City's New Hotel Lease Paves Way for Union

By Jorge Casuso

The pro labor City Council Tuesday night approved a new $27 million lease agreement for the City-owned Pacific Shore Hotel that calls for the new management to remain neutral in any unionizing drive.

The unusual clause -- which according to sources close to the negotiations delayed closure of the deal for more than a month -- will likely make Pacific Shore the city's second unionized hotel. It also paves the way for a $12 million to $15 million facelift that will turn the 164-room economy lodgings on the corner of Pico Boulevard and Ocean Avenue into a "quality class" hotel by 2003.

Union leaders lauded the agreement, saying it shows that a card-check election like the one they are pushing for at the Loews Santa Monica Beach Hotel is a viable alternative to the National Labor Relations Board elections Loews management is insisting on.

"We think it's great," said Kurt Petersen, the lead organizer for the local Hotel Employees and Restaurant Employees Union. "The workers are super excited. They're ecstatic. This completely undermines Loews' credibility."

Representatives of Elkor Realty Corporation, the new operators of the hotel, also praised the agreement, saying it will guarantee labor peace and the continued flow of revenues to the City, which collects both Transient Occupancy Taxes and rent based on a percentage of the room revenues.

"The council expressed some concern for the welfare of the employees and want to continue the flow of revenues to the City," said Howard Robinson, a former city employee who served as Elkor's consultant. "They didn't want labor disputes to potentially derail their revenues."

But Councilman Robert Holbrook, who opposed the lease agreement, said the council's pro-union stance would cost the city revenues, since the lease discounts the amount of rent paid by the hotel.

"I believe we discounted the rent so they could unionize," Holbrook said. "That's the bottom line. It's to cover the cost of the labor contract. That's obvious to me."

Holbrook said that the bitter union battle at the Loews Hotel, which has been waged for four months, has had little or no effect on business.

"What's happening at the Loews hasn't disrupted their business," Holbrook said. "We've had this hotel for 35 years and they've had no labor problems."

As part of the agreement, the new operators received an extension on the lease from the current 48 years to 65 years. The new management also will receive a 4 percent reduction in the initial percentage of room rents collected by the City - from 8.5 percent to 4.375 percent for the first 15 years. The percentage will then increase to 6.375 percent.
Percentage rents for food, beverage and miscellaneous sales would be 5% of gross receipts

"Total income to the City would increase due to increased room rates and food and beverage sales, following completion of new capital investment and stabilization of rates and occupancy levels," according to City staff.

In order to reap the benefits of the lease amendments, Elkor must spend between $12 million and $15 million on renovations over the first three years.

The improvements include removing, relocating and replacing the elevator towers; removing and replacing interior and exterior windows and doors, window frames and glazing; turning the cafe into a quality restaurant; removing and replacing the entry lobby and interior lighting, and replacing exterior signage and landscaping. There also will be major improvements to the pool, spa, and guest deck.

After an initial reduction in minimum rent from $328,773 to $250,000 during the first year, the renovations will eventually result in higher room rates, increasing the City's rental income and occupancy taxes. Minimum rent will rise to $350,000 during the second year, followed by stepped increases to $400,000 in the third year and $460,000 in the fourth.

After renovations are completed, the total rental income is expected to reach at least $522,000 and possibly $597,000 per year, according to staff. The annual Transient Occupancy Tax revenue to the City would increase from approximately $617,000 to at least $1.2 million.

In addition, the Possessory Interest value base (in-lieu property tax) would increase from $22,150,000 to an estimated $38,850,000, with benefit accruing to the Redevelopment Agency, according to staff.

The previous leaseholders -- Sunstone Hotels, LLC -- acquired the 35-year-old hotel on 1.75 acres of City property on September 4, 1998, for $22,150,000.