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Dec. 20: Council Is Asked To Give Away Half of LB's Hotel Room Tax For Up To 20 Yrs. To Developer Proposing Boutique Hotel Inside Ocean Center Bldg. (SW Corner Ocean/Pine); Proposed LB taxpayers' Subsidy = $12.4 Million
In May 2016, Council approved 8-0 50% hotel room tax giveaway for a new hotel/mixed use building across Pine Ave. (former Jergins Trust Bldg. site); LB taxpayers' subsidy = $27 Million


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UPDATE: (Dec. 20, 2016, 9:50 p.m.) -- As seen LIVE: at the opening of the Dec. 20 Council meeting, Mayor Robert Garcia announced that this item (described below) was withdrawn from Dec. 20 agenda so staff can do additional work on it.
(Dec. 18, 2016, 11:50 a.m.) -- An item placed on the City Council's Dec. 20 asks LB City Councilmembers to approve giving away (City Hall calls it "sharing") half of LB's hotel room tax ("transient occupancy tax") for up to the next twenty years, an estimated roughly $12.4 million sum, for a developer/investor group that proposes to create a "boutique" hotel inside the historic Ocean Center Bldg. at the SW corner of Ocean Blvd. at Pine Ave.

The agendized action is a formal hearing item, required under state law since Jan. 1, 2014 for local "economic development subsidies" of this type (details below.)

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In its agendizing memo, city management describes the proposed transaction as a transient occupancy tax "sharing" agreement that would effectively give up an estimated $12.4 million in hotel room tax revenue over up to twenty years. City management says the subsidy will bridge what it describes as a "feasibility gap" between the assumed development costs and 10.5% return on assumed development costs, figures proffered by a City Hall-paid consultant.

The agendizing memo indicates City Hall's "real estate economic consultant," Kayser Marston Associates (KMA), reviewed the proposal's financial framework based on the Developer's pro forma, in part citing information prepared by a "valuation and advisory services group" contracted by one of the developer's general partners. The agendizing memo (signed by Kathryn McDermott, the City's Interim Director of Economic and Property Development, co-signed as approved by City Manager Pat West) offers the reasoning below in seeking Council approval for the hotel room tax giveaway...and asserts that "absent the City's participation in covering the majority of the feasibility gap identified by KMA through TOT sharing, the Proposed Project would not proceed."

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[City management agendizing memo text] KMA estimates the Proposed Project return based on the anticipated development costs and the Proposed Project's operating parameters. This analysis compares the level of investment supported by the Proposed Project's NOI [net operating income] to its total development costs. Typical hotel returns in Southern California range from 8.5 percent to 10.5 percent on costs. Given the location, operator, proposed quality and the fact that this is a renovation project, KMA assumed a 10.5 percent return on costs for the Proposed Project. Specifically, the high return on cost assumption reflects the complexity and risk associated with the renovation of a historic building.
  • Assuming the development costs are $40.7 million and the total available investment for the Project is $34.6 million, there is a feasibility gap of $6.1 million.

  • Assuming a 10.5 percent return on costs and $5.4 million of Historic Tax Credits, the total warranted investment for the Proposed Project is $34.6 million.

As a result, the Developer is seeking to share the TOT generated by the Proposed Project. The Developer seeks 50 percent of the TOT actually received by the City (not including the 3 percent TOT generated under the Long Beach Tourism Business Improvement Area) for a period not to exceed 20 years. The percentage and duration of the TOT subsidy are the same as granted to the proposed American Life hotel project at 100 East Ocean Boulevard.

The total TOT to be received by the City during the first year of the Proposed Project's operation is estimated to be $712,100. Over the 20-year term of the TOT subsidy, it is estimated the Developer and the City would each receive approximately $12.4 million. KMA discounted the potential TOT subsidy at 8 percent and determined the present value of the subsidy is $5.6 million, which is less than the feasibility gap of $6.1 million.

Although a feasibility gap will exist after the TOT subsidy based on the analysis, the Developer has agreed it will never pursue any additional subsidy from the City and has agreed to incorporate this condition in the TOT Sharing Agreement.

Absent the City's participation in covering the majority of the feasibility gap identified by KMA through TOT sharing, the Proposed Project would not proceed. Staff requests City Council's authority to enter into a TOT Sharing Agreement for up to 50 percent of the TOT generated by the Proposed Project and actually received by the City, for a period not to exceed 20 years. After the 20-year term expires, the City would receive 100 percent of the TOT generated by the Proposed Project, not including the portion collected under the Long Beach Tourism Business Improvement Area.

FISCAL IMPACT

If the City Council approves a TOT Sharing Agreement, upon hotel occupancy up to 50 percent of the TOT received by the City, not including the TOT associated with the Long Beach Tourism Business Improvement Area, will be rebated back to the Developer and at least 50 percent will be retained by the City. This rebate is anticipated to be approximately $12.4 million during the term of the Agreement, which shall be not more than 20 years, with a similar amount being retained by the City.

The approval of this action will provide continued support to our local economy by creating or facilitating the creation of approximately 317 direct, indirect and induced construction jobs and 111 permanent jobs.

SUGGESTED ACTION:

Approve recommendation.

Respectfully submitted,

Kathryn McDermott
Interim Director of Economic and Property Development

Approved:

Patrick H. West
City Manager

CA Government Code Section 53083 (effective Jan. 1, 2014) requires that before a local government entity approves an economic development subsidy (defined as "any expenditure of public funds or loss of revenue to a local agency" of over $100,000 "for the purpose of stimulating economic development within the jurisdiction of a local agency, including, but not limited to, bonds, grants, loans, loan guarantees, enterprise zone or empowerment zone incentives, fee waivers, land price subsidies, matching funds, tax abatements, tax exemptions, and tax credits"), the local government entity must make a number of informational statements available in written form to the public and through its Internet Web site, if applicable.

The City of LB maintains a website page listing "economic development subsidies" (currently for seven other entities) which can be found at this link. Regarding the Ocean Center Building proposal, the City's economic development subsidy statement at this link recites in pertinent part:

The Developer is with an entity to be formed, comprised of the entities below, who propose to redevelop privately owned property at 110 East Ocean Boulevard for development as a hotel and benefit from the economic development subsidy:

The single purpose entity that will be the beneficiary of the subsidy will be comprised of the following:

  • To be formed LLC principally controlled by ESI Ventures, Inc., 7801 Hayvenhurst Avenue, Van Nuys, CA 91406
  • To be formed LLC comprised of a joint venture of the following:
    • Lighthouse Investments, LLC – 1180 S. Beverly Drive, Suite 508, Los Angeles, CA 90035
    • Firth Howard, LLC – 944 Pacific Avenue, Long Beach, CA 90813
    • David Clement – 235 Coronado Avenue, Long Beach, CA 90803
    • To be formed LLC controlled by Torey Carrick - 2883 East Spring Street, Suite 100, Long Beach, CA 90806
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An internet check (Dec. 18, 2016) indicates:

  • Co-investor Firth Howard LCC lists the 110 E. Ocean Blvd. project on its website at this link which states in pertinent part, "Firth and Howard found an incredible opportunity to acquire, renovate, and reposition an irreplaceable historic building at a low-cost basis in an established upscale lodging submarket...The hotel is fully supported by City Mayor and Planning and has a world-class hotelier as operator and co-investor."

  • Co-investor David Clement (3rd dist. resident) is a Mayor-chosen, Council-approved appointee (July 15, 2016) to City Hall's Citizen Police Complaint Commission.

  • Co-investor Torey Carrick is listed as Vice President - Sales and Expansion Director at the Anderson Real Estate Group (company website here)

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In a section titled "statement of the public purposes for the economic development subsidy," the economic development subsidy document states:

Hotels provide an important service to cities by providing facilities for tourists and conventioneers to stay, providing direct benefits to the City, its nearby retail establishments, surrounding tourist attractions, and Convention Center activities. These direct benefits include increased revenues from property, sales, parking, business license, utility and hotel taxes and enhanced economic benefits for the supporting food and beverage establishments. While the General Fund revenue picture has improved, long-term revenues are not expected to be sufficient to maintain current service levels. Pursuit of opportunities, such as this hotel development, which generate new General Fund revenues like TOT reflect the City’s holistic approach to economic development.

This hotel development is located in a prominent location in Downtown Long Beach. It has been vacant for several years. The Development Project will be catalytic in activating this prominent landmark in Downtown Long Beach. The building has been designated a City Historic Landmark.

Additionally, the proposed development will revitalize an underutilized and long fallow vacant lot in the Downtown area. However, hotels are a very risky investment. Although Average Daily Room rates have increased in the Downtown over time, the cost to develop and construct a new hotel is often greater that its market value based on capitalized net operating income. As a result, hotel development and construction is not economically viable without some form of subsidy. The opinion that the public benefits received by the development, construction and operation of a hotel business center at this strategic location significantly outweighs the subsidy being proposed. [sic, incomplete sentence]

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On May 17, 2016, the Council approved (8-0, Gonzalez absent) a 50% hotel room tax giveaway for the developer for a new building to be constructed (hotel and other mixed uses) at the former site of the Jergins Trust Building across Pine Ave. from the Ocean Center Bldg. City staff informed the Council at that time that the hotel room tax giveaway (50%) for that project was expected to amount to roughly $27 million over twenty years. The Council-approved transaction also included sale of the prime located property as city "surplus" (acquired from LB's dissolved Redevelopment Agency) for $7 million dollars.

In its urging Council approval of the May 2016 transaction, city management's agendizing memo (signed by City Hall's now-retired Director of Economic and Property Development, Mike Conway, and the City's Director of Development Services, Amy Bodek) stated: "For comparison purposes, the Buyer/Developer's project across the street from LA Live in downtown Los Angeles includes a rebate of 100 percent of the TOT received by the City of Los Angeles for a period of 25 years. Staff believes that the proposed TOT sharing agreement for this Project is mutually beneficial and an essential requirement for development of the Project." (Details of the May 17, 2016 Council approved transaction here.)

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