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City Mgm't Recommendation To Give Up Half Of Hotel Room Tax Revenue From New Downtown Hotel (SE Corner Ocean/Pine) For 20 Yrs Is Based In Large Part On Figures/Assumptions From Consultant Hired By Buyer/Developer; Review By City's Real Estate Economic Consultant And Independent Appraisal Of Land Value Not Attached


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(May 17, 2016, 4:45 a.m.) -- City staff's recommendation that the City Council approve (May 17) giving up half of LB's hotel room tax ("transient occupancy tax" or "TOT") for 20 years to "incentivize" a proposed downtown hotel is based in large part on figures/assumptions in a report prepared by a consultant hired by the buyer/developer that seeks the City action.

City staff's agendized materials don't attach the buyer/developer-hired consultant report or an analysis of its figures/assumptions by the City's real estate economic consultant or an independent appraisal of the land value at the key downtown location of the SE corner of Pine Ave./Ocean Blvd.

[Scroll down for further.]


City staff's agendizing memo, signed by Mike Conway, City Hall's Director Economic and Property Development and by Amy Bodek, Director of Development Services, says the City's real estate economic consultant, Keyser Marston Associates, Inc. (KMA), is [present tense] conducting an analysis of the financial framework of the Project to determine if it supports the analysis presented in the Report and confirm if, up to what extent, an economic gap exists [to justify the hotel room tax giveaway/sharing] but doesn't attach the results of City consultant's analysis. The basis for some figures used by the buyer/developer-hired consultant in seeking the hotel tax transaction -- including a 9% discount rate to present value for ten year cash flows -- aren't independently analyzed in the agendized materials but appear to be accepted by city staff.

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City staff states in pertinent part [emphasis added by LBREPORT.com].

[Conway/Bodek memo text] The hotel brand is an important element of the Project. Pinnacle Advisory Group, a hospitality consulting firm, contracted by the Buyer/Developer, prepared a Hotel Market Demand and Cash Flow Projects Summary Report (Report) that determines the economic gap between the cost to construct the Project (but assuming 350 hotel rooms) and the Project's imputed market value upon stabilized operations. [emphasis added]

The Report identified five hotels in Downtown Long Beach, which total 1,907 hotel rooms that are likely to be 100 percent competitive with the Project and four hotels in the greater Long Beach area, which total 727 hotel rooms that are likely to be 50 percent competitive with the Project. These nine hotels are aggregated and weighted to create a competitive supply of 828,700 available rooms per year.

In order to estimate the value of the Project, net operating income estimates and industry standard expenses were analyzed. The Net Operating Income for the Project is estimated at $4.086 million in 2019 (18.3 percent profit margin) growing to $8.367 million in 2023 (27.1 percent profit margin). Assuming a sale of the Project after the end of year ten (at a 6.5 percent exit capitalization rate), discounting the ten-year annual cash flows to present value at a 9 percent discount rate, the estimated value of the Project today is $117.5 million, or about $337,000 per room (for 350 hotel rooms). Project costs in the Report are estimated to be $165 million (for 350 hotel rooms). This cost, when compared to the estimated present value for the future Project, reflects an economic gap of approximately $47 million.

The City's real estate economic consultant, Keyser Marston Associates, Inc. (KMA), is conducting an analysis of the financial framework of the Project to determine if it supports the analysis presented in the Report and confirm if, up to what extent, an economic gap exists. [emphasis added]

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As for the purchase price for the prime-located property, city staff doesn't attach (or indicate) an independent appraisal of its value. City staff's agendizing memo states:

The Purchase Price proposed for the property is $7 million, or $197 per square foot (not including Victory Park). The purchase price is based on residual land value and required return on costs. This price may fluctuate if off-Subject Property improvement costs associated with the Jergins Tunnel, Victory Park enhancements or the Seaside Way pedestrian bridge exceed the amount budgeted in the Buyer/Developer's pro-forma analysis.

City staff's agendizing memo states's that without the hotel room tax "sharing" agreement, the project would not proceed. (To view the full agendized item, click here.)

The hotel room tax "sharing" proposal comes as LB Mayor Garcia, the City Council (without dissent) and city staff say the City needs more revenue to provide basic core services as it seeks public approval of a June 2016 ballot measure ("Measure A") that would raise LB's sales tax to 10% (currently 9% in Signal Hill/Lakewood and 8% in most OC cities.)

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As previously reported by LBREPORT.com, the Council voted on April 5, 2016 (7-0, Lowenthal and Austin absent) to receive and file a city staff report indicating that staff planned to study development of a "Transient Occupancy Tax Incentive Program" that would kick-back ("share") a portion of LB's hotel room tax as an "incentive" to attract new hotels. (City management described the program as applying the principles of LB City Hall's "Retail Sales Tax Incentive Program" (begun in 1992) under which the City kicks back (City Hall says it "shares") part of LB's sales tax as a [memo text] "business retention or attraction tool." LB has five such sales tax kick-back agreements currently in effect (at least three of which are with automobile dealerships. [LBREPORT.com has editorially likened these programs to corporate welfare.]

The Jergins Trust building [demolished despite civic attempts to save it] was acquired by the City from LB's dissolved Redevelopment Agency, which acquired the property using public money and then failed to successfully redevelop it.

City management's memo seeking Council approval committing the City to the sales tax aspect of the deal mentions future "discussion" -- short of a commitment -- to incorporate some currently unspecified type of public access to the Jergins Tunnel in the project design.

The agendizing memo also states: "Activation of the Jergins Tunnel will be discussed during the due diligence and entitlement phase of the development. Restoration and redevelopment of that portion of Victory Park, which fronts Ocean Boulevard, is also an integral part of the proposal."

For detailed discussion -- including LBREPORT.com "Amnesia File" coverage -- of the Jergins Tunnel aspect of this story, see separate LBREPORT.com coverage here.



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