08/22/2001 RPV FAC Meeting Staff Report Finance, Advisory, Committee, Staff, Report, Long, Point, Resort, Project, Draft, 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 Long Point resort project on the former Marineland site (hereafter referred to as the "Resort Project"). The Developerís plan includes the use of a portion of Upper Point Vicente Park that surrounds City Hall, for five (5) holes of the proposed nine-hole regulation length golf course. The City has not decided to provide a portion of the Upper Point Vicente Park for the proposed golf course. The Planning Commission is currently considering this matter, as well as all other land-use issues, during its processing of the Developersí application Finance Advisory Committee Staff Report Regarding the Deferral of Undergrounding Districts Rancho Palos Verdes Finance Advisory Committee Agenda august 22, 2001

 

Note: Tables omitted throughout staff report.

TO: HONORABLE CHAIR AND MEMBERS OF THE FINANCE ADVISORY COMMITTEE

FROM: DENNIS McLEAN, FINANCE DIRECTOR

DATE: AUGUST 22, 2001

SUBJECT: PROPOSED LONG POINT RESORT PROJECT Ė PREPARATION OF A DRAFT RECOMMENDATION TO THE CITY COUNCIL

 

RECOMMENDATION:

To review and discuss: (a) the purpose and chronological history of the Finance Advisory Committeeís assignment as directed by the City Council; (b) the FACís findings (including information provided by Hospitality Valuation Services International while performing their services); and (c) the process and content for drafting of a recommendation to the City Council.

 

BACKGROUND AND DISCUSSION:

Finance Staff has written the following report using a format and including certain chronology, findings and conclusions that the Finance Advisory Committeeís (hereafter referred to as the "FAC") may desire using in its recommendation to the City Council. Therefore, some of the following content is a mere restatement of facts and chronology known well to each member of the FAC.

The chronology is followed by the findings of the Cityís resort consultant, Hospitality Valuation Services International (hereafter referred to as "HVSI"). Finance Staff has attempted to note its best understanding of the FACís concurrence (or non-concurrence) with the findings of HVSI or simply left a blank for discussion and formulation of a conclusion. The Findings and Conclusions are presented in the following format:

  • Significant questions asked by the FAC and answered by either the Developer, Finance Staff and/or the Cityís consultants;
  • Answers to the three questions directed by the City Council;
  • Information relevant to a concession agreement between the Developer and the City; and
  • Other financial and economic comments and suggestions regarding the Resort Project.

Brief Overview:

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 Long Point resort project on the former Marineland site (hereafter referred to as the "Resort Project"). The Developerís plan includes the use of a portion of Upper Point Vicente Park that surrounds City Hall, for five (5) holes of the proposed nine-hole regulation length golf course. The City has not decided to provide a portion of the Upper Point Vicente Park for the proposed golf course. The Planning Commission is currently considering this matter, as well as all other land-use issues, during its processing of the Developersí application.

In the event the Planning Commission approves the Developerís applications and the use of a portion of Upper Point Vicente Park, it would forward the matter to the City Council, subject to a number of conditions of approval. The City Council would then decide whether to approve the Resort Project as well as the use of a portion of Upper Point Vicente Park for golf. The proposed use of Upper Point Vicente Park would also require the consent of the U. S. Department of Interior due to the deed restrictions imposed upon the transfer of the park to the City in 1979. The City Councilís approval would be followed by negotiations of a concession agreement led by the City Manager, with the assistance of the City Attorney and the Cityís consultants. The final concession agreement would require the approval of the City Council.

Description of FACís Assignment by the City Council:

During the month of August 2000, the City Council requested the FAC to review the Developerís financial reports to determine:

  • Whether or not the developerís basis for computing the projected tax and fee revenue to be paid the City is reliable; and
  • Whether the projected tax and fee revenue to the City is achievable.

During the January 16th meeting of the City Council, Councilmember Stern presented a staff report that included a recommendation to direct the FAC to analyze the financial implications to the Resort Project resulting from the elimination of the proposed resort villas, casitas and/or other facilities (including the possibility of underground parking). After completing its discussion, the City Council provided directions as follows:

The Developerís Consultant shall conduct a financial analysis [and the Cityís Consultant, HVSI shall review the analysis] regarding the financial impact resulting from the elimination of Resort Villas, Casitas and/or other facilities from the Resort Project.

Chronology of the FACís Assignment:

August 2000 Ė Financial Reports Provided By Developer

Subsequent to filing its applications in July 2000, the Developer submitted two studies prepared by Economic Research Associates, titled "Analysis of Fiscal Impact Long Point Development" and "Overview Analysis of Market and Economic Potentials Long Point Nine-Hole Golf Course and the Practice Range" (hereafter referred to as the "ERA Reports"). The ERA Reports include projections that stated the operation of the Resort Project would generate the following projected annual tax and fee revenue to the City:

Transient Occupancy (TOT) Tax
$3,989,906
CA Sales Tax
338,340
Utility Users (UUT) Tax
70,500
Property Tax
117,250
Golf Tax
212,500
TOTAL
$4,728,496

 

Obviously, the most significant portion of the projected tax and fee revenue would be derived from TOT tax revenue based upon ten (10%) percent of projected gross occupancy rental revenue. If so, the tax and fee revenue would be deposited into the Cityís General fund, therefore, available to fund normal operations of the City. For the sake of comparison, the total General fund revenue during FY 01-02 is anticipated to reach $12.7 Million. Therefore, the additional annual tax and fee revenue would increase General fund revenue by nearly forty (40%) percent.

The projected gross occupancy rental revenue contained in the ERA Reports was based upon an Average Daily Rate of $265. Both the projected gross occupancy rental revenue and related TOT tax revenue relied on the underlying projected Room Inventory, Occupancy Rate, Revenue Per Available Room (REVPAR) and other projected operating statistics presented in the 1997 market feasibility study prepared by PKF Consulting, one of the Developerís consultants.

August 8, 2000 FAC Meeting Ė Review of ERA Reports and Request for Developerís Feasibility Studies for the Resort Project

Upon concluding its review and discussion regarding the ERA Reports, the members of the FAC reached a consensus that it could not evaluate the projected tax and fee revenue to City without reviewing all of the appropriate feasibility studies associated with the Resort Project. The FAC requested the feasibility studies via a letter to the Developer, dated September 1, 2000. The letter also included a request for the Developer to answer several broad questions regarding the Resort Project during its next meeting on September 12, 2000.

September 12, 2000 FAC Meeting - Developerís Assertion: Resort Project Is Not Feasible Without A Regulation Length Nine-Hole Golf Course as an Amenity and FACís Request for Additional Information

The Developer provided the FAC with a broad overview about the Resort Project during its September 12, 2000 meeting. When asked by a member of the FAC during the meeting, the Developer stated that the Resort project is not feasible without the proposed nine-hole regulation length golf course. Near the conclusion of the meeting, the Developer volunteered or members of the FAC requested the following information:

  • The 1997 market feasibility study prepared by the Developerís consultant, PKF Consulting;
  • A "bridge" update to the market feasibility study prepared by the Developerís consultant, based upon a [regulation length] nine hole golf course;
  • The legal opinion received by the Developer regarding the deed restriction on the city owned land proposed to be used for the golf course and practice range; and
  • Copies of concession agreements for other private use of public land.

The meeting was attended by Robert Wetmore of Keyser Marston, one of the Cityís Consultants assisting staff during its processing of the Developers application for the Resort Project. Near the end of the meeting, Mr. Wetmore recommended that the City retain HVSI, a consulting firm specialized in hospitality resort properties, to conduct a limited review of the 1997 market feasibility study prepared by the Developers consultant, as well as the "bridge" update to it. Mr. Wetmore also suggested that HVSI could independently attempt to answer the question whether or not golf is a necessary amenity, as well other relevant questions raised by both members of the FAC and Finance Staff, regarding the feasibility of the Resort Project.

November 14, 2000 FAC Meeting Ė Review and Discussion of Feasibility Information Provided By Developer And HVSI Scope of Services Letter

1997 Market Feasibility Study Regarding the Resort Project:

The information volunteered or requested by the members of the FAC during its September 12, 2000 meeting was made available prior to the meeting, including the market feasibility study that was prepared for the Resort Project in 1997 by PKF Consulting. It is noteworthy that the 1997 market feasibility study included the assumption that a regulation length eighteen-hole golf course (rather than the proposed 9-hole course) would be provided as a necessary amenity for the Resort Project. The 1997 market feasibility study was used for the preparation of the ERA Reports. Therefore, the ERA Reports included projected gross occupancy rental revenue and related TOT tax revenue that relied on the underlying projected Room Inventory, Occupancy Rate, Revenue Per Available Room (REVPAR) and other projected operating statistics based upon an 18-hole golf course.

2000 Update to 1997 Market Feasibility Study:

At the request of the FAC, the Developerís consultant, PKF Consulting, prepared a bridge update to the 1997 study, titled "Summary Report on the Potential Market Demand for the Proposed Long Point Resort to be developed in Rancho Palos Verdes, California", and dated October 2000 (hereafter referred to as the "2000 Update").

The 2000 Update was silent regarding the impact on the feasibility of the Resort Project, if any, resulting from changing the Resort Project plan to include a regulation nine hole golf course, with adjoining practice facility and golf learning center, rather the eighteen hole course included in the 1997 market feasibility study.

Upon request by the FAC and the Cityís Financial Consultants, the Developer was directed to instruct its Consultant to consider the impact on the feasibility of the Resort Project, resulting from changing the application to include a regulation nine-hole golf course, rather the eighteen-hole course. The Developerís Consultant 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 as to whether or not any quantitative research was conducted to support the assertion that the Resort Project, with a regulation length nine-hole golf course, is feasible.

HVSI Scope of Services Letter:

The first draft of the HVSI Scope of Services letter was prepared by Mr. Wetmore of Keyser Marston, one of the Cityís Financial Consultants for the Resort Project. Finance Staff presented the proposed HVSI Scope of Services letter to the members of the FAC during its November 14, 2000 meeting. Upon completion of the presentation, the members of the FAC made several suggestions, including several questions that should be asked of, and answered by HVSI, regarding the feasibility of the Resort Project. Several noteworthy excerpts included in the HVSI Scope of Services letter follow:

"The issue that the city has raised is whether the use of the public land for the 9 hole golf facility is necessary for project feasibility. (Note: Within this context, "feasibility" refers to market feasibility rather than to financial feasibility testing in respect to development cost, rate of return, etc.). The range of response could be, as examples:

    • Without immediate proximity of the golf course amenity the project concept would be (or would not be) significantly flawed.

    • Without immediate proximity of the golf course, there is significant (or insignificant) likelihood that the projected room rates and occupancy could be achieved.

We would anticipate that a fundamental approach would be identification and evaluation of comparable projects.

The HVS report should specifically address these questions:

    1. Does HVS agree with the conclusions drawn by PKF consulting regarding the room rates and occupancy levels projected for the proposed hotel?
    2. Given the remote location of the Rancho Palos Verdes site, the relative lack of amenities, and the substitution of a 9-hole golf course for an 18-hole golf course, does HVS agree with the projects selected by PKF as "comparable"?
    3. Absent an 18-hole championship golf course (as was contemplated by the original PKF market study) can the proposed hotel achieve the projected occupancy and income levels?
    4. Is the nine-hole golf course, driving range and practice facility currently proposed by the developer required to achieve the room and occupancy rates currently projected?
    5. Would the hotel achieve projected occupancy and income levels if the portion of the golf amenity proposed to be built on City property is eliminated (a par 3 course, driving range and practice facility would remain)?
    6. Would the hotel achieve projected occupancy and income levels if the portion of the golf amenity proposed to be built on City property is eliminated and the developer enters into a marketing arrangement with a nearby golf course (i.e. Ocean Trails)?"

December 12, 2000 - Summary Of Suggestions Regarding Valuation Methods For A Concession Agreement

The Members of the FAC have substantial expertise and experience with complex business matters. Therefore, Finance Staff solicited suggestions from the FAC regarding the determination of the concession value for the use of the Cityís land and related concession fee. The FACís suggestions are summarized later in this report.

June 13, 2001 Ė HVSI Report, Dated June 8, 2001

The Cityís resort consultant, HVSI, completed their limited study and issued their report (hereafter referred to as "HVSI Report"), dated June 8, 2001. HVSI presented an overview of its findings contained in the HVSI Report during the June 13th FAC meeting. During its discussion, the members of the FAC directed Finance Staff, HVSI and Keyser Marston to research the answers to several questions and obtain additional information. A list of the information requested by the FAC during the June 13th FAC meeting follows:HVSI was directed to obtain additional comparatives of other resort projects;

1.) HVSI was directed to obtain additional comparatives of other projects.

1.) HVSI is to perform a break-even analysis of the financial projections prepared by the Developer;

2.) HVSI was to request the amount of money provided in the Developerís financial projections for concession payments to the city for use of the Point Vicente Park land for golf;

3.) HVSI was to request the Developer to revise its financial projections and determine the impact on internal rate of return resulting from the elimination of golf on city land with and without a joint marketing agreement with Ocean Trails;

4.) HVSI is to compare and determine the significance of the Developerís estimates of the land cost vs. the total overall cost of the resort project; and

5.) Keyser Marston was to conduct a review of the feasibility of the proposed golf operation.

Most of the information requested above was provided by HVSI in a supplementary report provided for the August 15th FAC meeting. Additionally, the FAC Chair requested the Developer to provide an overview about the capabilities of its organization at the June 27th meeting of the FAC.

June 27, 2001 - Requested Information For The Finance Advisory Committee

Because of the short duration of time since the previous meeting, Finance Staff provided a progress report and some preliminary comments forwarded by the Cityís consultants. At the request of Finance Staff, HVSI also prepared a Methodology Letter, dated June 21. 2001, describing its credentials, experience, the scope of inquiries made during its visit to the offices of the Developer and the methodology it used during its limited study. During its discussion, the members of the FAC directed Finance Staff, HVSI and the Developer to research the answers to several additional questions and obtain additional information. A list of the additional information requested by the FAC follows:

1) The Finance Advisory Committee (the "FAC") directed Finance Staff to instruct HVSI to review the "the supporting analysis that the developer likely has as the basis for the analysis". Based upon its discussion upon review of the Methodology Letter dated June 21, 2001, the FAC noted that the pro formas reviewed by HVSI were in "summary format."

2) The FAC agreed with the recommendation and directed Finance Staff to direct HVSI to 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 9-hole courses to 18-hole courses. HVSI will also interview operators of resorts with 27 holes of golf to determine the demand for 9-hole play.

3) The FAC agreed with the recommendation and directed Finance Staff to instruct HVSI to review the stress test projections prepared by the Developer 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. Additionally, the Developer is to compute the estimated transit occupancy tax (TOT) revenue that would be earned by the City based upon the break-even levels. HVSI will then review these stress tests and report the conclusions to the FAC. During the June 27, 2001 FAC meeting, the Developer stated that they have already forwarded the stress test projections to HVSI.

4) The FAC directed Finance Staff to request either a range or an estimate of the

concession amount the Developer has included in its pro formas. Subsequent to the June 27, 2001 meeting, the Developer offered to forward to both the City Manager and the Finance Director the first proposal provided the Cityís consultant, PMW Associates. Based upon its content, the Developer and staff will agree if the concession proposal may be acceptable disclosure to both the FAC and the Developer.

5) The FAC directed Finance Staff to instruct HVSI to determine and apply an approach to provide the FAC additional assurance that the Developerís land cost is not excessive and causing the Developerís IRR calculation to be feasible based only upon the assumption that 550 keys are available for rent.

6) The FAC directed Finance Staff to instruct HVSI to review the calculations, discuss with the developer (if necessary), and report to the FAC why the IRR calculation is less, using an 8.5% borrowing rate.

7) The FAC directed Finance Staff to instruct HVSI to review the calculations of projected TOT revenue and reconcile with the revenue subject to TOT presented in the Developerís pro-formas.

8) Subsequent to the June 27, 2001 FAC meeting, Member Wolowicz clarified his second recommendation to #5 above via e-mail to both the FAC Chair and Finance Staff. Accordingly, Finance Staff will instruct HVSI to review the IRR calculations assuming the villas are deleted from the plan and two golf holes are moved to the Developerís own property.

The findings, conclusions and answers to the above questions were presented by Finance Staff and HVSI during the August 15th FAC meeting.

Mr. Robert Lowe, President of Destination Development Corporation, gave an overview about its organization, including its commercial properties, hotel and resort properties and residential properties it owns and manages throughout the world. A summary of the Developerís capabilities are described in the Findings and Conclusions section of this report.

August 15, 2001 - Additional Information Requested June 27, 2001

Prior to the August 15th meeting, HVSI made additional inquiries and reviewed additional information as requested by the FAC during meetings on June 13th and June 27th. HVSIís findings are included in the "Supplemental Report Ė Additional Information - Requested June 27, 2001". HVSI provided an overview of its Supplemental Report and answered questions from FAC members. Finance Staff separately presented an overview regarding the concession compensation that the Developer included in its pro-formas.

Noteworthy Limitations:

During the FACís assignment regarding the Resort Project, Finance Staff experienced a highly professional spirit of cooperation with the Developer, the Cityís Consultants and the FAC. Even with this spirit of cooperation, the following limitations are noteworthy:

  • The Developer has expressed that a regulation length 9-hole golf course is a necessary amenity for the Resort Project to be feasible. The Developerís consultant, PKF Consulting, did not conduct any research of comparable resorts with 9-hole golf courses in the preparation of its 2000 Update to 1997 Market Feasibility Study. At the direction of the FAC, HVSI performed inquiries with resort operators with 9-hole golf courses. Unfortunately, HVSI found no comparable resorts with 9-hole golf courses. Notwithstanding the lack of comparable 9-hole golf resorts, HVSI concluded that the inclusion of a regulation length 9-hole golf course and spa amenities enable comparability with other Southern California resorts.
  • The Developerís financial pro-formas are proprietary documents maintained in confidence during the course of the FACís assignment. It is customary for similar work product (e.g. business plans and strategic forecasts) to be reviewed by consultants, auditors, prospective lenders and investors pursuant to a confidentiality agreement. Accordingly, HVSI and the Developer entered into a confidentiality agreement enabling HVSI to review any and all relevant information it deemed necessary to perform its inquiries and reach its conclusions. The presence of the confidentiality made it more difficult for HVSI to report its findings to the FAC. Notwithstanding the fact that members of the FAC and Finance Staff understand and respect the Developerís need to keep the information in confidence, it significantly limited the FACís ability to directly review financial information about the Resort Project.

FINDINGS AND CONCLUSIONS:

As described previously, the assignment directed by the City Council to the FAC was to review the Developerís financial reports to determine:

  1. Whether or not the developerís basis for computing the projected tax and fee revenue to be paid the City is reliable; and
  2. Whether the projected tax and fee revenue to the City is achievable.

  3. The assignment was revised to include a review of the following:

  4. The Developers Consultant shall conduct a financial analysis [and the Cityís Consultant, HVSI shall review the analysis] regarding the financial impact resulting from the elimination of Resort Villas, Casitas and/or other facilities from the Resort Project.

Though the FACís findings have led to certain conclusions about the three questions asked by the City Council, it has raised many other noteworthy questions to the Developer, Finance Staff and the Cityís Consultants that are:

  • Sub-questions of the three City Council questions stated above;
  • Additional questions significant to its review of the Resort Project; and
  • Follow-up questions resulting from the findings, answers and conclusions of the Cityís consultant, HVSI;

Regardless of its conclusions to the three questions asked by the City Council, The members of the FAC do not agree with all conclusions expressed by the Developer, Finance Staff or HVSI. Even in reaching its concurrence (or non-concurrence), the members of the FAC have certain noteworthy reservations. Finance Staff has attempted to incorporate its best understanding of the FACís non-concurrence and reservations into Findings and Conclusion section of this report for the sake of discussion during the August 22nd FAC meeting.

Format of Presentation of Findings and Conclusions:

The Findings and Conclusions are presented in the following format:

  • Significant questions asked by the FAC and answered by either the Developer, Finance Staff and/or the Cityís consultants, Keyser Marston and HVSI;
  • Answers to the three questions directed by the City Council;
  • Information relevant to a concession agreement between the Developer and the City; and
  • Other significant findings that members of the FAC deem noteworthy for consideration by the City Council.

Significant Questions And Information Requested By The FAC And Answered By Either The Developer, Finance Staff And/Or The Cityís Consultants:

Six Questions Raised By Members Of The FAC And Finance Staff, Included In The HVSI Scope of Services Letter, Dated December 15, 2000 and Answered In the HVSI Report, Dated June 8, 2001:

1.Does HVS agree with the conclusions drawn by PKF Consulting regarding the room rates and occupancy levels projected for the proposed hotel

    "In order to answer this question, HVS International reviewed both the 1997 and 2000 market studies presented by PKF Consulting, as well as data from our in-house databases. The consultants also requested additional information from PKF Consulting, regarding a more detailed analysis of the contribution of occupancy and rooms revenue provided by the various components of the proposed development (i.e., standard hotel rooms and casitas). Upon request, PKF Consulting provided detailed projections regarding the contribution of the standard hotel rooms and casitas and their relationship to the proposed subject propertyís occupancy and average rate.

    The average rates set forth in the PKF report forecast an average rate for the proposed Long Point Resort of $285 in 2000 dollars. PKF inflates the average rate by 3.0% per year throughout the analysis, resulting in the following average rate and occupancy forecast, assuming the resort was to open on July 1, 2003.

     


PKF Occupancy and Average Rate Projection

The income and expense pro formas prepared by Destination Resorts were based upon the following occupancy and average rates, assuming an opening date of January 1, 2005. The projected average rates expressed in 2000 dollars are set forth for comparison purposes.


Destination Resorts Occupancy and Average Rate Projection

Both the PKF and Destination Resorts projections stabilize at the same occupancy and average rate, but differ in terms of the pace at which stabilization will be achieved. PKFís 2003 forecast is for a partial year (six months), which accounts for most of the difference in the first yearís occupancy levels. We note that PKF does not forecast a buildup in average rate to stabilization, while the Destination average rate assumes a discounting of rates during the initial years of operation. Based upon our understanding of new resort hotel operations, the current economic environment, as well as the level of stabilized average rate projected, it is our opinion that discounting of average rate during the initial years of operation will likely be a required course of action. Since we are commenting on the appropriateness of Destination Resortsí development pro formas, we will comment on the reasonableness of their projected occupancy and average rate, as opposed to those projected by PKF.

Based on the information available, it is our opinion that the projections of occupancy and average rate set forth by Destination Resorts are reasonable, assuming that the current facilities plan for the proposed resort remains intact, including the nine-hole golf course, meeting space, spa, and proposed room inventory. No projection of occupancy and average rate were prepared by PKF or Destination Resorts assuming that the resort was built without the nine-hole golf course, so there was no comparative analysis for us to assess."

HVSI Conclusion:

"HVS International has reviewed the actual operating results of several comparable properties located in the Southern California region, including those listed as competitors in the PKF study. The projected average rate of the proposed development are comparable to the rates being achieved by other leisure and group-oriented destination resorts in the region."

FAC Comments:

The members of the FAC generally agree with HVSIís findings, but express their reservations because no true comparable resort properties with 9-hole golf courses exist.

2. Given the remote location of the Rancho Palos Verdes site, the relative lack of amenities, and the substitution of a nine-hole golf course for an 18-hole golf course, does HVS agree with the projects selected by PKF as "comparable"?

"The comparable properties described in the PKF market study (Four Seasons Biltmore, Four Seasons Aviara, Ritz-Carlton Laguna Niguel, Hotel Del Coronado, La Costa Resort and Spa, Ojai Valley Inn, and Loews Santa Monica) are group- and leisure-oriented, full-service properties (with the exception of the Loews Santa Monica, which has a significant commercial demand component) and are generally considered to be the premier meeting and group destinations in the Southern California region. While each of the properties differ slightly from one another in terms of their age, quality of improvements, quality of service, and location, each comparable property offers a unique amenity (i.e. the sweeping ocean views at the Ritz-Carlton Laguna Niguel or the world-class golf facilities at the La Costa Resort and Spa) that allows for its inclusion in this top-tier of meeting and group destinations in the region. Appropriately excluded from the analysis are the higher-rated boutique and golf resorts in Southern California, which obtain average rates in excess of $400, and the lower-rated resorts such as the Loews and Marriott resorts on Coronado, which attained a combined average rate of $185 in 2000."

HVSI Conclusion:

"Based on the unique location and dramatic views afforded by the subjectís location as well as a review of the proposed improvements of the subject site, including the proposed amount of meeting space and the nine-hole golf and practice facility, it is our opinion that the proposed subject property would have sufficient appeal to compete among the hotels described as comparable in the PKF market study."

FAC Comments:

The members of the FAC generally agree with HVSIís findings, but express their reservations because no true comparable resort properties with 9-hole golf courses exist.

3. Absent an 18-hole championship golf course (as was contemplated by the original PKF market study) can the proposed hotel achieve the projected occupancy and income levels?

"Without the inclusion of the golf component of the proposed resort development, it is unlikely that the proposed subject property can achieve the occupancy projections set forth in the PKF study within the time frame presented in the report. This is not to say the development of a meeting-and-group-oriented resort is not suitable for the subject site. Rather, without an amenity such as a golf facility, it would likely take longer for the resort to develop the strong base of meeting and group demand required to successfully penetrate the market, which would potentially render the project unfeasible at this time. As support for this statement, HVS points to several resorts that were developed on Coronado Island (in San Diego County), the early operating histories of which reflect that which could be expected of the subject property in the absence of a golf facility. Both the Loews Coronado Resort and the Coronado Le Meridian (now the Marriott Coronado Resort) offer high-quality hotel improvements and feature spectacular waterfront views and well-designed meeting-and-group facilities. However, without true recreational and leisure amenities (such as the golf facility at the subject property) these resorts took several years to successfully penetrate the Southern California meeting and group market. It should be noted that both of these resorts are now achieving healthy market penetrations, but it took several years longer than similarly positioned competitors that offer golf or some other unique recreational amenity.

To illustrate the difference in average rate attainable by hotels without a golf course as compared with those of hotels with a golf course, we point to the actual performance of four resort hotels, all with a leisure and group meeting mix of business similar to that anticipated for the subject. The Loews Coronado and Marriott Coronado hotels, neither of which has an on-site golf course, attained a composite average rate of $185 in 2000. Contrast this rate with those attained by the Four Seasons Aviara Resort and the Ritz-Carlton Laguna Niguel, which averaged $312 in 2000. While the Ritz-Carlton does not have a golf course on site, it is marketed in conjunction with a separately owned golf course across the street. We also note that Four Seasons and Ritz-Carlton are luxury brands, while Loews and Marriott are considered to be upscale brands. The Destination Resorts brand is generally viewed as falling between the luxury niche and the upscale niche. The subject property will not have an established luxury brand identity, but it will have a unique location in the Los Angeles area with access to a densely populated area of potential corporate and individual consumers. The subjectís proposed average rate of $285 in 2000 dollars is only $27 below the composite average rate of the Ritz-Carlton and the Four Seasons. It is extremely difficult to make an objective analysis of the facilities, amenities, location, and market orientation of the competitive resorts to discern the impact of replacing an 18-hole golf course with a nine-hole course, or omitting an on-site golf course altogether. It is the general consensus of the consultants that the subject site offers a unique, superb opportunity to develop a resort within the greater Los Angeles area."

HVSI Conclusion:

"We know that the presence of a marketable golf course enhances average rate and occupancy, and thus the overall feasibility and financibility of the project. While an 18-hole golf course would obviously be preferred, the physical constraints of the site make a regulation length nine-hole course (that can be played as 18 holes back-to-back) a worthy alternative. With the subjectís extraordinary location and views it is our opinion that even a nine-hole golf course would become an attraction that would enhance the overall resort ambience of the operation considerably."

FAC Comments:

The members of the FAC generally agree with HVSIís findings, but express their reservations because no true comparable resort properties with 9-hole golf courses exist.

4.Is the nine-hole golf course, driving range and practice facility currently proposed by the developer required to achieve the room and occupancy rates currently projected?

"Based on current market observations, it is unlikely that the performance of the proposed subject property will be negatively impacted to a significant degree by the decision to offer a nine-hole golf facility rather than an 18-hole facility. Given the views afforded by the oceanfront location of the proposed golf course facility, it is likely to be an attractive amenity even though it only offers a nine-hole layout. There are also advantages to offering a nine-hole layout (as opposed to an 18-hole layout) at a meeting-and-group meeting oriented resort. Specifically, a nine-hole course takes less time to play, so the property is likely to get higher golf participation from its group meeting guests who would only require a few hours of free time to play the course. This is in direct comparison to the estimated five hours required to play 18 holes at a normal resort course. Additionally, the proposed subject property will be able to offer a golfing experience at a lower price point than the subjectís competitors with 18-hole facilities. Ultimately, these two factors (less time requirements and a lower price for the golf experience) afforded by the golf amenity are likely to allow for the proposed subject property to more effectively penetrate the meeting and group market segment."

HVSI Conclusion:

"Clearly, an adjacent 18-hole course would be preferable in terms of building consumer awarenessóthat is, to provide a stimulus for rapid market penetration and to maximize the resortís average rate. However, it is our opinion that a resort with a nine-hole course will perform at a level closer to that of one with an 18-hole course than to one without any course at all."

FAC Comments:

The members of the FAC agree with HVSIís findings.

5. Would the hotel achieve projected occupancy and income levels if the portion of the golf amenity proposed to be built on city property is eliminated (a par-three course, driving range, and practice facility would remain)?

"It is our opinion that a further reduction in the scope of the proposed golf amenity would have a negative effect on the viability of the proposed subject property. While the previous response details our opinion as to the acceptability of a nine-hole course versus an 18-hole course, it is likely that a par-three course, or executive course would not offer a golf experience commensurate with the needs of the typical resort guest. Additionally, it is our opinion that a limited-scope golf amenity would likely have less appeal to local golfers, thus having a negative impact on the overall viability of the resort development. Again, the nine-hole golf course, while not as beneficial to the resort operation as an 18-hole golf course, still provides an attractive resort amenity that will facilitate the marketability of the proposed subject property."

Restatement of HVSI Conclusion:

"It is likely that a par-three course, or executive course would not offer a golf experience commensurate with the needs of the typical resort guest."

FAC Comments:

The members of the FAC agree with HVSIís findings.

6.Would the hotel achieve projected occupancy and income levels if the portion of the golf amenity proposed to be built on city property is eliminated and the developer enters into a marketing arrangement with a nearby golf course (i.e. Ocean Trails)?

"The Ocean Trails development offers a unique opportunity for the operators of the proposed resort property to provide its guests with a high quality, 18-hole golf experience at a location that is within a ten-minute drive of the subject property. While it is our opinion that the existence of Ocean Trails will likely enhance the operation of the proposed resort, it is not a strong enough amenity to attract sufficient demand to the subject property in the absence of an on-site golf facility. The Ocean Trails golf course should be viewed as providing an additional amenity to resort guests, assuming that the currently proposed facilities are developed (including the nine-hole golf facility)."

HVSI Conclusion:

"Assuming that the nine-hole golf facility is not developed as part of the subject resort, and that the developers are able to gain the cooperation of the owners of Ocean Trails in forming some marketing and packaging alliances, the Ocean Trails facility is not close enough to the resort to offer a seamless resort and golf experience. In our opinion, this would potentially limit the effectiveness of any joint marketing efforts. Ultimately, this would have a detrimental effect on the overall viability of the proposed subject property."

FAC Comments:

The members of the FAC ________________. Even if the Developer agreed with the opinions of the FAC and Finance Staff, itís a moot point simply because only the Developer and Ocean Trails could make such an arrangement happen.

Request for Additional Information or Questions Raised By Members Of The FAC and Answered By HVSI, Keyser Marston and Finance Staff, Staff Report Dated June 27, 2001:

Additional time was necessary for HVSI to perform the work directed by the FAC during its previous meeting on June 13th. Several of the replies provided by the Cityís consultants and included in the June 27th staff report were noteworthy as follows.

1.) HVSI was to perform A Break-Even Analysis of the financial projections prepared by the Developer.

Several members of the community have said that the City would become an "equity partner" in the event a portion of Point Vicente Park, is provided for golf as a part of the proposed Resort Project. With a lenderís perspective in mind, several members of the FAC requested that a "break-even" analysis be performed. Though the break-even analysis was completed later, HVSI offered the following comments:

"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 propertyís 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."

The cessation of operations of a resort property in the Western United States is a rare occurrence. The Cityís consultants see this as a "worst Ė worst case scenario".

2.)Keyser Marston was to conduct a review of the feasibility of the proposed golf operation.

Keyser Marston offered the following reply:

"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."

  1. The members of the FAC noted that HVSIís Original Report, dated June 8, 2001, described its review of "summary" financial information as follows:
  2. Forecast of Income and Expense for Hotel Ė Summary Form:
  3. Forecast of Income and Expense for Golf Course Ė Summary Format
  4. Forecast of Villa Sales Revenue and Expenses and Ongoing Management Income to the Hotel Ė Summary Format
  5. Summary Development Budgets for Each Component: Golf, Hotel and Villas
  6. Forecast of Project Financing Inflows and Outflows.

The FAC directed HVSI to conduct an additional site visit at the administrative offices of the Developer to review the details associated with the forecasts described above.

Request for Additional Information or Questions Raised By Members Of The FAC and Answered By HVSI, Supplemental Report Ė Additional Information - Requested June 27, 2001:

As described previously, the FAC requested the following additional information during its meeting on June 13th. HVSIís reply and conclusion along with comments by the FAC follow:

1.)The FAC directed Finance Staff to instruct HVSI to review the "the supporting analysis that the developer likely has as the basis for the analysis". Based upon its discussion upon review of the Methodology Letter dated June 21, 2001, the FAC noted that the pro formas reviewed by HVSI were in "summary format."

"As previously stated in the methodology letter dated June 21, 2001, HVS International previously reviewed developerís development pro formas which served as the basis for the IRR calculations discussed in the original HVS International report. These pro formas included the following components: forecast of income and expense for hotel Ė summary format; forecast of income and expense for golf course Ė summary format; forecast of villa sales revenue and expenses and ongoing management income to the hotel Ė summary format; summary development budgets for each component, including golf, hotel and villas; and forecast of project financing inflows and outflows. In order to review the developerís pro formas in greater detail, members of HVS International met for approximately four hours with members of the development team (Robert Lowe Jr., Michael Mohler, and Lisa Mullaney) on July 19, 2001, at the developerís Brentwood offices.

During this meeting, members of HVS International reviewed detailed financial statements and/or key operating ratios from seven of the developerís existing resorts. It was explained by the developer that the operating results of these existing resorts formed the basis of the pro forma projections presented to HVS International in previous stages of this consulting assignment. This exercise was undertaken in order to review the methodology used by the developer in forming the pro forma projections, and to further test the reasonableness of these projections. In addition, members of HVS International reviewed detailed development cost estimates for the various components of the resort, including the main hotel building and casitas, the golf course, the villas, and other proposed site improvements.

Detailed operating information was reviewed from the following resorts: the Hotel Del Coronado, San Diego, California; the Iverness Hotel & Golf Club, Denver, Colorado; LíAuberge Del Mar, Del Mar, California; the Argent Hotel, San Francisco, California; the Eden Roc Resort, Miami, Florida; the Tempe Mission Palms Resort, Tempe, Arizona; and the Vail Cascade Resort, Vail, Colorado. It should be noted that of the resorts detailed above, the Hotel Del Coronado was considered by the developer to most closely resemble the market positioning of the proposed subject property in terms of its coastal location and market mix. While the Hotel Del Coronado does not have a golf amenity and is slightly larger than the proposed subject property, it currently accommodates a significant portion of its demand from the meeting and group market, as is expected at the proposed subject property. The high proportion of meeting and group business impacts the hotelís operating performance due to the strong food and beverage revenue derived from this segment, as well as meeting room rental and other revenue streams associated with the typical meeting and group guest. Because of the similarities between the proposed subject property and the Hotel Del Coronado, the Hotel Del Coronadoís historical operating results were heavily relied upon by the developer in formulating the cash flow projections of the proposed Long Point Resort. HVS International agrees with the developerís assumption that the Hotel Del Coronado is the most likely comparable property of those listed above.

Utilizing the data discussed above, members of HVS International reviewed the projected income and expense items in terms of three industry measures: percentage of revenue, amount per occupied room, and amount per available room. The most appropriate measure may vary by each revenue or expense item. For example, other income revenue, which varies almost directly with the number of occupied rooms at a hotel, is generally forecasted on a per-occupied-room

basis. A propertyís administrative and general expense, which is largely fixed in nature, is generally projected on a per-available-room basis (dollar amount multiplied by the number of rooms). Each of the developerís pro formas for the proposed subject property was reviewed in terms of these three measures, and compared to the range set forth by the existing resort operations. Upon completion of this review, members of HVS International concluded that

the developerís cash flow projections for the proposed subject property appeared reasonable.

In addition, members of HVS International reviewed detailed development cost budgets for the various components of the proposed subject property. The projected costs were reviewed on a total cost basis, as well as on a per-room basis. These budgets were presented for each development scenario, and served as the basis for the IRR calculations presented in the previous consulting letter, dated June 8, 2001. Upon review of the detailed development cost budgets, the consultants concluded that the development costs used in the pro formas

appeared reasonable. While the consultants are not professional cost estimators, the cost estimates fell within a normal range of development costs expected of a high-quality, oceanfront resort. This conclusion was based on the development costs of similar oceanfront resorts in California that HVS International obtained through the course of other assignments."

Restatement of HVSIís Conclusion:

"Upon completion of this review, members of HVS International concluded that the developerís financial projections for the proposed subject property appeared reasonable. While the consultants are not professional cost estimators, the cost estimates fell within a normal range of development costs expected of a high-quality, oceanfront resort. This conclusion was based on the development costs of similar oceanfront resorts in California that HVS International obtained through the course of other assignments."

FAC Comments:

The members of the FAC ______________________.

2.) The FAC agreed with the recommendation and directed Finance Staff to direct HVSI to 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 9-hole courses to 18-hole courses. HVSI will also interview operators of resorts with 27 holes of golf to determine the demand for 9-hole play.

"Utilizing the National Golf Foundationís (NGF) directory of golf courses, members of HVS International were able to find approximately nine golf resorts offering a nine-hole golf course. Of the resorts presented, none offered a dramatic oceanfront location similar to that of the proposed subject property, and only the Meadowood Resort offered a high-quality facility and guest experience that equaled or exceeded that which is expected to be provided guests of the proposed subject property. Of these courses, the majority offered only lower to upper mid-rate accommodations, which tend to consist of "lodge"-style facilities. It is our opinion that none of these resorts with nine-hole golf courses can reasonably be viewed as truly comparable to the proposed subject property.

The properties included: the Four Points, San Diego, California; the Aliso Creek Inn, Laguna Beach, California; the Edgewater Beach Resort, Panama City Beach, Florida; the Doral Arrowood Conference Center, Rye Brook, New York; the Lodge at Woodcliff, Rochester, New York; the Radisson Poco Diablo Resort, Sedona, Arizona; the Sea Pines Golf Resort, Los Osos, California; and the Meadowood Resort, Napa, California. In addition, the NGF survey included the Sea Ranch Lodge, which had operated with a 9-hole golf course at the time of the survey, but whose owners have subsequently expanded the course to 18 holes due to heavy local play. It should be noted that the owners did not expand the course to increase demand at the resortís lodge facility, which only has 20 units. While none of these properties are expected to compete directly with the proposed subject property due to their locations and/or limited lodging and

meeting facilities, members of HVS International conducted telephone interviews with the general managers or directors of sales from several of the aforementioned properties.

A majority of the managers or directors of sales of the properties (particularly the lower-rated properties) reported that they consider their golf course to be an amenity or an extension of their services rather than a revenue generator or a major source of demand. However, many of the managers attributed this to their lack of a first-class golf facility. As a result, it was reported that the properties tend to market their golf facilities moderately. The managers reported that much of their room night demand is generated by leisure sources living in relatively close proximity to the property. This is consistent with the smaller, lodge-style facilities offered at these properties. The properties whose representatives were interviewed generally lacked a true resort identity due to their lack of extensive services and amenities, as well as their smaller room counts. We ascertained during several of our interviews (with the operators of resorts with a nine-hole golf amenity) that meeting planners have more recently shown a propensity to prefer nine-hole courses. Meeting and group demand sources have less time for leisure activities during their stay, as the average length of stay for this segment has decreased in recent years. Additionally, the extension of amenities at many resorts, particularly the proliferation of full-service spas, has further eroded time or money available for golf. Many guests opt for one amenity or another, but generally not both. For example, some guests may opt for a spa treatment rather than playing golf. However, the opportunity to do either is reportedly an important factor when choosing a resort destination for a particular group.

It was reported during our interviews that the biggest disadvantage of having a 9-hole golf course (instead of an 18-hole facility) was the inability to host tournaments. Another disadvantage reported was the inability of properties to market their golf facilities as a main attraction. The people we spoke with reported an obvious difficulty in attracting serious golfers who are seeking a "big name"-designed course. However, given the panoramic ocean views that are expected to be offered at the proposed subjectís golf facility, this challenge is likely to be minimized.

In general, those interviewed reported that they are successful in penetrating the local golf market, which includes a strong local base and hotel guests that are not seeking a major golf destination. The property representatives do not think that their facilities competed with 18-hole courses in their respective areas. In addition, due to the relatively small room counts of these lodge-style properties, the hotels reportedly did not compete to a large degree with other regional lodging facilities that contained a golf amenity.

Members of HVS International also interviewed management at three resorts that did not offer on-site golf, but participated in joint marketing programs with other golf courses in their respective areas. Management of these resorts, the Ritz-Carlton Laguna Niguel, the Ritz-Carlton Rancho Mirage, and the Lakeway Inn, were interviewed via telephone. The results of these interviews are as follows.

Management of the Ritz-Carlton Laguna Niguel did not report any major disadvantages with not having a golf course due to their association with the Links at Monarch Beach, a golf course located within one-quarter mile of the resort. It should be noted that the Ritz-Carlton has a golf-use agreement with this course that allows the resort to use up to 50% of the total tee times on any given day. Golf-use agreements of this nature are fairly common among resorts in the region. In fact, resorts such as the Arizona Biltmore, which had owner-operated golf facilities at one time, have sold their adjoining golf courses, while retaining the rights for preferential tee times and allowing continued marketing of the course as a resort amenity.

The Ritz-Carlton Rancho Mirage has associations with 18 golf courses in the Coachella Valley. Management reported that the associations have worked well for them due to the variety of courses and their renowned nature. The owners have finally obtained approval to build an 18-hole golf facility on site. According to property management, the golf course will enable the property to be marketed as a self-contained, complete destination resort and is expected to increase the resortís ability to generate revenue. While the propertyís performance hasgenerally exceeded, or been on par with, the performance of other luxury golf resorts in the immediate market area (such as La Quinta), the proposed golf course will reportedly offer Ritz-Carlton a greater competitive advantage and is expected to significantly boost average room rates.

The Lakeway Inn in Austin, Texas is a dedicated conference center hotel associated with an 18-hole golf course located approximately five minutes from the property. Transportation is provided but hotel guests do not receive preferred rates or tee times at the golf facility, unless the hotel is offering a special promotion. The hotel receives a 20% commission for all hotel guests playing at the course. Property management reported six to eight occupied rooms per night (subject to slight seasonality) utilizing the golf course. While these additional room nights add to the subjectís overall occupancy, the resort is not marketed as a golf destination. Instead, the Lakeway Inn markets its location on Lake Travis more heavily than it does the associated golf course. However, the combination of the lake, dedicated conference center, swimming pools, and the associated golf course enables it to compete effectively with true golf resorts in the region, including the Barton Creek Resort. Barton Creek is also a dedicated conference center hotel with an 18-hole championship golf course, but lacks the lakefront locale.

Based on our telephone interviews with representatives of several of the properties with nine-hole golf facilities, an on-site golf amenity was considered to have positive effects on their respective occupancy and/or average rate attainment. While a joint marketing affiliation with a neighboring golf facility was also found to have positive impacts on the performance of the resorts interviewed, it was considered to be most successful when a golf-use agreement and preferential tee times were in place, and when the affiliated golf course was within three miles of the resort. Based on these findings, HVS International believes that the proposed 9-hole golf course, while not as beneficial to the resort operation as an 18-hole golf course, still provides an attractive resort amenity that will facilitate the marketability of the proposed subject property. This will ultimately enhance the revenue potential of the proposed subject property while reducing the risks associated with revenue attainment. In addition, HVS International believes that the single high-quality golf course in the subjectís area (the Ocean Trails facility) is not close enough to the subject site to offer a seamless resort and golf experience. In our experience, this would potentially limit the effectiveness of any joint marketing efforts. Ultimately, this would have a detrimental effect on the overall viability of the proposed subject property."

Restatement of HVSI Conclusion:

"It is our opinion that none of these resorts with nine-hole golf courses can reasonably be viewed as truly comparable to the proposed subject propertyÖ. HVS International believes that the proposed 9-hole golf course, while not as beneficial to the resort operation as an 18-hole golf course, still provides an attractive resort amenity that will facilitate the marketability of the proposed subject property. This will ultimately enhance the revenue potential of the proposed subject property while reducing the risks associated with revenue attainment. In addition, HVS International believes that the single high-quality golf course in the subjectís area (the Ocean Trails facility) is not close enough to the subject site to offer a seamless resort and golf experience. In our experience, this would potentially limit the effectiveness of any joint marketing efforts. Ultimately, this would have a detrimental effect on the overall viability of the proposed subject property."

FAC Comments:

The members of the FAC ______________.

3.)The FAC agreed with the recommendation and directed Finance Staff to instruct HVSI to review the stress test projections prepared by the Developer 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. Additionally, the Developer is to compute the estimated transit occupancy tax (TOT) revenue that would be earned by the City based upon the break-even levels. HVSI will then review these stress tests and report the conclusions to the FAC. During the June 27, 2001 FAC meeting, the Developer stated that they have already forwarded the stress test projections to HVSI.

"Per the recommendation of the Financial Advisory Committee, the developer prepared two break-even scenarios that were reviewed by HVS International. Note that in each of the scenarios that assumed a "break-even golf operation," cash flow for the golf facility was not projected, as it was assumed that it would not generate any positive cash flow. In addition, it is assumed that the proposed subject propertyís food and beverage revenue will be reduced in each scenario due to the projected decrease in occupied room nights. These scenarios are described below:

  1. A resort RevPAR that yields break-even cash flow to cover debt service, assuming reduced food and beverage revenue and a break-even golf operation.
  2. A resort RevPAR that yields break-even cash flow before debt service (operational break-even), assuming reduced food and beverage revenue and a break-even golf operation.

According to the developer, the majority of the RevPAR (a product of occupancy and average rate) reduction was accounted for in terms of average rate rather than occupancy. The developerís rationale for this assumption was that given the proposed resortís Los Angeles location and superb oceanfront site, demand for the resort would be readily available at a lower rate. HVS International concurs with this assumption. The occupancy and average rate projected for these two scenarios are presented below, along with the original base-case pro forma.


Break-Even Occupancy and Average Rate Projections:
 
Transient Occupancy Tax Calculations:

 

HVSI Conclusion:

"Members of HVS International reviewed the detailed cash flow projections for each of the two break-even scenarios and found that the projections were accurately modified to reflect substantially reduced operating cash flows relative to the base-case scenario. It is the opinion of HVS International that the break-even projections prepared by the developer appeared reasonable. Based on the break-even cash flow projections presented previously, the developer computed the estimated transient occupancy tax (TOT) revenue that would be earned by the city of Rancho Palos Verdes if these scenarios were to occur. These calculations appeared to be accurate and are presented as follows."

FAC Comments:

The members of the FAC generally agree with HVSIís conclusion, ________________.

4.) The FAC directed Finance Staff to request either a range or an estimate of the concession amount the Developer has included in its pro formas. Subsequent to the June 27, 2001 meeting, the Developer offered to forward to both the City Manager and the Finance Director the first proposal provided the Cityís consultant, PMW Associates. Based upon its content, the Developer and staff will agree if the concession proposal may be acceptable disclosure to both the FAC and the Developer.

The Developer provided the following answer to Finance Staff for inclusion in the June 27th staff report to the FAC as follows:

"A Long Point Resort concession agreement is contemplated to have two compensation features:

 

  • Construction of public improvements on city property; and
  • A stream of cash payments.

Estimated Value of capital Improvements:

The Developer proposes to construct public improvements on the City property (generally throughout the Upper Point Vicente Park land), including the following:

    1. A 30+ acre native vegetation conservation plan;
    2. Several miles of public trails, including those reflected in the Cityís master plan;
    3. Additional park facilities;
    4. Minor utility relocation and undergrounding;
    5. Additional public parking; and
    6. Pedestrian element in tunnel under Palos Verdes Drive that connects City property to Marineland property.

The Developer has reported that the value of these proposed improvements is estimated between $1.8-2.0 Million.

Stream of Cash Payments:

The Developerís financial projections included a cash payment would be based upon the present value of a stream of payments over thirty (30) years, using a 7% interest rate. The present value computation would be based upon the Developerís own estimate of the value of the Upper Point Vicente Park land. The Developer used a $38,000 per acre valuation for the 37.1 acres it proposes to use for a 9-hole golf course. Based upon these assumptions, the annual cash payment would be approximately $112,000 annually.

Finance Staff has verified the accuracy of the Developerís present value computation resulting in the amount of $112,000 annually. Finance Staff hereby asserts that the presentation of the above concession information is not an endorsement of it. Except for the verification of the computation, Finance Staff has performed no further inquiries about the concession information.

Both Finance Staff and the Developer agree the presentation of this information in this Staff Report does not constitute the beginning of the negotiation of the concession amount. The presentation is included for the sole purpose of answering the question raised by the FAC regarding the concession amount included in the Developerís financial projections. Finance Staff discourages any negotiation of the concession amount as a part of the FACís review of the Resort Project. It is Finance Staffís understanding that this is the direction established by the City Council as well."

FAC Comments:

The FACís comments regarding the amount the Developer has included in its financial projections for concession compensation are included later in this report.

5.)The FAC directed Finance Staff to instruct HVSI to determine and apply an approach to provide the FAC additional assurance that the Developerís land cost is not excessive and causing the Developerís IRR calculation to be feasible based only upon the assumption that 550 keys are available for rent.

"Members of HVS International had detailed discussions with the developer with respect to the projected land costs for the proposed subject property. While the confidentiality agreement precludes HVS International from presenting the developerís projected land costs, the developer has indicated that the site of the proposed subject property is currently under contract with the current owner. According to the developer, this contracted price will not vary under any of the

development scenarios presented in the course of this consulting assignment. As a result, the developerís baseline scenario for the IRR calculations (including all proposed amenities) shows the highest return as the cost of the land is distributed over more revenue-producing assets.

For the purpose of this research, HVS International looked at the developerís land costs on a per-room basis and as a percentage of total development cost for each scenario. While the per-room cost of the land cannot be presented here, as it would allow the reader of this report to calculate the projected total land cost, HVS International has concluded that under the baseline development scenario, the per-unit cost of land is toward the lower to middle end of a range established by the per-unit land costs of other proposed coastal resorts developed in Southern California in recent years (the St. Regis Laguna Niguel and the Marriott Laguna Beach Resort). As the development scenarios requested by the Financial Advisory Committee involved the reduction of revenue-producing assets (i.e., the removal of the villa component, the removal of the villa and casita component, etc.), the per-unit cost of the land for the subject site subsequently moved toward the upper end of the established range as the resulting number of

units decreased. At a certain point, these high per-unit land costs can become prohibitive for a proposed development, particularly since the underlying revenue-producing amenity base is eroded.

The consultants also looked at the developerís land costs as a percentage of total development cost. Recall that the developer presented eight unique development scenarios. The following chart details the percentage of the total development cost estimate attributable to the cost of land for each scenario.


Land Cost Ratios as a Percentage of Total Development Cost:

Land costs for hotel and resort developments, excluding entitlement costs, typically range between 10% and 20% of total project costs. This ratio in California, particularly for coastal properties, generally falls toward the upper end of the range. As seen in the previous chart, the land cost ratios, excluding estimated entitlement costs, fall within the normal range of cost ratios.

From the data presented in the chart above, as well as the per-room land cost analysis previously discussed, HVS International concludes that the developerís land costs for the proposed subject property are not excessive, nor are they unreasonably impacting the IRR calculations presented in the previous consulting assignment.

HVSI Conclusion:

"HVS International has concluded that under the baseline development scenario, the per-unit cost of land is toward the lower to middle end of a range established by the per-unit land costs of other proposed coastal resorts developed in Southern California in recent years (the St. Regis Laguna Niguel and the Marriott Laguna Beach Resort). As the development scenarios requested by the Financial Advisory Committee involved the reduction of revenue-producing assets (i.e., the removal of the villa component, the removal of the villa and casita component, etc.), the per-unit cost of the land for the subject site subsequently moved toward the upper end of the established range as the resulting number of units decreased. At a certain point, these high per-unit land costs can become prohibitive for a proposed development, particularly since the underlying revenue-producing amenity base is erodedÖ HVS International concludes that the developerís land costs for the proposed subject property are not excessive, nor are they unreasonably impacting the IRR calculations presented in the previous consulting assignment."

FAC Comments:

The members of the FAC generally agree with HVSIís conclusion.

6.)The FAC directed Finance Staff to instruct HVSI to review the calculations, discuss with the developer (if necessary), and report to the FAC why the IRR calculation is less using an 8.5% borrowing rate.

ĎMembers of HVS International had detailed discussions with the developer with respect to the above question. The developer supplied HVS International with the following response to the question:

"The return schedule on page 9 of the HVS Report represents a seven-year hold scenario. The chart on page 10 is one of the additional runs required by HVS and represents a ten-year hold from the land purchase, a hold of three and one-quarter years longer than the original pro forma. The difference in the hold periods accounts for the inconsistency between interest rate and the IRR on the two schedules.

HVSIís Conclusion:

HVS International concurs with the developerís explanation of this inconsistency.

FAC Comments:

The members of the FAC agree with HVSIís conclusion.

7.)The FAC directed Finance Staff to instruct HVSI to review the calculations of projected TOT revenue and reconcile with the revenue subject to TOT presented in the Developerís pro formas.

"Members of HVS International reviewed the transient occupancy tax projections from the July 2000 ERA report and compared the calculations with those of the developerís baseline pro forma. The following chart details the two streams of estimated TOT revenue for both the ERA study and the developerís pro forma. Note that all dollar amounts are shown in 2000 dollars.


Estimated Stabilized TOT Revenue (2000 dollars)

 

HVSIís Conclusion:

"As shown in the preceding chart, the transient occupancy tax projections from the developer compare favorably to those projected by ERA in their report dated July 2000."

FAC Comments:

The members of the FAC agree with HVSIís conclusion, but offer several comments related to the potential impact of the La Habra Supreme Court decision later in this report.

8.)Subsequent to the June 27, 2001 FAC meeting, Member Wolowicz clarified his second recommendation to #5 above via e-mail to both the FAC Chair and Finance Staff. Accordingly, Finance Staff will instruct HVSI to review the IRR calculations assuming the villas are deleted from the plan and two golf holes are moved to the Developerís own property.

"The following chart details the developerís revised IRR calculations, including the additional scenario depicted in the above question (referred to as "442 Rooms; No Villas; Parking") and the revised development costs mentioned in a previous question. The resulting IRR calculations are as follows.


Revised IRR Calculations Ė Including Additional Scenario

As shown in the previous chart, the additional development scenario (442 Rooms; No Villas; Parking) produces a levered IRR of 10.0%, and an unlevered IRR of 9.7%."

HVSI Conclusion:

"As discussed in the previous HVS consulting letter, it is unlikely that a 10.0% IRR, or a 9.7% IRR, would be considered as an acceptable return for investors in the current market. As such, it is unlikely that this development scenario would be feasible for the developers to undertake at this time, nor would it represent the highest and best use of the subject site."

FAC Comments:

The members of the FAC generally agree with HVSIís conclusion. The FAC recognizes that there may be further revisions to the Resort Project plan that increase development and/or operational costs that may impair the Developerís ability to obtain equity and debt financing for the project. In light of the possibility of providing a portion of Upper Point Vicente Park for golf, the members of the FAC encourage City staff and the City Council to monitor the credit risk borne by the City in the event significant cost revisions are made to the Resort Project.

Is The Developerís Basis For Computing The Projected Tax And Fee Revenue To Be Paid The City Reliable?

Restatement of HVSIís Conclusion, Supplemental Report Ė Additional Information - Requested June 27, 200, Dated July 30, 2001:

"Upon completion of this review, members of HVS International concluded that the developerís financial projections for the proposed subject property appeared reasonable. While the consultants are not professional cost estimators, the cost estimates fell within a normal range of development costs expected of a high-quality, oceanfront resort. This conclusion was based on the development costs of similar oceanfront resorts in California that HVS International obtained through the course of other assignments."

FAC Comments:

The FAC agrees with HVSIís conclusion.

Is the projected tax and fee revenue achievable?

HVSI Conclusion:

HVSI never expressed (nor is it likely that any consultant in a similar engagement would express) a direct, unqualified conclusion as to the achievability of the projected tax and fee revenue.

Finance Staffís Comments:

During its engagement, HVSI complimented the professionalism and the attention to detail exhibited by the Developer. HVSI has opined that the Developerís financial projections appear reasonable. Though no one can predict whether the Resort Project could attain TOT and other revenues included in their financial projections, Finance Staff did not uncover any information that significantly contradicts the reliability of the Developerís financial projections.

FAC Comments:

The members of the FAC ____________________.

The Developerís Consultant shall conduct a financial analysis [and the Cityís Consultant, HVSI shall review the analysis] regarding the financial impact resulting from the elimination of Resort Villas, Casitas and/or other facilities from the Resort Project:

HVSIís Review of Development Scenarios (excerpt from HVSI Report, June 8, 2001)

"As previously discussed, HVS International was asked to review the developerís original eight development pro formas in order to render an opinion regarding the reasonableness of the internal rates of return. The scenarios provided by the developer presented an economic analysis of the proposed resort, golf facility and proposed villas, into a total project financial internal rate of return calculation.

For each of the eight scenarios outlined earlier in the Assignment Objective and Overview, the developer presented detailed financial projections, as well as a calculation of the internal rates of return, on both a leveraged and unleveraged basis. Destination Resorts assumed a 9% interest rate and a 50% loan-to-value ratio for both the construction loan and the permanent loan. While these loan-to-value ratios are at the low end of the typical range, we find that they reflect the norm for financing large projects such as the subject in todayís capital-constrained environment.

The following charts set forth the internal rate of returns derived from original development pro formas provided to HVS. The leveraged return is the internal rate of return on equity, while the unleveraged return is the discount rate that equates operating cash flow (i.e., net income before debt service and a return on equity) to the total invested capital (i.e., the total project cost). The leveraged rate of return is what is critical in this analysis because that is the benchmark or hurdle rate they upon which they base their investment decisions. The calculations presented by the developers provided the following results.


Internal Rates of Return Ė Eight Original Scenarios

Footnote Please note that we reviewed all of the developerís input variables, and then performed a spot check on the accurateness of the internal rate of return calculations. We did not check every mathematical calculation in the analyses. We also note that calculating internal rates of return based upon end-of-the-year inflow or outflow, as opposed to end-of-quarter inflow and outflow, does enhance the internal rates of return across the board by approximately 50 basis points. However, actual investment in projects of this nature requires quarterly funding and distribution; thus, we are of the opinion that a quarterly internal rate of return calculation is the most appropriate.

 

Based upon our experience with hotel investments we find that investors generally require internal rates of return on equity in the range of 20% to 25%, with returns at the mid to higher end of this range required for proposed hotels with development risk. Only one of the scenarios set forth above generates returns above 20%. The base-case scenario, assuming development of 550 units and the 32 villas with surface parking, is the only scenario that generates an internal rate of return in excess of 20%. Given the current environment for financing new hotel development, these internal rates of return conclusions are not surprising. It is extremely difficult to render new full-service hotels, and particularly resort hotels of the subjectís caliber, feasible at any time, but even more so in the current investment environment. While interest rates are relatively moderate, the limited availability of construction and permanent financing requires a significant amount of equity capital for a project such as the subject to reach fruition. The debt that is available is at low loan-to-value ratios by traditional standards, reducing the ability to leverage equity into rates of returns in the low to mid 20s.

The internal rates of return on equity are reduced to an inadequate level when the higher-rated casitas are eliminated from the project or reduced in number. PKF estimates the average rate for the casitas at $370, as opposed to $253 for the standard rooms. With a reduced number of casitas or no casitas at all, the average rate is lowered to a point that does not sustain the development. Occupancy is also estimated to be two percentage points lower without the inclusion of the highly desirable casitas, resulting in a 15% reduction in the resortís overall revenue without the casita units. The internal rates of return in the scenario assuming underground parking are reduced to an inadequate level, due to the increased cost of construction. Elimination of the villa units also reduces the internal rates of return to inadequate levels due to the absence of profit from sale of the units as well as on-going villa management revenue.

The assumed 50% loan-to-value ratio for both the construction loan and the permanent financing at a 9.0% interest rate appear to reasonable assumptions given the current market for hotel financing. With interest rates trending downward, and the possibility that when the developer is ready to obtain permanent financing loan-to-value ratios will have likely improved, we requested the developer to prepare additional scenarios based upon an 8.5% interest rate and loan-to-value ratios for the permanent debt of between 60% and 75%, to see what the impact was upon the equity returns if a lower interest rate and higher loan-to-value ratio were obtained. We also requested that the analysis be performed over an assumed ten-year development and holding period. The developer also provided us with another set of comparable scenarios, assuming sale of the asset as of the date of operational stabilization, which they indicated more accurately reflected the norms required by their equity investors. The internal rate of returns varied for the scenarios assuming sale upon stabilization, but the yields never reached a level high enough level to make a difference in our conclusions. A matrix setting forth the internal rates of return, as provided by Destination Resorts for the additional scenarios, are presented as an attachment to this letter. The following chart sets forth the internal rate of return calculations considering the additional loan-to-value ratio scenarios and an 8.5% interest rate for the permanent debt.


Internal Rates of Return - Additional Scenarios Ė 8.5% Permanent Loan

The internal rates of return generated for the additional scenarios were not materially different from those generated for the original eight scenarios. The additional holding period appears to have offset the higher loan-to-value ratios for the permanent loan. It is likely that the only variable that would significantly increase these rates of return would be the assumption of a higher loan-to-value ratio on the construction loan. We did not feel that it was appropriate to request such a scenario because we cannot see a return to higher loan-to-value ratios for construction loans of this magnitude for some time to come. We are at the end of the current development cycle for hotels and it will likely be several years or more before we see a favorable financing environment again. Predicating development of this project upon the opening of what are historically short windows in time for favorable hotel financing would render the completion date of this project difficult to predict. Missing the current development opportunity may set the project back for a number of years.

The HVS International review of the additional materials can be summarized in a discussion of the following four questions:

1.Is the proposed project, as currently designed, appropriate for the market?

It is our opinion that the proposed project, as currently designed, offers a complement of amenities that are appropriate for the current destination resort market in Southern California. While the subject site offers a unique and dramatic location, it would be difficult for the proposed subject property to successfully penetrate the market without a strong amenity base, such as the golf facility; the spa facility, which was not specifically addressed in this review; and the planned meeting, restaurant, and catering facilities.

In addition, the proposed development needs to be considered as a viable project from a financing perspective. In the current debt and equity market, capital is both very difficult to find, and becoming more expensive. Debt and equity sources are currently looking for projects that are financially sound, located in strong markets, and offer an amenity base that provides the property with a more diverse demand of base. The proposed resort, as currently designed, is likely to be more attractive to the capital markets, and ultimately more financeable, than if the proposed resortís amenity base were reduced through the reduction of the golf facilityís scope, the elimination of the villas, or the removal of the casitas.

2.Do the development costs in the analysis appear reasonable?

HVS International reviewed the development cost estimate of the proposed resort, as prepared by Swinterton & Wahlberg, Inc., the contractor of record for the proposed subject property. Based upon our recent experience with several resorts under development the projected construction costs appeared reasonable; however, we note that we are not construction cost experts and the complexity of this project warrants advice from a professional cost estimator.

3.Do the operating projections as presented in the analyses appear reasonable?

A comprehensive review of the operating projections of the proposed subject property was completed on May 9, 2001. Upon review of the financial projections, HVS International concluded that the projections appeared reasonable. Based on knowledge gained in previous assignments concerning similar resort properties, the projected departmental expenses, undistributed operating expenses, fixed expenses, and overall profitability projections were in line with similar resort properties. We asked Destination Resorts a number of questions regarding the income and expenses, and were given very sound detail and reasoning leading us to believe that the pro formas were prepared in a thoughtful, accurate and reasonable manner.

4.Do the returns, as calculated by the developer, appear correct and reasonable?

The forecasts of income and expense for the hotel and golf course have been reviewed and are considered to very reasonable and in-line with actual income and expenses for comparable properties. The developerís financial analyses under each scenario are comprehensive, accurate, and reasonable. As such, the calculations of the internal rates of return previously presented are considered to be well supported."

The Long Point Resort
Sensitivity Analysis

Scenarios Including Villas
400 Rooms
422 Rooms
550 Rooms
550 Rooms w/ Parking
10 Year Stabilazation 10 Year Stabilazation 10 Year Stabilazation 10 Year Stabilazation
Unleveraged Return
10.1%
8.9%
11.7%
11.2%
15.4%
16.6%
14.6%
15.4%
Leveraged Return                
75% LTV
8.5% Permanent Financing
10.6%
8.1%
13.7%
12.3%
21.1%
21.9%
19.5%
19.8%
60% LTV
8.5% Permanent Financing
10.5%
8.2%
13.2%
12.1%
19.8%
21.1%
18.4%
19.1%
50% LTV
8.5% Permanent Financing
10.4%
8.2%
13.0%
12.0%
19.1%
20.6%
17.7%
18.7%
Scenarios Excluding Villas
400 Rooms
422 Rooms
550 Rooms
550 Rooms w/ Parking
10 Year Stabilazation 10 Year Stabilazation 10 Year Stabilazation 10 Year Stabilazation
Unleveraged Return
8.6%
6.8%
10.3%
9.3%
14.2%
15.0%
13.4%
13.8%
Leveraged Return
75% LTV
8.5% Permanent Financing
8.0%
4.3%
11.2%
8.8%
18.7%

18.9%

17.2%
16.9%
60% LTV
8.5% Permanent Financing
8.1%
4.7%
11.0%
8.9%
17.7%
18.3%
16.3%
16.4%
50% LTV
8.5% Permanent Financing
8.2%
4.9%
10.9%
8.9%
17.1%
17.9%
15.8%
16.1%

HVSIís Conclusion:

"The developerís operating projections and internal rate of return calculations are reasonable and supportable. It is our opinion that the proposed subject property, as currently designed (including the nine-hole golf facility and 32 villas), represents the most viable product for the subject site from the perspective of both market and financial feasibility. None of the additional development scenarios generated an internal rate of return adequate to attract the enormous amount of equity capital required to finance this project. The average rates for the project already appear to be at the upper end of the supportable range, and thus we feel that the developer is assuming a degree of operational risk in addition to development risk. The project will likely not attract equity and debt financing without the additional amenity of a regulation length nine-hole golf course. If the goal of the city is to preserve, at minimum, the portion of Point Vicente Park lying between Villa Capri and City Hall, then perhaps it might make sense to request that the developer see how they can reconfigure the project to maintain the golf course and as many of the casitas and villas as possible to maximize return on investment, while freeing up that portion of the cityís land. However, it appears from the financial analyses presented thus far that little room exists for such a reconfiguration of the project."

FAC Comments:

The FAC generally agrees with HVSIís conclusion. The FAC recognizes that their may be further revisions to the Resort Project plan that increase development and/or operational costs that may impair the Developerís ability to obtain equity and debt financing for the project. In light of the possibility of providing a portion of Upper Point Vicente Park for golf, the members of the FAC encourage City staff and the City Council to monitor the credit risk borne by the City in the event significant cost revisions are made to the Resort Project.

FACís Comments Regarding Capability of Developer:

At the request of FAC Chair Butler, Mr. Robert Lowe, President of Destination Development Corporation (a subsidiary of Lowe Enterprises), gave an overview about its organization, including the parent company, its real estate holdings, resort properties it manages and the resort properties the company has renovated. The Developer previously distributed a capability brochure about its organization.

A summary of information extracted from the capability brochure of Lowe Enterprises (the parent company of the Developer) follows:

  • Lowe Enterprises is privately owned corporation with over 5,500 employees, based in Los Angeles, California (Brentwood), with seven regional offices throughout the US, as well as offices in the United Kingdom;
  • Lowe Enterprises Investment Management manages over $1 Billion of assets for major public and corporate pension funds in the US;
  • Lowe Enterprises Realty Services Group manages commercial, retail and residential properties ranging from $5 Million to $ 1 Billion; and
  • Destination Hotels & Resorts manages a portfolio of commercial hotel and destination resort properties with an aggregate value exceeding $900 Million;

FAC Comments:

Based upon the information provided, the Developer appears very capable of developing and operating the Proposed Resort.

FAC Comments Regarding a Possible Concession Agreement Between the City and the Developer:

The FAC respects the direction from the City Council to not negotiate a concession agreement during its assignment. As described previously herein, the Developer disclosed that it included $112,000 annually for a proposed concession payment in its financial projections. The FAC strongly feels that $112,000 significantly understates the annual concession value of the use of a portion of Upper Point Vicente Park for golf.

During the course of its assignment, the FAC reviewed the first draft of a concession agreement presented by the Developer. The prospect of providing a portion of Upper Point Vicente Park to the Developer for a golf course creates several "lessor-like" risks including:

1.)The fact that the passive nature of the parkland would be changed dramatically to a golf course, including non-native grasses, installation of a self-contained irrigation and drainage system and other golf course facilities. In the event the proposed golf operation were discontinued, either:

(a) the parkland would need to be restored to its original state; or

(b) a succession plan would be necessary to enable the City to continue operation of the golf course.

2.) It is likely that the Resort Projectís lender would require the Developer to provide the entire golf course operation as collateral. This would be in direct conflict with the concept of providing the City a succession plan in the event the golf operation is discontinued. Additionally, this may interfere with the prospect of providing City Hall property as collateral for any future lending arrangements that the City may desire to enter into.

In the event the Developerís lender is provided a security interest in the golf course operation, the City should be provided the opportunity to step in and operate the golf course if any discontinuance of the golf operation occurs for more than 30 days. The FAC encourages the City Council and staff to consider these and other security issues while negotiating a concession agreement with the Developer.

Additionally, the members of the FAC ______________.


Other Financial and Economic Comments and Suggestions Regarding the Resort Project:

Recent Supreme Court Decision - Howard Jarvis Taxpayers Association v. City of La Habra (2001) 25 Cal. 4th 809:

The following explanation was included in the staff report for the FAC meeting on August 15th.

"As you may already know, the California Supreme Court recently ruled that a taxpayer is afforded a new three-year period during which the taxpayer maychallenge the validity of the tax for not having been submitted to the voters pursuant to Proposition 62. This is a complete reversal of the decisions of the three appellate courts that previously ruled regarding this matter.

It also means that no window period tax is afforded protection by an applicable statute of limitations. Its validity always may be challenged so long as the tax is being collected. This applies to the golf tax and the transient occupancy tax rate increase that Rancho Palos Verdes adopted during the window period.

As a result of the California Supreme Court decision, unless the ten (10%) percent TOT tax rate is affirmed by the voters of the City, it could be argued that the Cityís TOT rate is enforceable at a rate of only six (6%) percent. It could be argued that the Cityís ten (10%) percent golf tax is unenforceable as well.

The potential current impact to the City is immaterial, because the City currently receives only about $3,000 of TOT annually. The City is on the verge of beginning to collect golf tax from Ocean Trails. Regardless, Ocean Trails has provided the City a guarantee of the golf tax in accordance with its Development Agreement with the City.

As you will recall, the Developer has estimated that the Cityís annual TOT would exceed $3.9 Million in the event the Proposed Resort is built and operated, based upon a 10% TOT rate. Additionally, the Developer has estimated that the Cityís annual golf tax would exceed $200,000 in the event the Proposed Resort is built and operated. Therefore, the potential loss of TOT and golf tax revenue would be a minimum of $1,760,000 annually. The potential annual loss of tax revenue is calculated as follows: $3.9 Million of TOT, based upon a 10% TOT rate, less $2.34 Million TOT, based upon 6%, plus $200,000 of golf tax revenue."

The City Council discussed this development during its August 7th meeting. Upon completion of its discussion, the City Council unanimously agreed to ask the voters to decide whether or not to reaffirm the current TOT and golf tax. The matter will be placed on the ballot for the November 6th municipal election.

The members of the FAC suggest that payment of TOT and the Developer should guarantee golf taxes, in the event the Cityís tax ordinance should ever be deemed unenforceable. The City obtained a similar guarantee from Ocean Trails upon entering into its development agreement.

The FAC offers the following financial and economic comments and suggestions regarding the Resort Project:

1)The TOT and golf taxes should be defined and computed in a manner to minimize and/or eliminate creative tax avoidance strategies (i.e. allocation of marketing discount packages that would be allocated more heavily to food and beverages and little to room charges and golf fees).

2)Require the Developer to revise its plan to include either active (i.e. athletic facilities) or passive improvements throughout the portions of Upper Point Vicente Park that will not be included in the golf course.

3)________

4) ________

5) ________

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 necessary.

Respectively submitted,
Dennis McLean
Finance Director

Cc:
HVSI Report, dated June 8, 2001
HVSI Methodology Letter, dated June 21, 2001
HVSI Supplemental Report Ė Additional Information Ė Requested June 27, 2001, dated July 30, 2001