Jun. 27, 2006 - As with many disagreements, the legal tangle between the city of East Palo Alto and the developer of the town's five-star Four Seasons hotel started with something seemingly insignificant: a geotechnical report that projected the hotel's foundation would support its weight.

City officials, eager to boost the civic image of a town that in 1992 was named murder capital of the U.S.A., offered a nice incentive to the LDW Resort and Hotel: Open the hotel before the end of 2005 and you won't have to pay hotel tax to the city for 42 months or until that tax total reaches $8.4 million.

But, in large part because the foundation began sinking into soggy soil, the hotel didn't make the deadline. The cash-strapped city says that means the tax waiver is off.

East Palo Alto officials have been trying to resolve the disagreement out of court, said Mayor Ruben Abrica. "But we got to the point where they were not willing to meet us even halfway. That's why we authorized our attorneys to initiate a lawsuit."

But Friday, LDW filed suit first.

The hotel tax waiver was part of a long list of give-and-takes between the city and LDW. For the developer, it was the most important part. "The hotel would not have been built without that waiver," said Dave Hyams, an LDW spokesman.

In 2001, the city council approved the agreement and LDW began work, although its construction plan was initially delayed because of a dispute over sewer rates.

Some prep work on the site had already been done by the developers of University Circle, the 450,000-square-foot development that changed East Palo Alto's gritty Whisky Gulch into a set of pristine mini-skyscrapers.

The development group had commissioned a geotechnical report on the hotel site and had built a foundation pad based on a report prepared by a local engineering firm, Hyams said.

The 10-floor hotel began to rise from the pad -- and in 2004, began to sink. All work had to stop. Only when the earth underneath the building settled could construction begin again. The first move was to remove what had been built and remake the pad so it would be stable.

The total cost of the foundation fix: $10 million.

The sticky part came when LDW asked the city for a deadline extension, allowed under their agreement for a long list of circumstances.

LDW believes the foundation problems qualify for an extension. The city disagrees. "The city's position is that it is not the city's fault," East Palo Alto city attorney Michael Lawson said of the delay.

And, the city argues, LDW did not request a deadline extension for the problem in a timely fashion. Therefore, the tax waiver deal is off.

Lawson said the city may file its own lawsuit if the LDW suit "doesn't present the issues in a way that gets the issues properly before the court."

Having that $8.4 million in taxes eventually come to the city rather than the developer might be nice: East Palo Alto is mulling over budget cuts that might mean the loss of seven employees.

The Southern California-based LDW, a frequent partner with the Four Seasons hotel chain, has sued the local engineering firm that projected the foundation pad would hold up. A settlement is on track, Hyams said.

Both the city and LDW said the tax dispute doesn't threaten their broader relationship. "This is like a quarterback having a dispute with the team over a contract," Hyams said. "Both are trying to make the team successful."

Added Abrica: "This is not Four Seasons vs. the city. I think that's going well."

Contact S.L. Wykes at [email protected] or (650) 688-7599.

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