CITY OF RANCHO PALOS VERDES
SPECIAL MEETING OF THE FINANCE ADVISORY COMMITTEE
JUNE 27, 2001
RANCHO PALOS VERDES FINANCE ADVISORY COMMITTEE
June 13, 2001
The meeting was called to order at 7:03 P.M. by Chair Butler at Fred Hesse Community Park, 29301 Hawthorne Boulevard, for the purpose of conducting the business pursuant to the Agenda delivered by mail to the Members. Present: Butler, Clark, Smith, Van Wagner, Wallace and Wolowicz. Absent: No one.
Roll call was answered as follows:
PRESENT: Butler, Au, Smith, Van Wagner, Wallace, and Wolowicz
ABSENT: No one.
LATE: Clark (excused by Chair Butler).
Also present were Finance Director Dennis McLean, Accounting Consultant Kathryn Downs, HVSI representatives Suzanne Mellen and Brian Rogers, Keyser Marston Associates representative Robert Wetmore, Destination Development Corporation representatives Robert Lowe and Mike Mohler and Minute Taker Jackie Drasco.
APPROVAL OF AGENDA:
Commissioner Smith moved to approve the agenda, seconded by Commissioner Wolowicz. Motion carried.
MINUTES OF THE MEETING OF APRIL 11, 2001:
Member Smith moved to accept the minutes as presented seconded by Wolowicz. Motion carried.
REPORT BY HOSPITALITY VALUATION SERVICES INTERNATIONAL (HVSI)-PROPOSED LONG POINT RESORT PROJECT:
Chair Butler explained that the Finance Advisory Committee was asked to evaluate the financial viability of the proposed Long Point Resort Project (Resort Project). Having received the report provided by HVSI only a few days prior, the objective of the meeting was to first evaluate the report, listen to the presentation by the consultants and finally, ask questions of the consultant and developer. The committee will receive public comments related only to the financial aspect of the project.
Director McLean presented his staff report regarding the chronology leading to the HVSI report. Mr. McLean then introduced Robert Wetmore of Keyser Marston Associates, Inc., as well as Suzanne Mellen and Brian Rogers of HVSI. Mr. Wetmore is the City's consultant assisting staff with the review of golf and financial aspects of the Resort Project.
Suzanne Mellen, of HVSI, gave an overview of their report, dated June 8, 2001, including the eight scenarios evaluated (as directed by the City Council) and the six questions that were asked by the FAC about the Resort Project.
Brian Rogers, also of HVSI, discussed HVSIs conclusion that a 9-hole golf course was A necessary amenity for the Resort Project to be feasibility. Mr. Rogers also discussed both pros and cons regarding a 9-hole vs. 18-hole golf course. Mr. Rogers also discussed HVSIs conclusion that a joint venture with Ocean Trails Golf Course is not an acceptable alternative to the 9-hole golf amenity to enable the Resort Project to be feasible.
Suzanne Mellen further described the issues regarding the financing of the Resort Project. Ms. Mellen explained that based upon the rate of return calculations for the eight scenarios prepared by the Developer (and reviewed by HVSI), that the 9-hole golf amenity and 550 room keys would be necessary in order for the Resort Project to be feasible.
At this time Committee members asked questions of HVSI and suggested investigating different scenarios.
Robert Lowe, Senior Vice President of Destination Development Corporation, and Mike Mohler answered questions asked by the members of the Committee.
Break time- from 8:58 to 9:07pm.
Chair Butler said it would be good to have any new information concerning the project by the next meeting of June 27, 2001. The Committee and Director McLean prepared a list of additional information requested by the Committee.
Public Comments regarding the Agenda Item:
Rowland Driskell, 30 Via Capri, favored all development on the developer's property.
Bob Nelson, 6612 Channelview Court, questioned whether there would be a traffic impact.
Tom Redfield, 31273 Ganado Drive, expressed that he trusted the ability of the finance committee to analyze the report.
Dean Friedson, 1737 Via Boronada, Palos Verdes Estates, questioned how City revenues would be affected by proposed sale of the villas.
Betty Strauss, 10 West Pomegranate Road, commented on the unpredictability of values for the proposed houses for the development.
Frank Bescoby, 19 Surrey Lane, stated his opposition to the project.
George Gleghorn, 28850 Crestridge Road, stated that he had hoped HVSI's report might have included analysis on all possibilities, not just ones with golf.
Gloria Anderson, 6818 Los Verdes Drive #8, commented on the HVSI report and questioned the amount provided in the projections for concession payments to the City.
Mike Mohler, Destination Development Corporation, 11777 San Vicente Blvd., Suite 900, Los Angeles, commented that the City should not make a decision based solely on economics. He felt the aesthetics, access, and benefits should also be considered.
The rest of the items on the agenda were continued to the meeting of June 27, 2001.
Commissioner Wolowicz stated he sent some questions regarding the 2001 Five-Year Financial Model to Director McLean.
ORAL REPORTS BY COMMITTEE MEMBERS
Commissioner Wolowicz stated in accordance with the Brown Act: that he had lunch with Jim York and Mike Mohler and proliferarily discussed the Resort Project. By stating this, he wanted it to become part of the public record.
There were no general public comments. All public comments had been incorporated into individual agenda items.
The meeting was adjourned at 10:02 P.M.
Chair, Finance Advisory Committee
Finance Director (Minute Taker)
FROM: DENNIS McLEAN, FINANCE DIRECTOR
DATE: JUNE 27, 2001
SUBJECT: METHODOLOGY EMPLOYED BY HOSPITALITY VALUATION SERVICES INTERNATIONAL (HVSI) - PROPOSED LONG POINT RESORT PROJECT
The Citys consultant, Hospitality Valuation Services International (hereafter referred to as "HVSI"), completed their limited study regarding the proposed Long Point Resort Project (hereafter referred to as "Resort Project") and issued their report, dated June 8, 2001. During its discussion about the HVSI report, the members of the FAC asked many questions, including several questions about the methodology used by HVSI in the conduct of its study. As a part of its study, HVSI reviewed the financial projections, requested revisions of the same projections using HVSIs own assumptions and conducted interviews with the staff of Lowe Enterprises, the parent company of Destination Development Corporation.
Finance Staff discussed the methodology with HVSI during the duration of HVSIs study. Unfortunately, it was not practical for the members of the FAC to participate in those same discussions. Therefore, the members of the FAC have been unable to develop the same understanding of the work performed by HVSI. Accordingly, Finance Staff has requested HVSI to prepare the attached letter, dated June 21, 2001, detailing the methodology used in the conduct of its study.
To receive, discuss and file the HVSI methodology letter dated June 21, 2001. Staff has written a separate report regarding the FACs directions and questions resulting from its discussion of the HVSI report. As always, Finance Staff remains ready to answer any questions regarding the HVSI methodology letter, or re-direct them to HVSI for their reply.
NOTE: A SIGNED COPY OF THIS LETTER WILL BE AVAILABLE TO VIEW AT CITY HALL ON TUESDAY, JUNE 25, 2001
June 21, 2001Mr. Dennis McLean Finance Director City of Rancho Pales Verdes 30940 Hawthorne Blvd. Rancho Palos Verdes, California 90275 (310) 544-5212 (310) 544-5291 FAX email@example.com
Re: Long Point
Resort - Rancho Palos Verdes
Dear Mr. McLean:Pursuant to your request, this letter addresses serves as an addendum to our consulting report referenced above and sets forth the methodology employed by HVS International in reviewing the PKF occupancy and rate projections and the development pro formas prepared by Destination Resorts. Please note that we have signed a very strict confidentiality agreement with Destination Resorts that mandates that we do not identify any information in our communication with you other than that which has already been made public in the PKF and ERA reports and the internal rates of return resulting from their development pro formas. These documents are referenced in our consulting letter dated June 8, 2001.
I have been asked to set forth my experience and qualifications for performing the review undertaken in this assignment. By education I am a hotel consultant and designated real estate appraiser. I began consulting on hotels in 1976, and have specialized in the appraisal and/or evaluation of hotels exclusively since January of 1978, giving me over 22 years of experience in this area. I established my practice in California in 1985 and have been significantly involved in assignments pertaining to most of the resorts in California at some point in time during the last 16 years. We appraise or evaluate 200 to 300 existing and proposed hotels from my office alone each year. My office also shares a database of hotel income and expense statements with the other 11 offices of our firm, four of which are in the United States. I review numerous hotel and resort hotel development budgets each year. While not a lender or mortgage broker, we do keep current on lending parameters for existing and proposed hotels in order to perform our appraisal assignments. During the course of our consulting work we have reviewed or performed our own modeling of development cash inflows and outflows, including project financing. I have been designated as an expert in hotel feasibility studies, market analysis, and valuation in numerous courts of law. I am a teacher, author, and speaker on this topic and I would be pleased to further share with you my qualifications and references.
Brian Rodgers, who assisted me in the review and analysis, holds a Masters degree in Hotel Administration from Cornell University. He has substantial hotel operating experience and for the past three years has been performing varied hotel and appraisal and consulting assignments for HVS. Brian worked as the pre-opening assistant to the General Manager of the Four Seasons Aviara, is a resident of San Diego, and is extremely knowledgeable about Southern California resorts.
Both the Appraisal Institute and the Counselors of Real Estate have Standards of Professional Practice and a Code of Ethics that must be adhered to by their members when performing consulting assignments. As an MAI (member of the Appraisal Institute) and a CRE (Counselor of Real Estate) I am required to adhere to these ethics and standards and have done so for this review assignment. Our work was independently performed and we believe that we had sufficient evidence to reach our conclusions.
The original scope of our assignment was to review the studies performed by PKF and to opine on the reasonableness of their occupancy and average rate forecasts and the need for a nine-hole golf course, as opposed to an 18-hole golf course, based upon information contained in the reports. PKFs October 2000 letter report set forth their conclusions regarding average rate and occupancy but did not contain any analysis pertaining to the impact on the resort of a nine-hole golf course, as opposed to an 18-hole golf course. We can infer, based upon our review of their 1997 study, that they have forecast the resort with a nine hole course to obtain an average rate approximately $10 to $12 lower than the same resort with an 18-hole resort course. No data or analysis was provided to substantiate this conclusion. HVS had not been retained, as of the time of our review, to perform our own independent data collection and analysis of the impact of a nine-hole golf course as opposed to an 18-hole golf course.
Our conclusion that the occupancy and average rate forecast for the proposed resort is reasonable is based upon our own in-house database of the occupancy and average rate results of other Southern California resorts. We have not undertaken a complete supply and demand analysis to develop our own independent conclusions regarding average rate and occupancy. The PKF report provided us with their analysis of the projected average rate for standard rooms as well as the casita units, but we were not provided any specific individual comparable property data supporting their forecasts. Destination Resorts then took the PKF forecasts and applied discounts to the average rate in the first through third years of operation for the hotel to buildup to the stabilized average rate as projected by PKF ($285 in 2000 dollars).
The second phase of our work entailed reviewing the developers development pro formas for reasonableness. The development pro formas prepared by Destination Resorts, which we were given to review, are comprised of several components, as delineated below:
In reviewing the hotel and golf pro formas prepared by Destination Resorts, we looked over the forecasts of income and expense and had approximately four hours of discussions with the developer regarding the resorts various sources of revenue and expense. We did not review all of the supporting analysis that the developer likely has as the basis for the analysis; rather, we requested and received supporting data for those specific revenue and expense line items for which we had a question. Without the benefit of a detailed written report setting forth the basis for each line item of the forecasts, such a review would take an estimated two days of our time. We would normally review a number of "comparable" income and expense statements and gain an understanding of the basis for the developers rationale behind each revenue and expense item, looking at operating ratios, and dollar amounts per occupied and per available room. Our review in this instance consisted primarily of the review of operating ratios. Our opinion of the reasonableness of the forecast was based upon our years of experience in reviewing income and expense statements for existing hotels and golf courses and preparing forecasts of income and expense for proposed resorts in Southern California. Based upon our experience, the income and expense ratios set forth by Destination Resorts fall within the range of typical industry norms.
In our review of the villas sales revenue we relied upon the ERA May 2001 report, which sets forth a forecast of villa pricing and sales pace. The forecast of ongoing management income appeared reasonable based upon our experience with income generated by resorts with comparably structured rental-pool agreements.
The development pro formas hypothesized certain construction and permanent financing that we determined was reasonable based upon our knowledge of the current market for hotel financing. The quarterly inflow and outflow of debt proceeds and debt service payments were reviewed and appear to be accurately modeled. We tested the internal rate of return calculations for accuracy; in our opinion, the derived equity yields appear fundamentally sound and reasonable.
The summary development budgets for each component of the project were reviewed. The development cost forecast for the resort and golf components falls within a reasonable range based upon our familiarity with the development costs of other California resorts and golf courses in recent years. However, note that development costs for these types of projects vary widely.
Please contact us if you have further questions or if you would like additional clarification regarding our methodology in this assignment.
Suzanne R. Mellen, CRE, MAI
FROM: DENNIS McLEAN, FINANCE DIRECTOR
DATE: JUNE 27, 2001
SUBJECT: REQUESTED INFORMATION FOR THE FINANCE ADVISORY COMMITTEE - PROPOSED LONG POINT RESORT PROJECT
The Citys resort consultant, Hospitality Valuation Services International (hereafter referred to as "HVSI"), recently completed their limited study regarding the feasibility of the proposed Long Point Resort Project (hereafter referred to as "Resort Project") and issued their report, dated June 8, 2001. A copy of the report is attached to this staff report.
During its discussion regarding the HVSI report, the members of the FAC directed Finance Staff, HVSI and Keyser Marston (the Citys golf and financial consultant), to research the answers to several questions and obtain additional information (hereafter referred to as the "Requested Information") described on page 2 of this report. Both HVSI and Keyser Marston have offered many comments and recommendations that are incorporated into this staff report.
Subsequent to the June 13th FAC meeting, the FAC Chair requested that this matter be added to the June 27th FAC agenda. Additionally, the FAC Chair requested the Developer to provide an overview about the Lowe Enterprises organization, especially its capabilities.
A brief summary of the purpose of the FACs involvement and the HVSI study follows:
Primary Purpose Of FACs Review Of The Resort Project
During the month of August 2000, the City Council directed the FAC to review the financial reports submitted by the Destination Development Corporation (hereafter referred to as the "Developer"). The City Council specifically requested the FAC to review the financial reports provided by the Developer and, if possible, recommend to the City Council: (1) whether or not the Developers basis for computing the projected tax and fee revenue is reliable; and (2) whether the projected revenue to the City is achievable.
Primary Purpose Of HVSIs Study Of The Resort Project
The primary purpose for of the limited review conducted by HVSI was to answer the primary question:
Whether the use of the Citys public land for the 9-hole golf facility is necessary for project feasibility?
Finance Staff, HVSI and Keyser Marston have exchanged emails and conducted several phone conferences since the June 13th FAC meeting. During the phone conferences, Finance Staff, HVSI and Keyser Marston reviewed the details of the Requested Information, developed its approach for obtaining the Requested Information, established a few questions of its own and determined a recommended timeline for providing the Requested Information. A list of the Requested Information follows:
A background summary, recommendation and the proposed timeline follows for each of the six items included as a part of the Requested Information:
FINDINGS AND RECOMMENDATION
The Developers application to build the Resort Project, filed in July 2000, includes a regulation nine-hole golf course, with adjoining practice facility and golf learning center. During 1997, the Developer retained PKF Consulting (hereafter referred to as "PKF") to perform a market feasibility study for a resort project at the Marineland site based upon assumptions under consideration at that time. The 1997-resort project included an eighteen-hole course, rather than the 9-hole course included with the Developers application. At the request of the FAC, the Developers consultant, PKF updated the 1997 study and issued the report in October 2000 (hereafter referred to as the "Bridge Update").
The Bridge Update is silent regarding the impact on the Resort Project resulting from the inclusion of a regulation nine-hole golf course, rather than the 18-hole course made apart of the 1997 market feasibility study. Upon request by the FAC and the Citys consultants, the Developer was instructed to consider the impact resulting from changing the application to include a regulation nine-hole golf course, rather the eighteen-hole course. PKF issued a letter, dated November 13, 2000, asserting the following:
"While we believe that an 18 hole course at the subject site [Long Point] would be preferable, a high quality nine hole course with an ocean orientation, driving range and learning center should be strong enough amenity for the hotel to enable it, along with its other attributes, to compete in the regional marketplace. It should be noted, however, that the aforementioned nine hole course would be a minimum to allow the property to compete effectively."
The November 13, 2000 letter did not include any statements whether or not PKF conducted any quantitative research (e.g. a market feasibility study) to support the assertion that the Resort Project is feasible with a regulation length nine-hole golf course, rather than an 18-hole course.
Recommendation And Timeline
It is Finance Staffs understanding that PKF did not conduct a market feasibility study to determine whether or not a nine-hole course would cause reduced room rates and occupancy levels, compared with those reported in the 1997 market feasibility study. Accordingly, HVSI will perform a limited study to determine whether or not any comparable resorts with a nine-hole course exist. If so, HVSI will interview resort operators that currently manage properties with nine-hole regulation length golf courses. HVSI will also interview resort operators that have expanded from nine-hole courses to eighteen-hole courses. HVSI will also interview operators of resorts with 27 holes of golf to determine the demand for 9-hole play.
HVSI expects to complete this study on or before July 18th. This would enable HVSI to present its findings at a Special Meeting of the FAC that could be held on July 25th.
Several members of the community have said that the City would become an "equity partner" in the event all, or a portion of Point Vicente Park, is provided for the proposed Resort Project with golf course. With a lenders perspective in mind, several members of the FAC have requested that a "break-even" analysis be performed.
HVSI and Keyser Marston have expressed several noteworthy comments regarding the financing risks of resort properties during discussion with Finance Staff since the June 13th FAC meeting. HVSIs comments and recommendation follow (in italic fonts):
"It is extremely rare for resort properties to cease operations. In the event a resort property is unable to generate sufficient cash flow to service debt, the propertys capitalization is restructured and the lender generally reduces interest and/or principle payments to enable continued operations and manageable debt service payments. If a resort property defaults to the hands of a creditor, it is generally sold to another investor for an amount less than the original investment. The sale is financed by either the original lender or a new lender at a dollar amount appropriate for the then market value of the property.
Based upon the assumed 50% loan-to-value ratios utilized in the developers proformas for both the construction and permanent loans, it would appear to be appropriate to perform a stress test to see to what level the resorts occupancy and average rate would have to decline before debt service payments could not be met. A second stress test should be performed to determine to what level the resorts occupancy and average rate would have to decline before the resort could not cover its operating expenses. The assumption is that at this level continued operation of the resort could not be justified".
The cessation of operations of a resort property in the Western United States is a rare occurrence. The Citys consultants see this as a "worst worst case scenario".
Recommendation And Timeline
HVSIs recommendation is as follows:
"HVSI suggests that the Developer prepare stress test projections to determine what reduced occupancy and room rates will generate cash flow available to 1) break-even at a level to service debt and 2) break-even at a level to cover operating expenses. HVSI will then review these stress tests and report the conclusions to the FAC to the extent that Destination Resorts permits per the confidentiality agreement".
HVSI expects to complete this study on or before July 18th. This would enable HVSI to present its findings at a Special Meeting of the FAC that could be held on July 25th.
In the event the Citys provides Point Vicente Park for use of the proposed nine-hole gold course, it would do so pursuant to the terms and conditions of a concession agreement. Among other terms, the concession agreement would require payments to the City for use of the Citys land. Members of the community have expressed concerns about the non-economic value of the Point Vicente Park land. During the June 13th FAC meeting, a member of the community raised the question regarding the amount the Developer has included in its financial projections for an annual concession payment. The FAC directed the Citys consultants to obtain the amount provided in the Developers financial projections.
Recommendation And Timeline
Finance Staff and the Citys consultants have discussed this request several times since the June 13th FAC meeting. Though the proposed concession amount is meaningful to the City, it will not be a significant annual operating cost of the Resort Project. Based upon Finance Staffs own "what-if" calculation, the concession amount may even be less than one (1%) percent of the annual cash outlay of the Resort Project. Likewise, the golf operation will not be a significant revenue center for the Resort Project.
As you may recall, HVSI has conducted its review, including the cash flow projections of the Resort Project, pursuant to a binding confidentiality agreement with the Developer. Finance Staff and the Citys consultants recommend that the concession amount included in the Developers financial projections not be disclosed at this time.
HVSI will inquire whether the financial projections include a sufficient provision for the annual concession expense for six golf holes, rather than four golf holes included in the Developers original application. HVSI expects to present its findings at a Special Meeting of the FAC that could be held on July 25th.
During its discussion of the HVSI report, several members of the FAC asked whether or not the Resort Project (or any other resort project at the Marineland site) is feasible without golf as an amenity. The question was also asked whether or not the Resort Project is feasible without a golf course on the Citys land, but available as an amenity via a joint marketing agreement with Ocean Trails. The inherent assumption includes the willingness for both the Developer (or any other developer) and Ocean Trails to enter into the proposed joint marketing agreement.
The Developer has already prepared projections that purport that its 20% internal rate of return (IRR) benchmark is achievable only with a 9-hole course and 550 keys. Any further revisions based on no golf and fewer units will only reduce the projects IRR. The Developer is not interested in revising its plan to exclude golf and/or significantly reduce the number of units.
"As an alternative, the City could request its consultants to prepare a feasibility study based upon the Citys own assumptions including no golf, fewer units, and other amenities. In the absence of golf, a new concept for the resort would have to be hypothesized. Options that might be considered include development of a dedicated conference center resort, a dedicated spa resort, or a generic group and leisure oriented resort hotel such as the Coronado Marriott. An additional option would be some combination of these three concepts. A concept would have to be agreed upon for the consultants to perform a feasibility study. HVSI estimates that such a study may take at least 3 plus months to complete.
It is HVSIs opinion that it is unlikely that these various options would render the project feasible. Dedicated spa resorts are generally smaller, more intimate properties that require an owners personal expertise to be successful. They also generally evolve through expansions and build up a strong reputation over time. A resort may contain a significant spa component without being a dedicated spa resort, but a spa operation does not enhance a hotels average rate, occupancy and overall marketability to near the same degree as a golf course. Lenders are wary of significant reliance upon a spa component to render a resort hotel feasible. Dedicated conference centers are extremely expensive to develop and are also smaller than the proposed subject. Conference centers have had mixed success and are extremely challenging to finance and operate. A concept comparable to the leisure and group oriented Coronado Marriott would likely not be feasible or financeable in the current hotel investment environment. Few such resorts have been built over the past decade because their obtainable room rates are not sufficient to support the high land, infrastructure and overall development costs of a resort. For the most part, throughout the United States, only those full service hotels and resorts targeted to the highest rated consumer have been successfully developed during this most recent development cycle. There has been a marked absence of full service hotel and resort development because average rates are not sufficient to support the high construction costs of these projects. The majority of hotel development since 1994 has been of limited service hotels such as Holiday Inn Express, extended-stay hotels such as Extended Stay America and Residence Inn by Marriott, or luxury hotels and resorts, such as Ritz Carltons and Four Seasons. It is only at the luxury end of the market that new resort development has been feasible in recent years.
Resort operators, needing to maximize average rate and occupancy, will almost always require that golf be provided as a component of the resort project. For these reasons, the City may want to consider whether it would be useful for the consultants to perform a feasibility study of alternate resort scenarios without golf".
Recommendation And Timeline
HVSI has estimated that the study could be completed in about three (3) months, at a cost of approximately $25,000. In light of the time required to perform the feasibility study, its cost, as well as the uncertainty of its conclusions, its justification is questionable. In the event the members of the FAC feel such a study is necessary, Finance Staff suggests that it direct the matter to the City Council immediately.
Finance Staff has raised the question regarding the ratio of the Developers land cost, in conjunction with the overall development cost of the Resort Project. After reviewing the internal rate of return results included in the HVSI report, dated June 8th, Finance Staff questioned whether the land cost is excessive for the Resort Project.
HVSI replied to the Finance Staffs inquiry as follows:
"The projects actual land cost is confidential. HVSI has reviewed the hotel land cost set forth in the development proforma, together with the cost of obtaining entitlements, and they opine that the combined cost, while substantial, is at the low end of the typical range of land costs when analyzed as a percentage of total development cost for resorts of this nature. Based upon the development of a 550 room resort with 32 villas, the land cost falls at the low end of the typical range of land percentages and land value per unit. Assuming the development of a 400 unit hotel the land percentage and amount per unit rises to the high end of the range evidenced by comparable properties. The cost of the land and entitlements clearly play a significant role in the sizing of the resort.
Finance Staff sees no further need for any follow-up inquiries regarding this matter at this time.
In the event the City provides all, or a portion of, its Point Vicente Park for a part of the 9-hole course, it will be necessary to include adequate protections for the city in the agreement, to cover a variety of potential contingencies. These protections typically include the requirement that the operator continuously operate the improvements, with failure to do so constituting an event of default.
Keyser Marston feels that it noteworthy to point out:
" the resort lender will be vitally concerned about golf course operations, since the course is a vital amenity of the development. Any impairment of golf operations could drastically affect the value of the property and hence the lender's security. The Resort Project lender will require the Developer be current on all obligations and covenants included in the concession agreement. Failure to do so constituting an event of default on the mortgage commitment and will insist on a right to cure a default on obligations by the developer in respect to obligations to the city.
The protection of the City's interest in the agreement is a vital aspect of the overall business terms. Typically, consideration of these issues is part of the overall negotiation of business terms of the concession agreement negotiated between the City and the Developer, if such negotiations occur".
Neither Keyser Marston, HVSI nor Finance Staff believes a feasibility study of the proposed golf operation is warranted. The proposed golf operation is a proposed amenity, not a significant revenue center. As stated previously, the protection of the City's interest in the agreement is a vital aspect of the overall business terms to be included in a concession agreement that would be negotiated. It is likely that any secured lender of the Resort Project will not permit the operation of the golf course to pass to the City, except in the event of its cessation.
Based upon a recent discussion with the Director of Planning, Building Safety and Code Enforcement, it appears as though the Planning Commission will make its recommendation to the City Council at its September 4th meeting. Finance Staff continues to encourage the FAC to complete its review in coordination of the Planning Commission timeline. Accordingly, Finance Staff recommends and seeks direction regarding the following:
Finance Staff is available to assist the FAC with any necessary Special Meetings during the Summer to enable the FAC to make a recommendation to the City Council during the month of August or September, although the Director would really like to take a weeks vacation in August as well.
FROM: DENNIS McLEAN, FINANCE DIRECTOR
DATE: JUNE 27, 2001
SUBJECT: 2001 FIVE-YEAR FINANCIAL MODEL
Staff Coordinator: Kathryn Downs, CPA, Financial Consultant
June 13th FAC Meeting Review of 2001 Five Year Financial Model (Continued to the June 27th FAC Meeting)
Due to the late hour of the June 13th meeting of the Finance Advisory Committee (the "FAC"), its members acted to continue Agenda item #5, 2001 Five Year Financial Model (hereafter referred to as the "2001 Model"), to the agenda for the Special Meeting on June 27th. For the convenience of the FAC members, as well as other readers, Finance Staff has incorporated the content of the staff report dated June 13, 2001 into this staff report.
Significant Events Subsequent to City Councils Review of 2001 Model on May 1st and the FACs review on April 11th
During its meeting on June 5th, the City Council acted to approve a purchase agreement for the acquisition of approximately 626 acres of open-space land as follows:
The estimated combined purchase price for the Portuguese Bend and Filiorum properties is $27,335,000. The City is eligible to receive up to approximately $400,000 of Proposition 12 state funds for open space purchases. The remainder of the financing required to complete the purchase will require the combined effort of the City, Palos Verdes Peninsula Land Conservancy, state and local agencies and private monies. The Palos Verdes Peninsula Land Conservancy has pledged $6 Million in private donations to finance the purchase.
April 11th FAC Meeting Review Of 2001 Five Year Financial Model And Recommendation To The City Council
The FAC reviewed the first draft of the 2001 Model at its meeting on April 11, 2001. Upon finishing its review, the FAC acted to: (1) accept the 2001 Model: and (2) forward it to the City Council with a recommendation to continue the utility users tax at a rate of 3%, in light of the uncertainty of the state of the national and state economic future, its potential impact on future revenue to the City, as well as the potential (and unknown) cost of storm drain repairs and improvements. During the meeting, the members discussed the possibility of reviewing the 2001 Model at a later date.
May 1st City Council Meeting Significant Revisions To The 2001 Model
The 2001 Model was presented to the City Council on May 1, 2001. As a result of its review, the City Council directed Finance Staff to revise the 2001 Model as follows:
Finance Staff included the same fund transfers in the remaining three years of the 2001 Model. Therefore, assuming the City Council directs Finance Staff to include the transfers through FY 05-06, General fund reserves would be decreased by an additional $2,125,000 ($225,000 plus $200,000 x 5 years), compared with the 2001 Model reviewed by the FAC during its April 11th meeting. The Recycling fund would be decreased $500,000 through FY 05-06 ($100,000 x 5 years).
The City Council further directed staff to clearly explain in the Budget Document that the monies transferred to the newly created funds are not appropriated for spending until the City Council approves appropriate CIP projects. The City Council has the discretion to transfer the monies back from the Roadway Beautification CIP fund and Utility Undergrounding CIP fund at any time, subject to a majority vote of the City Council.
Summary Of Other Changes In The 2001 Model Subsequent To The FACs Review And Recommendation To The City Council During Its April 11th Meeting
During the course of completion of the FY 01-02 and FY 02-03 Budget Document, Finance Staff made several refinements, based upon new information provided from state, county and internal sources. Most of the revisions were immaterial, except for the changes directed by the City Council (described in the previous section), as well as several increases and decreases of General fund revenues and program expenditures. A summary of the material changes in the General fund follows on the subsequent page of this report. Also, the Economic Model Input Factors for FY 01-02 (Adopted Budget) and FY 02-03 (Proposed Budget) included on Page 1 of the 2001 Model are meaningless.
Format of the 2001 Model
The 2001 Model includes the presentation of revenue, expenditures and ending fund balances for all funds for the FY 98-99 and FY 99-00. The financial statements for FY 98-99 and FY 99-00 were audited by the Citys independent auditors, who expressed an unqualified (clean) opinion regarding the fair presentation of the statements. Estimates of revenue, expenditures and ending fund balances are presented for the current fiscal year that will end June 30, 2001. The first two years of the 2001 Model include estimates of revenues, expenditures and ending fund balances based on the adopted FY 01-02 budget and the proposed FY 02-03 budget. The remaining three years of the 2001 Model through FY 05-06 are based upon the assumptions described on Page 1 of the 2001 Model.
Significant Assumptions Considered during the Preparation of the 2001 Model (Unchanged):
The following assumptions (remained unchanged) and were used in the preparation of the 2001 Model: