Riverside officials are hammering out a deal to give a $20 million loan to a developer who plans a 125-room hotel near the reopened Fox theater.

 

The city sees the hotel as a key piece of downtown revitalization plans that include expanding the convention center. Officials say right now, the city is the only available creditor for the project and that they've included several safeguards to protect its investment.

 

The City Council is expected to vote on the deal in February. If it's approved, the city would sell $20 million in tax-exempt bonds that are available under a federal stimulus bill and lend the money to developer Siavash Barmand's MetroPacific Properties.

 

Barmand would build a 125-room Hyatt Place, which he described as an "upper class, select service hotel," at Fifth and Market streets. Such hotels typically offer guests limited services and don't include a restaurant or banquet rooms.

 

The new Hyatt is part of the larger Fox Plaza, a development that has been in the works for four years but was slowed by the recession. Barmand said he plans to scale back the remainder of the project, which was to include more than 500 residential units and up to 76,000 square feet of restaurant and retail space.

 

"The city believes strongly that we need a new hotel as part of this entire program to develop interest in the downtown area," said Paul Sundeen, the city's chief finance officer.

 

"The hotel won't be opened until 2012 and everybody believes at that point in time the economy will have recovered, and we think that the hotel will do well."

 

While much can happen in two years, right now the hotel industry is in "the worst downturn since the Great Depression in terms of falling room revenues," said Alan Reay, president of Atlas Hospitality Group, an Irvine-based consultant.

 

New hotel projects have closed down mid-construction, and some hotel owners are finding themselves with the same problem as homeowners, owing more than their properties are worth, Reay said.

 

"If a hotel makes sense, you've got private investors that are willing to do it," he said.

 

But Sundeen said the deal would be structured to protect the city even if the developer were to default.

 

The tax-exempt bonds would carry a lower interest rate than a private loan, and two separate cushions of reserves would be created that together would cover two years of debt service if the developer couldn't pay, Sundeen said.

Barmand would need to pay off the loan at the end of seven years, but if he couldn't, the city would have 30 years to repay the bonds.

 

And if the city doesn't get paid, Sundeen said, it would foreclose on the property and own the hotel.

 

The deal would be structured as a loan from the general fund but it would go through the city's redevelopment agency, which could repay the general fund if necessary, he said.

 

Sundeen said he's only heard of one other city using this new bond financing for a project.

 

Reay said although the market looks bad now, Riverside's hotel project is a gamble that could pay off. The hotel can be built more cheaply now than it could have a few years ago, he said.

 

"As long as the city is able to provide lower-priced financing and they're not themselves on the hook for money to get paid back, then it's probably not a bad idea," he said.