Rancho Palos Verdes City Council
   

TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: STEVE WOLOWICZ, CHAIR, FINANCE ADVISORY COMMITTEE

DATE: AUGUST 6, 2002

SUBJECT: PROPOSED LONG POINT RESORT PROJECT – STATUS REPORT TO THE CITY COUNCIL

Staff Coordinators:Dennis McLean, Finance Director

Kathryn Downs, Accounting Manager

BACKGROUND

City Council Assignment to the Finance Advisory Committee

On May 7, 2002 the City Council directed the Finance Advisory Committee (the "FAC") to provide the City Council with feedback with respect to the following start-up matters concerning the proposed Long Point Resort (the "Resort") including answers to the following questions:

  1. Could the City be damaged economically in the event the Resort ceases operations? If so, what safeguards could be instituted to mitigate the cost of possible damages?
  2. What, if any, infrastructure and operational costs will the City incur during construction and after initial operations begin (e.g. Public Works and Public Safety)?
  3. Will the City experience negative cash flow during the development and early operations of the Resort?

Overview Of The Activities of the Finance Advisory Committee – Proposed Long Point Resort - August 2000 through October 2001

During the month of July 2000, Destination Development Corporation, a subsidiary of Lowe Enterprises (hereafter referred to as the "Developer"), submitted applications and plans to build the proposed Resort on the former Marineland site. The Developer’s original plan included the use of a portion of Upper Point Vicente Park that surrounds City Hall, for six (6) holes of the proposed 9-hole regulation length golf course.

 

Between the months of August 2000 and November 2001, the FAC met nine (9) times regarding the Resort to consider:

  • Whether or not the Developer’s basis for computing the projected tax and fee revenue to be paid the City is reliable;
  • Whether the projected tax and fee revenue to the City is achievable; and
  • To review the financial impact resulting from the elimination of Resort Villas and/or Casitas from the Resort and/or the addition of other facilities (e.g. underground parking).

Hospitality Valuation Services International (HVSI), the City’s consultant, performed a review of the Developer’s pro-formas during its assignment. Based upon its review, HVSI stated the following in its report:

 

"Based on the information available, it is our opinion that the projections of occupancy and average rate set forth by Destination Resorts [the Developer] are reasonable. Upon completion of this review, members of HVSI concluded that the developer’s financial projections for the proposed subject property appeared reasonable."

At the conclusion of its assignment, the FAC stated the following in its report, dated October 19, 2001:

 

"Based upon the review performed and the oral statements made by HVSI, the FAC finds that the Developer’s presentation of projected tax and fee revenue appear to be reasonable using methods and assumptions consistent with the resort and leisure property industry. Forecasts and projections are prepared based upon assumptions about the future. Additionally, future events, including possible negative economic trends, changes in customer demand, perils and governmental legislation may significantly impact actual results and cannot be predicted. Such future events may have a significant impact on the Resort’s attainment of the results contained in its financial projections, especially projected tax and fee revenue. Therefore, the FAC finds that the projected tax and fee revenue to the City cannot be predicted with a high degree of certainty.

In addition, the FAC expresses the following reservation and limitation regarding the reliability of the Developer’s financial projections, including the projected tax and fee revenue:

The severity and length of the apparently emerging economic downturn is an important factor that may impair the Developer’s ability to secure investment and debt financing and attain the revenue results reported in its financial projections."

Information Obtained By Finance Staff Subsequent To The July 22, 2002 FAC Meeting

The City Attorney and City staff met with the Developer’s legal counsel and Vice President, Mike Mohler on July 30, 2002 to discuss the draft conditions of approval. The Finance Director presented and discussed the FAC’s suggestions for revised Conditions of Approval at that time. Staff’s findings regarding those suggestions are presented below as "Finance Staff’s Findings" .

DISCUSSION

1)Could The City Be Damaged Economically In The Event The Resort Ceases Operations? If So, What Safeguards Could Be Instituted To Mitigate The Cost Of Possible Damages?

During the July 22, 2002 FAC meeting, the Developer’s representative, Mike Mohler stated to the FAC that the Developer does not plan to submit a Development Agreement to the City. Therefore, the Conditions of Approval are expected to include all known provisions available to safeguard the City during the phases of planning, construction and operation of the proposed Resort. During its July 17, 2002 meeting, the City Council directed staff to present revised Conditions at its next meeting (this evening). Therefore, Finance Staff asked members of the FAC to review the draft Conditions and offer comments. Upon completion of its discussion during meetings on July 17, 2002 and July 22, 2002, the FAC forwarded the following suggestions for inclusion in the revised Conditions of Approval separately presented in a staff report by the Planning department (this evening).

FAC’s Suggestions For Inclusion In Revised Conditions Of Approval And Finance Staff’s Findings Regarding The FAC’s Suggestions For Inclusion In Revised Conditions Of Approval:

  1. FAC’s Suggestion:Request advice from the City Attorney and the City’s insurance administrator (CJPIA), if there is an insurable risk for the City during the construction period of the Resort to protect the City should there be a major delay or stoppage of construction.
  2. Finance Staff’s findings:

    Based upon Finance staff’s discussion with the City Attorney, it appears as though the City has no insurable risk during the construction period of the Resort in the event there be a major delay or stoppage of construction because there is no quantifiable insurable loss. However, the Developer will be required to provide performance bonds for each phase of the project. Therefore, performance (completion) will be secured.

  3. FAC’s Suggestion:Request that the Developer/Resort obtain and maintain (if available) landslide subsidence coverage.
  4. Finance Staff’s findings:

    During the July 30, 2002 meeting with City staff, the Developer’s legal counsel stated that the Developer will not be able to obtain landslide subsidence insurance coverage.

    The FAC continues to suggest that if the Developer obtains such coverage in the future, the City should be considered to be added as a "Named Insured".

  5. FAC’s Suggestion:Request that the City be added to the Developer’s/Resort’s insurance policies as a "Named Insured" for potential causes of shared risk (e.g. injury claims);
  6. Finance Staff’s findings:

    Staff and the Developer have agreed for the City to be a "Named Insured" in the Developer’s (and its successor) general liability insurance policies.

  7. FAC’s Suggestion:Request the Developer/Resort to obtain and maintain insurance coverage for defects of any infrastructure or public amenities transferred to the City by the Developer. The FAC believes that the coverage may be obtained for a period of ten years after the commencement of operations of the Resort.
  8. Finance Staff’s findings:

    Based upon a discussion with the Developer’s legal counsel, they will not be able to obtain and maintain insurance coverage for defects of any infrastructure or public amenities transferred to the City by the Developer. During the meeting with the Developer on July 30th, the parties agreed that the Developer would extend the standard one year warranty bond protection to a second year. The warranty bond covers infrastructure and public amenities that would be transferred to the City. Additionally, the Director of Public Works offered that most every defect arises during the first year after completion.

  9. FAC’s Suggestion:The Conditions of Approval should clearly define the responsibilities of storm drain ownership between the Developer, the County and the City.

Finance Staff’s findings:

The responsibilities for storm drain improvements are currently under consideration by the City and the Developer. Finance staff offers that staff is cognizant of the FAC’s concerns.

While the FAC continues its assignment, it will continue to watch for unforeseen events that may cause the City to incur economic damage. The FAC will immediately report recommendations and/or findings to both staff and the City Council that may mitigate the cost of possible damages.

2) What, if any, infrastructure and operational costs will the City incur during construction and after initial operations begin (e.g. Public Works and Public Safety)?

Background Information Provided by Developer

On May 14, 2002 the City’s Director of Finance sent a written request to the Developer for "computations (not merely the results thereof) of monthly transient occupancy tax ("TOT"), sales tax and utility users tax ("UUT") during each of the initial twenty-four months of operation of the Resort." See attachment B.

On May 28, 2002 the Developer provided tax computations for the initial twenty-four months operation of the Resort. The Developer included the following explanations for three changes in assumptions used to compute the various taxes (see attachment C):

  • "We have assumed the first year of operations will be 2006 vs. 2005 in the last report. As such, there is one additional year of rate inflation to the average daily rate ("ADR")."
  • "We have assumed a slightly slower occupancy ramp-up during the first two years. However, we do believe that our stabilized income will be consistent with our previous projection."
  • "Based on our prior experience with similar units, we have assumed that the average owner of a casita will use 30 of his/her 60 available use nights. When applying the stabilized hotel occupancy against the owner use nights that are removed from the hotel supply, we see 2.2% fewer occupied room nights and therefore a 2.2% reduction in stabilized TOT as compared to the original program."

On May 30, 2002, the Director of Finance emailed a request for clarification to the Developer. The Director’s questions and the Developer’s answers follow:

Question I

What occupancy and room rates were used in the preparation of the Break-Even Occupancy Rate Projections &TOT Calculations included on pages 7 & 8 of the 7/30/2002 HVSI report?

The Developer’s reply, dated June 5, 2002, (see Attachment D) asserted that the same occupancy rates were used in their calculations as what was presented in the July 30, 2002 HVSI report.

Question II

Your letter, dated 5/28/2002, refers to a 2.2% reduction of occupied room nights resulting from owner occupation of the Casitas.  Is the calculation of the occupancy rate of the Casitas based upon the same occupancy rate of the Hotel, but adjusted for owner occupation?  Or, has the occupancy rate of the Casitas been projected based upon other criteria similar to the Villas?   Note: the occupancy rate of the Villas is less than the Hotel as presented in the Initial 24 Month City Income Tax spreadsheet.  Additionally, please provide the calculation of the impact of owner occupancy on the occupancy rate of the casitas.

The Developer’s reply stated: "On a per key basis, the casita rooms are projected to receive equal consumer demand and rental rates as the standard hotel rooms. The 2.2% reduction in stabilized room nights (excluding villas) reflects owner usage of the casita units."

The Developer’s calculation of a 2.2% reduction in stabilized room nights is based on owner occupancy rates less than the proposed maximum allowable specifically related to the Casitas. The FAC feels it is important to point out that the TOT reduction could be as much as 5.6%, or approximately $300,000 annually, based on the proposed maximum allowable owner occupancy days for both Villas and Casitas.

Background And Assumptions Regarding the Pro-Forma Schedule Of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort

Staff has prepared the Pro-Forma Schedule Of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort (see Attachment A). The pro-forma includes the Developer’s estimate of the City’s monthly tax revenue from operation of the Resort and staff’s estimate of the costs directly resulting from operation of the Resort during the initial twenty-four months. A brief description of the resulting costs follows:

Public Safety Costs

The City contracts with the County Sheriff for public safety services. Key personnel at the Sheriff’s department have asserted that one 56-hour car (7days per week, 8 hours per day) would be a sufficient increase of police coverage. The estimated annual cost of increased coverage at FY 2002-2003 rates is $254,343. Staff has included this cost with a 3% annual inflation factor within the pro-forma calculation.

Infrastructure Capital and Maintenance Costs

Public Works Staff has asserted that the Developer will be required to pay for all infrastructure improvements associated with the Resort, including a traffic signal, street improvements, storm drain improvements, median landscape improvements, and park and trail improvements. The Conditions of Approval or Development Agreement (if applicable) will establish the responsibilities for both the Developer and the City for the maintenance of the infrastructure created in conjunction with the Resort.

Notwithstanding the final responsibility for the City to maintain the new infrastructure as established in the final documents, staff has included median landscape and traffic signal maintenance costs in the pro-forma cash flow calculation. Estimates are based on FY 2001-2002 budgets of similar maintenance activities with a 3% annual inflation factor. These estimates are not intended to express staff’s expectations of the City’s responsibilities, but are merely a presentation of a possible cost scenario. City staff believes the direct cost of maintaining new infrastructure created in conjunction with the Resort is expected to be minimal during the initial twenty-four months of operation of the Resort.

Insurance Costs

During the June 17th meeting of the FAC, several questions were raised regarding the potential increase of the City’s insurance premium costs once the proposed Resort becomes operational. Finance Staff provided the following response during the July 17th meeting of the FAC.

The City’s liability insurance premium is based on accident incident rate. Based upon Finance Staff’s inquiries with the City Manager and the Public Works Director, insurance claim incident rates are classified into three categories: slip and fall, traffic accidents, and damage caused by falling tree limbs. Staff has analyzed each of these affecting factors.

  • There is no additional sidewalk to be added along Palos Verdes Drive South (PVDS) as a result of the Resort. Therefore, there appears to be no reason to expect an increase in the number of slip and fall incidents along the City’s right-of-way.
  • Finance Staff reviewed the traffic study portion of the Environmental Impact Report ("EIR"). Although one traffic signal will be added to the intersection of PVDS and the Resort entrance, there was no indication within the Traffic Study that Resort activity will contribute to an increase in the number of traffic accidents.
  • No additional trees will be added to the City’s right of way as a result of the Resort. Therefore, there appears to be no reason to expect an increase in damage caused by falling tree limbs.

Considering the information presented above, staff believes it appears reasonable that the City’s liability insurance premium will not increase significantly as a result of the Resort.

The FAC expressed a concern that various factors such as the City’s revenues and additional items related to the development may affect insurance premiums. Staff reviewed the calculation of the City’s insurance premiums and determined that the City’s liability, property and workers compensation insurance premiums are not affected by increased revenue to the City.

Public Works Staff has estimated that infrastructure valued at approximately $3 Million will be added to the City’s capital assets as a result of the Resort. The City’s capital assets currently have an estimated replacement cost in excess of $260 Million. The additional infrastructure approximates a 1% increase in covered assets; however, the infrastructure coverage portion of the premium is rated less than the building and equipment coverage portion of the premium. Based on this information, it appears reasonable that the resulting increase to the City’s property insurance premium would be less than 1%. The annual premium is approximately $50,000; therefore, the estimated increase would be less than $500 annually. Due to the immateriality of this potential increase, staff has not included it in the Pro-Forma Schedule Of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort.

Finally, the City’s workers compensation insurance is based on payroll costs. The City’s payroll is not expected to increase significantly as a result of Resort operations. Therefore, staff believes it appears reasonable that the City’s workers compensation insurance will not increase as a result of the Resort.

To address unknown insurance cost of coverage issues, the FAC recommended the City request an analysis from the City’s insurance administrator (CJPIA), of the potential increase of insurance cost as well as any other insurance issues resulting from the Resort, including: (1) potential increase of property and injury claims resulting from errant golf balls; (2) potential increase of injury claims from use of City owned park amenities provided by the Resort; (3) potential increase of liability claims resulting from increased traffic activity; (4) an estimate of the potential increase of insurance cost resulting from the value of City infrastructure transferred by the Developer; and (5) whether coverage limitations are adequate in light of the construction and operation of the Resort.

The City Manager has forwarded a request for analysis to CJPIA. If a reply is received prior to the August 6, 2002 meeting, staff will provide the results of that analysis to the City Council at or before that meeting. If a reply is received after August 6, 2002, staff will forward any significant analysis comments to the City Council.

Analysis of Costs After the Initial Twenty-Four Months of Resort Operations

Maintenance costs will be incurred for infrastructure created with the Resort after the initial twenty-four months of operations of the Resort. These infrastructure maintenance costs include routine street repairs and improvements resulting from additional traffic, as well as future maintenance and replacement of sewer and storm drain improvements constructed by the Developer. The cost of these improvements cannot be determined at this time; however, staff believes infrastructure improvement costs will be immaterial when compared to the entire stream of revenue generated by the Resort.

3) Will the City experience negative cash flow during the development and early operations of the Resort?

Analysis Of Revenue And Costs Before Initial Operations

Finance Staff offered the following Pro-Forma Table Of Revenue And Costs Before Initial Operations (presented below) and the Pro-Forma Schedule Of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort (see attachment A).

PRO-FORMA TABLE OF REVENUE AND COSTS BEFORE INITIAL OPERATIONS

Revenues Before Initial Operations

Environmental Excise Tax

350,000

Affordable Housing Fees

931,910

Affordable Housing - Administration Fee

93,191

Parkland Dedication (Quimby) Fees

Not Determined at this time

Building & Safety Fees

200,000

Public Works Fees

Immaterial

Costs Before Initial Operations

City Attorney Fees For Development Agreement Negotiation

Not Determined at this time

Note: the costs of consultants representing the City while processing the Developer’s application (e.g. geo-technical engineers, civil engineers and environmental consultants) are entirely paid for by the Developer via trust deposits; therefore, not included in the table above.

Although the City’s net revenue before initial operations is estimated to exceed $1.6 Million, the City’s use of a majority of this revenue is restricted in nature.

Restricted Revenue

The City’s use of Environmental Excise Tax (EET) is limited to development or improvement of public facilities such as land, buildings, machinery and capital equipment. Use of the Affordable Housing Fees is limited to providing affordable housing to low and moderate-income households and the use of Parkland Dedication Fees (Quimby Act) is limited to the development or rehabilitation of park or recreational facilities. All of the expected restricted revenue would be deposited into their respective restrictive funds (rather than the General fund) and not available for general operations of the City

Unrestricted Revenue – Permit Fees

Based on prior experience with development projects, Building and Safety and Public works staff expects that permit fee revenue would likely exceed $200,000.

Unrestricted Revenue –Trust Deposit Administrative Fees

Excluding the City Attorney’s time spent during a possible negotiation of a Development Agreement, the costs of consultants representing the City while processing the Developer’s application (e.g. geo-technical engineers, civil engineers and environmental consultants) are entirely paid for by the Developer via trust deposits. The Developer makes deposits into the project trust deposit prior to the commencement of services by the consultant. The City directly pays the consultant as progress billings are tendered and approved for payment by City staff.

In addition to Planning, Building Safety and Public Works fees, the City assesses a 10% administrative fee for processing trust deposit activity. Although the expected administrative fee cannot be calculated at this time, administrative fees collected from the Ocean Trails project approximated $250,000 during the processing of the application for the project. Based on the scope of the Resort project, staff believes it appears reasonable that the administrative fees will meet or exceed the amount received from the Ocean Trails project. Planning Staff reported and Finance Staff has verified that more than $100,000 of administrative fees has already been received for the Resort project. Based on this information, staff expects that at least an additional $100,000 of administrative fees will be collected before the project is complete. Additionally, the administrative fee associated with the Affordable Housing Fee is expected to exceed $93,000. In summary, an additional $200,00 of unrestricted trust deposit administrative fee revenue would be received prior to the completion of the Resort project.

General fund (Unrestricted Costs)

Subsequent to the last FAC meeting on July 22, 2002, Chair Wolowicz inquired whether or not the City may experience negative cash flow during the Resort project construction period, based upon the cost of staff’s involvement compared with expected unrestricted revenue from permit and trust deposit administrative fees.

Finance Staff’s Reply:

Except for the possible cost of the City Attorney’s services associated with the negotiation of a possible Development Agreement, Staff does not expect to experience any additional incremental costs associated with the Resort Project. Notwithstanding the fact that the payroll cost of the Senior Planner assigned to the Resort Project is a fixed cost to the City, the Finance Director believes that Unrestricted Revenue expected from permit and trust deposit administrative fees will exceed the allocable payroll costs of the Senior Planner’s time. The Unrestricted Revenue expected from permit and trust deposit administrative fees may also exceed the allocable payroll cost of other staff directly assigned to the Resort project.

FAC Inquiry - Will Trust Deposit Balances Be Negative?

In their report to the City Council dated May 7, 2002, Planning Staff noted the Resort trust deposits had a combined deficit balance of approximately $156,000. As a result, the FAC and Finance Staff discussed the trust deposit mechanism during the July 17, 2002 FAC meeting. Finance Staff reported that it is now providing weekly trust deposit activity information to the Planning Department for the Resort project.

Additionally, staff and the Developer have agreed to the following Condition, subject to approval by the City Council:

Every TD provision should include a requirement that the Developer shall pay 110% of the estimated amount of the cost of services to be provided on behalf of the City prior to commencement of such services (e.g. Golf Safety Consultant, geotechnical consultants). Perhaps services provided by the City Attorney and other consultants providing services during the entire duration of the project would be exempt form the 110% requirement. In such cases, the developer would make advances into the TD prior to the commencement of services, in amounts reasonably requested by the City, based upon an estimate of the cost of services for the period of at least 90 days after services commence.

Upon inquiry, Finance Staff has advised the FAC that preparation of cost schedules and semi-monthly cash flow reports to the City Council will be time consuming and redundant. Finance Staff has reported to the FAC that it expects that measures taken by City staff will prevent further occurrences of deficit trust deposit balances for the Resort project.

The costs of consultants representing the City while processing the Developer’s application are not operating costs of the City and are not included in the City’s budget. Trust deposit advances received from the Developer and payments for services provided by consultants representing the City flow through the balance sheet of the City as a liability and contra-liability respectively.

 

SUMMARY OF FINDINGS

Future events, including possible negative economic trends, perils and other unforeseen circumstances and governmental legislation may significantly impact the proposed Resort as well as its economic and financial impact on the City and cannot be predicted. With this in mind, the FAC and Finance Staff will continue to monitor the Resort project and will immediately report any significant observations to the City Council. Subject to the foregoing, as a result of its review, the FAC offers the following findings related to the Analysis Of Revenue And Costs Before Initial Operations And Cash Flow For Initial Twenty-Four Months Of Operation:

  • The City’s anticipated revenue from the Resort prior to initial operations will likely exceed the City’s costs by an amount in excess of $1.6 Million as presented in the Pro-Forma Table Of Revenue And Costs Before Initial Operations. Although the revenue is estimated to exceed $1.6 Million, the City’s use of a majority of it is restricted in nature. Specifically, use of Environmental Excise Tax (EET) is limited to development or improvement of public facilities such as land, buildings, machinery and capital equipment. Use of the Affordable Housing Fees is limited to providing affordable housing to low and moderate-income households and the use of Parkland Dedication Fees (Quimby Act) is limited to the development or rehabilitation of park or recreational facilities.

  • The City’s anticipated revenue from the Resort during the initial twenty-four months of operations is expected to significantly exceed the City’s costs as presented in the Pro-Forma Schedule Of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort.
  • The costs of consultants representing the City while processing the Developer’s application are entirely paid for by the Developer via trust deposits. Based upon the expectation that the Developer would make deposits into the project trust deposit account in accordance with the proposed Condition (see the proposed Trust deposit Condition above), the FAC concurs with staff’s statements that staff does not recommend the preparation of cost schedules and semi-monthly cash flow reports to the City Council at this time.
  • To address unknown insurance cost of coverage issues, the FAC recommends the City request an analysis from the City’s insurance administrator (CJPIA), of the potential increase of insurance cost as well as any other insurance issues resulting from the Resort, including: (1) potential increase of property and injury claims resulting from errant golf balls; (2) potential increase of injury claims from use of City owned park amenities provided by the Resort; (3) potential increase of liability claims resulting from increased traffic activity; (4) an estimate of the potential increase of insurance cost resulting from the value of City infrastructure transferred by the Developer; and (5) whether coverage limitations are adequate in light of the construction and operation of the Resort.

 

The FAC remains available to answer any questions the City Council may have and perform any further work regarding the Resort Project that the City Council may deem to be necessary.

 

Respectfully submitted,
Stefan Wolowicz, Chair

Finance Advisory Committee
Reviewed,


Les Evans
City Manager