California Coastal Commission Fines Hotel Developer Record $15M For ‘Bait And Switch’

Joseph Pimentel, Bisnow Los Angeles    

A Santa Monica hotel developer has agreed to pay a a record $15.58M fine for operating a luxury boutique hotel illegally without a coastal development permit in what some officials called a “bait and switch.” 

An attorney for Sunshine Enterprises, which operates the 164-unit Shore Hotel in Santa Monica, told the California Coastal Commission Wednesday that his clients have accepted the punishment.

“The owners now fully understand how the commissioners and staff have viewed this violation,” attorney Sherman Stacey said. “We have agreed to accept the penalty.”

The hefty fine — the largest ever in the 40-year history of the commission — may not be enough. A key part of the commission’s role under the Coastal Act is to protect public access and preserve affordable lodging along the California coast, a spokeswoman for the Coastal Commission said.

Several of the commissioners have asked staff to look into having the hotel owners, the Farzam family, convert some of the hotel’s luxury rooms into affordable accommodations. Such a move would be in lieu of a $9.5M mitigation fee paid on top of the fine due to the loss of affordable lodging and if the hotel owner wants a permit to legally operate.

“I don’t want their money — I want their hotel rooms,” Commissioner Aaron Peskin said during the meeting. “Why can’t they just convert 87 of the 164 rooms to [an affordable] price point?”

The Shore Hotel is a 164-unit luxury boutique hotel at 1515 Ocean Ave., a few blocks away from Santa Monica beach, the pier and Third Street Promenade. 

The developers had demolished and replaced two motels on the site and originally received approvals from the commission in 2009 to build a low- to moderately priced hotel with rooms costing around $160/night.

The developers let the permit expire and built a luxury hotel that opened in 2011. Rates for the new hotel range from $300 to $800 a night, according to Coastal Commission staff.

After the city of Santa Monica fined Sunshine $1.2M for failing to provide affordable accommodations under the city’s rules, the Coastal Commission sent a violation letter in 2014.

Sunshine had tried to apply for an after-the-fact permit in 2015, only to be denied by the commission. The developers filed a lawsuit challenging the denial but a Los Angeles Superior Court judge agreed with the Coastal Commission’s decision, calling Sunshine’s actions a classic case of “bait and switch.”

“Petitioner conducted a bait and switch, obtaining a permit for a moderately priced Travelodge and then constructing a boutique luxury hotel,” the judge ruled, according to the staff report.

Stacey, the lawyer representing Sunshine, told the commissioners the hotel owners are willing pay the $9.5M mitigation fee to make up for the loss of affordable lodging in the area.

But several commissioners said paying the fee was not enough of a deterrent to prevent other wealthy developers from coming in and doing the same thing.

Commissioner Mark Vargas said Sunshine’s action is a perfect example of how a wealthy developer could game the system.

If it were up to him, Vargas said, “I’d knock the thing down.”

“This was not oversight. This was willful,” Commissioner Steve Padilla said.

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