SR-900-003-03
RMD:EDD:DM:F:\RESOURCE\SHARE\GRETCHSH\StaffReports\PACIFIC
SHORE HOTEL.doc
Council Meeting: September 19, 2000 Santa Monica, California
TO: Mayor and City Council
FROM: City Staff
SUBJECT: Authorization to Negotiate and Execute an Amended and Restated
Pacific Shore Hotel Lease Agreement with Elkor Realty
Corporation, Including Assignment and Modification, and
Termination of Existing Lease With Sunstone Hotels, LLC
INTRODUCTION
This report recommends that Council authorize staff to execute an amended and
restated Pacific Shore Hotel lease agreement with Elkor Realty Corporation,
including assignment and modification, and termination of the existing lease with
Sunstone Hotels, LLC. This report contains a brief background of the property,
and proposed modifications to the lease.
BACKGROUND
Sunstone Hotels, LLC, operates Pacific Shore Hotel on 1.75 acres of City
property located at the northeasterly corner of Pico Boulevard and Ocean
Avenue pursuant to an initial lease (Contract Number 1740) dated December 29,
1966, and subsequently amended on six separate occasions. Sunstone
acquired the 164-room hotel effective September 4, 1998, for $22,150,000 and
was granted assignment of the lease, which expires February 11, 2048. As a
condition of City consent to the assignment, Sunstone committed to an
investment of approximately $750,000 in the property. These cosmetic
improvements were completed. The hotel remains a plain, box-like and relatively
unattractive structure which lacks guest room ambiance and hotel features and
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amenities typically provided by competitors in the marketplace, such as fitness
facilities, small meeting rooms, and quality dining opportunities.
Current minimum annual rent to the City is $328,773 per year. Inclusive of
percentage rent compensation, the lease generates revenue to the City of
approximately $460,000 per year, based on 8.5% of gross receipts from room
revenues, 5% of gross receipts from sale of alcoholic beverages, and 3% of
miscellaneous other gross receipts. Pacific Shore Hotel also pays approximately
$617,000 per year in Transient Occupancy Tax at its present $120 per night
average room rate and 80% occupancy rate. As of July 2000, the average room
rate in Santa Monica and adjacent/competing environs (Marina del Rey, West
Los Angeles, West Hollywood) was $180 per night at 75% hotel occupancy.
Focusing solely on the existing range of Santa Monica guest lodging, facility type
and room price distribution may be summarized as follows:
Deluxe Class ($250 + per night) approx. 1,200 rooms
e.g.: Loew?s, Casa del Mar, Shutter?s, Le Merigot, Fairmont Miramar
Quality Class ($150-250 per night) approx. 1,100 rooms
e.g.: Radisson-Huntley, DoubleTree, Four Points, Georgian
Value Class (less than $150 per night) approx. 1,000 rooms
e.g.: Pacific Shore, Best Western, Travelodge
DISCUSSION
Sunstone recently made a business decision to dispose of the property and
solicited purchase offers for Pacific Shore Hotel and prospective assignment of
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the leasehold. Sunstone elected to pursue a proposal from Elkor Realty
Corporation and requested that the City negotiate directly with Elkor for an
appropriate lease amendment. Elkor has proposed to acquire the leasehold for
approximately $27,000,000, and intends to make a new capital investment of
approximately $12 - 15,000,000 in the facility. Completion of these
improvements and reorientation of facility management and marketing should
create a quality boutique hotel property with the anticipated average daily room
rate projected to increase to at least $180 in Calendar Year 2003.
Improvements funded by the new capital investment would include:
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Removal, relocation and replacement of elevator towers;
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Removal and replacement of HVAC system to meet or exceed Title 24
standards;
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Removal and replacement of interior and exterior windows and doors, window
frames and glazing;
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Renovation of café to a quality restaurant;
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Removal and replacement of the entry lobby and interior lighting;
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Replacement of exterior signage and landscaping; and
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Major improvements to pool, spa, and guest deck.
All building modifications would be subject to standard City zoning, planning,
building and architectural reviews and permits. The new facility improvements
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and room pricing will move the property from the ?Value? category to the ?Quality?
category, consistent with the enhanced guest amenities.
In order to secure leasehold financing for the acquisition and new capital
investment, Elkor requests assignment and amendment to the property lease.
Elkor proposes that the City consent to assignment from Sunstone, extend the
lease term from the current 48 years to 65 years, and increase the guaranteed
monthly rent to a level equivalent to revenue now received by the City on a
percentage basis. The amendment would also reduce the percentage rent on
room revenues from the current 8.5% to 4.375% for the initial fifteen years and to
6.375% thereafter. Percentage rents for food, beverage and miscellaneous sales
would be 5% of gross receipts. Total income to the City would increase due to
increased room rates and food and beverage sales, following completion of new
capital investment and stabilization of rates and occupancy levels.
It is also proposed that, if at least $12,000,000 in new capital investment is not
expended by Elkor within three years of assignment, the lease term of years and
percentage room rent would revert to current levels. Other terms and conditions
of the lease would remain unchanged.
A ?Labor Peace Provision,? is proposed whereby the City?s proprietary interest in
revenues anticipated under the lease is protected from any adverse economic
effects of labor disputes. The tenant agrees to execute and submit to the City a
valid labor peace agreement with any labor organization seeking to represent the
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tenant?s employees. The proposed lease will not be executed by the City until
the City approves the agreement.
The City currently receives minimum annual rental of $328,773. The proposed
lease amendment will result in an initial reduction in minimum rent to $250,000
during the first year of facility rehabilitation and $350,000 during the second year,
followed thereafter by stepped increases to $400,000 in the third year, $460,000
in the fourth year, plus CPI adjustments thereafter. Indexing of the minimum
annual rent will guarantee income to the City which is equivalent to the current
level of percentage revenue participation.
Upon completion of renovations and occupancy stabilization, the total rental
income, minimum plus percentage, to the City would increase from
approximately $460,000 to at least $522,000 and possibly $597,000 per year.
The annual Transient Occupancy Tax revenue to the City would increase from
approximately $617,000 to at least $1,200,000. The Possessory Interest value
base (in-lieu property tax) would increase from $22,150,000 to an estimated
$38,850,000, with benefit accruing to the Redevelopment Agency.
Benefits to the City include improved economic terms, extension of the economic
life of the hotel, substantial physical improvement of an aging lodging facility, and
better on-site lodging facilities and services to guests. Finally, the exterior
physical appearance of this prominent civic center adjacent property would be
substantially enhanced.
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BUDGET/FINANCIAL IMPACT
Most of the financial impact will occur in years subsequent to the current fiscal
year. Due to the fact that renovations are not expected to commence until Fiscal
Year 01/02, at which time blocks of rooms would be taken out of service and
percentage rents would decline temporarily, the current fiscal year rental income
is expected to be unaffected. However, the City will participate (per the current
lease) in net sale proceeds at the rate of 2% of the estimated $4,178,623 value
gain ($26,850,000 Elkor purchase, vs. $22,671,377 Sunstone purchase and
capital expenditures), which equals $83,572 revenue budgeted to revenue
account number 01224.404170.
RECOMMENDATION
Staff recommends that Council authorize staff to negotiate and execute an
amended and restated Pacific Shore Hotel lease agreement with Elkor Realty
Corporation, including assignment and modification, and termination of the
existing agreement with Sunstone Hotels, LLC, as outlined above.
Prepared by: Jeff P. Mathieu, Director of Resource Management
Mark Richter, Economic Development Manager
Gretchen Kubacky, Senior Real Estate Analyst
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