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:
- 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.
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.
- FAC’s Suggestion:Request
that the Developer/Resort obtain and maintain (if available) landslide
subsidence coverage.
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".
- 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);
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.
- 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.
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.
- 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).
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.
