City Council
MEETING DATE: 4/13/2016
TITLE:
Title
Transient Occupancy Tax Sharing Agreement for Best Western Plus
End
FROM:
Leisa Lukes, Economic Development Manager
RECOMMENDATION:
Recommendation
Staff recommends the City Council conduct a public hearing under Municipal Code Title 3, Chapter 3.25 and consider designating Best Western Plus to be located at the southeast corner of Bob Hope Drive and Varner Road (TPM 36619, Parcel 8) as an Approved Hotel; receive comments and other evidence; consider terms of a Transient Occupancy Tax Sharing Agreement between the City and Mirage Bob Hope Varner, LLC, doing business as Best Western Plus; and adopt a Resolution making findings and authorizing a Transient Occupancy Tax Sharing Agreement between the City and Mirage Bob Hope Varner, LLC, doing business as Best Western Plus.
Body
BACKGROUND:
Mirage Bob Hope Varner, LLC, proposes to construct a 90-room Best Western Plus hotel in The Crossings at Bob Hope, a proposed commercial center to be developed at the southeast corner of Bob Hope Drive and Varner Road. The project is currently under review by the City and is scheduled for a Planning Commission hearing on May 4, 2016.
Cathedral City Municipal Code Chapter 3.25 provides for economic incentive payments for the opening, operation, renovation and expansion of hotel facilities within the City upon determination by the City Council that providing such payments would achieve the City's tourism expansion goals and create new sources of transient occupancy tax (TOT) revenues for the general fund to support the public services that the City provides to its residents. The Applicant is requesting to participate in the City's economic incentive program to receive payments supporting the proposed hotel development.
DISCUSSION:
Mirage Bob Hope Varner, LLC, (Applicant), represented by Mr. Cody Small and Mr. Brent Ogden, have developed a number of commercial properties over the years, including several in the Coachella Valley. They initiated development of a 9-acre parcel located north of Interstate 10 at Bob Hope Drive over four years ago. This property and adjacent land westerly to Cathedral City's then easterly boundary was, at that time, within unincorporated Riverside County. The property owner, Mr. Bill Messenger, with support of the Applicant and approval of the City, submitted an application to Riverside County to annex that land, including the 9 acres, into Cathedral City. Concurrent with the annexation application, they processed the North City Extended Specific Plan with the City to establish City land use and zoning designations for the property. The Specific Plan and annexation were approved in 2014 following the Applicant's significant investment in time and resources.
Prior to the annexation being initiated, the Applicant had secured a letters of intent from several national retailers to locate on the 9-acre property. They agreed that this property, directly adjacent to Interstate 10 with visible freeway frontage, access to the newly-constructed Bob Hope freeway interchange and centrally located within the Coachella Valley, would be a prime location for freeway commercial development.
Flood Control Issues -
The Coachella Valley Water District (CVWD) manages the drainage systems for the area north of Interstate 10. The water flow map used for infrastructure design and flood plain determinations for the area had been in place for over 30 years. During the past three years, CVWD undertook efforts to update the map by analyzing water flow based on current technologies in order to better predict flood risks. The time to perform this analysis and the resulting projected water flows and risk factors have hindered the Applicant's ability to further their project design. While the proposed site plan was previously completed to identify the locations of future retailers, including a Best Western Plus hotel (Attachment 1), the engineering design to determine grading and finish elevations was unable to be completed. Methodologies and costs associated with infrastructure required to mitigate flood risks based on CVWD's new water flow map was also unknown.
The Applicant, Messenger and other investment partners working together with CVWD over many months and investing nearly $500,000, have been able to complete an agreed-upon updated flow analysis and develop a plan to mitigate the impacts of the regional floodwaters as determined by this analysis. As of December 2015, all parties have entered into a Regional Storm Water Facilities Agreement. This Agreement will enable development of the property, including the subject parcel, pending completion of agreed-upon flood control facilities. The Applicant will participate in implementing development of the required facilities estimated to cost $3.5 million. Flood control facility design and construction costs will be paid through a public-private partnership, between the property owners, developers and CVWD. Once construction begins, the facility is anticipated to take 8 months to complete.
The 9-acre site will develop first pending completion of the flood control facility. The commitment for development of this area remains strong. Letters of intent with the retailers remain active, some nearly 4 years old. Upon approval by the Planning Commission for development of the site and a conditional use permit for the 90-room hotel, anticipated on May 4, and upon consent by the City Council for a transient occupancy tax sharing agreement as currently being requested, the Applicant will submit a non-refundable deposit to Best Western to secure a Best Western Plus franchise for the property.
Project Description and Tax Sharing Application -
The Project entails development of a 4-story, 90-room, upper-midscale limited service hotel with a port cochere, outdoor pool, off-lobby lounge and eating area with breakfast offerings and daily snacks; a small 10 to 20-person conference space; and two large suites. Average room rate will be approximately $100 per night. This will be the second Best Western Plus in the Coachella Valley and the first in Cathedral City (Attachment 2). Overall development costs are projected to be approximately $13 million, including current and projected costs associated with the Project's proportionate share of the Specific Plan preparation, annexation application, flood control measures and other off-site improvement costs.
The Applicant submitted a request to the City to share in a percentage of the additional TOT to be generated upon development of the hotel for a period of time in order to recover the gap between the cost of the development and the anticipated financial return.
Analysis -
The City contracted with Keyser Marston Associates, Inc. (KMA), an independent professional financial consultant, to evaluate financial data obtained from the Applicant and derived from industry standards to project the expected gap, if any, between the Applicant's financial investment to complete the Project and projected future earnings. The Applicant provided a deposit to cover 100 percent of the cost of KMA's analysis.
The Transient Occupancy Tax Sharing Ordinance is an economic incentive program that enables the City to enter into agreements with new hotels to enhance the travel experience for visitors to the City and increase the TOT revenue that might not otherwise be produced. Promoting and enhancing the economy of the City translates into new sources of revenue for the City's general fund, which supports public services the City provides to its residents and visitors. Only new taxes that would otherwise likely not be generated without the addition of the business are eligible to be shared with the operator of the business. The intent of the ordinance is to incentivize business activity. For new hotels, the maximum amount of TOT sharing is 75 percent of the increment actually received and retained by the City for a period not to exceed 10 years, unless the City Council determines an increase is warranted to achieve the goals and intent of the program. Factors taken into consideration are the quality of the facility and the services to be provided; the projected TOT to be generated and the cost to construct the hotel; and the necessity for public assistance.
Developers of new, limited service hotels, according to KMA, currently seek economic returns (leveraged return on equity invested) in the mid-teens. The Applicant is projecting approximately $13 million in site preparation, construction, and soft costs to complete the project. In assessing the Applicant's project proposal, anticipated development budget, and achievable net operating income, KMA concluded that the targeted return on investment could not be achieved without participation in the City's economic incentive program.
Table 1, Column A (Attachment 3) shows the Applicant's share of anticipated project cash flow, including the initial investment in the construction year (Year 0 - pre-operation), annual revenues (net of hotel operating expenses and loan payment), and hotel sales proceeds at Year 10. To calculate the leveraged return to the Applicant during the ten-year analysis period, hypothetical sales proceeds from the property in Year 10 are combined with the annual cash flow both before and after the proposed tax sharing. A City share of 50 percent of project-generated TOT for the first 10 years of operation brings the original expected 11.2 percent leveraged return to 13.8 percent, which is more in line with KMAs determination of expected developer returns for a hotel project of this type. The City's economic incentive program is performance driven; therefore, payments would cease upon totaling $1,438,800 or at the end of the ten-year period, whichever occurs first. A total net increase of $2,877,300 in TOT revenues from the Project to the City, prior to the proposed tax sharing, is projected through Year 10.
Project entitlements are anticipated to be received in May 2016. Pending City and CVWD approval of the final engineering and drainage design plans, construction of the flood control project will proceed and is estimated to take approximately eight months to complete. During this time, the Applicant will pursue building permit approvals from the City. The hotel construction, estimated to take twelve months, would follow. Receipt of entitlements and consent to participate in the City's economic incentive program will provide the Applicant with the support necessary to pursue the hotel franchise, which in turn will further the Applicant's pursuit of the remaining project approvals and implementation of the required flood control facilities, which will also lead to development of the other commercial retailers in the Center.
Summary -
The intent of the Transient Occupancy Tax Sharing Ordinance is to encourage the addition, expansion, and renovation of new and existing hotels within the city thereby creating new sources of TOT for the City's general fund to support public services that the City provides to its residents and businesses. Consideration regarding the extent to which the City will participate in this or other Transient Occupancy Tax Sharing Programs is within the realm of policy as to the benefit the project brings to the City beyond economics.
Within the past four years, the Applicant has invested a significant amount of time and resources in securing the property and prospective commercial retailers; obtaining approval of a new specific plan and adding the Project area to the City's corporate boundaries; preparing site design and development plans; and securing City and CVWD approvals. The proposed addition of a 90-room upper-midscale limited service hotel with freeway frontage to serve long-distance travelers and other visitors to the City will serve to further the City's tourism expansion goals and create a new source of TOT revenue for the City's general fund.
The Best Western Plus hotel and surrounding commercial retail has the potential to be the first development to occur north of the Interstate 10 freeway within the City. It is projected to initiate future growth in that area of the City and will be the gateway to Cathedral City for the westbound traveler. The architecture is reflective of current upper mid-scale hotel designs with room rates averaging $100 per night. It will be the second Best Western Plus in the Coachella Valley and will support up to 15 employees.
FISCAL IMPACT:
The proposed amount of TOT to be shared is derived on several factors, including: 1) completion of the Project, and 2) the amount of TOT that actually flows to the City. In order to achieve the economic return generally targeted for hotels similar to that proposed and to ensure that the Applicant is able to secure the Project, staff recommends capping the economic incentive payments at $1,438,800 for a period not to exceed ten years at 50 percent tax sharing. There would be a loss to the City of the additional projected TOT up to the maximum amount to be shared; however, since the additional projected TOT does not presently exist, there would be no loss of existing revenue to the City and a net projected gain of more than $1.4 million during the first ten years following completion of the Project.
The Transient Occupancy Tax Sharing Program is performance driven so if the maximum amount of taxes to be shared is reached prior to ten years, the Agreement would be terminated. Once the dollar cap is achieved or the maximum number of years is reached, the City will receive 100 percent of the net TOT revenue. The Operating Covenants require the Applicant to operate the property as intended for the duration of the Agreement. The Agreement is not automatically transferrable.
ATTACHMENTS:
1. Site Plan
2. Proposed Elevations
3. Table 1
4. Resolution
5. Tax Sharing Report
6. Tax Sharing Agreement and Operating Covenants