UCLA Committee on Planning & Budget on Revised UCLA Hotel

UCLA Academic Senate, Council on Planning and Budget March 22, 2012 Professor Andy Leuchter Chair, UCLA Academic Senate Re:

CPB Statement on Luskin Conference and Guest Center Proposal

Dear Professor Leuchter, Background and Summary Academic Senate Chair Andrew Leuchter asked the Council on Planning and Budget (CPB) to develop the Senate position on the revised proposal to build and operate the Luskin Conference and Guest Center on the UCLA campus. In preparation for this task, CPB members read three new documents provided by the Chancellor’s Office: a draft Project Planning Guide (dated January 2011….apparently a typo), a draft Business Case Analysis (January 2012), and a draft Regents Action Item (transmission dated 3-5-2012).

We also reviewed news stories and university press releases, and did a modest amount of web searching for current hotel rates and other information. On March 12, Vice Chancellors Steve Olsen and Jack Powazek spent an hour with CPB, answering our questions and providing additional information.

Last March CPB reviewed and recommended against plans to build a residential conference center on the site of the current Faculty Center. We were worried that only the most affluent professional schools could afford the high guest room and conference facility tariffs. We did not see evidence that there was sufficient effective demand for such an expensive facility. We also worried that it would drive another wedge between those schools and other academic programs on campus. Our concern was not so much equity in itself, but rather the corrosive effect on academic integration of building a facility that would be out of reach for so many academic units, especially if the current Faculty Center were torn down in the process. We also noted neighborhood resistance and broader public relations issues. Subsequently the Chancellor’s office withdrew that proposal; we understand that the current proposal is in part an answer to the concerns we raised last year.

The revised plan is to demolish Parking Structure 6 and construct a 242,000 gross square feet residential conference facility, with 250 guest rooms, 25,000 square feet of meeting space, a dining room/bar, a 125 car parking garage, and a campus catering kitchen that would be funded and operated separately. This central location just south of the West Alumni Center is within easy walking distance of Ackerman Union, the new Engineering complex, Pauley Pavilion, Reagan Hospital, and several large parking structures. In contrast to last year’s plan, construction will be in the middle of campus instead of adjacent to affluent and influential neighbors. It is an easier build, somewhat reduced in size and will have somewhat less expensive guest rooms and facilities. Despite displacing a parking structure, this new location apparently requires fewer dedicated parking spaces due to the abundance of available parking nearby. The Faculty Center is not directly affected; it remains to be seen if the Luskin Center would take business away from the Faculty Center.

It s the consensus view of the Council on Planning and Budget that the revised plans for the Luskin Conference and Guest Center respond well enough to our objections to the previous proposal that we are CPB Statement: Luskin Conference and Guest Center Proposal, Page 1 of 6

no longer opposed to the project. The documentation and additional evidence provided by Vice Chancellors Olsen and Powazek convince us that it could be a valuable addition to the campus physical resources that would benefit a wide spectrum of users. The project has shed the negatives of the previous site and the few potential issues associated with the new site (in particular the loss of parking) are convincingly addressed in the proposal. The financing model is sound. We do continue to be concerned that the revenue generated may not be sufficient to meet operating and debt service costs, but we are much less concerned than we were last year. The Luskin Center will not make UCLA a greater research university than it already is…no building can do that. And, no one can guarantee that it will be financially successful. But it could improve the quality of life for many academic units, and enhance UCLA’s visibility across academia nationally and internationally.

The Case for a Residential Conference Center at UCLA In terms of enrollment, employees and research UCLA is the largest campus in the UC system, nearly the equivalent of a Berkeley general campus and a San Francisco Health Science campus combined. The combination of Health Sciences and professional schools is particularly important because they would provide the lion’s share of paying customers through continuing education programs, academic conferences and public outreach. We understand that University Extension also savors the prospect of a residential conference center on campus, which would facilitate the development of a wide range of programs with academic units across campus. Smaller and less affluent departments could also benefit from a large combined residential and conference facility; the faculties of even small departments often belong to multiple large professional associations that could be attracted to these new and more ample facilities.

UCLA has never been well served with local hotels and certainly the situation today is inadequate. The combination of high property values, lack of buildable plots, height limitations and NIMBY neighborhood associations has impeded hotel development in and near Westwood Village. In contrast to UC Davis, which has both an array of small inns in the village and a privately operated hotel next to its conference center, or even Berkeley with its Hotel Durant, small inns and multiple campus guest houses, UCLA is sorely lacking in affordable hotel rooms nearby. Indeed, if by “nearby” we mean within easy walking distance, then UCLA has only the expensive ($350 plus) W Hotel, the modest Hilgard House and basic Royal Palace and Claremont. Few department chairs would consider putting up academic guests in the last two; the Hilgard House is often full and the W is out of reach for most academic units. All other adjacent hotels require car or van transport to get to campus, and one of the closest may soon go out of business. Plans do exist to build an expensive ($400/night) high-rise boutique hotel on a sliver of land at Wilshire and Gayley. In the unlikely event that it is ever built, it would be no more appropriate than the W. We understand that the so-called “innkeepers of Westwood” oppose any residential conference center plans on campus. We find it a stretch to consider the hotels overlooking the 405 Freeway to be in Westwood, or the corporate owners of the Starwood W to be local innkeepers.

Having a residential conference center on campus could be useful to a wide range of academic units, especially if reduced prices are available to poorer departments. Currently, rooms appropriate for meetings and small conferences are spread across campus, and often inconveniently located far from the centers of academic life. A campus residential facility would be far preferable to our current practice and necessity of schlepping visitors to and fro from hotels several miles away. The convenience of a campus residential conference facility could even outweigh any price disadvantage; if the Luskin Center rooms are priced similarly or even below rooms west of the 405 Freeway, it will be no contest.

The Case Against a Residential Conference Center at UCLA Most research universities, good and great, public and private, make do with a patchwork of campus guesthouses and small private hotels. The institutions with residential conference centers referred to in the Regents Item – UT Austin, Emory, and Notre Dame – are decent enough places, but hardly on UCLA’s aspirational comparison list. Many academics tolerate, or even relish having to use facilities that do not meet commercial hotel standards. Rooms like those offered by, for example, the University of Chicago Quadrangle Club and Berkeley Faculty Clubs seem to satisfy a stoic impulse. Many UCLA departments CPB Statement: Luskin Conference and Guest Center Proposal, Page 2 of 6

happily put their visitors up in the campus Guest House or Hilgard House. The Guest House and the Tiverton combined (which is primarily for hospital visitors) have 161 affordable rooms, and five local or adjacent hotels (Hotel Angeleno, The Luxe, The Palomar, Hilgard House, Royal Palace) offer Expedia rates of $170 to $300 (including room tax); several have reduced rate deals for UCLA departments. Of the five, only the Hilgard House and the Royal Palace are within easy walking distance of campus; but the others offer van service, and UCLA department chairs are accustomed to shuttling back and forth between these hotels and campus. As for conference facilities, many small and medium-sized programs can be carried out in the Faculty Center, Covel, or elsewhere, given sufficient lead-time. Larger events do present logistic challenges, and very large events are just not possible; but we are no worse off than many other fine research universities.

In an era of optimism, growth and affluence a new top-of-the-line residential conference center might be attractive. But of course, ours is not such an era. Large building projects that rely on unsubstantiated future income streams put campus finances at risk. And even if they do turn out to be financially successful, they can subject the University to damaging public criticism. In the last five years in particular, the University of California has been targeted for criticism by those who decry what they see as runaway construction subsidized by sharply rising tuition and scarce state funds. Assurances from administrators that buildings like conference centers are not funded by tuition or state funds fall on deaf ears. A recent (3-15-2012) San Francisco Chronicle story about the brick and mortar mania of UC Chancellors is just the latest and certainly not the last in a long line of bad publicity. Even new dormitories are subject to the accusation that they are part of a plot to force students to live on campus and pay high room and board charges.

CP B m em bers w eighed these argum ents for and against building a residential conference center and w e com e dow n in favor of both the general idea and the revised Luskin Conference and Guest Center proposal. The change of site is a crucial change from last year, financing and revenue plans are sounder and better com m unicated, and w e now believe that the facility is likely to be in dem and from a w ide range of cam pus and affiliated users.

Financing This proposal has the distinct initial advantage of the 40 million dollar gift from Meyer and Renee Luskin for construction of the Center, amounting to a 26 percent reduction in capital costs. This leaves 112 million dollars in construction costs remaining for the LCGC itself, along with 7 million from housing reserves for the campus catering kitchen that will be built at the same time but operated separately, and 3 million from campus funds (not General Funds) for reconfiguring Gateway Plaza (the area between Lot 6 and the Engineering buildings used for buses and drop-off). The current plan for financing the 112 million is somewhat complex. But, after some due diligence of our own, we conclude that the plan is sound. It divides long-term funding into an 80 million dollar portion to be financed with 35-year tax exempt bonds, at a rate to be determined by market conditions but probably well below the 6 percent rate used in the financial feasibility model (Regents’ Item, p.10). The remaining 32 million would come from the very large 4.95 percent taxable 100-year “Century Bond” that UC has recently issued (UCLA’s portion is about 400 million dollars). Both the taxable and tax-exempt portions would be amortized after initial periods of paying interest only, a common practice in university capital programs. If municipal bond yields were to rise substantially in the near future, then UCLA could opt to fund the entire 112 million dollars within the 4.95 Century Bond, though this would mean that one quarter of the Century Bond would be devoted to this one project. If the entire 112 million dollars came from the Century Bond, annual interest payments would be about 1 million dollars less than those presented in the Financial Feasibility plan. If tax-exempt bonds are used as proposed, then interest savings would probably be even greater.

The combination of the generous Luskin gift, the security of the Century Bond, and favorable current conditions for issuing tax-exempt bonds add up to a sound financing model for the Luskin Conference and Guest Center.

CPB Statement: Luskin Conference and Guest Center Proposal, Page 3 of 6

Revenues But of course even low interest payments have to be paid and financial concerns surrounding this project have centered more on unconvincing revenue expectations than on financing. Last year’s proposal contained more detail on the components of expected revenue, but CPB felt those details were somewhat bogus, because the all-important estimates of usage were not well-supported. This year’s proposal contains only summary estimates of revenue components, including an apparent 50/50 split between guest room rental on the one hand and conference facilities, food and beverage margins on the other.

Another feature of this year’s proposal is that revenue and expense projections for the LCGC are presented within the context of a “self-funded auxiliary” including the Guest House and Arrowhead Center. Because the two existing facilities have relatively high net income compared to their debt service costs, the combined figures including the Luskin Center look better than expectations for the Luskin operation alone, which is projected to barely break even after two years of initial operating losses.

If occupancy rates do not meet expectations, then losses would be even greater. On the other hand, we note that actual debt servicing costs are almost certain to be substantially less than the 6.4 million figure used in the financial analysis being presented to the Regents (because bond interest will be lower than the 6 percent rate used in the financial feasibility analysis). And presumably operating costs are at least somewhat reduced if there is less business. We understand that managing the three units together provides a cushion from possible Luskin Center losses. But the two smaller operations do not have margins large enough to absorb serious problems should they develop.

The Luskin Center revenue estimates are based on average room charges of $235/night in Year 3 (2018/9), which is real number when the headline figure of $185 in 2011is escalated 3.5% over seven years (2011 to 2018). This is only 13 percent below last year’s third-year figure of $271, which CPB and others found to be excessive. Will rooms actually cost $235 in 2018? It depends on market conditions and operating expenses at the time. Our informal surveys last year and this indicate that local commercial hotel rates have risen substantially as general economic conditions have improved over the past year, but that does not mean they will continue to do so. Lower prices mean lower income, assuming all else is constant. Debt service and operating costs would remain the same.

We think it was unfortunate that UCLA’s initial press release for this year’s proposal used the $185 figure, implying that room charges would be less than two-thirds last year’s figure. The “$185 in 2011” headline figure may not have been technically wrong, but it was confusing, if not misleading. We think all concerned would have been better served by a clearer statement of room cost expectations. The most recent iteration of campus publicity in support of the Luskin Center project (UCLA Magazine, April 2012, p. 45) states that “The projected daily room rate is below the $200 average for hotels in the surrounding area”…not exactly a step in the direction of transparency.

Like last year’s proposal, this one will stand or fall financially on the amount of usage, not on the components of revenue, or on minor variations in room rates. The financial feasibility of the Luskin Center is based on an expected guest room occupancy rate of 70 percent, somewhat below the Westwood/Westside hotel average of 77 percent. About two-thirds would be “academic group business” and the remaining third “UCLA-affiliated individual traveler(s).” No finer breakdown was provided, in the written materials or in our discussions with Vice Chancellors Olsen and Powazek. But our discussions with them did provide better insight into the varieties of expected users.

The “UCLA-affiliated individual travelers” component is the smaller of the two, but perhaps the more sensitive. Hotels that currently do business with UCLA understandably do not want to loose business, and they point to the campus exemption from the 14 percent bed tax as unfair competition. In addition, the Luskin Center needs to meet certain “public purpose” criteria to qualify for the bed tax exemption, and also to meet the standards for tax-exempt financing and the integrity of the Luskin gift. CPB was provided with excerpts from a legal opinion on allowable “university affiliates” that specifically included prospective students, parents of students, alumni, potential donors, patients, and people doing business with UCLA. Excluded were tourists or basketball fans not otherwise affiliated with the University. These are, we understand, also the rules governing the Guest House and the Tiverton. The list was rather CPB Statement: Luskin Conference and Guest Center Proposal, Page 4 of 6

broad, yet not so broad that the LCGC could operate and compete like a commercial hotel. It seemed to us to be fair, to prospective visitors and to local hotels. Most of the potential affiliated individual visitors would probably prefer to stay on campus, as their reason to be in Los Angeles is to visit UCLA. Those who value or require more economy will stay at the Royal Palace, or the Guest House if it is available.

And those who want and can pay for flash and style will opt for the W or some other upscale establishment. We think the balance is fair and that there will indeed be substantial demand from UCLAaffiliated individual travelers.

We were also encouraged by what we heard about conference and other academic visitors. For professional schools and many departments the Luskin would be the obvious choice for individual academics, a good complement to the Guest House that will continue to serve those units that prefer it.

For continuing education and large conferences, on the basis of convenience alone it would be the hands down favorite for professional schools and many if not most academic departments. AGSM is expected to be among the largest customers, primarily for their executive MBA and executive education programs.

But the Schools of Medicine, Dentistry and Law have also indicated substantial interest, for continuing education as well as conferences and a wide variety of individual travelers and small groups. Presumably the eponymous School of Public Affairs would also be a frequent user. University Extension has expressed the desire to develop programs that they could not even contemplate without a facility like the Luskin Center. Campus administrators themselves have indicated that such a facility would be ideal for their professional meetings and visits by government officials, assuming charges could be met by the applicable per diem allowances. And CPB members themselves indicated that the availability of the Luskin facilities would make it possible for UCLA to host a wide-range of professional conferences, which would not otherwise be feasible on or near campus.

One important point to remember is that the 10 million dollars from the Luskin gift set aside as an endowment for needy academic departments will substantially stimulate effective demand. The income generated from this endowment can be thought of as fifty dollar discounts on ten thousand guest room nights a year, about 16 percent of expected annual occupancy or the equivalent of 200 academic conferences with 50 visitors each per year. Would these plus the bread-and-butter continuing education programs, professional school conferences and the variety of individual travelers add up to the requisite 64,000 annual visitors? Obviously, we cannot say for certain. We would have liked to see firmer declarations of intent from deans, and we would have liked to see actual quantitative analyses of the demand from these various segments; apparently neither is available. Nevertheless, we are definitely more encouraged than last year that there is likely to be sufficient demand for the Luskin Center facilities to meet projected operating and financial costs.

Parking and Traffic The Luskin Conference and Guest Center would displace Lot 6. The permit holders would be assigned to Lots 8 and 4; the 100 or so day parkers would be accommodated in these lots as well as the adjacent lots 7 and 9. This loss of parking has understandably raised concerns. We were pleased to hear that in fact UCLA actually has a parking surplus today, and that this surplus is concentrated in these central lots; traffic onto campus is the lowest it has been in the last 20 years. Together the four lots contain about 8000 parking spaces and can easily accommodate the permit holders and day parkers who currently use Lot 6. Only 6 of the 650 permit holders are faculty, so redirecting permit holders will have little or no impact on blue faculty parking spaces. And few faculty members regularly part in lots 4, 7 and 8. Some CPB members remain leery about knocking down a parking lot, an action so contrary to our campus traditions. Others applaud the demolition of a parking lot, and hope that the campus can find ways to move further away from reliance on automobile commuting.

Part of the Luskin Center project is the renovation of the Gateway Plaza in front of the current Lot 6.

This would expand the bus-stop and drop-off area, while reducing automobile traffic at the turnaround that formerly had to compete with busses to enter Lot 6. We do not know the details of this renovation, or the implications for traffic flow into campus along Westwood Blvd, but the increase in bus access to the campus is a definite plus in our view.

CPB Statement: Luskin Conference and Guest Center Proposal, Page 5 of 6

Some CPB members are concerned that the LCGC will have only 125 parking spaces, but most do not see this as a problem, since many travelers arrive by taxi or airport van. We understand that the LCGC parking garage will be separate from the UCLA Parking Services, like the parking for the current Guest House. No Parking Reserves are being used for the construction of the Center or its parking garage.

Final Thoughts, Concerns and Suggestions The Council on Planning and Budget supports this revised proposal, but with some reservations. The Council agrees that the Luskin Conference and Guest Center could be a valuable addition to the campus, with benefits for a broad swath of the academic community. But we also recognize the risks involved.

No one can guarantee that it will be a financial success, and if demand does not meet expectations, then operating at a loss for an extended period of years would be a drain on the already precarious campus budget. These losses would be a public relations nightmare. And even if the Luskin Center is financially successful, we continue to be worried about the potential public relations damage from accusations (no matter how incorrect) that UCLA is building a luxury project on the backs of students and taxpayers. The Luskin Center has to be, and to be seen as, a valuable resource for the entire campus and for the public as well. Some specific suggestions: --We urge the Chancellor’s Office to maintain maximum transparency at all stages of this project; obfuscations like the supposed $185 guest rooms only do damage in the long run. We understand the reasons to merge the Luskin finances with the Guest House and Arrowhead Center, but we urge the Chancellor’s Office to provide regular separate public reports on Luskin Center operations. We also hope that the Chancellor’s Office will be able to provide more detail on revenue expectations and their analysis of risk to the Academic Senate and other campus bodies.

--We urge the Chancellor’s Office to maximize the usefulness of the subsidy endowment to needy campus units, providing additional funds for this purpose as possible, and offering conference planning assistance so that even small academic units can benefit from these new facilities.

--Guest room and conference facility pricing should be kept flexible and sensitive to campus educational and research goals. In addition to the departmental subsidies, this could mean special accommodation for diverse categories of visitors like government officials traveling on state and federal per diems, prospective students and notable visiting scholars. Important as financial success may be, the most important “profits” to be derived from the Luskin Center will be academic, not financial.

Regards,

David Lopez Chair, Council on Planning and Budget cc:

Linda Sarna, Vice Chair, Academic Senate Ann Karagozian, Immediate Past Chair, Academic Senate Jaime Balboa, Chief Administrative Officer, Academic Senate Linda Mohr, Assistant Chief Administrative Officer, Academic Senate Members of the Council on Planning and Budget

CPB Statement: Luskin Conference and Guest Center Proposal, Page 6 of 6