The city of Long Beach will forgo millions of dollars in taxes from the future Hard Rock Hotel in Downtown thanks to a deal with the developer originally struck in 2016.
During the first nine years that the hotel is open for operations, the developer — Steinhauer Properties — will keep 80% of so-called transient occupancy tax revenue, which is a 13% tax assessed to each hotel room rented. Under the agreement, the developer is expected to receive more than $28.4 million, which would normally be split between the General Fund and the Special Advertising and Promotion Fund.
“These types of agreements are generally accepted economic development tools and practices used by cities in real estate, hotel development, business expansion and attraction efforts,” Bo Martinez, director of the city’s Economic Development Department, said in an email.
The city and Hard Rock officials announced the new hotel last month. It is expected to open in 2027.
A similar deal to forgo tax revenue was used by the city for the Hotel Maya in 2008, Martinez said, adding that these arrangements are important to make sure a project “pencils,” or makes financial sense, for the developer.
While the city is losing out on millions in revenue, Martinez explained that ensuring the project gets built has numerous upsides. First and foremost, he noted that the project will activate a property that has been vacant for nearly three decades. The construction process, followed by hotel operations, will generate jobs and also reactivate the historic Jergins Tunnel (as a speakeasy, according to Steinhauer).
The hotel also will generate more sales tax than residential or office use, according to Martinez. He said it will boost local businesses as well as the tourism and hospitality sector overall by bringing visitors to the city, which will generate “direct and indirect spending and increase tax revenue.”
“The Hard Rock Hotel will be a game changer for the city … by increasing our marketing and promotion as a destination for conventions, meetings, trade shows, and tourism,” Martinez said. “It will help us attract additional national/international conventions, which will translate to new and greater revenues to the city as whole, the convention center, and community.”
The development of a hotel at 100 E. Ocean Blvd. has been nearly a decade in the making and has faced several hurdles that caused delays, according to Mike Murchison, a lobbyist on behalf of Steinhauer Properties. Like most things, the pandemic set the project back, but a shake up with the original developer as well as finding funding and a brand also added to the timeline, Murchison said.
The city issued a request for proposals for the redevelopment of the site in July 2015, after it had sat vacant for 27 years following the demolition of the Jergins Trust Building in 1988. Ultimately, Washington-based American Life, Inc. won out with its proposal for a 427-room hotel with tens of thousands of square feet of event and meeting rooms, restaurant space and guest amenities.
In May 2016, the City Council approved a conditional purchase and sale agreement as well as a transient occupancy tax sharing agreement with American Life. Under that agreement, the city and developer would split that tax 50-50 for 20 years, which staff estimated would bring in $27 million each. After two decades, the city would keep 100% of the tax revenue.
The deal garnered pushback from the public and a lawsuit was filed. In September 2017, the court ruled in favor of the city. The delay, however, pushed up expected development costs and a new tax sharing deal was approved by the council in December 2017.
Under the new agreement, the city agreed to an 80-20 tax split for nine years, allowing American Life to cover its economic gap more quickly. Over the nine-year period, American life was expected to receive $27 million, while the city brought in $7 million.
When Gregory Steinhauer split from American Life and longtime business partner Henry Liebman early last year, his new company, Steinhauer Properties, took the Long Beach hotel project with it — including the now seven-year-old tax-sharing deal.
The deal remains an 80-20 split for nine years; however, due to current economic conditions, Steinhaur is expected to receive over $28.4 million in that time. If the project comes in under budget, the amount will be reduced according to the fully executed agreement dated Nov. 3. If project costs rise, however, the agreement amount will remain the same.
Steinhauer along with city leaders officially announced the Hard Rock brand on Nov. 13. The 31-story glass tower will include 429 rooms, 50,000 square feet of dining and meeting space, an outdoor pool, a three-story atrium and a rooftop bar and lounge, which the firm claims will be the highest on the West Coast.
The historic Jergins Tunnel, which has been closed to the public since 1967, is expected to become a speakeasy as part of the project, Mayor Rex Richardson said during the announcement event.
Late last month, Stienhaur secured $8.7 million in early phase financing to cover the land acquisition from the city through commercial real estate financing firm Gantry.