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Cost Overruns Plague Biltmore Restoration

September 14, 1986|DAVID W. MYERS | David W. Myers specializes in the financial aspects of real estate. and

While many hotels downtown and throughout the Southland are thriving, at least one landmark Los Angeles property--the Biltmore Hotel--isn't faring as well.

The Times has learned that Westgroup Inc., the developer and a co-owner of the property, has given its well-heeled partner in the ambitious rehabilitation and expansion project a larger equity stake in the hotel, in part because the renovation project has been marred by large cost overruns.

The hotel is actually owned by a limited partnership known as Biltmore Partners. Westgroup is one of the general partners, and originally owned 50% of the hotel.

The other 50% was owned by investors who bought shares in the partnership from financial-services giant First Boston Inc. A subsidiary, First Boston Real Estate & Development Corp., is Biltmore Partners' other general partner.

The investors purchased the hotel for $75 million in 1984, and soon launched a $200 million-plus restoration and expansion program.

As part of the restoration plan, the number of hotel rooms at the Biltmore has been reduced to 728 from 1,002, in part so 276,000 square feet of office space could be created inside the building.

A 24-story tower, which will provide an additional 132,000 square feet of space adjacent to the hotel, is expected to be completed by the end of the year.

So far, the restoration job alone has run more than $10 million over the $25 million that was initially budgeted. The original contractor for the restoration work--a Westgroup entity--was relieved of its duties a few months ago with the agreement of both First Boston and Westgroup.

Soft Downtown Market

It was replaced by Feiler Bros. Corp. of San Francisco, a highly regarded firm that handled the restoration of the St. Francis and Mark Hopkins in San Francisco, the Claremont Hotel in Berkeley and the Disneyland Hotel in Anaheim.

But the Biltmore needs more than a new contractor, some hotel consultants say. The project is hurting from the relatively soft market for downtown hotel rooms, and an even softer market for downtown office space.

Compounding the hotel's problems, some observers say, is that the reduction in the number of the Biltmore's rooms has made it unattractive to sponsors of large conventions--an important contributor to large hotels' bottom lines.

Rumors about the financial health of the Biltmore and high-profile Westgroup Properties have been sweeping across local financial circles almost as frequently as presidents, royalty and movie stars used to appear in the celebrated hotel's elegant lobby and expensive restaurants.

Some people even said that Westgroup was behind on its payments to firms involved in the restoration and expansion project.

No Payment Problems

Westgroup Properties' management denies those allegations, and subcontractors involved with the job said they're having no problems getting paid.

But Westgroup and First Boston have had some unpleasant surprises. First, there are the cost overruns. Said Westgroup President Patrick R. Colee: "We had so many problems from so many (government) agencies in the very beginning . . . money was required for one thing after another. We're doing a lot of things that we hadn't originally planned."

Since Westgroup was the Biltmore's developer, it was responsible for the cost overruns. Rather than reaching deeper into the company's coffers, Westgroup recently struck a bargain which enlarges the First Boston investors' stakes in the property and reduces Westgroup's share.

Downtown Vacancy Rates

Neither of the companies will disclose details of the new agreement.

But it will be a while before the entire development moves into the black. Only one tenant has agreed to take space in the tower when it is completed, Westgroup Executive Vice President Charles Lande said, and much of the office space in the hotel building is vacant.

Overall, office vacancy rates in the downtown area are hovering around 17%, according to the most recent report by commercial broker Grubb & Ellis Co. Some building owners are trimming rents and providing other incentives to lure new tenants and keep existing ones.

However, Lande said, "we're not panicking" about the current pace of the Biltmore's leasing activity.

"This type of (renovation) project takes time to lease," he said. "People want to see what the final product is going to look like before they sign-up." He added that he expects the development to fill up "pretty quickly" once the job is completed.

Cites Market Change

Lande gets support from Bruce Archibald, a vice president in Grubb & Ellis' downtown office.

"I think they should be able to lease their space," Archibald said. "The market seems to be shifting from a tenants' market to an owners' market, and it's getting better by the month."

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