the third phase. Again, what we have done is go to the community groups and the unions and bought them into the concept that our work here has just started. The next phase is going to be a new, 300-room hotel directly across the street from the Ritz Carlton and the Marriott. There will be a new headquarter building for an entertainment company that will mirror what ESPN has done. ESPN built their studios down here. If you watch Sports Center at night it is coming from Downtown Los Angeles. There are other entertainment companies out there, spread out, within our community. We are prepared to spend the money to build world-class headquarters and studios on our dime if they are prepared to sign 20-year leases. In this economy we are finding that there are great opportunities to consolidate. We can save them money.
We, in turn, are very fortunate with Mr. Anschutz-that we have the wherewithal and have been thinking ahead, knowing that if we start today with this vision, three years from now when we come out of this economy, we will be the only ones standing with condos, hotels, and these new office structures.
USC's Steve Sample taught us an awful lot about how to get along with community. They do a fantastic job with the neighborhood. We went to everyone, listened, and learned from our Joel Wachs experience. We knew not to go in and negotiate with 15 council people who all had their different agendas. We got a consensus within the labor movement and we are partners today. And we keep building for the future.
Life is a marathon, not a sprint. This will pass. Whatever economic times we are in, it is going to change. Eventually banks make money. They are going to come back out of their holes. Our bankers are sometimes harder to find than Bin Laden, but they will come out. They have to start lending money because it is the only way, ultimately, that they will pay off the TARP funds and get out of the terrible situation they are in with the government telling them how to run their businesses. We just saw with Pfizer that you don't want the government to run your business. The banks will come out. If you have a vision today, if you stick with it, and you spend a little bit of blood, time, and money, you will be sitting there in three years with projects while everyone else is sitting on the sidelines trying to chase you...
...We still have condos for sale across the street. People say, "Are you worried about that?" I tell them no because I know that when we open our Ritz-Carlton condos in March, and we walk people through these condos (including the one on the 54th floor), they will find some of the best high-end accommodations in all of Southern California. We are the only ones out there now. Everybody else has put their projects on hold. We will get a bank to finance, and we are going to find the market. There are only 224 condos and the majority of them are sold. We will find people that want to live in and around the entertainment hub of Southern California. If you build it, and if you have faith and patience, they will come...
...I know this is a tough time but one thing I would tell you is that if you look across the street at that tower, just understand two things. This is the most important lesson we have learned: One, this is a great community, full of abundant opportunities. We are underdeveloped in Los Angeles, believe it or not. There is room to grow here. Second, one of our lawyers the other day said to me that sometimes you have to make the problem bigger in order to solve it. We certainly have made the problem bigger across the street. If you look at our accounts on our restaurants at L.A. Live today we are doing record numbers at all of the restaurants. We have to have faith. We have to plow straight ahead and bust through the walls and think of life as a marathon. There are great opportunities coming our way in this city if we all stay focused. We are proud of what we have built.
WEB EXCLUSIVE
Questions from the audience With the condo market the way it is, and the financing in particular for buyers, I understand that the agencies have come out with requirements that I believe are 50 to 70 percent of units are sold prior to them financing. How do you work around that? I grew up in sports and music and spend all of my time now worried about covenants. All we seem to do is make sure we take our financing and don't do anything to let the bankers come in and renegotiate. All of the bankers for L.A. Live, including the hotel, came by a few weeks ago. We did a first quarter review. We went through the whole review, had a nice lunch, took them on a tour of the campus, and then finished up with a summery meeting. One of the guys raised his hand and said, "Is that it?" I said, "Yeah, that's it." He said, "You're not going to ask to renegotiate? You don't need to work on your covenants? You don't need help from us at all?" We said, "No, we were fine. We're hitting all of our budgets; everything is good." He said, "Do you realize that since January 1 of this year, this is the first meeting we have had, out of hundreds of meetings, where we don't need to renegotiate a note?" The good news for us is that we wrapped up our financing a long time ago, so it's available to us on the interest rates and the covenants. We are locked in for the next five years. Our issue is going to be getting the financing for each of the individual condos and the condo buyers. We had, unfortunately, Wachovia. That didn't work out real well for us at first. Now Wells Fargo stepped in. The good news with Wells Fargo is that they are probably one of the best-managed financial institutions in our country today. They are conservative. They didn't get caught up in a lot of the downfall some of the other banks did. They are very stringent on what they expect out of us. They have asked us for a few commitments in order to do the financing on the rest of the units. Number one, we need to have more than 50 percent sold. The good news is that we have 119 units sold under contract with a 10 percent deposit down. We may have some slippage when it comes to getting that final check but we believe that by the time we start financing we will be well over 50 percent sold. Secondly, they are going to do a credit check on everybody buying the condos. People buying $6 million condos, I'm assuming, have to have a pretty decent track record on credit. Third, although the interest rates are good, they are not doing 70/30. These are probably going to be closer to 60/40 loans. People are going to have to put up real money; they are going to want these folks to have skin in the game. We will have financing. It is going to get done, we think, by the summer. It's a little tougher. Credit has to be good. Our units start at $1 million, so we are fairly certain we are dealing with an audience and demographic where it's probably not as big an issue as it would be for a lot of other products in Southern California. We are going to be able to finance these things. You haven't seen any ads for our product lately and you won't. We will talk to people about condos next January. Whatever situation we are in, we aren't getting out of it quickly. We will let this go through its process and then during the first quarter of next year we will try to sell condos again. Are we worried? Yes, but guess what? Look outside. We built it. There is no sense sitting here second-guessing. We will plow straight ahead. Can you give any insight to your difficulties with the entitlement process? We had a pretty good entitlement process because of the community and the unions. I know a lot of people like to go after the unions but they have been fantastic for us here. We are proud that we are a union building. If you walk out there today we probably have 2,500 union workers on site building-out the various properties still under construction. That we had a union deal up front added a lot of credibility. We created the 20 percent affordable housing component before we went to the politicians. We had a huge amount of support from those in the community that were out there pushing for affordable housing and a solution for our housing issues. We have a foundation that gives a lot of money back to the community. We have quietly given over $20 million back to this community. We had a lot of support from Para Los Ninos, the Salvation Army, Inner-City Arts, Tenth Street Elementary School, etc. The community kind of rallied around us. Once we got past Joel Wachs and the short sightedness of a guy that doesn't even live here anymore we didn't have any entitlement issues. We have a current issue with signage. I understand the signage issue for people that live in the Valley or West L.A. Taking static signs and turning them into LED signs without any kind of political process or approval from the neighborhood is crazy. But when you go into our district I don't think signage is the issue. We have to go back to the Planning Commission one more time on our signage package. With the exception of that, the Mayor has been great; the city has been great; we have no issues at all. People saw us deliver. The most important thing is that there have been 50 projects talked about in Los Angeles. We went out and just built it and because of that, now if we go back in for a second entitlement for the new hotel and new office building. By the way, there are federal funds that the city should be using to build another quarter of a million square feet here in this convention center. We are never going to find it in the city budget. You just brought up the signage for the Convention Center and L.A. Live. What would your thoughts be if you had to pay property taxes on those signs? We pay a lot of property tax now. We have already offered to go back to the city. Technically we have the right to approve any signage on any of the Convention Center, inside or outside. We have the right to withhold that approval, unreasonably. It's a pretty good clause built into our contract. We went to the city and said we would pay $15 million up front to give some revenue from the advertising and we will share 50/50 excess. We are prepared to write a check. It would be better for them to just do a base deed because they collect 100 percent of that. They won't get 100 percent of the property tax. We don't want to double dip, so we wouldn't build the signs if they came to us and said we had to pay the $15 million plus the property tax. But, we are prepared to take half of the profits and take all the risk and build the infrastructure ourselves. I'm not sure we are going to offend people in the number one traffic town in the United States if we happen to have signs on the 10 and 110. We just have to go to the Planning Commission and make sure we don't get double-taxed. The city has a lot to deal with on the billboards, but the property taxes are from the county. Add the state on there. These ballot initiatives are scary. I hear people say that they don't want taxes for another two years. I keep looking at them and say, "Fine. If they get voted down what do you think we are going to do?" We are $35 billion short on this year's budget already. Where do you think they are going to find that money? They are going to create bigger taxes. They want to tax signage. If we don't pass 1A through 1F you won't believe the ideas they come up with to tax us all. They are not going to stop spending. They are heroin addicts up there; they are going to spend the money. We have the county, the city, and the state all looking at us. They want to pass a ticket tax. We know the county is talking about property tax but we are trying to structure our deal with the city in a way where the signage on the Convention Center is property of the city of Los Angeles and the Convention Center Authority. We would be exempt from that property tax by paying the fee directly back to the city and letting them own the signage on their property. Our lawyers will figure out a way. We just can't get double-dipped.
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