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SR-212-001-01 (2) . ;? / 2 -- c:.-,r ~/ . ;.../ ~ /'-'/ (/ II-E: DEe 1 2 \989 ^...... .~, I - :~'d <:::;;J \ C' - '-- .-, I Santa Monica, California C/ED:CPD:PB:SF:JG w/lodging Council Meeting: December 12, 1989 TO: Mayor and city council FROM: City staff SUBJECT: Recommendation to Adopt a Low Cost Coastal Lodging Fee for the City of Santa Monica INTRODUCTION This report recommends that the City Council adopt a low cost lodging replacement fee as required by the City's Draft Local Coastal Program to mitigate the loss of affordable hotel and motel rooms within the Coastal Zone and direct the city Attorney to prepare an ordinance to implement the program. This fee would be imposed on developments that remove affordable guest rooms from any site within the coastal zone. The purpose of this replacement fee is to maintain a range of prices for overnight lodging in the city. BACKGROUND Both the California Coastal Act and the city's Draft Local Coastal Program include policies that address the protection of low cost lodging~ IJ-E. - 1 - DEe 1 2 ljUg . . State Coastal Act section 30213 of the Coastal Act states in part that: "Lower cost visitor and recreational facilities shall be protected, encouraged, and, where feasible, provided." The intent of Section 30213 is to ensure that there is a balanced mix of visitor and recreational facilities within the Coastal Zone, so as to provide recreational opportunities to all economic sectors of the public. Access to coastal recreation facilities is also enhanced when there are overnight lodging facilities for all economic sectors. On October 6, 1989, the Coastal Commission and staff defined "low-cost overnight facilities" as follows: "A low-cost overnight facility is an overnight lodging facility which charges no more than the average per room, per night rate of lodging facilities such as a hostel, Motel 6, Super 8 Motel or other similarly priced lodging facility." Santa Monica's Local Coastal Program Policies 37 and 45 of the City' s Draft Local coastal Program state: Policy 37. Lower cost visitor and recreational facilities shall be protected, encouraged, and, where feasible, provided. Developments providing public recreational opportunities are preferred. Policy 45. Where new development removes low cost lodging facilities, such new development shall mitigate this impact. - 2 - . . Mitigation shall be in the form of a fee paid into a fund established by the city for the provision, including land acquisition and construction, of replacement of low-cost lodging facilities within the Coastal Zone. The Coastal Commission has been implementing the above policies for projects in Santa Monica that involve the removal of low cost visitor accommodations. Three such projects have been required to provide fees to mitigate the loss of low cost accommodations. In 1983, the coastal Commission approved the demolition of the 97 room Surf rider Hotel and, as a proj ect condition, required an in-lieu fee of $500,000.00 to mitigate the loss of 97 affordable rooms. The $500,000.00 was utilized to help finance the Youth Hostel currently under construction downtown. In 1988, the Coastal Commission approved demolition of a low cost, 34 room motel at 1501 Ocean Avenue and the construction of a retail/office project. A condition of project approval included payment of an in-lieu fee of $200,000.00 to mitigate the loss of low cost visitor serving accommodations. On October 10, 1989, The California Coastal Commission approved a 62 room hotel project at 1447-53 Ocean Avenue that included demolition of a motel (Auto Motel) with 30 affordable rooms. A condition of approval imposed by the Coastal commission included a $255,450.00 replacement fee for low cost accommodation replacement. The Coastal Commission declined to give Santa Monica the mitigation fee for disbursal as the City currently does not have a mitigation fee program in place. - 3 - . . originally, the fee program was to be included in the City's Local Coastal Program, but due to the Coastal commission action on the Auto Motel, and other upcoming projects within the coastal zone, staff recommends implementing the low cost lodging replacement fee prior to adoption of the revised Local Coastal Program. By adopting this ordinance, the city will be able to set and collect the mitigation fee from upcoming projects. Upon certification of the City's Local Coastal Program, this ordinance will be incorporated into the Zoning Ordinance along with the Coastal Program's implementing ordinances. PROPOSED FEE PROGRAM Policy 45 of the City's Local Coastal Program proposes the establishment of an in-lieu fee to be paid by the developers of projects which displace low cost or budget motel or hotel units in the Coastal Zone. A development proposal in the Coastal Zone which removes low-cost lodging would be required to pay a per unit fee to the City to mitigate the loss of the units. The definition of a low-cost unit established by the City is based on average nightly rental rates. A survey of motels and hotels (see Attachment A) in Santa Monica's Coastal Zone, identified 24 lodging establishments containing a total of 2, 375 rooms. Of this total, 650 rooms, distributed among 15 different motels and hotels, were classified as low-cost units (the hotel/motel survey included the Kensington and Flamingo complexes). Room rates for low-cost/economy hotels/motels were identified to be in the range of $35.00 to - 4 - . . $80.00 per night. The average room rate of the above range is $57.00 per night for a double occupancy room. In a report entitled ~otel Development Update Report, May, 1989, motel rooms within the above range were defined as economy or low cost. Additionally, staff considered the potential for on-site replacement of affordable rooms within a newly constructed hotel. This option has not been included in the program as industry experts advised staff that this was an unlikely scenario. It would be administratively impossible to operate a single lodging facility with greatly disparate room rates unless there is a significant difference in accommodations and amenities in a facility. Such a facility is highly unlikely to be constructed. Fee Methodology An economic consultant was retained to provide an analysis to deterllline the proper amount of the fee to be assessed. To develop this fee, the analysis included: land costs a hotel/motel operator could afford in order to build low-cost lodging, operating costs consistent with hotel/motel industry experience, financing and return on equity, improvement costs, and development parameters. The basic approach in the analysis was to determine the amount of assistance required by a developer of new economy rooms so that a 10% return on equity investment could be achieved. The analysis assumed that the assistance is the amount of fee the City should collect for the removal of the 650 low-cost visitor accommodations in the Coastal Zone. A standard development model was used utilizing the following assumptions: - 5 - . . o A pure hotel/motel facility; that is, no restaurant o~ other non-room income operations; o Density of 187 units per acre with a resultant FAR 0= 1.5.; o Parking requirement of 1.0 space per room; free parking; predominant use of subterranean parking (about 80% 0= total) ; o Improvement costs (excluding land but including furniture, fixtures, and equipment) of approximately $42,600 per room; o Land cost at $106 per square foot; o Financing at 11. a%: annual interest rate and 30-yea= equal amortization; o 90%: of total development costs in the form of a mortgage with a resultant lO%: developer equity investment; o Return on developer equity investment requirement of 10% annually; (return on equity is a widely accepted measure of prOfitability.); o Average building space of 350 square feet per roo~ (including lobby, corridors, and other common areas); o Average three floor construction above parking; o Average parking space of 350 square feet. To determine the appropriate density for a replacement project, data was gathered from affordable hotel/motel projects recently approved in Santa Monica. Three examples were found: o The 126-room Econo Lodge to be located on a 22,500 square feet site, with a resultant density of 244 rooms - 6 - . . .. per acre. o The 68-room King Chai (in planning) to be located on a 15,000 square foot site, at a resultant density of 197 rooms per acre. o A 69-room hotel proposed for an 8,720 square foot site on Main street, with a resultant density of 345 units per acre. For this analysis, land sale comparables for 13 properties within the City of Santa Monica were obtained. Sales prices range from a low of $70.15 per square foot of land area to $143.59 per square foot. Based on the comparables, the analysis utilized an average of $106 per square foot for land cost (the mean value) . Replacement Fee Program Based on the above methodology, it was determined that a mitigation fee of $8,000.00 per room would be necessary to ensure full replacement. To reflect changes in financial conditions such as land costs, improvement costs, maximum allowable rental levels, and operating costs, an inflation adjustment factor has been included as part of the fee program. Similar to the method used in the housing and parks mitigation fee, the fee should be adjusted for inflation by the percentage change in the consumer price index and a factor that accounts for any changes in land costs. Developers demolishing affordable motel or hotel rooms within the Coastal Zone will be required to pay the fee on a per room basis. Prior to issuance of a demolition permit or building permit for a - 7 - .. . . new project, at least 50% of the total fee required shall be paid. The balance of the fee shall be paid in full prior to the issuance of a certificate of occupancy and shall be secured by an irrevocable letter of credit or other form of security acceptable to the city. Disbursement of Program Funds A program to allocate the low cost lOdging mitigation fees will be implemented after a sufficient amount has been collected by the City. It is anticipated that an RFP process, similar to the one used in connection with housing fees and the fees previously collected will be used to allocate the funds. BUDGETARY/FISCAL IMPACT This ordinance will result in the receipt of low cost lodging replacement funds. A separate account will be established for deposit of these funds. RECOMMENDATION It is respectfully recommended that the City Council direct the ci ty Attorney to prepare an ordinance to establish a low-cost lodging mitigation fee for first reading at the January 9, 1990 City Council meeting. Prepared by: Paul Berlant, Director of Planning Suzanne FriCk, Principal Planner Johanna GUllick, Associate Planner 12/06/89 - 8 - . . - ATTACHMENT A AFFORDABLE ROOMS IN THE SANTA MONICA COASTAL ZONE: FALL 1989 NAME OF MOTEL/HOTEL NUMBER OF ROOMS PRICE RANGE Ocean Park Motel 2452 Lincoln Blvd. 29 $38-55 TraveLodge Motel* 1525 Ocean Avenue 35 $65-80 Pacific Sands Motel 1515 Ocean Avenue 42 $40-45 Auto Motel 1447 Ocean Avenue 30 $45 Hotel Carmel* 201 Broadway 93 $38-60 Ocean Lodge 1667 Ocean Avenue 16 $55 seaview Hotel 1760 Ocean Avenue 11 $35 Beach Auto Hotel 1670 Ocean Avenue 25 $45-55 Sea Shore Motel 2617 Main street 20 $40-50 Bayside Hotel 2001 Ocean Avenue 39 $42-62 Cal Mar Hotel 220 California Avenue 35 $55-78 Santa Monica Motel 2102 Lincoln Blvd. 29 $40-50 Kensington/Flamingo Hotel 1746 Ocean Avenue 182 $35-65 Embassy Hotel 1001 Third Street 43 $40-60 Sovereign Hotel* 205 Washington Avenue 21 $69-89 TOTAL 650 * Hotel or motel also contains rooms that are above $80. Note: Average price of hotel rooms = $57.00. This is based on a room rate range of $35.00 to $80.00 w/low2 . . ATTACHMENT B Additional Operating Expenses Item Cost Basis Utilities $4 per square foot of building space Property Taxes 1.1% of total development costs (including land) Insurance 0.3% of development costs excluding land Repairs and Maintenance 5.0% of development costs excluding land Maintenance (reserve) 2.0% of development costs excluding land Supplies and Misc 4.0% of total operating revenues Note: These factors are based upon reported industry averages HARD CONSTRUCTION COST FACTORS Item Cost Basis Building Shell $65 per square foot of building space Surface Parking $8 per square foot of land area subterranean Parking site Work $8,800 per space $8 per square foot of landscape/hardscape area Off-site Costs Estimated at $80,000 lump sum w/lodgA . -/ ;.--- r . ./, ./ ~ .-"/ /~ ? _______f.../ ~ S;J/ CITY OF SANTA MONICA INTER-DEPARTMENT MEMORANDUM DATE: December 8, 1989 TO: Mayor and Councilmembers FROM: city Clerk SUBJECT: INCORRECTLY CODED AGENDA ITEM A staff report coded Item ll-F, delivered in Wednesday's packet delivery, was incorrectly coded. It should be coded II-E. 11-E: Recommendation to direct the City Attorney to prepare an ordinance implementing a low-cost lodging replacement fee to mitigate the loss of affordable hotel and motel rooms within the Coastal Zone. Please note this change in your council packets. We apologize for the inconvenience.