$2-BILLION DOWNTOWN OVERHAUL IN THE RED

The ambitious effort to remake downtown’s Grand Avenue into a $2-billion cultural and retail hub designed by Frank Gehry is over budget and behind schedule, with the developers saying the project “is not economically feasible” without tax breaks from the city, according to documents obtained Thursday.

The developers said they are negotiating with the city for temporary rebates of more than $40 million on hotel and parking lot taxes.

They said such concessions are needed to make the project work financially. The complex is to include eight high-rises and retail pavilions around Gehry’s landmark Walt Disney Concert Hall.

Phase One -- which includes the architect’s dramatic glass-curtained 47-story tower, a 24-story tower and shopping areas -- was supposed to break ground as early as next month. But officials now say it will be delayed at least until October and possibly beyond.

The developer’s request for the tax rebates was criticized by some community activists, who have already questioned whether the city and county governments are getting a good deal under the complex financing plan.

The request is the latest of several tie-ups involving the plan’s fine print that have caused delays and left some Grand Avenue supporters concerned.

The situation mirrors a slowdown in downtown Los Angeles’ once red-hot construction market. A Times review of approximately 100 residential and commercial developments downtown shows that about 20% are behind schedule. Though parts of the city center are abuzz with heavy construction, some real estate specialists say a slowdown is apparent.

“It has gotten to the point where with ... huge construction costs combined with huge land costs and a flat sell-out rate, it just doesn’t pencil out anymore,” said Mark Tarczynski, a senior vice president at CB Richard Ellis.

In recent months, relatively few new projects have been announced, Tarczynski added. In addition, he said, “you’re seeing a lot of projects getting theoretically put on hold. Most do not want to admit that their projects are put on hold. You don’t see anything happening.”

Some experts are skeptical about several huge projects announced with much fanfare, including a 50-story condo development near the Civic Center and twin residential towers near the Harbor Freeway.

Gehry and officials at Related Cos. unveiled the first plans for the Grand Avenue project in April. His design calls for the two glass towers situated around shops, outdoor dining areas and a boutique hotel on the block bounded by 1st, 2nd, and Olive streets and Grand Avenue. The project is also to include 400 condominiums, 100 affordable housing units, a health club and a spa.

The complexity of the design, coupled with site issues and increased construction costs, have driven up the price tag. Previous estimates had put the cost of the project, including a 16-acre park that would run from the Music Center to City Hall, at $1.8 billion. Now, according to the documents, the three-phase project will cost $2.05 billion.

Bill Witte, president of Related California, called the delays and cost increase “nothing out of the ordinary for a project this size.... It’s just complicated. I really know of no other way to say it. I will only say that for a project of this magnitude, if you don’t have hiccups like this, it would be highly unusual.”

Related announced in September that Gehry’s design would push up the cost of Phase One by 40%. But the company laid out a broader outline Thursday of why the overall costs are rising and presented its case for why the tax rebates are necessary.

Among other things, Witte said, the cost of building the first phase’s 100 affordable housing units (20% of the total units in that phase) is much higher than the developers previously thought.

The delays and cost fluctuations mean that Related will not pre-sell condominiums in the first phase until at least mid-2008.

“I’d rather that it be then than today,” he said. “Clearly there’s a slowdown, not just in downtown.... People are on the sidelines waiting to see where the market is going to go.”

Financing for the project is complicated because the city and county own the land on which the first two phases are to be built.

Related is essentially leasing the parcels for 99 years. Last year, the company paid the city and county $50 million, which is the projected rent the developer owes on Phase One and part of Phase Two for that period. The city and county plan to pour the $50 million back into the development of the park and street improvements.

Civic leaders initially hailed the deal, saying it would allow a major new development to rise without direct taxpayer subsides. But a consultant who analyzed the agreement for the county Board of Supervisors concluded that the arrangement puts the county at risk if the project goes over budget or if the downtown real estate market cools.

Witte said Related officials have told city and county leaders that the hotel in Phase One “is completely unfeasible” without a 20-year rebate of the city’s hotel tax, which is a little more than 14%.

Related also says a temporary rebate on the city’s 10% parking tax is necessary because the company has agreed with public officials’ request to keep parking fees affordable.

In order for the deal to go through, final documents -- including lease agreements and a disposition and development agreement -- must be approved by a phalanx of government bodies.

Appraisal cited as pivotal

Sources involved in the planning process said the fate of the final deal hangs in large part on how the properties are appraised. If the county’s land is assessed at a much higher value than the city’s, that could necessitate renegotiating how some of the rent from the deal is shared by the two governments.

Last week, the final environmental impact report on the project found that it would increase traffic downtown and require more police and other public services. Details of the study were first reported in the Daily News.

The tax rebate request has buoyed critics who question the city and county’s financing help for Grand Avenue.

“I want to ask, ‘Do the people of South-Central, East L.A. and the Valley have to subsidize yuppie housing downtown?’ ” said Joel Kotkin, a Southland author and commentator on urban issues. “Where is our City Council and our progressive mayor on that issue?”

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., said the continuing negotiations over tax givebacks point to the problems that occur when governments decide to help finance private developments.

“I have respect for developers,” he said. “They are good businessmen. But they are businessmen interested in the bottom line, and they will negotiate the best possible deal for themselves. Often what is the best possible deal for them is not the best deal for the taxpaying public.”

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Times staff writer Amanda Covarrubias contributed to this report.