Negotiations between Los Angeles developer Rick Caruso and Santa Barbara County officials have been suspended after county officials determined an agreement on how to implement an incentive program for the Miramar Hotel isn't currently possible.
The county says it can’t guarantee multi-year payments under the recently adopted hotel incentive program, which gives developers occupancy tax rebates over a 15-year period. The deal — designed with Caruso’s Miramar in mind — was supposed to encourage the building of luxury hotels, but detractors say the county is giving away too much tax revenue to wealthy developers. Santa Barbara officials believe that under state law — which doesn’t allow counties to take on long-term indebtedness — implementation agreements are “subject to annual appropriations,” meaning the current board of supervisors can't guarantee the money each year of the agreement, and future supervisors could choose not to set aside the funds.
Understanding this, Caruso wants to include a term in the agreement that would penalize the county — or for the county to agree to litigation that would compel the funds be distributed — should it not pay. County officials would not accept this suggestion. “Without such assurances, the County is essentially preserving its rights to breach the agreement at any time, without reason, and without any recourse for the property developer,” wrote Matt Middlebrook, executive vice president for Caruso Affiliated, in a letter to County CEO Chandra Wallar. In its current form, the agreement states Caruso would have to pay “prevailing wage” upfront during construction — an estimated $10 million in additional construction costs — without any guarantee he would receive the back-end funds.
Wallar informed the Board of Supervisors and Caruso of the decision to end further discussions last week. In her letter, she noted several areas where both sides came together, including instituting a priority of local hires and initiation of demolition. Middlebrook said Caruso Affiliated believes the county misunderstood the provisions of the proposed agreement or misinterpreted the applicable law, and he urged county officials to take a closer look at things. Included in his response letter is a legal opinion from area law firm Hollister & Brace, which says the county “plainly has the ability” to make the appropriation.
The deal could be worth at least $15 million for Caruso throughout the life of the rebate, less than 10 percent of the total $170 million estimated construction cost. However, that could be enough to make the project that much more attractive to potential financiers, Middlebrook said. “The intent of the ordinance is to strengthen the viability of the applicant hotels through the rebate of a portion of the transient occupancy tax in order to attract financing in a very difficult market for new hotels,” he said. Letters from Union Bank and PNC Bank officials — who have had informal talks with Caruso—said that if the rebate is not guaranteed, it would not be considered reliable and thus banks would not consider it in a financing decision.
Caruso’s group had been in negotiations with county officials from the CEO, Auditor-Controller, Planning and Development, and County Counsel offices. Dennis Bozanich, assistant to the CEO, said a third-party review to determine whether the tax rebate is needed to make the project economically viable is underway, but as of Tuesday it had not been provided to the county. When completed, the review should be an interesting read, as many don’t believe Caruso’s plan will make enough money. According to county analysts, the Miramar could reasonably generate between $8 million and $12 million annually after expenses, but that’s considered a “low return for a project of this magnitude and risk.”
Caruso, who recently put to bed rumors he would be running for mayor of Los Angeles, is the most recent of three owners to have trouble getting the Miramar rebuilt, though he is perhaps the closest to getting the site up and running again after it was shut down 12 years ago. His plans for the Miramar include 186 rooms, a beach club, and a spa. Caruso said he was committed to demolishing the buildings on the property once the rebate program was in place.
Middlebrook points out the property currently brings in no sales or bed tax revenue, and little property tax revenue compared to when the hotel is built on what is now a dilapidated lot.
“This program will assist in getting the Miramar built as soon as possible,” Middlebrook wrote. “By getting the hotel built sooner, the County will benefit from the creation of hundreds of new jobs, and millions of dollars in new sales, property, and hotel tax revenue,” he went on. “By ending the negotiations abruptly and without a sound basis as you have puts all of these badly needed financial benefits in jeopardy.”