1. Roll Call.
   
   
2. Approval of Agenda.
   
   
3. Approval of Draft Minutes for the meetings conducted April 24, 2002.
   
   
4. Proposed Long Point Resort Project – Analysis Of Revenue And Costs Before And After Initial Operations And Cash Flow For Initial Twenty-Four Months Of Operation. (Downs, McLean)
   
   
5. GASB 34 update. (Smith, Downs)
   
   
6. Financing Alternatives update. (McLean, Clark, McLeod)
   
   
7. Report on Budget action by Council. (McLean, Wolowicz)
   
   
8. Review of 2002-2003 Agenda and Calendar; assignments of tasks to members. (Wolowicz)
   
   
9. Public Comments.
   
   
10. Adjournment.

TO: HONORABLE CHAIR AND MEMBERS OF THE FINANCE ADVISORY COMMITTEE

FROM: DENNIS McLEAN, FINANCE DIRECTOR

DATE: JUNE 17, 2002

SUBJECT: PROPOSED LONG POINT RESORT – ANALYSIS OF REVENUE AND COSTS BEFORE AND AFTER INITIAL OPERATIONS AND CASH FLOW FOR INITIAL TWENTY-FOUR MONTHS OF OPERATION

Staff Coordinator: Kathryn Downs, Accounting Manager

BACKGROUND

City Council Assignment to the Finance Advisory Committee

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

• Could the City be damaged economically in the event the Resort ceases operations? If so, what safeguards could be instituted to mitigate the cost of possible damages?

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

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

Overview Of The Activities of the Finance Advisory Committee, Planning Commission and City Council – Proposed Long Point Resort

Finance Advisory Committee

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

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

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

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

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

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

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

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

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

Planning Commission and City Council

The May 7, 2002 staff report to the City Council, prepared by the Planning department included the following background:

Beginning in April 2001, the Planning Commission conducted twelve public hearings to review the proposed Long Point Resort applications, which at the time proposed the use of the City owned Upper Point Vicente property. On October 9, 2001, the Planning Commission recommended, by a 4-3 vote, conditional approval of the Long Point Resort to the City Council. At that time, it was anticipated that the City Council would begin considering the project applications at its November 7^th meeting.

At the October 16^th City Council meeting, an item was agendized at the request of the City Council’s Open Space Acquisition Subcommittee, made up of then Mayor Lyon and then Councilman Stern, for the Council to consider directing the Long Point developer to minimize the use of the City’s Upper Point Vicente property. After considering public testimony and discussing the concerns raised by the Department of Fish and Game with respect to the use of City land for the Long Point project, the City Council unanimously agreed that the Long Point Developer could not use the City’s Upper Point Vicente property.

In response to the Council’s action on October 16^th, the Long Point Developer submitted a letter requesting that the Council refrain from considering the project applications that had been forwarded to the Council by the Planning Commission, to allow the developer adequate time to reassess the project. On November 7, 2001, the City Council unanimously agreed to place the project applications "on hold" for a period of six months (until May 7, 2002), during which time the Developer was directed to either formally withdraw the proposed project or submit a revised project without the use of the City’s Upper Point Vicente property.

On April 22, 2002, the Developer for the Long Point Resort Hotel project (Destination Development Corporation) formally submitted a revised project to the Planning Department for consideration. The revised project no longer includes the Upper Point Vicente property and has been modified from a nine-hole golf course to a resort hotel with a golf academy and driving range amenity.

On May 7, 2002, the City Council held a joint meeting with the Planning Commission and Finance Advisory Committee, at which time, the Developer presented a revised project site plan for the Resort that excludes the use of the City owned Upper Point Vicente Park area. The revised project consists of a 400-room resort hotel with a golf academy/practice facility. Furthermore, as originally proposed, the project includes 50 casitas (a maximum of 3 keys per unit), 32 single keyed villa units, conference center, golf club house, related commercial uses, restaurants, public trails and park areas, coastal access points, 100 public parking spaces, natural open space and habitat areas. Based on the breadth of the revised project, the Council unanimously agreed to keep the discussion of the proposed project applications at the Council level, rather than remanding the project back to the Planning Commission or Finance Advisory Committee. Notwithstanding, the Council encouraged individual Planning Commissioners to provide input to the Council on the revised Long Point project for consideration at a future meeting. As such, the Council continued the public hearing on the revised project to its June 18, 2002 meeting.

City Council Approval Of The Proposed Long Point Resort Subject To Conditions Of Approval And Requirement Of A Development Agreement

In the event the City Council approves the application for the Resort, it would be subject to Conditions of Approval and negotiation and execution of a development agreement that would govern most all aspects of the design, construction and operation of the Resort. The 175 – 200 Conditions of Approval would include a requirement to:

• Negotiate and execute a Development Agreement with the City;
  
  
• File regulatory permit applications and pay Public Works, Planning and Building Safety fees;
  
  
• Pay an affordable housing-in-lieu fee, environmental excise tax and parkland dedication fee prior to issuance of an occupation permit; and
  
  
• Provide customary deposits and/or performance bonds for grading, sewer, geological, street improvements and other portions of the project.

The proposed Development Agreement would address:

• The guarantee of minimum revenue payments (e.g. Transit Occupancy Tax ("TOT") to the City by the Resort upon commencement of operations and afterwards;
  
  
• The guarantee of all of the Developer’s financial obligations under the Development Agreement in a form and amount acceptable to the City Council and the City Attorney, preferably an irrevocable letter of credit, which shall be provided to the City prior to the issuance of building permits;
  
  
• The financial responsibilities of both the City and the Developer with respect to maintaining the public improvements constructed as part of the project;
  
  
• Payment of traffic impact fees in an amount determined by the Director of Public Works; and
  
  
• Indemnity provisions, in a form acceptable to the City Attorney, requiring the Developer/operator to indemnify the City from and against any and all damages, costs, expenses, liabilities, claims, demands, causes of action, proceedings, expenses, judgments, penalties, liens, and losses of any nature whatsoever resulting from any negligent act, failure to act, error, or omission of the Developer or any of its officers, agents, servants, employees, subcontractors, materialmen, suppliers or their officers, agents, servants or employees, arising or claimed to arise, directly or indirectly, out of, in connection with, resulting from, or related to the construction or operation of the project.

The Development Agreement would survive the construction of the Resort and become one of the legal documents that would govern the responsibilities of both the Developer and the City upon issuance of occupancy permits when the Resort becomes operational.

DISCUSSION AND FINDINGS

As stated previously, the City Council directed the FAC to provide feedback with respect to the following start-up matters concerning the proposed Resort:

• Could the City be damaged economically in the event the Resort ceases operations? If so, what safeguards could be instituted to mitigate the cost of possible damages?

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

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

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

Staff encourages the FAC defer these "economically damaged" and "safeguard" questions until the City Council approves the Resort, subject to the Conditions of Approval and the preparation of the first draft of the Development Agreement. As described above, the Conditions of Approval and the Development Agreement will govern all aspects of the design, construction and operation of the Resort, including safeguards to protect the City’s interest subsequent to the beginning of operations of the Resort. Therefore, it appears premature to consider the safeguards until the City Council approves the Resort. The FAC may wish to defer these questions and consider them in conjunction of its review of the first draft of the Development Agreement. Any suggestions made by the FAC could be incorporated into Development Agreement.

ANALYSIS OF REVENUE AND COSTS BEFORE AND AFTER INITIAL OPERATIONS

Staff offers the following Pro-Forma Table of Revenue and Costs Before And After Initial Operations (presented below) and the Pro-Forma Schedule of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort (see attachment A) for the FAC’s review of the following two questions:

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

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

In addition to Planning, Building Safety and Public Works fees, the City assesses a 10% administrative fee for processing trust deposit activities. Except for the City Attorney’s time spent negotiating a Development Agreement, the costs of consultants representing the City while processing the Developer’s application (e.g. geotechnical engineers, civil engineers and environmental consultants) are entirely paid for by the Developer via trust deposits. The Developer makes deposits into the trust deposit project prior to the commencement of services by the consultant. The City directly pays the consultant as progress billings are tendered and approved for payment by City staff. Although the expected administrative fee cannot be calculated at this time, administrative fees collected from the Ocean Trails project approximated $250,000 during the processing of the application for the project.

Based on staff’s prior experience with development projects, Planning and Building and Safety fee revenue will probably exceed $50,000. In light of the expectation that the City’s revenues before the commencement of operations of the Resort will significantly exceed costs (see PRO-FORMA TABLE OF REVENUE AND COSTS BEFORE AND AFTER INITIAL OPERATIONS), staff has not made calculations of Planning and Building and Safety fee revenue at this time.

CASH FLOW FOR INITIAL TWENTY-FOUR MONTHS OF OPERATION

Information Provided by Developer

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

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

• "We have assumed the first year of operations will be 2006 vs. 2005 in the last report. As such, there is one additional year of rate inflation to the average daily rate ("ADR")."

• "We have assumed a slightly slower occupancy ramp-up during the first two years. However, we do believe that our stabilized income will be consistent with our previous projection."

• "Based on our prior experience with similar units, we have assumed that the average owner of a casita will use 30 of his/her 60 available use nights. When applying the stabilized hotel occupancy against the owner use nights that are removed from the hotel supply, we see 2.2% fewer occupied room nights and therefore a 2.2% reduction in stabilized TOT as compared to the original program."

On May 30, 2002, the Director of Finance emailed a request for clarification to the Developer:

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

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

Email request continued:

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

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

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

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

Public Safety Costs

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

Infrastructure Capital and Maintenance Costs

Based on discussions with City Public Works staff, the Developer will be required to pay for all infrastructure improvements associated with the Resort, including a traffic signal, street improvements, storm drain improvements, median landscape improvements, and park and trail improvements. The Development Agreement and Conditions of Approval will establish the responsibilities for both the Developer and the City for the maintenance of the infrastructure created in conjunction with the Resort.

Notwithstanding the final responsibility for the City to maintain the new infrastructure as established in the final documents, staff has included median landscape and traffic signal maintenance costs in the pro-forma cash flow calculation. Estimates are based on FY 2001-2002 budgets of similar maintenance activities with a 3% annual inflation factor. These estimates are not intended to express staff’s expectations of the City’s responsibilities, but are merely a presentation of a possible cost scenario. Based upon discussion with other members of staff, the direct cost of maintaining new infrastructure created in conjunction with the Resort is expected to be minimal during the initial twenty-four months of operation of the Resort. Staff will inform the FAC in the event it learns of any significant change of this assumption while the FAC conducts this assignment.

Findings Regarding the Pro-Forma Schedule of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort

Based upon the assumptions described above, it appears as though the Total Tax Paid To the City will significantly exceed the City’s costs during the initial twenty-four months operation of the Resort. (see Attachment A).

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

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

POSSIBLE RECOMMENDATION TO THE CITY COUNCIL AND ALTERNATIVES

Staff encourages questions and discussion regarding this City Council assignment. Based upon the findings prepared by staff, the FAC may wish to:

• Report to the City Council that the City’s anticipated revenue from the Resort prior to initial operations significantly exceeds the City’s costs as presented in the Pro-Forma Table of Revenue and Costs Before And After Initial Operations, subject to revisions resulting from discussion during the June 17^th FAC meeting; and/or

• Report to the City Council that the City’s anticipated revenue from the Resort during the initial twenty-four months of operations significantly exceeds the City’s costs as presented in the Pro-Forma Schedule of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort, subject to revisions resulting from discussion during the June 17^th FAC meeting; and/or

• Report to the City Council that it will defer "economically damaged" and "safeguard" questions until the City Council approves the Resort, subject to the Conditions of Approval and the preparation of the first draft of the Development Agreement; and/or

• Request additional information prior to making any reports to the City Council; and/or

• Discuss and consider other actions pursuant to this City Council assignment.

Staff is available to assist the FAC and seeks direction how to proceed.

Respectfully submitted,
Dennis McLean
Finance Director

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