AGENDA July 17, 2002
TO: HONORABLE CHAIR AND MEMBERS OF THE FINANCE ADVISORY COMMITTEE FROM: DENNIS McLEAN, FINANCE DIRECTOR DATE: JULY 17, 2002 SUBJECT: PROPOSED LONG POINT RESORT PROJECT – PREPARATION OF A DRAFT STATUS REPORT TO THE CITY COUNCIL INCLUDING 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 RECOMMENDATION To review and discuss: (a) the purpose and chronological history of the Finance Advisory Committee’s ("FAC’s") assignment regarding the Proposed Long Point Resort Project (the "Resort") as directed by the City Council on May 7, 2002; (b) the draft preparation of the draft status report to the City Council, including a draft of the FAC’s Summary of Findings; and (c) the process and timeline for the FAC’s review of the draft Conditions of Approval presented to the City Council on June 18, 2002. ADDITIONAL INFORMATION During the June 17th meeting of the FAC, several questions were raised regarding the potential increase of the City’s insurance premium costs once the proposed Resort becomes operational. Staff has made several inquiries and presented its findings below. Other additional information has been incorporated into the body of this report and is summarized below as well. During the June 17th meeting of the FAC, concern was raised regarding whether the City would experience of negative cash flow before or after the proposed Resort would begin operations. Finance staff has included the following text in the draft Summary of Findings included in the draft status report to the City Council.
During its June 18th meeting, the City Council raised a number of questions about the proposed Resort. It directed Planning staff to obtain the answers and provide responses at its July 16th meeting. Accordingly, both Planning Commission and FAC were invited to submit their questions regarding the Resort for incorporation of Planning staff’s response on July 16th. FAC members are encouraged to review the video replay of the Resort project portion of the June 18, 2002 City Council meeting on the City’s Web site. Staff mailed the FAC the draft Conditions of Approval presented to the City Council on June 18, 2002 immediately after the meeting. The draft Conditions of Approval can be found on the City’s website via the following link: http://www.palosverdes.com/rpv/citycouncil/agendas/2002_Agendas/MeetingDate-2002-06-18_700pm/ - 12a Staff has also attached the Planning staff report titled "Long Point resort (Conditional Use Permit No. 215 et al) which includes responses to questions asked by the City Council during its June 18th meeting. Trust Deposits Finance Staff inquired with Planning Staff to obtain an update regarding consultant costs and trust deposit activity. Planning Staff reported that more than $100,000 of administrative fees related to trust deposits has already been received by the City for the Resort project. Based on an estimate of more than $2 Million of consultant costs flowing through the trust deposit system during the project, Staff expects at least an additional $100,000 of administrative fees will be collected before the project is complete. Occupancy Rates - Casitas Casita and villa owners will likely classify their asset as rental property. As a result of income tax laws, it appears as though owners would loose significant tax benefits in the event their personal use exceeds 10 days annually. Due to potential loss of tax benefits, it seems unlikely that casita and villa owners will personally occupy their units for the maximum 60 days allowable. Therefore, a 2.2% occupancy reduction resulting from converting the casitas privately owned units appears reasonable. During the June 18th meeting of the City Council, the Developer offered to provide market statistics regarding personal use of privately owned casitas and villas at other similar reports at the July 16, 2002 City Council meeting. Staff encourages the FAC to review the information when it is available. Insurance The City’s liability insurance premium is based on accident incident rate. Based upon Finance staff’s inquiries with the City Manager and the Public Works Director, the insurance claims incident rates are classified into three categories: slip and fall, traffic accidents, and damage caused by falling tree limbs. Staff has analyzed each of these affecting factors.
Considering the information presented above, it appears reasonable that the City’s liability insurance premium will not increase significantly as a result of the Resort. The most significant rating factors that may affect the City’s insurance costs are increased revenue and additional infrastructure. The City’s liability, property and workers compensation insurance premiums are not affected by increased revenue to the City. With respect to additional infrastructure, Public Works Staff has estimated that infrastructure valued at approximately $3 Million will be added to the City’s capital assets as a result of the Resort. The City’s capital assets currently have an estimated replacement cost in excess of $260 Million. The additional infrastructure approximates a 1% increase in covered assets; however, the infrastructure coverage portion of the premium is rated significantly less than the building and equipment coverage portion of the premium. Based on this information, it appears reasonable that the resulting increase to the City’s property insurance premium would be less than 1%. The annual premium is approximately $50,000; therefore, the estimated increase would be less than $500 annually. Due to the immateriality of this potential increase, it has not been included in the Pro-Forma Schedule Of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort. Finally, the City’s workers compensation insurance is based on payroll costs. The City’s payroll is not expected to increase as a result of the Resort. Therefore, it appears reasonable that the City’s workers compensation insurance will not increase as a result of the Resort. BACKGROUND AND DISCUSSION - DRAFT STATUS REPORT TO THE CITY COUNCIL Finance Staff has written the following draft using a format and including certain chronology, findings and conclusions that the FAC may desire to use in its status report to the City Council. Therefore, most of the following content is a mere restatement of facts and chronology known well to each member of the FAC.
City Council Assignment to the Finance Advisory Committee On May 7, 2002 the City Council directed the Finance Advisory Committee (the "FAC") to provide the City Council with feedback with respect to the following start-up matters concerning the proposed Long Point Resort (the "Resort") including answers to the following questions:
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:
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, 2001 meeting. At the October 16, 2001 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, 2001, 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. On June 18, 2002, the City Council continued its review and discussion of the proposed project to the meeting of July 16, 2002. The City Attorney stated that the City Council must take action to approve or reject the Developer’s application on or before November 4, 2002 in accordance with the California Permit Streamlining Act. Planning Staff presented a revised draft list of Conditions of Approval. Additionally, the City Council directed the Developer to provide Staff with their own financing timelines, so they could be considered along with the permit streaming deadline. The City Attorney also reminded the City Council that the Conditions of Approval must be limited to the Marineland site itself. Though the Developer expressed that the Ocean Trails golf course is a necessary amenity, no Conditions could be enacted requiring the pending management arrangement to operate Ocean Trails Golf Course. An operating agreement did not exist between the Developer and Credit Suisse as of the date of the City Council meeting. The City Council inquired about the plan revision for the Casitas to be privately owned. The Developer replied that they felt they needed to reduce their permanent capital requirements in the current financing markets. The City Council asked about the impact of owner occupation of the City’s TOT. The Developer reported their expectation for a 2.2% reduction. The Developer offered to provide market statistics regarding personal use of privately owned casitas and villas at other similar reports at the July 16, 2002 City Council meeting. City Council Approval Of The Proposed Long Point Resort Subject To Conditions Of Approval And Requirement Of A Development Agreement As you already know, 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:
The proposed Development Agreement would likely address:
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. 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 has provided the FAC with the draft Conditions of Approval presented to the City Council on June 18, 2002. In addition, a revised draft of the Conditions of Approval can be viewed on the City’s Web site at http://www.palosverdes.com/rpv/citycouncil/agendas/2002_Agendas/MeetingDate-2002-06-18_700pm/ - 12a The Conditions of Approval and the Development Agreement are expected to include all known provisions available to protect the City during the phases of planning, construction and operation. While the FAC continues its assignment, it will continue to watch for unforeseen events that may cause the City to incur economic damage. The FAC will review the Conditions of Approval and the first draft of the Development Agreement over the next several months and immediately report recommendations and/or findings to both Staff and the City Council that may mitigate the cost of possible damages. 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:
Although the City’s estimated net revenue before initial operations is estimated to exceed $1 Million, the City’s use of a majority of this revenue is restricted in nature. Specifically, use of Environmental Excise Tax (EET) is limited to development or improvement of public facilities such as land, buildings, machinery and capital equipment. Use of the Affordable Housing Fees is limited to providing affordable housing to low and moderate-income households and the use of Parkland Dedication Fees (Quimby) is limited to the development or rehabilitation of park or recreational facilities. TRUST DEPOSITS AND ADMINISTRATIVE FEES Based on staff’s prior experience with development projects, Planning and Building and Safety fee revenue will likely 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. In addition to Planning, Building Safety and Public Works fees, the City assesses a 10% administrative fee for processing trust deposit activity. Excluding the City Attorney’s time 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 project trust deposit prior to the commencement of services by the consultant. The City directly pays the consultant as progress billings are tendered and approved for payment by City staff. Although the expected administrative fee cannot be calculated at this time, administrative fees collected from the Ocean Trails project approximated $250,000 during the processing of the application for the project. Based on the scope of the Resort project, it appears reasonable that the administrative fees will meet or exceed the amount received from the Ocean Trails project. Planning Staff reported and Finance Staff has verified that more than $100,000 of administrative fees has already been received for the Resort project. Based on this information, Staff expects that at least an additional $100,000 of administrative fees will be collected before the project is complete. 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):
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." In addition, casita and villa owners will likely classify their asset as rental property. As a result of income tax laws, it appears as though owners would loose significant tax benefits in the event their personal use exceeds 10 days annually. Due to potential loss of tax benefits, it seems unlikely that casita and villa owners will personally occupy their units for the maximum 60 days allowable. Therefore, a 2.2% occupancy reduction resulting from converting the casitas privately owned units appears reasonable. 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. Insurance Costs During the June 17th meeting of the FAC, several questions were raised regarding the potential increase of the City’s insurance premium costs once the proposed Resort becomes operational. Finance staff provided the following response during the July 17th meeting of the FAC. The City’s liability insurance premium is based on accident incident rate. Based upon Finance staff’s inquiries with the City Manager and the Public Works Director, insurance claim incident rates are classified into three categories: slip and fall, traffic accidents, and damage caused by falling tree limbs. Staff has analyzed each of these affecting factors.
Considering the information presented above, it appears reasonable that the City’s liability insurance premium will not increase significantly as a result of the Resort. The most significant rating factors that may affect the City’s insurance costs are increased revenue and additional infrastructure. The City’s liability, property and workers compensation insurance premiums are not affected by increased revenue to the City. With respect to additional infrastructure, Public Works Staff has estimated that infrastructure valued at approximately $3 Million will be added to the City’s capital assets as a result of the Resort. The City’s capital assets currently have an estimated replacement cost in excess of $260 Million. The additional infrastructure approximates a 1% increase in covered assets; however, the infrastructure coverage portion of the premium is rated less than the building and equipment coverage portion of the premium. Based on this information, it appears reasonable that the resulting increase to the City’s property insurance premium would be less than 1%. The annual premium is approximately $50,000; therefore, the estimated increase would be less than $500 annually. Due to the immateriality of this potential increase, it has not been included in the Pro-Forma Schedule Of Cash Flow For The Initial Twenty-Four Months Operation Of The Resort. Finally, the City’s workers compensation insurance is based on payroll costs. The City’s payroll is not expected to increase as a result of the Resort. Therefore, it appears reasonable that the City’s workers compensation insurance will not increase as a result of the Resort. 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. SUMMARY OF FINDINGS Future events, including possible negative economic trends, perils and other unforeseen circumstances and governmental legislation may significantly impact the proposed Resort as well as its economic and financial impact on the City and cannot be predicted. With this in mind, the FAC and Finance Staff will continue to monitor the Resort project and will immediately report any significant observations to the City Council. Subject to the foregoing, as a result of its review, the FAC offers the following findings related to the Analysis Of Revenue And Costs Before And After Initial Operations And Cash Flow For Initial Twenty-Four Months Of Operation:
The FAC will review the Conditions of Approval and the first draft of the Development Agreement over the next several months and immediately report any recommendations and/or findings to the City Council. 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. END OF DRAFT STATUS REPORT. Finance staff welcomes questions and further suggestions regarding the draft status report to the City Council. Respectfully submitted, Dennis McLean Finance Director
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