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After Years of Challenges, New Financing has City of Escondido
Poised to Approve $70 million Downtown Marriott

By David Garrick, North County Times, Escondido, Calif.McClatchy-Tribune Regional News

Jun. 6, 2010--After years of financing problems and litigation, city leaders say they are finally poised to dramatically bolster downtown Escondido by having a large luxury hotel built next to the city's performing arts center.

Critics continue to complain that the $70 million project requires too much financial help from the city, such as a $10.7 million cash subsidy, providing land valued at $1.8 million and giving the developer the city's conference center, which has been appraised at $5.6 million.

But the project, which would be a Marriott built along Valley Parkway on a 75-space parking lot between City Hall and the arts center, is supported by four of the five City Council members.

They say the subsidies are warranted by more than $27 million in estimated tax and lease revenue from the project over the next 55 years, and the economic boost the city would get from having a seven-story, 196-room hotel in the heart of downtown.

They contend the hotel would help the city attract conventions, bolster the struggling arts center by making Escondido more of a tourist destination and help attract technology firms because big businesses prefer to have luxury hotels nearby.

"This is the next generation of developing our downtown and our city," Mayor Lori Holt Pfeiler said last week.

A public hearing on the project and its complicated financial package has been scheduled for 4 p.m. Wednesday at City Hall, 201 N. Broadway. It will be the first time the council has discussed the project publicly in more than four years.

The physical details of the project are virtually identical to what they were when the city chose La Jolla developer Craig Clark to build the hotel back in 2003, but the financing and the development team have changed dramatically.

The city's cash subsidy, which had climbed to roughly $19 million in spring 2008, has been reduced to $10.7 million.

In addition, the subsidy will no longer come from unrestricted city money that could be used to increase library hours or pay firefighters. It will come from redevelopment money, which must be spent on projects that enhance economic activity.

Hensel Phelps, Clark's key partner in the early years, has been replaced by Bahen Enterprises, a venture capital firm, and Jaynes Construction, which recently built a new fire station for the city on Quince Street. In addition, financing will come from private lender J & H Capital instead of a bank.

The development team has also been forced to buy a $43 million insurance policy in case any of the partners runs out of money during construction.

Larry Kimball, a representative for the development team, said the policy ensures that the project will not become another half-built, downtown Escondido eyesore, such as the Paramount condos along Washington Avenue or the City Plaza apartments on Third Avenue.

The developers have also set aside $3 million to cover any increased costs for construction. And they have agreed to pay prevailing wages to workers on the project.

"We have finally covered all the bases," Councilman Sam Abed said last week. "We had to make sure that when we put up $10 million, there is minimal risk to the city."

Councilwoman Olga Diaz, a longtime opponent of the project, said she was pleased that the deal is much more financially sound, contending that her aggressive scrutiny saved the city about $9 million in subsidies and made the project much less risky.

But Diaz said she still has concerns about why any cash subsidy is needed, where the private capital is coming from, whether the underground parking garage might have flooding problems and why the developers won't pay rent for the first 12 years.

Diaz said another key concern she has is the city's estimated revenue from the hotel, especially projections that nightly room rates would average $174 by the fourth year of operation and that occupancy would be 75 percent at that time.

"Hotel occupancy rates and revenues are much lower than they were when these studies were conducted," Diaz said, explaining that the last analysis was completed in 2006. "I don't see evidence that this is a viable project -- for either the city or the developer."

But Kimball said it would be very pessimistic to assume that the hotel industry won't bounce back when the economy does, and that tackling large projects during a recession makes financial sense because construction costs are much lower.

"It's all about timing," said Kimball, explaining that construction of the hotel would begin this fall and conclude in spring or summer 2012. "Two years out, everyone's expecting that the market will have rebounded."

Harvey Mitchell, chief executive of the Escondido Chamber of Commerce, said he expects the hotel to succeed and help other local businesses thrive.

"The chamber is squarely behind this project, and we have been all along," said Mitchell. "We have some nice motels here, but nothing of this caliber and quality."

Councilwoman Marie Waldron, who withdrew support for the project last year based on concerns about financing, said last week that she has always supported the concept of having a luxury hotel downtown.

"The important thing is the protections for the city," said Waldron. "But this has always been a key part of redeveloping downtown."

Councilman Abed said the hotel would bring Escondido to the "next economic level" by attracting events that need hotel rooms, such as the Amgen bike race. When the city served as the race finish line last year, all the bicyclists and their entourages stayed at hotels in Rancho Bernardo because Escondido lacks adequate lodging.

But Lisa Prazeau, leader of the Escondido Chamber of Citizens, said hotel supporters are being overly optimistic.

"We don't trust this project as far as we can throw it," said Prazeau. "For some reason, this council has a death grip on this hotel deal and they were determined to get the money wherever they could. They are misleading the public that this will turn a profit."

Diaz said it has been frustrating to be the council's lone hotel opponent.

"Talking about this makes my blood boil," she said. "I don't understand why they're so committed to this project. It seems like city staff spent so much time on this that they don't want it to come to nothing."

Diaz said she planned to use Wednesday's hearing to aggressively question the consultants who analyzed the deal.

"I'll ask them whether they would do this project if it was their money, and I'm guessing they'll say 'no,'" Diaz said.


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Copyright (c) 2010, North County Times, Escondido, Calif.

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