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HomeMy WebLinkAbout2004-07-21 e-packetSPECIAL MEETING CITY COUNCIL OF THE CITY OF SOUTH SAN FRANCISCO P.O. Box 711 (City Hall, 400 Grand Avenue) South San Francisco, California 94083 Meeting to be held at: MUNICIPAL SERVICES BUILDING 33 ARROYO DRIVE WEDNESDAY, JULY 21,2004 6:30 P.M. NOTICE IS HEREBY GIVEN, pursuant to Section 54956 of the Government Code of the State of California, the City Council of the City of South San Francisco will hold a Special Meeting on Wednesday, the 21st day of July 2004, at 6:30 p.m., in the Municipal Services Building, Community Room, 33 Arroyo Drive, South San Francisco, California. Purpose of the meeting: 1. Call to Order 2. Roll Call 3. Public Comments - comments are limited to items on the Special Meeting Agenda 4. Study Session: Oyster Point Marina Hotel ProposM - Dalton Smith, Developer .5. Closed Session: Pursuant to Government Code section 349.56.8 real property negotiations related to SF-PUC property located on Mission Road (APNs: 093-312-0.50/060); Negotiator: Assistant City Mm~ager Van Duyn 6. Adjournment × "~ Citi'Clerk' AGENDA ITEM #4 DATE: TO: FROM: SUBJECT: July 21, 2004 Honorable Mayor and City Council Marty Van Duyn, Assistant City Manager Jim Steele, Director of Finance PROPOSAL FROM DALTON SMITH FOR A NON-PROFIT CORPORATION FINANCING OF A NEW HOTEL AT OYSTER POINT RECOMMENDATION: It is recommended that the City Council review this staff report, ask follow-up questions of staff and of the developer at the July 21, 2004 study session, as well as review any materials that may be presented by the developer at the study session, and indicate their interest in pursuing a financing proposal from the developer for a hotel at Oyster Point. BACKGROUND/DISCUSSION: On April 28, 1999, the City Council approved a Precise Plan, Amendment to the Zoning Ordinance and Negative Declaration to construct a 325-room, full-service hotel and a three-level parking garage on a 6.33-acre vacant site located at the western edge of the Oyster Point Marina Park. The subject site is located in the Oyster Point Marina Specific Plan District, which is owned by the City of South San Francisco and currently leased to the San Mateo County Harbor District. On September 27, 2000, the City Council approved a design modification to the original project. Since that time, a developer that had been pursuing private financing for a hotel at the site withdrew its interest in the project. At a joint study session with the Conference Center Board on April 1, 2004, staff presented several options for a new hotel/convention center development at Oyster Point. They included: Traditional private financing for which the market for hotels has dried up since 2000. Primarily private financing, with more traditional city involvement using redevelopment (RDA) tools and resources as an incentive to the private sector. RDA tax increment could conceivably be used if a new convention center were being built, but staff believes it would not be appropriate to use RDA funds solely to support a hotel. Possibilities for RDA funds in a public/private partnership include: o To pay for the public infrastructure associated with a hotel/convention center (landfill mediation; roads, sewers, traffic, landscaping; and/or recreational Staff Report Subject: Dalton Smith Hotel Proposal July 21, 2004 Page 2 of 5 facilities at the marina that enhance the hotel's value and competitiveness or directly complement the hotel's use); To assist the private developer through paying for joint hotel/convention center facilities (joint lobby/atrium, walkways, landscaping, parking structure and traffic flow, joint restaurant and adjacent retail). Complete Public Financing. On May 19, 2004, Mr. Dalton Smith made a presentation to the City Council at a study session on his proposal for public financing. His proposal is to use a non-profit corporation he has set up (through the San Mateo County Harbor District) to sell tax-exempt bonds to construct a hotel on the Oyster Point site. At the May study session, the Mayor requested that staff return to Council with an initial analysis of the proposal in July. The report below is that brief analysis, and is comprised of two parts: a review of the proposal from a financial and economic feasibility standpoint, and a discussion of various design and planning issues. Financial and Economic Feasibility of the Hotel Mr. Smith has proposed a financing plan under which the non-profit hotel may generate sufficient revenues to pay for itself. Under the proposal, the City would be pledge its hotel tax revenue (TOT) from the new hotel as backup revenue for the bonds that Mr. Smith's non-profit would issue. (That non-profit corporation is the Harbor Revitalization Corporation, or HRC). If the hotel generates sufficient revenue from room rentals and food/beverage sales to pay the bonds, as the HRC model presumes, there would be no need to tap into the City's TOT, which would therefore exist more as an insurance policy for bondholders. The model further assumes a substantial net surplus, which Mr. Smith has indicated could come back to the City for its use. HRC's financial projections assume a 65% occupancy rate in the first year, peaking at 76% within 3 years, with an initial room rate of $150/night, rising to $200 within five years. While those figures may be appropriate in other markets, staff is not comfortable making the assumption that they are realistic for South San Francisco. To be fair, a four-star full-service hotel does not currently exist in our market to compare to, and an independent market analysis has not been done of our market since after the September 11 events of 2001, so the numbers in Mr. Smith's proposal could be realistic. However, staff believes that without an updated and independent market study, there is no way to gauge the accuracy of the assumptions. Unfortunately, the bulk of any comparable four star hotels in this area that Mr. Smith might point to for market data are in San Francisco, and it is not at all clear to staff that a four star hotel at Oyster Point could generate what a four star hotel in San Francisco could generate. Because staff believes it is not possible to gauge the accuracy of the proposal's assumptions, another approach is to review the potential downside risk exposure using more conservative assumptions. Staff therefore used the financial model supplied by Mr. Smith's underwriter, and input more conservative assumptions, reflecting a 65% occupancy rate, and beginning with a $125/per night average room rate (higher than any hotels in South San Francisco now generate on an average basis throughout the year), with room rates (and therefore revenues) growing by Staff Report Subject: Dalton Smith Hotel Proposal July 21, 2004 Page 3 of 5 5% annually. A 65% occupancy rate is slightly higher than our current average occupancy, but below what our average was before September 11. $125 is about what our highest priced hotel charged, on the average, in the months just before September 11. While these assumptions may not be reasonable for a full service hotel, they do indicate a lower floor of what could happen if the local hotel industry does not recover and room revenues come in lower than projected. Staff's numbers here are more in line with the numbers staff worked on with Mark Tobin from HREC Asset Management on an alternative financing proposal. In the work staff did with Mr. Tobin last year, we had agreed that market data from San Francisco should be back down to a lower average daily room rate to reflect the fact that South San Francisco will never have the attractions and amenities to command as high a room rate as San Francisco can. Staff Review of Financial Information If these more conservative assumptions from staff are closer to being accurate than the assumptions provided by Mr. Smith's team, then the hotel would not generate a net positive cash flow for about 25 years, requiring the use of the hotel's TOT to meet operating and debt service obligations for that time. In addition, these more conservative assumptions indicate that some additional unidentified revenues would be required over and above the hotel's revenue and TOT for the first 20 or so years in order to make all operating and debt service commitments. Sources of such additional revenues could be, for example, some combination of RDA tax increment, a citywide TOT or Conference Center Tax increase, or equity contributions from the developer. It is important to emphasize again that staff is not projecting with certainty that this more conservative scenario is more likely than HRC's assumptions, but staff does caution that an informed understanding of the risks/rewards of the proposal cannot be gauged without an updated, independent economic/market feasibility study, and detailed analysis by a financial advisor. Those services could cost in the $150,000 - $200,000 range. Design and Planning Issues In 1999, the City Council approved the construction of a ten story, 325-room hotel on a vacant 6.33-acre site located at the western edge of Oyster Point Marina Park. The approved project would be designed to the standards of a 4-star hotel with meeting rooms, restaurant, lounge, business center, gift shop and boutiques, fitness center and an indoor pool. A three-level parking garage would be located at the south end of the site and include 337 parking spaces. Differences Between the Original Project and the Proposed Project The Dalton Smith proposal would incorporate several uses that are found in full service hotels, including suites, a full-service restaurant, several banquet and meeting rooms, a swimming pool, a large lobby area, and a restaurant/lounge on the penthouse floor. The hotel data is summarized as follows: - Building Height = 10-stories - Total Guest Rooms = 332 - GSF Building = 246,150 Staff Report Subject: Dalton Smith Hotel Proposal July 21, 2004 Page 4 of 5 - Total Parking = 399 stalls, including surface parking and parking structure - Total Parking Area = 103,200 SF Dalton Smith's proposal would modify the original hotel site plan and architecture by relocating the driveway entry from Marina Way to Gull Drive, placing the pool on the west side of the building facing Gull Drive, and locating additional surface level "valet" parking adjacent to the San Francisco Bay Trail area. Proposed Parking Garage The original project included a three level parking garage that would be located at the south end of the site that would contain 337 parking spaces. The Bay Conservation and Development Commission (BCDC) approved the parking garage within the BCDC 100 foot shoreline area. As part of the approved BCDC permit, the public access route would be located along Marina Boulevard in order to link the hotel site with both the bike route being built on Oyster Point Boulevard and the existing Bay Trail. The BCDC permit also preserved the "view corridor" and the open space area along the drainage that divides the Oyster Point Marina area from industrial development to the south of the site. Mr. Smith proposes to expand the parking area on the site by using both a parking structure and surface parking. The parking structure would be lowered to two levels and expanded toward the swale. Hotel guests would have direct access to the structure from Gull Drive. The surface parking area would be located in the area east of the hotel next to the swale. Hotel employees and valet parking would have direct access to the parking area from Marina Drive. Both the parking structure and the parking lot would encroach into the BCDC 100 foot shoreline area. Staff Review of Planning Issues Since the last study session, City staff and two members of the City's Design Review Board (DRB) have undertaken an informal review of the proposed site plan and architecture in order to provide quick feedback to the developer. The DRB and staff comments include: 1) The plans need to show a road leading to the loading dock area; 2) The architecture lacks articulation and has the appearance of a storefront facade; 3) The building seems to be oriented toward industrial area rather than the marina; 4) The glass facade on the north elevation looks very much like Embassy Suites; and, 5) The parking lot should remain an open space area. Mr. Smith and his team will be at the study session on July 21st, and they and City staff will be available to answer questions from Council. Staff Report Subject: Dalton Smith Hotel Proposal July 21, 2004 Page 5 of 5 Prepared by: Ji/n Steele F~nance Director Approved ~ ! City Managc~ - ATTACHMENT: Letter from Hilton Hotels Cc: Dalton Smith, Public Project Management LLC Sandra O'Toole, Conference Center Director Hilton PAGE 02/02 Frederick J, Smith Direetor-Fra~aehis~ Development Western Region June 18, 2004 Mr. Dalton Sm/th Principal Pablie Project Management LLC :2222 West~rla.ad Suite 217 Houston, TX 77063 De~r Dal*on; Proposed Hotel project- Oystar Point-South San Francisco, CA. Thank you vex.3, much for ccmtacting l:[ilton regarding our interest m a potential full service hotel project at Oyster Po~t- South Sar[ Franc/soo, We are always in~wsted in pursu~g projects tha~ make economic sense md are supported by current thkd pav~y ind~endent feasibility studies. As you lmow, Hilton previously approved the site, and eta' interest remains high. Tl~refore, shmfld you wbh to proceed with obtaining Hilton affiliation in the £m-m cfa franchise license, we urge you to send us a completed application along with the required supporting documentation and a third party study validating the econom/c viability of the proposed projem. The Hilton affiliation will provide the Licensee ~4th a wealth of benefits cad assistance described in om Uniform Franchise Offering Circular, which was provided to you last week. Conversely, franchise affiliation does not i~ any way pro,r/de any form of fixmnclal assistance (equity contribution, loans or other forms of risk associated a~sistance). h the meantime, we can also work with you to rev/em the plans and specifications to Lmare they meet your recommendations and are within Hilton's standards for full service hotels. With respect to letters of intent, we do not use this vehicle as we have elected to me the application proc~s m foammliz¢ the relationship. We look fonvgd to worldng w/th you. Sincerely Frederick I. 8mith Director-Franchise Development, Western CC: G-rea Francois Hilton. Hotels Corporation 9g01 NW Randall Lane, Portland, OR 97229 Tel; ~0~ 296 6027 CMl: 503 805 8515 F~; 505 296 6028 ~a: ~e~$mi~hfltomeom Re~e~ation~ ~.bJ]tOn.oom or 1-800-HIL~N~