May 24, 2009 - Terranea Resort, Rancho Palos Verdes CA

Rancho Palos Verdes city council holds key to Terranea Resort's future

On Tuesday, the City Council will weigh a request from Terranea developer Lowe Enterprises to rebate $8 million in hotel tax revenue - money that company officials say they need to begin operations at the 102-acre property.

Rancho Palos Verdes city council holds key to Terranea Resort's future

Just a few days before its fate was set to be decided by the Rancho Palos Verdes City Council, Terranea Resort was alive with activity.

Hundreds of workers were buzzing around the property last week - laying sod, hanging light fixtures and altering staff uniforms. Pieces of blue tape dotted tile and stone, indicating tiny flaws that would be buffed out before the massive seaside resort's opening June 12.

Employees were being trained, paintings were being hung. Everything smelled new.

The place hardly felt like an establishment that could be about to go under.

"I don't like to think about that," said the project's development manager, Todd Matcher. "The thought of us not opening is heartbreaking."

On Tuesday, the City Council will weigh a request from Terranea developer Lowe Enterprises to rebate $8 million in hotel tax revenue - money that company officials say they need to begin operations at the 102-acre property.

The potential deal would give Terranea the cash flow to operate its 360-room hotel, 20 bungalows, three restaurants, golf course, spa and 82 "legacy real estate" properties.

After more than a decade of planning, the $480 million luxury resort is slated to be the largest in Los Angeles County. It is expected to generate more than 600 jobs and millions of dollars of revenue for Rancho Palos Verdes.

But the international financial crisis and flagging profits in the hospitality industry have Advertisement combined to make it impossible for Lowe to operate without a cash infusion, company officials have said.

Because of nearly frozen credit markets, Lowe has been unable to refinance its debt on the project to pay for Terranea's operation. The company's primary lender is financially troubled, Chicago-based Chorus Bank, which may soon be taken over by the federal government, according to reports in the financial press.

On top of that, the resort has not sold any of its 82 ownership properties - casitas and villas that range from $2.25 million to $4.45 million - since early 2008. And Terranea officials expect that when the resort closes the 49 existing contracts in coming weeks, there may be some commitments that will fall apart.

"It's logical to assume that some people are facing a different life today than they were in 2005," when the initial offerings were made, said Dan Cooke, who is overseeing real estate sales at Terranea.

Bob Lowe, chief executive officer and founder of Lowe Enterprises, told City Council members at a meeting earlier this month: "We are opening in the most challenging time since at least World War II."

In April, the company - a well-respected real estate entity based in Los Angeles with properties across the country - proposed to the city what some critics have derisively called a "bailout."

Originally, Lowe asked for half of the city's 10 percent transient occupancy tax over 10 years - about $35 million. That plan was whittled down to $8million of TOT over 27months, to be repaid with interest.

"It's a very unusual proposal, but we are in very unusual times," Mayor Larry Clark said. "We're talking about a future revenue stream that is only there if they are up and operational."

Under the deal, the city would still receive anticipated revenues of $500,000 from golf, property and sales taxes at the resort, which is on the former site of Marineland of the Pacific. That money would vanish, of course, if Terranea's opening were delayed.

With the financial backing of the city, Lowe Enterprises could obtain an additional loan of $8 million to $12 million from its existing lenders to help fund operations, company officials said.

"What we're suggesting here is being done all over the state, all over the country - where local government agencies are using economic incentives to help businesses that are important to the local area," Lowe said in an interview.

"We're not happy with the difficult economic environment where we find ourselves, but we believe that our request is balanced and represents what will be a very reasonable long-term partnership."

The request comes as municipalities across the state fear the threat of Sacramento grabbing city property tax revenue, even as shrinking sales tax returns, reduced development fees and increased costs create ever larger budget holes.

Rancho Palos Verdes is struggling to balance its books for the coming fiscal year, and officials recently learned that Los Angeles County is reassessing a broad swath of properties, the decreased value of which may in turn affect the city's budget.

In potentially forgoing hotel tax revenue, the city stands to lose a long-expected revenue stream that could pay for much-needed storm drain improvements and other unfunded projects - which total more than $77 million - in the city's new capital improvement plan.

In a report that outlines the proposal before the council this week, municipal staff wrote that the deal is "not fiscally prudent at this time."

And while Lowe insisted Rancho Palos Verdes would be repaid, the staff report suggested doubts about whether Lowe Enterprises would have sufficient funds to do so by the city's desired date in 2013.

"It could come down to the fact that we are willing to accept their request with the understanding that we may not get repaid. That for me is a problem," said Councilman Steve Wolowicz, who along with Clark sat in on detailed negotiations with Lowe. "The question is whether or not that is the role of government, giving a pure bailout scenario."

As an alternative to Lowe's proposal, city staff has suggested giving the company $3million in hotel tax revenue over two years, without an expectation of repayment. That would leave $5 million to put toward city projects.

That option, finance director Dennis McLean said, "is fiscally prudent."

The report, which McLean wrote, stated the team that examined the $8 million Lowe proposal "continually asked itself the most important question for the city: Will Terranea open and operate without the city's financial assistance?"

The report, released late Friday, suggests that a lengthy delay in the resort's opening is not a real possibility.

"The advisory team believes that Lowe, its investors and its lenders will not allow Terranea to not open," the report states. "It is impossible to know whether financial assistance from the city is actually necessary."

Lowe refused to say whether Terranea's opening would be delayed - or whether his company would be foreclosed upon - if the city did not grant the deal.

"If they don't make a positive decision, that makes it very difficult for us to raise the additional equity required to give us reasonable cash reserves," he said. "We'll have to make some very difficult decisions on Wednesday."

Original Story - Daily Breeze

Rancho Palos Verdes gives luxury resort an $8-million bailout

Developers of Terranea Resort, slated to open June 12, say the credit crunch forced them to ask the city for a loan. The council unanimously OK'd the deal despite concerns from city staff.

When the owners of a $480-million seaside luxury resort said they needed more money to ensure it would open, they turned to Rancho Palos Verdes.

The City Council last week unanimously agreed to give Terranea Resort what amounted to an $8-million loan by allowing Lowe Enterprises to defer payment of its hotel tax for several years. The vote came despite concerns from city staff members who said the loan was "not fiscally prudent."

The 102-acre resort is scheduled to open June 12 where the Marineland of the Pacific oceanarium once stood. It will include three restaurants, a nine-hole golf course, a 360-room hotel and 20 bungalows. Also on the grounds are 82 casitas and villas that range in price from $2 million to $4 million.

Mayor Pro Tem Steve Wolowicz said the city, which has few businesses, has never provided an economic stimulus package like this one, or dealt with a project like Terranea.

"We have not had anything like it before, and our city is not likely to encounter something like this again," he said.

According to the deal, Terranea will be allowed to keep the 10% hotel tax customers pay. The resort will receive $8 million or collect the taxes for 27 months, whichever comes first.

The loan will be repaid by 2013 at the London interbank offered rate, plus 8 percentage points. LIBOR is a benchmark used globally, similar to the prime rate. The deadline can be extended for a year at a higher interest rate. The rate for three-month LIBOR loans last week was .66%.

The council made its decision Wednesday morning at a special meeting that ended around 1:30 a.m.

Robert Lowe, chairman and chief executive of Lowe Enterprises, said in an interview that he was forced to go to the city for the funds because of the credit crisis.

Asked what would have happened if the city had turned him down, he said, "I don't want to speculate. It's not going to happen."

He said the resort should provide the city with $7 million to $8 million in taxes annually once it reaches "stabilization" in three to four years.

Among the resorts and hotels the company owns are the Resort at Squaw Creek in Lake Tahoe, Stowe Mountain Lodge in Vermont, Sheraton Universal Hotel in Hollywood and the Miramonte Resort and Spa in Indian Wells.

Lowe first approached the city in April with a deal that would have provided the company with about $35 million of hotel taxes over 10 years.

"It was problematic whether the city would be repaid," Wolowicz said. "An outright gift by the government we didn't think was right."

Still, there was opposition to the deal that the council approved. The city's Finance Director, Dennis McLean, wrote that it was "not fiscally prudent."

Wolowicz said the council seldom goes against city staff recommendations.

The councilman said the city had not made plans yet to spend the hotel tax money, so the deal would not require budget cuts.

He said the city has reserves of about $19 million.

The city is low on the list of creditors who would be repaid in case of default.

"We made this decision understanding there is a certain element of risk, but feeling the benefits and safeguards and economic substance of the city's position warrant the decision that we made in granting the request," he said.

Update Story - LA Times