The joint city-county board overseeing the much-delayed, $3-billion Grand Avenue project established financial penalties Monday that the developer must pay if ground isn't broken by February.
The action marks the toughest stance yet by city and county leaders overseeing the development of the Frank Gehry-designed residential and commercial complex, which many see as a centerpiece in the revitalization of downtown Los Angeles.
By a unanimous vote, the committee approved a request by the developer, Related Cos., to postpone the start of construction on the project's first phase, which includes a luxury hotel, shops and housing units, until Feb. 15, the latest of several delays.
Related has said that a tightening construction market makes it necessary to wait until all construction documents have been finalized before obtaining financing.
But the postponement came with a major catch.
If the project is delayed beyond February, the developer will pay $250,000 a month to the Los Angeles Grand Avenue Authority for a maximum of two years as part of the deal approved today. If Grand Avenue has not started construction by February 2011, the authority has the right to renegotiate the deal.
Related is trying to find the funding to get the project off the ground. The California Public Employees' Retirement System pulled out of Grand Avenue last year, saying that it had too much investment in downtown. But a fund controlled by Dubai's royal family has invested $100 million.
Grand Avenue was once scheduled to be completed in 2009. But that date was shifted to 2011. Now Related wants to push the opening to 2012.
Gary Painter, director of research for the Lusk Center for Real Estate at USC, said financial penalties like the one officials unveiled today can sometimes help get projects moving. But Painter was quick to note that the $250,000 monthly penalty seemed "not a large sum of money relative to the scale of the project."
Painter also questioned whether the penalty would in any real way change Related's ability to quickly procure a construction loan.
The agreement approved Monday, said Nelson Rising, chairman of a committee overseeing the negotiations on behalf of the city and county, meets the concerns of public officials. "The credit markets make it impossible to obtain construction financing in the amount we defined" in the original agreement between the developer and the city and county, Rising said.
Joanna Rose, a spokeswoman for Related Cos., said the developer was working diligently to finalize construction documents -- which as part of Monday's agreement must be 80% complete by Dec. 15. Having the thousands of documents completed by then would allow the developer to have a better sense of costs before shopping for a construction loan.
"Once we meet that milestone, we will be reaching out to the markets," Rose said. The developer, she said, is "uniquely well-positioned to secure financing if it is available."
Grand Avenue is among several mega-developments around the nation that are in trouble because of the credit crunch. Huge projects in Las Vegas, Phoenix and New York have also been scaled back or delayed because of difficulties in the financial markets.
The public officials heading the Grand Avenue development say they understand the market realities, but were also reticent to approve the delay without certain guarantees. County Supervisor Gloria Molina, head of the authority, said she hoped the compromise would "keep the project alive, considering how difficult the credit situation is. . . . We're doing everything we can to be a cooperative partner."
Los Angeles City Councilwoman Jan Perry, a member of the authority, said that although she supported the penalties for additional delays, she was concerned about how the Community Redevelopment Agency would be able to pay for the low-income housing that is part of the project's second phase. Some tax increment money generated by the project's first phase was to be set aside to pay for the 170 low-cost units that are part of the second phase.
But because the opening date of that first phase is now delayed -- to mid-2012 if the project breaks ground in February -- the amount of tax money that would flow to the CRA could be compromised, Perry said. She introduced a motion, approved by the authority, that would explore setting aside the penalty money paid for further delays for development of low-cost housing within the project, if the funding has indeed been jeopardized.
Paul Novak, a deputy for Supervisor Mike Antonovich, was the sole person who questioned the further delays at Monday's meeting.
In his speech before the vote, he complained that details of the agreement between Related and the joint powers authority were released only Monday morning, saying that the public "had only had two hours to digest" the terms of the new deal.
On Monday, the developer agreed to set aside $30 million -- partly in cash and partly in a letter of credit -- to ensure completion of the pre-construction work that must be done before building begins. So far, Related estimates that it has spent more than $109 million on the project.
"This is the best arrangement we can get considering the times," Molina said.
One piece of the Grand Avenue project not affected by the delays approved Monday is the 16-acre civic park planned for the space between City Hall and the Music Center, which is part of the development.
The deadline for the park, which must be completed before occupancy permits can be granted for the rest of the project's first phase, still stands at mid-2011.