An August 14 report to city management by Kayser Martson Associates (KMA), obtained by LBREPORT.com , doesn't recite this in its narrative text and doesn't recommend against the subsidy.

However the final page of KMA's report includes a Table showing total revenue -- net hotel room tax (after the subsidy) + generated sales tax + property tax -- that the City-hired consulting firm projects the City would receive over the first ten years of its operation amounts to $6.952 million (bottom right corner, Table 4 below.) Basic math indicates that's an average of roughly $690,000 a year for LB taxpayers from the hotel project during the hotel's first ten years of operation.

Source: KMA Aug. 14 report, Table 4.

By comparison, basic math indicates the proposed $13 million "economic development subsidy" would provide the hotel operation with an average estimated subsidy of $1.44 million per year ($13 million / 9 years = $1.44 million/yr.) for the first nine years of its operation -- basically twice the amount LB taxpayers would receive from all consultant estimated revenue from net hotel room + generated sale tax + property tax during the hotel operation's first ten years.

The KMA report notes (on the same chart) that over the first 20 years will generate $33.2 million in revenue for the City from all taxes (hotel room tax + gross sales tax + property tax...but that assumes a future Council won't choose to continue the subsidy beyond the first nine years.

As first reported on Sept. 25 by LBREPORT;com, the item is scheduled for a City Council hearing/voted action on Oct 1 (agenda item #1.) The KMA report is referenced in but not attached to city staff's agendized Oct 1 hearing memo. LBREPORT.com asked the City's Economic Development Dept. to provide a copy of the KMA report and it did so. In the public interest, LBREPORT.com publishes the KMA report in full at this link.

Responding to LBREPORT.com's invitation for a response/comments, Brandon Dowling, Communications Director Pacific6 Enterprises, emailed the following statement:

At completion, the Breakers Hotel will support over 200 local jobs, will become a gateway for thousands to experience our city's continued renaissance, and will create a vibrant hub in Downtown for residents and visitors alike. We're proud of our work with the City of Long Beach to ensure this historic building is returned to its former purpose and glory and can be enjoyed by many for years to come.

[Scroll down for further.]

LBREPORT.com also asked the City's Economic Development Dept. to release a second report referenced in several places in city management's agendized hearing memo, prepared by a firm hired by developer Pacific6. The City's Economic Development Department provided the report but redacted (blacked out) all or portions of 22 pages of its 74-pages, indicating that "after checking with our City Attorney's office, due to the fact that the report was commissioned by Pacific 6, has proprietary information about their proposed hotel operation and provided to KMA for review, we cannot provide a full copy of the report and have included a "redacted" copy of the report." [LBREPORT.com hasn't asked Pacific 6 to release the full report it commissioned and provided to City Hall at this point.]

The City's agendizing states: "As a result of the high costs of development due to the adaptive re-use, the Developer has requested that the City share a portion of the future Transient Occupancy Tax (TOT) to be generated if the project is completed" [but doesn't indicate how much the Developer sought.] City management proposes "to share 80 percent of the project's TOT received by the City for a period of nine years."

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The City-hired KMA report estimates the hotel project's net operating income (stabilized in year 5 at 80% occupancy) would amount to $7.736 million. It estimates a "warranted investment" (assumed 8.0% return on costs) of $96.7 million. And it estimates development costs of $134.3 million. This produces what KMA calls a "feasibility gap" of $37.7 million.

KMA recommends that "Given the magnitude of the feasibility gap, the City and Developer may consider exploring the utilization of historic tax credits, EB-5 financing or other alternative financing vehicles." City management's memo doesn't mention these options in its Oct. 1 agendized hearing memo

The KMA report said among the "key issues" that the City "needs to consider" is "Any agreement with the Developer will need to ensure the proposed quality level of the Project is maintained throughout development. In particular, KMA would suggest including a minimum diamond rating and/or cost threshold (shell and or FF&E) in any agreement with the Developer." City management's hearing memo recommends Council approval of the subsidy if the firm invests $70.7 million in direct costs for the hotel's development including construction costs and furniture, fixtures, and equipment. If the firm doesn't invest $70.7 million, city management indicates the issue would return to the Council [a future Council] "to amend" the subsidy...leaving open in what way(s) a future Council might do so.

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KMA's analysis also "assumed the proposed Breakers Hotel and Spa will be an independent hotel affiliated with the 'Preferred Hotels and Resorts' brand" and its analysis is "predicated on a AAA 4-Diamond hotel and...specifically used Preferred Hotel and Resorts as the hotel brand/flag." Accordingly, KMA noted that any agreement with the Developer "will need to ensure the proposed quality level of the Project is maintained throughout development. In particular, KMA would suggest including a minimum diamond rating and/or cost threshold (shell and or FF&E) in any agreement with the Developer."

On this issue, city staff's agendizing memo proposes: "In event the hotel operator loses the Preferred Hotels and Resorts as the hotel brand/flag but replaces the flag with another AAA-rated Four Diamond Hotel flag, equal to, or better than, Preferred Hotels and Resorts, subject to City Manager approval, the TOTSA [transient occupancy tax sharing agreement] would remain in effect." City management's agendizing memo doesn't indicate what options/protections the City would have if a lesser owner/operator took over. [The contract text itself isn't attached to the agendized item, a practice LB Councils have routinely allowed for agenda items seeking Council approval to enter into contracts; the City discloses the contracts only after they're binding on LB taxpayers.]

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KMA's report advised city management in pertinent part: "Given the current lending environment, equity requirements and capitalization rates, typical hotel returns in Southern California range from 8.0% to 9.5% on costs. Given the location, operator and proposed quality level, KMA assumed a 8.0% return on costs for the project." It described the difference between the hotel-supported investment ($96.7 mil) and development costs ($134.3 mil) as a "feasibility gap" of roughly $37 million, calling it "significant" and adding that the developer "would be required to accept a below market rate of return even after a subsidy provided by the City."

The KMA report also indicated it believes the "public revenues generated by the project are significant" based on the following:

...The gross TOT generated by the project over 20 years is $42.6 million (present value of $19.4 million when discounted at 8.0%.)...[T]he developer would receive $13.0 million in TOT, which has a present value of $10.6 million when discounted at 8.0%.

The food and beverage department of the Hotel will generate significant sales. Based on the projected revenues, the Project will generate $3.1 million in sales tax over 20 years (present values of $1.4 million when discounted at 8.0%.)

The City will receive a share of the property tax levy on the Project. Based on similar projects in Long Beach, the City's share is estimated at 2.325% of the base levy, which results in the City receiving $546,000 in property tax revenue over 20 years (present value of $255,000 when discounted at 8.0%.) [footnote in text: The City needs to confirm its share of the property taxes.]

Assuming the revenues and subsidy described above, the City would receive $33.2 million in net revenues (after the subsidy) from the Project over 20 years ($12.3 million present value.)

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The city's real estate consultant stated that the City "needs to consider the following key issues":

• The estimated feasibility gap would suggest the Developer is willing to accept a below market return. Any City participation in the Project should require a review of the Project's financing to ensure adequate debt and equity is available for its construction and stabilization period.

• KMA utilized a relatively low return on cost to reflect the Project's coastal location, which traditionally support lower returns.

• Given the magnitude of the feasibility gap, the City and Developer may consider exploring the utilization of historic tax credits, EB-5 financing or other alternative financing vehicles.

• The proposed FF&E allowance and renovation costs for the Project reflect a very high quality level for the hotel. It should be noted, that it can be difficult for boutique hotels to receive a four diamond rating, as they often do not have some of the physical amenities (e.g. conference space, spa, porte cochere, etc.) required by the rating agencies.

• The City needs to review the proposed permits and fees to ensure there is an adequate budget.

• The Project will generate a significant amount of revenue to the City, including $42.6 million in gross Transient Occupancy Tax over 20 years ($29.6 million net) [footnote text: Based on KMA projections] In addition, the food and beverage operations would generate over $3.1 million in sales tax revenue over the same [20 year] period.

• Any agreement with the Developer will need to ensure the proposed quality level of the Project is maintained throughout development. In particular, KMA would suggest including a minimum diamond rating and/or cost threshold (shell and or FF&E) in any agreement with the Developer.

Overall, the feasibility gap is significant, reflecting a relatively [sic, adjective appears missing here] risk development due to high cost of renovating a historic building and the challenging ADRs currently supported by the market.

On Sept. 19, the City posted a legally required statement on the City's Economic Development webpage reciting the "public purposes" for the proposed economic development subsidy:

[City of Long Beach "public purposes" text] 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 [transient occupancy tax] reflect the City’s holistic approach to economic development.

This economic development subsidy will support the adaptive reuse of a historic structure in the downtown Long Beach area by transforming a vacant and underutilized building into an upscale boutique hotel and spa. 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.

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LBREPORT.com first reported on Sept. 25 that city staff had scheduled an Oct. 1 public hearing on the "economic development subsidy" for "Breakers Development, LLC," an affiliate of Pacific6 Enterprises (a Long Beach-based corporation whose co-founders include John Molina and through a Pacific6 subsidiary owns LBPost.com).

Pacific6 also owns the Ocean Center Building roughly a block west of The Breakers on the SW corner of Ocean Blvd. at Pine Ave. which Pacific6's website indicates it plans to convert into an apartment/residential facility. There's no public indication at this point as to whether Pacitic6 will seek, and city management will recommend, some type of economic development subsidy for the Ocean Center building. However in 2016, the City agreed to offer the building's previous owner (who had planned to turn it into a hotel) an economic development subsidy equal to 50% of transient occupancy tax for up to 20 years.

The City of LB, with City Council voted approval, has provided economic development subsidies to a number of firms listed on a City webpage here.. They include a 2017 economic development subsidy amounting to 80% of the transient occupancy tax -- $28 million over nine years -- expected to be generated by an American Life envisioned high rise hotel on the SE corner of Ocean Blvd/Pine Ave. (former Jergins Trust site across the street from the now-Pacific6 owned Ocean Center building.

Pacific6's John Molina is separately a principal in Molina/Wu/Network, LLC, an entity now finalizing an agreement with the City already approved in principle by the City Council, that would let the LLC operate -- for the LLC's profit and rent of $1 a year -- a smaller version of the former/larger non-profit Community Hospital on Termino Ave. just south of PCH. Under the City Council's approved general terms, LB taxpayers would spend $25 million over 20 years to cover half the cost of seismic upgrades required by state regulators to enable the Molina/Wu/Network LLC to operate a smaller version of Community Hospital on the site.

The City Council has signaled that it plans to spend Measure A General Fund ("blank check") sales tax dollars for this (which the Council told voters in 2016 would be used to prioritize police, fire, street and sidewalk infrastructure.) In July 2019, the Council voted without dissent to hold a special citywide election on a City Hall written ballot measure that would make the Measure A sales tax permanent.

In mid-June 2018, Pacific6 acquired LBPost.com, which has since published a number of stories describing Pacific6's plans for The Breakers. In mid-August 2019, LBPost.com displayed artist renderings and described them in these terms:

New renderings reveal what the Breakers Building will look like after community-investment partnership Pacific6 has completed its renovation of the 14-story building on Ocean Boulevard. Converting the building into a hotel, it will feature a jazz club, rooftop terrace, spa, swimming pool and other amenities that will serve both visitors and locals -- and the renderings showcase both the grandeur and return to former glory that its developers hope to bring back into the building...John Molina has previously stated he plans to restore the building to its glory as a Long Beach landmark. "Our goal is to bring back an iconic building in the city and make it useful," he told the Post earlier this year."

A July 23 City Council agenda indicated (among "hearing reminders") that a hearing on the economic development subsidy for the Breakers Development scheduled for August 13 but the hearing wasn't scheduled. Instead, management agendized it for Oct. 1. In previous Council items related to The Breakers, Councilmembers have effusively praised Pacific6's stated plans for The Breakers building.

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