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Hotel Developer Could Void Loan Repayment : Burbank: City contract may allow Hilton project partners to keep $3 million. They say they intend to repay it.

March 06, 1995|VIVIEN LOU CHEN | TIMES STAFF WRITER

BURBANK — An agreement backed by the Burbank Redevelopment Agency could enable the developer of the city's largest hotel to borrow as much as $3 million in taxpayer money and then void its obligation to repay, The Times has learned.

Developer Lew Wolff, head of a general partnership group that expanded the Burbank Airport Hilton and built an adjacent conference center, can choose to not repay the loan because of the wording of a contract approved by the agency in 1988, city officials acknowledged in interviews.

Although Wolff said in an interview that "our intent is to pay it back," Burbank officials were so concerned about the possibility that they spent more than a month studying the contract and proposing solutions.

The power to cancel the debt depends in part on the Hilton's profitability. Based on the contract's complex formula, officials now project that the Wolff partners will obtain the right to cancel the debt by April, 1996, when it will have reached $1.2 million.

The deal was designed to encourage the developer to add 220 hotel rooms and a conference center by ensuring the Hilton's profitability. The agency allowed the group, known as Burbank Partners, to borrow up to $6 million to cover any operating losses, including a built-in 12% profit on the cost of the expansion, public records show.

But as written, the contract also allows Burbank Partners to keep up to $3 million in loan proceeds without repayment by giving up the right to borrow the remaining $3 million in the future.

"We certainly don't want to get a reputation for tricky things," said Wolff. "We've generated a lot. We've been pretty good citizens of the community."

The provision in the agreement--drafted by Wolff's attorney and reviewed by the city attorney's office--states that the developer's debt to the agency and the amount he has a right to borrow in the future "be mutually offset and canceled to the extent that they equal each other" and "shall be marked 'paid and canceled.' "

City Atty. Joe Fletcher defended the clause, saying the agency clearly gained from it. "The agency obtained the benefit, and that was the consideration that we don't have to advance (Wolff and his partners) the other $3 million."

But the deal was identified as a "problem" in a confidential memo to the Redevelopment Agency's executive director, Robert (Bud) Ovrom, who also serves as city manager. In it, Bob Tague, another redevelopment official, wrote that the agency had never expected Wolff and his partners to be able to keep the money.

Wolff is president of the Wolff Sesnon Buttery Development Co. The firm has received $1.1 million in loans to date under that section of the redevelopment agreement. The developer is entitled to borrow up to a total of $6 million, with the amount of monthly borrowing based on the amount of property and bed taxes generated by the Hilton expansion. Under the complicated deal, the city also acquired and assembled the land for Wolff and set up another fund that has provided an additional $1.1 million in subsidies to Wolff.

Seven years ago, both sides expected benefits from the deal, which is so complex the city's own auditor has said it generates "ambiguities" and "misinterpretations."

Wolff--who wanted to beat growing hotel competition in Glendale and Pasadena--sought the agency's help in expanding the 280-room Burbank Airport Hilton to 500 rooms. Agency officials wanted Wolff and his partners to build a new conference center, considered by some to be an important civic asset.

Then-Mayor Al Dossin cast the council's only dissenting vote. "It was a great project, but not at taxpayers' expense," he said in a recent interview. "Look at what the taxpayer was picking up."

City officials ultimately agreed to support a new hotel tower and 40,000-square-foot conference center by:

* Buying 7.8 acres for the hotel expansion and conference center at $1 million an acre and selling the land to the Burbank Partners at the same price. The developers were given 10 years to pay, and still owe the agency $3.8 million.

* Guaranteeing Wolff a continual source of revenue with the right to borrow monthly up to a total of $6 million to cover the Hilton's operating deficits.

The loans are to be paid back only after the Hilton reaches 65% occupancy and $10 million in gross receipts during a 12-month period.

Since the hotel tower and conference center opened in 1991, Wolff and his partners have borrowed $1.1 million and repaid nothing. Though the Hilton reached 70% occupancy in December, Wolff said the hotel has not yet reached levels of profitability that would trigger the requirement to begin repayments.

City records show the Hilton expansion has generated about $2 million in bed taxes from August, 1992, to November, 1994, according to the Redevelopment Agency.

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