TO:
Honorable Mayor and Members of the City Council
THROUGH:
Mark Danaj, City Manager
FROM:
Bruce Moe, Finance Director
SUBJECT:Title
Options for Development of City-Owned Property on Parkview Avenue, Including Hotel, Apartments or Office; Citywide Hotel Study Report (Finance Director Moe).
RECEIVE REPORT; PROVIDE DIRECTION
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Recommended Action
RECOMMENDATION:
Staff recommends that the City Council: a) receive reports on potential locations for hotels in Manhattan Beach, including City-owned property on Parkview Avenue, and financial pro forma for hotel and other potential uses of the Parkview property; b) discuss and provide direction on the Parkview Avenue property, including determining preferred use; and c) instruct staff to prepare a two-step competitive process for identification of qualified developers and selection of a development partner for the option selected.
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EXECUTIVE SUMMARY:
The PKF Consulting hotel study, with regard to the Parkview Avenue property, concludes that:
• Opportunity exists at that location for the development of a high-quality life-style 150 room hotel
• The hotel should offer on-site dining with bar/lounge open to the public
• Meeting space to accommodate social and corporate groups (approximately 7,500 square feet) is practical and desirable
• The location and nearby amenities will allow a hotel to capture existing leisure demand in the area, but also have the potential to generate additional commercial demand
• The hotel would be positioned to capture group and corporate demand not currently satisfied by existing hotels
• Stabilized occupancy rates will average 80% with an average room rate of $220/night
The PKF Consulting study of other potential Manhattan Beach hotel sites concluded that the capacity exists for five other potential hotel additions/expansion locations identified in the study. The additional rooms will reduce overall occupancy rates until the added rooms are absorbed by the market over the next eight years. If all six hotels identified in the report were added (including the Parkview location), over the next eight years the number of rooms will grow by 6.5% while occupancy will drop from 78% to a stabilized rate of 76%. The addition of all six hotel locations has the potential to increase City Transient Occupancy Tax revenues by 70.8% over an eight year period (using the existing 10% rate).
In conjunction with the PKF study, Keyser Marston Associates (KMA) performed an analysis of a hotel on Parkview Avenue, as well as various alternatives for that location. The KMA study concluded:
• A high-quality life-style hotel represents the strongest potential use for the site
• Estimated annual revenue from ground lease, property tax and transient occupancy tax (TOT) totals $1.16 million, which exceeds all other potential uses
• Other potential uses include office space and apartments. Office space would require a subsidy of approximately $95,000 per year. Apartments generate an estimated $200,800 per year.
• Given the lack of major street visibility and the lot size and configuration, KMA dismissed retail/restaurant as infeasible from a market perspective.
The PKF and KMA studies are provided as attachments to this report.
FISCAL IMPLICATIONS:
There are no fiscal implications associated with the recommended action.
The existing ground leases generate approximately $162,500 net per year, subject to annual adjustment by the Consumer Price Index. The alternatives listed within this report would generate revenues ranging from negative $177,500 for office use, to positive $200,800 for apartments, and positive $1.17 million for hotel. Retail and restaurant uses were eliminated as being not economically viable uses.
BACKGROUND:
The City Council directed staff to review the potential uses of the City-owned Parkview Avenue property currently utilized as parking for the Manhattan Village field, Manhattan Village Mall and the Manhattan Beach Country Club (the land also provides access to the Senior Villas housing complex. Possible uses include a hotel, office space, retail/restaurant and apartments.
Staff contracted with PKF Consulting to analyze the hotel potential for Parkview Avenue, as well as the capacity for additional hotels in Manhattan Beach. In conjunction with that study, Keyser Marston Associates (KMA) were retained to provide financial pro forma for the hotel and other potential uses.
DISCUSSION:
The PKF and KMA studies provide detailed information on hotels and other uses, as well as the financial feasibility of the various options.
Jointly, the reports conclude that a hotel is the preferred development of the Parkview Avenue property. If the City Council determines to proceed with that track, there are several considerations moving forward:
Existing Leases
The parking lot is under long term leases with the Manhattan Village Mall (approximately 184 spaces, maximum term to 2037, no early termination by City) and the Manhattan Beach Country Club (50 spaces, maximum term to 2035, early termination by City with 60 day notice). The existing parking will need to be replaced and augmented for the project, which has been included in KMA’s financial projects. While the Country Club lease may be terminated, the Mall lease will require discussions on temporary loss of use during construction.
Senior Villas
An easement exists on the Parkview Avenue parcel for access to the Senior Villas. Additionally, concerns have been raised on the impacts the hotel may have on the Senior Villas in general. These issues will need to be considered in the design if the project moves forward.
Quimby Fees
A representative of the Senior Villas raised a question about restrictions on development of the property due to collection of Quimby fees. The State Quimby Act (California Government Code §66477) was first established by the California legislature in 1965. It provided provisions in the State Subdivision Map Act for the dedication of parkland and/or payment of in-lieu fees as a condition of approval of certain types of residential development projects. The legislation was initiated in response to California's increased rate of urbanization and the need to preserve open space and provide parks and recreation facilities for growing communities. The State Quimby Act allows local agencies, such as the City of Manhattan Beach, to establish ordinances requiring residential subdivision developers to pay impact fees that can be used to purchase and develop land and/or recreational facilities.
Staff has researched this issue, and conclude that no Quimby funds from the Senior Housing Project were used in the modification of the then existing City owned parking lot. Therefore, there are no restrictions on development at this time.
Future Hotels
In addition to the Parkview Avenue property, PKF’s report includes a market analysis of five additional possible locations for hotels within Manhattan Beach. While these are identified as potential sites, they are not considered imminent, and are in various stages ranging from conceptual to theoretical/abstract:
• The northeast corner of Highland and Rosecrans
• Highland Avenue in downtown
• The Von’s site downtown
• The Fry’s location at the corner of Sepulveda and Rosecrans as part of Phase 3 of the mall project
• Expansion of the Shade Hotel at Metlox
The study projects the following market performance over the next eight years for these five locations, as well as the Parkview Avenue property:
• Transient Occupancy Tax increases by 70.8% to $11.2 million from increased room availability and room rates.
• Demand is not expected to outpace the growth in supply from these new room additions, but is expected to increase 6.1% per year over the next eight years.
• Occupancy rates are expected to decrease with the new rooms coming on line, from 78% in 2015 to 72% in 2020. By 2022, the market begins absorbing the new supply, and occupancy increases to 76% by 2023.
• With the additions, the average daily room rate over the coming eight years increases 4.3% annually compared to 3.8% without the new rooms.
Section VI of the PKF report (attachment #1) provides further detail on the market analysis of future hotel rooms.
POLICY ALTERNATIVES:
With respect to the Parkview Avenue property, the following options exist:
ALTERNATIVE #1: Hotel
• Most economically feasible
• Supportable land value of $1.31 million
• Ground lease payment of $130,700 per year
• $71,700 in increased property tax
• Transient Occupancy Tax revenue of $963,600
• Total revenue of $1.17 million annually
ALTERNATIVE #2: Apartments
• Less economically feasible than hotel
• Supportable land value of $1.0 million
• Ground lease payment of $100,000 per year
• Property tax revenue of $100,800
• Total revenue of $200,800 annually
ALTERNATIVE #3: Office
• Not economically feasible
• Results in annual City net cost of $94,900 annually
ALTERNATIVE #4: No Change
• Maintain the parcel as parking
• Annual net revenue of $162,500 (adjusting to CPI)
CONCLUSION:
The PKF and KMA staff reports conclude that a hotel is the strongest economic use of the Parkview Avenue property. If City Council wishes to proceed with this option, staff, in conjunction with KMA, will prepare a two-step process which begins with the preparation and distribution of Requests for Qualifications (RFQ) that will be sent to a group of hotel developers identified by PKF and KMA. Well qualified developers receive numerous solicitations to pursue potential development opportunities, and limiting the time and cost commitment involved in preparing an initial response can assist in attracting qualified developers to the process.
The RFQ will focus on the respondents’ recent experience completing comparable projects, their financial capacity, and their demonstrated understanding of the desired scope of development, guidelines and submission requirements. The responses will be evaluated by a selection committee that is comprised of City representatives and outside consultants (PKF and KMA). The objective of the RFQ process is to identify a short list of no more than three development teams to receive Requests for Proposals (RFP). The RFP will require the identification of the key team members, the submission of a proposed development plan, a pro forma analysis for the proposed development scope, a sources and uses of funds statement, a description of the proposed ground-lease terms, and an identification of any responsibilities proposed to be imposed on the City.
KMA recommends that the City select the desired development use prior to initiating the two-stage RFQ/RFP process. The process of preparing a response to a RFP is a time consuming and costly endeavor. As a reflection of this, highly qualified developers tend to focus their efforts on solicitations where the ground rules are established upfront. Solicitations that include multiple allowable land uses create a significant amount of uncertainty, which can result in qualified developers choosing to pass on the opportunity. Similarly, RFPs that are sent to a large number of respondents tend to discourage responses from well qualified development teams.
Attachments:
1. PKF Consulting Report
2. Keyser Marston Associated Report