LA's Convention Center Hotel Coming Soon? LA Inc.'s #1 Priority

Michael, when last interviewed by TPR some 18 months ago you emphasized the immediate need for a Los Angeles convention center hotel to supplement Staples Center and other downtown investments that have since been made along the city's Figueroa Corridor. Could you give our readers an update on the hotel?

Yes, I think an enormous amount has happened in the past year-and-a-half. In fact, we are on the brink of having a hotel development near the convention center and near Staples come together with a workable financial model.

The hotel has been wished for and contemplated literally since 1988-89, when the first pro-forma was put together for an expansion of the old convention center to the one that was ultimately built and opened in 1994. The assumption was that the expansion of 750,000 sq. feet into a modern, user-friendly facility would be served by additional 4,000 hotel rooms. And, it was a good assumption because at that time there were 10 or 11 hotel projects on the books. The notion was that 2,000 rooms would come online around 95-96 and another 2,000 toward the end of the 90s, yielding a net increase of 4,000 rooms. Obviously, that never happened. But, I'm beginning to believe that new hotel construction is just around the bend.

Could you share your evidence for such a bullish assessment, Michael?

This conversation is a little bit premature, but I anticipate an announcement in late July that will bring together an agreement between an organization that is going to develop, own and operate the hotel and The Anschutz Entertainment Group, which has owned the land. And, I expect the City will also play a role in closing the gap on the debt service.

Michael, is your answer/assessment a vindication of Zev Yaroslavsky's argument that there is neither blight around Staples nor the need for a CRA redevelopment zone extending to the convention center to stimulate private investment?

I'm not sure this is a vindication, but necessity is the mother of invention. What is being offered now in this relationship between an investor/developer and the Anschutz people is that we now have a context in which a hotel like that can thrive. The hotel developer now has the flexibility to create a financial model in the context of a huge partnership with an organization like Anschutz Entertainment. And, that's what making all of this possible.

The idea of a hotel has always been perfectly sensible and everyone has understood the need for it. But even the most ardent enthusiasts for the hotel would concede that the hotel would die if not for the development of a project like the LA Live entertainment district that Anschutz is now planning for the area. This hotel will serve a number of different audiences. Along with the tenants of LA Live, the new hotel will be designed with the meeting planner in mind.

Can you elaborate on the financial viability of L.A.'s convention business and its contribution to LA's economy?

That's the kind of question that can so easily lead me to make a theatrical statement that I may regret later on. At the risk of that, I can say the presence of a new Convention Center hotel will define whether or not LA will ever get a return on its investment of $500 million dollars in the convention center. Either such a hotel is built at or near the convention center, or the convention center should be contemplated for other uses. If we're serious about being in the convention business, like all the other cities we compete with, we have to face the fact that just because you build a building, and a very good one at that, it doesn't mean that they will come. They will come when the facility is convenient and when there is an adequate quantity and quality of places near that convention center for them to sleep.

Give us a sense of the economic dynamic and retail life that has to be downtown to pull off this convention center vision.

The shorthand on this is that we need to create more of a destination. The Anschutz project is being designed to offer virtually every facet of a visitor experience, starting with a place to stay. And, it is this massive development of retail, dining and entertainment that will be a logical extension of their investment in Staples Center. It will be the logical extension of the convention center and what it promises. In effect, it rounds out what any destination needs to succeed: it needs to be fun and it needs to be pretty, and that's what it's going to be. It's going to very attractive, offering high energy and high intensity fun. A successful convention venue must have the facility for exhibit and meeting space as well as the available hotel inventory near by. But, if it doesn't promise the fact that it can be fun, it's never going to get off the ground. And we have that promise right around the corner.

Let's digress now and address the governance and organizational changes that have occurred in the last year at LA Inc. Give us an update on how Los Angeles' Convention Center is now marketed.

Well, the idea that necessity is the mother of invention can goes to the heart of what's been accomplished. We've discovered that necessity is also the lubricant for a lot of creative thinking. Hard times inspire an aggressive view of the conventional wisdom, and that's the view we applied under the leadership of our new President, Mark Liberman. While some of the organizations changes have been necessarily painful, I would also suggest that this pain has already yielded positive consequences.

First of all, from the city's perspective, our funding has moved from the value of two percentage points of the transient occupancy tax to the value of 1%. And in hard dollars, that means a contract that's worth for one year $15 million dollars and the next year, half of that. As a result, we re-prioritized every dimension of our organization, including programming, operations and overhead. That's translated to a cut in staff of approximately 24%. This goes far beyond the usually adjustments organizations make as they expand and contract. We've taken whole marketing divisions, one international and one marketing, and merged them.

For the most part, we have retained our sales capacity in tact. However, we have begun to significantly redefine the universe in which we are competing. A few years ago, our client base and the client base of our major competitors totaled about 450-500 enterprises. That number is no longer an applicable one because we are no longer competing with the same four or five large west-coast cities. The business of conventions has radically shifted between 2000 and 2004. In the 11 west-coast markets, exhibit inventory has increased 60%. Now what do you suppose the demand has done between 2000-2004? One could argue that it hasn't increased one iota. In fact, as a result of international tensions and our national economic downturn, one could argue that it actually shrank. So there is this enormous increase in available space and by no means a commensurate increase in demand. So in order for a city to compete, LA no longer looks only to the "usual suspects"-Anaheim, San Diego, or San Francisco-as the markets for which it must compete for business. We're now competing with Reno and Phoenix and Seattle. And it means that the pieces of business will necessarily be a little smaller. But if we expand that universe and recognize that the real name of the game here is yield management for a large building that is capable of having simultaneous events, then we're going to be successful.

In the past, we maintained offices in NY, Chicago, and Washington. New York has been closed. We're expanding the use of home-based sales people and in so doing watching our overhead costs drop. Our new head of Sales Katie Callahan-Giobi is restructuring a sales force that's more agile and more adapted to fishing where the fish are. This means more people in the field and more people doing more selling with less administrative distractions. I think the good news in all of that is, unlike so many other cities facing the same market changes, LA has a compelling and distinctive offer to America's meeting market. We represent a brand that, notwithstanding how many tough times face this nation, still continues to rivet people's attention. L.A. is one of the most powerful and evocative brand names on the planet.

LAX is the portal by which most of the convention crowd passes when going to the convention center. Can you speak to LA Inc.'s interest in developing consensus around an LAX modernization plan?

The essential ingredient of success is that the facility be modernized. This modernization must be able to address the demands and the requirements of a rapidly changing domestic and international airline industry. Advancing a Consensus Plan, even with facets about which there are still serious questions, means that the city will avoid the prospect of reconstructing an environmental impact study that would in effect put the current airport into suspended animation for probably another 10 years. The idea of this Consensus Plan is to allow the elements of the plan that generate the greatest support to move forward while establishing an agreement to revisit those elements of the plan for which there has been some controversy. The modernization process will positively and significantly impact the ability of that airport to be the "shelf" upon which the world buys LA, especially the visitor industry. From a visitor industry perspective, we are greeting the current state of the plan's approval with considerable relief.

Lastly, Virgin USA recently announced that it has chosen San Francisco to be the West Coast hub for its new low-cost airline. Some have suggested it was an absence of leadership and vision here in Los Angeles that led to Virgin opting to choose SFO. Can you speak to Virgin's decision and what it means for Los Angeles tourism and our convention business?

Having a national and international air traffic distribution in effect, hubbed, in Los Angeles translates into more billions of dollars than I can adequately communicate to you. The impact is just too big to contemplate. So, the idea of LA being able to maintain its status as a gateway, especially an international gateway, is critically important to this region's economy.

The international visitor market is one that fuels one-third of the second largest economic engine in LA-the visitor industry. And if we aren't able to present a user-friendly facility, and by this I mean user-friendly to the airline industry as well as the passengers, the airlines and the travel trade will send their business elsewhere. We're about to announce that LA has made a very credible decision to make a serious commitment to significantly improve LAX. And we're all going to benefit by it, along with all those zeros that append all those economic development numbers that make everybody glassy-eyed. This investment touches just about every facet of commercial enterprise in Los Angeles.