Eli Broad's luxury Grand Avenue project is now half-owned by Dubai
WHAT BECOMES A ROYAL FAMILY MOST? Could it be the $95 million in subsidies from Los Angeles taxpayers — the windfall bequeathed to the Dubai royal family, whose co-ownership of the behemoth Grand Avenue development was approved by Los Angeles politicians last month?
(Click to enlarge)
Taxpayer largess: "The Grand" luxury complex facing Disney Hall at far right.
A little-known group, the so-called Grand Avenue Authority, whose members are County Supervisor Gloria Molina, City Councilwoman Jan Perry, County Executive Officer William T. Fujioka and Community Redevelopment Agency boss Cecilia V. Estolano, agreed to transfer 45 percent ownership in Grand Avenue to Istithmar, a vast investment fund controlled by the royal family of Dubai. The project’s original private developer, New York–based Related Companies, will retain 55 percent, and the much-delayed project is expected to break ground anytime.
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Out of the picture is the huge public investor CalPERS, representing more than 1.5 million California government workers, which backed out, citing its discomfort with “overexposure” in downtown’s real estate market.
Istithmar paid $100 million for its stake, and officials have begun referring to the project as “the Grand” — it has for years been called “Grand Avenue” by billionaire Eli Broad and its proponents.
Molina, Perry and other officials insist the project is an example of “public-private” cooperation and benefits. The Grand will sit on four parcels of choice, taxpayer-owned downtown Civic Center property and receive tax breaks of more than $66 million from city and county coffers.
While Los Angeles politicians and Broad have consistently justified subsidies for the project by touting its affordable-housing component, Brand Dubai embodies just one image: luxury. Oil money provided the original fuel for the Persian Gulf nation’s larger-than-life economy: Dubai City’s man-made islands, configured in the shape of palm trees; palatial homes; ultraluxurious developments and iconic skyscrapers; and old and brand-new cities in the desert nation on the gulf.
But the royal family that governs Dubai, which is an emirate that does not allow democratic elections, has also sought to diversify its holdings and wealth streams. By decree in 2006, His Highness Sheik Mohammed bin Rashid Al Maktoum created Dubai World, a global, sprawling 50,000-employee holding company. One of his many lucrative subventures is Istithmar, a sovereign wealth fund designed to make him and others even richer.
“There’s been a lot of publicity within the last two months about sovereign wealth funds and overseas investors having an interest in United States assets,” says Todd Millay, managing director of Choate Hall & Stewart’s Wealth Management Group, “but Istithmar was doing this two or three years ago. It was one of the earlier Dubai-based funds that was really looking aggressively at outside opportunities.”
In America, that translates to Istithmar’s ownership of opulent retail outlets and hotels. In August 2007, the investment house outbid a Japanese retailer to purchase Barneys New York, the outré, well-heeled department store, for $942.3 million. In October 2006, it purchased the W New York Union Square in Manhattan, a stopover-spot valued at $285 million.
That year, Istithmar’s CEO, Yale-educated David Jackson, told Reuters, “In the U.S., we believe in what we call ‘key gateway cities.’”
ENTER LOS ANGELES. Quietly this year, an eager circle of politicians, having heard for months they were losing CalPERS, readily agreed to the same basic deal with one of the richest families on the face of the globe, at taxpayer expense. Last month, the Dubai royal family did two things: It publicly announced its deal with Related Companies for “the Grand” and it announced a new route for its airline, Emirates, seen by some as the poshest of the posh global air carriers.
Beginning on September 1, 2008, the airline will fly from Los Angeles to Dubai, becoming the only air carrier to offer a West Coast–Persian Gulf nonstop flight. Emirates will offer such sumptuous amenities as private suites — that’s right, suites — for first-class air travelers, complete with meals on demand, individual minibars, lie-flat sleepers with massage capabilities and electronic doors for privacy. More than 1,000 channels of audio-video will be available in each seat, as well as phones for all passengers, individual screens and, should lingering questions remain over the acceptance of other faiths, kosher meals.
It’s all part of the royal family’s strategy to court high-end global tourists in their strange, far-off desert land, which got a boost in 2007 from the Dubai International Film Festival, featuring His Highness Sheik Ahmed bin Saeed Al Maktoum as honorary chairman — and George Clooney performing Hollywood royalty duties. Michael Clayton was screened, Sony and ICM sponsored, and the fest’s entertainment-industry street cred grew.
In the meantime, the Grand will now spread Dubai-brand luxury to downtown, in a project long touted by Mayor Antonio Villaraigosa, the City Council and the Board of Supervisorsas a “public-private partnership” to bring benefits, including “affordable housing,” to the Civic Center.
Solid and trusted, CalPERS had given the project much of its public do-gooder feel. But the project had been in disarray, as evidenced by delayed groundbreakings, skyrocketing costs and now-confirmed rumors of late payments from the developers to the city.
How did this extreme transformation — from a project involving a co-owner like CalPERS, one of the most transparent investors in the nation, to one with a co-owner like the Dubai royals, among the world’s most secretive investors — come to pass?
At least one well-known politician on the under-the-radar Grand Avenue Authority — Jan Perry, who represents much of downtown and voted to authorize Istithmar’s deal — appears not to have heard of the deal before approving it on March 17.
According to Eva Kandarpa, Perry’s communications director, the councilwoman learned of Istithmar’s proposed involvement at the Grand Avenue Authority meeting itself. Yet Related Companies’ Bill Witte some months ago helped throw a fund-raiser for Perry — a perfect time for her to have heard about the major ownership changes on the way. The media also played catch-up on March 17, with City News Service reporting that the meeting to decide co-ownership of the $3 billion project took less than five minutes.
According to City News, Molina, the Grand Avenue Authority’s chairperson, breezily stated of the process: “It’s all gone by so silently and so smoothly. You lawyers and accountants and financial guys must have done a great job.”
But if they haven’t done a great job, who would know, in what will be remembered by some development experts as one of the most hidden processes ever to usher in such a huge project in modern-day Los Angeles? Even the Grand Avenue Authority’s $4.4 million budget isn’t run through the city, county or redevelopment agency — but through a private nonprofit group.
Two Molina staffers verified to the Weekly that Molina did indeed comment on the silent, smooth nature of the goings-on. But in contrast to Perry’s claimed ignorance, Gerry Hertzberg, Molina’s policy and political director, stated, “The supervisor was aware of the change-in-ownership request quite some time prior to the March ... meeting,” and, “during that time, the request was subjected to financial and legal reviews.”
Illustrating the tangled relationships of those pushing Grand Avenue, Hertzberg is himself on the so-called Grand Avenue Committee of six people “implementing” the Grand Avenue Authority’s plan. This committee of insiders, which has the help of two pricey staffers, includes tycoons Broad and Nelson Rising and three others: a woman representing the land speculator and developer Thomas Properties Group; a politically connected downtown Latino-rights attorney; and a redevelopment-agency bureaucrat who works for Grand Avenue Authority member Estolano.
If Molina thought there should be more than five minutes of public review of the conditions placed upon Istithmar, she kept that to herself. Asked if Molina had spoken to CalPERS representatives to find out why they were abandoning the project, Roxanne Marquez, another spokesperson for Molina, said, “Not that I’m aware of.”
SUCH A LACK OF AWARENESS by elected politicians who have pushed hard for massive subsidies for the Grand appears to define the effort. In 2007, the Grand Avenue Authority canceled twice as many public meetings as it held: Six were canceled and three were held, according to county records.
As Mayor Villaraigosa pleads poverty at City Hall, pushing for numerous fee increases on residents, the city is outmatched in its negotiations over the Grand. In one of the major deals cut before Istithmar arrived on the scene, Related Companies, which developed Time Warner Center in New York, negotiated a 99-year lease of the public lands involved. The arrangement has allowed Related Companies to essentially make no payment on the land until the start of construction, costing the city and county — in other words, taxpayers — millions of dollars.
Taxpayers are also subsidizing the predevelopment work of those reporting to Rising and his co-chair Broad, both fantastically wealthy. Records show that Related Companies has paid only $600,000 into the Grand Avenue Authority’s $4.4 million budget.
And while the Los Angeles media were reporting that a $55 million “prepayment” for the land lease had been made by Related Companies, the fact is, no prepayment had been made. Local journalists almost certainly were misled by the cheery but false information from politicos, who eagerly back the Grand. (TheLos Angeles Timeson November 17, 2006, reported that the money had been paid.) In truth, the $55 million did not arrive until July 2007 — apparently costing taxpayers hundreds of thousands of dollars in interest.
Asked if taxpayers should be providing substantial subsidies to Dubai’s royal family, Hertzberg, Molina’s policy and political director, told the Weekly, “The public investment in the project is for special public benefits that bear no relationship to the ownership. We are providing investment in low- and very-low-income affordable housing, public open space and street-scape improvements.”
But how “special” are the benefits alluded to by Hertzberg?
Becky Dennison, co-director of the Los Angeles Community Action Network, which negotiated for greater community benefits, disagrees with Hertzberg. “They said there were benefits — but really it was ‘benefits’ that were required by law,” she says.
Not only is the affordable housing being built on land already owned and controlled by the city and county, but the modest number of affordable units proposed — just 100 apartments in Phase 1 — will be heavily underwritten by taxpayers to the tune of $100,000 per unit. And in Phase 2, 170 units are planned, with the city pouring in a staggering $200,000 per affordable unit.
Critics say that’s an awfully “special” public cost for what is, in fact, a luxury project comprising a five-star hotel, pricey shops and high-end condos — not an affordable-housing project.
A telling report by the city’s chief legislative analyst, which was used to support the City Council’s decision to provide more than $66 million in tax breaks to developers, states, “Without a significant public contribution, the hotel will not meet industry internal rates of return on a project of this type.” In other words, much of the public subsidy is needed to prop up the glitzy, Gehry-designed Mandarin Oriental Hotel.
Given Dubai’s immense wealth and its desire to court Hollywood, is the renamed “the Grand” simply a bobble, initiated to raise Dubai’s profile in L.A., and not expected to provide investment returns, as CalPERS would have had to do?
Millay of Choate Hall & Stewart says no. Millay grew familiar with Istithmar when he was the executive director of the Wharton Global Family Alliance, a center for research on family wealth and family business. Istithmar, the ultimate example of family wealth, supported the Wharton center’s studies.
Millay says that even “if there are additional benefits to Dubai” as a result of its having a West Coast outpost in Los Angeles, Istithmar is not a vanity investor.
“Istithmar is certainly focused on generating returns for the assets they are responsible for,” Millay explains. “And [Istithmar’s CEO is] certainly focused on that. He’s a savvy investor. He’s not going to invest in a project that’s not going to make money.”
Groundbreaking is expected soon, and the plan for implementing the tax-subsidy package is expected to go before the Los Angeles City Council as early as next month. Has the promised $95 million-plus in city and county subsidies created the profit margin Istithmar experts needed? Should taxpayers be subsidizing a royal family?
“That’s a good question,” says Dennison. “I think Los Angeles should be far more concerned and far more attentive.” She added, “If more people had been involved, maybe [Los Angeles] as a whole could have done better.”
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