March 11, 2012--REPORTING FROM SANTA BARBARA -- When Rick Caruso bought Montecito's Miramar Hotel in 2007, it was a long-vacant, fenced-off, dilapidated eyesore.

Five years later, the fences are still up, the windows boarded, the paint peeling. In a community of sky-high hedges and imposing gates, it's still an eyesore.

"I'm embarrassed we haven't been able to get it built," Caruso told Santa Barbara County supervisors at a meeting last week, "but it hasn't been for lack of trying."

Caruso, a celebrity developer who is considering a run for mayor of Los Angeles, was asking for a $15-million tax break that he said can speed transformation of the beachfront property into a new five-star hotel. For his part, he promised to demolish the decaying Miramar once the deal is approved.

Caruso got his wish: The board agreed to have an ordinance drafted, even as critics objected to what they saw as a sweetheart deal for a wealthy developer at a time of financial stress for local government.

With Tuesday's decision, the board signaled its willingness to give Caruso a 10-year rebate of the planned hotel's bed taxes. That concession, he said, will make financing the $170-million project more attractive to tightfisted lenders -- and return the county's subsidy many times over.

He got no sympathy from Rich Untermann, a retired urban studies professor and owner of the Inn of the Spanish Gardens, a small hotel in downtown Santa Barbara.

"Building boutique hotels is a risky business," he said in an interview. "It's the purview of rich men. The county doesn't need to come to their rescue."

County Supervisor Janet Wolf, the lone vote against the tax waiver, called it "terrible public policy."

"The idea was Caruso's and it was supported by his friends," she said. "We were circumventing the process to benefit him."

The Miramar has been out of business for 12 years. Opened as a resort in 1889, it was a collection of cottages and motel-like structures clustered around 13 acres split by railroad tracks that are still in use. It had down-home rates, bicycling waiters who held trays aloft as they pedaled around the property and an air of funky chic that drew famous visitors including William Randolph Hearst, Ronald Reagan and Groucho Marx.

In 1998, it was taken over by the first in what would become a string of high-profile owners. Ian Schrager, a hotelier who founded the legendary New York nightclub Studio 54, had plans for a glitzy resort. He started demolition but ran out of cash.

In 2005, Schrager sold it to Ty Warner, the Beanie Baby billionaire who owns the Biltmore and other top-of-the line hotels in Santa Barbara and elsewhere. At the time, a Warner executive spoke of "bringing new life" to the aging property.

Two years later, Warner, stymied by conflicts with neighbors, sold to Caruso, developer of the Grove in Los Angeles and other upscale Southern California shopping centers. Caruso, who recently lost a bid to buy the Dodgers, also rhapsodized about "breathing new life" into the Miramar.

But the blue-roofed relic has remained comatose.

"It's obviously been a challenging economy for hotels and we haven't been able to make the progress we hoped," said Matt Middlebrook, a vice president of Caruso Affiliated.

Building the 186-room Miramar would create more than 1,000 construction jobs, he said. The hotel's staff would number 200. By the county's estimate, the project would generate $3.2 million yearly in property and sales taxes -- nearly six times the tax revenue it yields now.

For Salud Carbajal, the county supervisor representing Montecito, those are persuasive figures.

"Zero more money won't help us keep our employees," he said. "Zero won't fund mental health or meet public safety challenges."

Tight budgets have forced the county to cut 500 positions, reducing the workforce to 1994 levels.

Carbajal said he had trepidations about the tax break but felt it would "give the public what it wants: demolition of this eyesore as soon as possible, building of the project as soon as possible, and an increase in revenue for taxpayers."

The move was supported by the Santa Barbara County Taxpayers Assn. and Montecito community groups. It was opposed by the Greater Santa Barbara Lodging and Restaurant Assn., which said it would give Caruso an unfair advantage.

Many other communities, including Los Angeles, have tried to sweeten hotel deals with bed-tax rebates, known in the trade as transient occupancy taxes, and they've often proved controversial. Two months ago, Anaheim offered a $158-million tax deal to builders of two luxury hotels near Disneyland. In a lawsuit, opponents call it "an illegal gift of public funds" and say they are considering a November initiative to block the deal.

In Santa Barbara, Caruso's critics are skeptical, pointing to big luxury projects around town that have been stalled for years.

Caruso seems unruffled, noting that the Grove, a hugely popular outdoor mall, had its skeptics before it opened.

Details of the rebate won't be final until they're drafted into a county ordinance. It probably will apply to all developers of hotels worth at least $50 million -- right now, Caruso's is the only one -- and hotel owners doing large-scale renovations. It was unclear whether Caruso would be able to transfer his potential rebate deal to any subsequent Miramar owners, though he insisted he had no intention of selling.

County staff members said the measure could be up for a vote in a few months. Wolf, the dissenting supervisor, was doubtful.

"It took us two years to draft a spay-and-neuter ordinance," she said.

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