Build a huge convention hotel now? With half the hotel rooms in downtown L.A. sitting empty and conventions being canceled left and right in the wake of the terrorist attacks?

Despite the current economic climate, developers and city officials are making a strong case for proceeding with the 1,200-room downtown hotel, which won’t be completed until at least late 2004 well after the current downturn is likely to ebb.

Just days before the terrorist attacks, the City Council approved the second phase of the Staples Center plan, including a 7,000-seat theater, shops, restaurants, nightclubs and residential units on what are now parking lots next to the arena. But the Council deferred indefinitely on whether to provide a subsidy for the hotel, leaving the hotel’s fate in limbo.

“This year, 2002 and 2003 will be dark years for the hospitality industry as it tries to rebuild from this shock,” said Michael Mahoney, director of hospitality and leisure consulting at the L.A. office of PricewaterhouseCoopers. “Assuming we have no other shocks of this magnitude a year or two down the line, the industry will likely be in a position by late 2004 to make a transaction such as this feasible.”

In fact, one consultant who has worked on the Staples project said he is advising many of his other clients to go ahead with plans for new hotels.

“A few decided they were going to cancel their plans,” the consultant said. “But most of these hotel developers are going forward, with the expectation that the worst will be over before their hotels come on line.”

That’s the strategy being adopted by developer L.A. Arena Land Co., a joint venture of Rupert Murdoch’s Fox Entertainment Group and the Anschutz Entertainment Group, headed by billionaire Philip Anschutz. While L.A. Arena Land Co. will not build the hotel a separate hotel operator/developer will likely be brought in to build it it owns the land and is working with the L.A. city Community Redevelopment Agency and other city government officials to take the project to investors.

Still called crucial

Backers say it is crucial a hotel be built so that the Convention Center can compete with other Western cities for conventions that now bypass L.A. in favor of cities with more hotel rooms around their convention halls.

But they also say that without a public subsidy, private investors would be unwilling to assume the full risk for the project. The city’s chief legislative analyst’s office is looking at how much that subsidy should be and what form it should take; its report is due out shortly after the first of the year.

City subsidies for private development projects have proven controversial, and this one is no exception. L.A. Mayor James Hahn has come out against using any general fund dollars for the hotel project, while at least one city councilman, Dennis Zine, is against any subsidy altogether.

But hotel consultants note that any decision is probably a full year away, by which time the economic conditions for the industry should be much clearer.

“If the issue were coming up today, I’d say the amount of subsidy that would be needed would be greater to satisfy investor concerns,” said Jeffrey Dallas, a partner with the hospitality service group at the L.A. office of Ernst & Young. “But the issue is not coming up today, but rather a year from now. The question is what the market conditions will be at that time.”

No changed minds

Some councilmembers say that the economic fallout from the Sept. 11 attacks has not changed their minds about the project.

“I am no more concerned now about the hotel’s financial viability than I was a month ago,” said Councilman Nick Pacheco, who chairs the council budget committee. “Conventions that are now being canceled will be rescheduled and, with them, hotel rooms should fill up. I believe the hotel will still be able to pay for itself when it is built, which is why I believe any taxpayer funds that are put forward should be recouped from future revenues generated by the hotel.”

Even if a subsidy is approved, however, it could take longer than expected and not because of the merits of the project itself.

“This city is going to have much more pressing needs over the next year than putting up funds for a hotel,” said political consultant Richard Lichtenstein. “You’ve got economic devastation at the airport, massive police and security concerns and a shrinking budget. I’m not saying this hotel project is dead far from it. But it may simply have to be put aside for several months as city leaders try to deal with these other issues.”