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Reneson Hotels

Rook vs Knight Endgame? The Corte Madera Inn developer puts property up for sale - Part II

When is an alternative not an alternative?

CEQA and common sense require that actual analysis be done and that “findings” be made based on evidence, in order for a town to approve a project. So criticism of the developer’s preferred plan is not a case of nitpicking or being anti-development. Rather, it is a good example of why we have laws like CEQA and regulations about wetlands, in the first place.

To protect habitat and species from the insatiable forces of greed.

In his email to Adam Wolff, Xavier Fernandez emphasized that “the pond is a special aquatic site that needs to be preserved to the maximum extent practicable.” Since, as noted earlier, the Draft Environmental Impact Report (2015), the Revised EIR (2015) and Final EIR (2016) all included an alternative proposal (Alternative 2) for a smaller, 147 room hotel, which preserves the pond, isn’t it now a fait accompli that there is a viable alternative solution at hand that is “practicable,” and therefore must be considered?

At this point, why wouldn’t the Town just acknowledge the regulatory correctness of the San Francisco Regional Water Quality Control Board’s comments, and simply move forward with that less impactful alternative? Unless, of course, the Town really did promise the developer that they would get all they wanted, before the public process ever started.

Is the Town now caught flatfooted because they never really seriously considered any of the other alternatives as being “real,” in the first place?

Over the past year, a number of residents have contacted the Marin Post, and claimed that Jana Haehl, the former mayor of Corte Madera, is still running things in Town. They characterize her role as being one in which she tells the Planning Department and the Town Council to “jump,” and they ask “how high?”

There is no way to know if there’s any truth to this. But one can only hope it’s not the case.

In any event, Jana has made no secret of the fact that the hotel owners are her friends and that she steadfastly supports their preferred project, and that any other alternatives should be dismissed out of hand. She has publicly stated as much and has argued that Corte Madera has lots of wetlands, and has saved enough of them, so it doesn’t matter what happens to this one.

Certainly, she’s entitled to her opinion like anyone else. She and other supporters also constantly bring up that the hotel owners are long term residents, who are very nice people that care deeply about Corte Madera, and claim that is sufficient reason to grant them what they want. The developer has also been playing the “We’re local owners” card very hard, and they have said all along that they intend to continue to own the new hotel.

The news that they’ve put the property up for sale to the highest bidder certainly casts some serious doubt on those sentimental arguments. It’s also curious that the broker’s sales brochure calls the property an “extremely rare…development opportunity” (instead of a “hotel for sale”), suggesting that an approval to build a new hotel on the site is a given.

In any case, as Marin Audubon president, Barbara Saltzman, wrote in the May issue of The Rail, “A person’s personality should not have anything to do with approving a development project.”

Financial analysis as creative writing

Marin and the entire SF Bay Area is now arguably the hottest real estate market in the country. The broad statistical data used by the developer in his project financials does not accurately reflect what is or is not financially feasible in Marin. And the methods of analysis presented, do not tell us what we need to know in order to evaluate whether or not the proposed redevelopment is financially feasible.

In Attachment 3 of the January 12th Staff Report, to the Planning Commission, Exhibit C (attached below) supposedly provides a financial analysis of the project. We assume the developer included it to show why they must have the maximum size hotel. We have to wonder if the Corte Madera Planning Department or anyone on the Planning Commission read it.

Conveniently, the developers only provide one financial scenario; the one they want. There are no comparative numbers offered for Alternative 2, the slightly smaller 147 room hotel scenario that preserves the pond; the one the developers contend they cannot possibly afford to build.

The developers provide a letter from Marriott Corporation saying that if the smaller hotel is built, it would probably be a Residence Inn, not a dual branded hotel with Springhill Suites. The developer contends that this is a deal killer. However, they provide no evidence to substantiate that claim, and the Marriott letter (Exhibit D, also attached below) does not say that such a project is not financially feasible.

So let’s take a look at "Exhibit C."

First off, there are a couple problems with this “analysis.” Number one is that it is not actually a “financial analysis” at all, at least like anyone in the real estate business would use to decide whether to build or not build. They call is a “Hotel Development Residual Value Analysis.”

A veteran, local real estate developer I showed this “analysis” to, euphemistically, called it “an interesting concept.” In other words, no one knows what “Residual Value Analysis” means and these figures don’t actually tell us anything about whether or not the investment is profitable, or the project is financial feasibility.

This lack of clarity is not helped by the fact that the information provided is not broken down or otherwise specific to this project (it relies on broad national statistics), and it mislabels things, somewhat nonsensically – it calls the projected project value “potential income.”

More odd is that no value is shown for land cost or equity in the deal. Is there debt on the property or is it owned free and clear? This matters because old debt has to be refinanced, which is a cost. And that impacts net revenues. But based on what is submitted and since the developer has owned this property for so many decades, it would be reasonable to assume that they own the land free and clear, and are pledging that as equity in order to get financing.

In any case, the developers are suggesting that all this adds up to a “Total Project Development Cost” of $54,800,758. They show no developer fees or other profits. They show the land value as “Residual Land Purchase Price,” as if to suggest it’s an expense.

In other words, they are asking us to believe they are doing all this for free. How charitable.

In addition, the developer’s information is far too incomplete to make any kind of determination about financial feasibility.

For example, is there cash required to close the deal? If so, how much and what is the cash on cash return on investment (ROI)? How is that cash invested and over what time frame, and what is the Internal Rate of Return (IRR)? What kind of construction and permanent financing is assumed, at what rate and term, and what loan to value? Is the land subordinated to the debt and if so on what terms? Is there a schedule of partial releases?

In other words, “profit” is a very flexible term. Sometimes the answers to these questions result in a little profit and sometimes they result in a lot.

In any case, let’s look at what their “analysis” shows.

Net building area: 131,180 square feet. Check.

Number of rooms: 185. Check.

Average room rate: $175/night. Check.

Occupancy rate: 75%. Hmmm?

Projected Hotel Occupancy: The estimated occupancy rate is very important because it significantly impacts operating revenues and how profitable the project will be (the number of rooms for rent multiplied by average room rental rate multiplied by number of nights per year of occupancy equals gross revenues[1]).

The developers cite PKF Hospitality Research in their presentation. PKF is a highly respected firm for such data. But PKF’s most recent reports and forecasts do not support the developer’s claims.

75% occupancy is a reasonable “average” room occupancy rate in Marin County. But that has little bearing on this particular project in this particular location, because that average includes a very wide range of types of hotel and motel rooms (from the four star Hilton Embassy Suites in San Rafael to the rooms for rent behind Smiley’s bar in Bolinas), the vast majority of which are significantly older and inferior to what is being proposed at the Corte Madera Inn. The Corte Madera Inn will arguably be one of the best located, highest quality hotels in all of Marin County. It is very likely that its occupancy rate will be higher than the Marin average.

All of the professional real estate brokers and investors we spoke with agreed on this.

In addition, in their December 2015 “Hotel Horizon” hotel occupancy forecast, PKF states that in hot West Coast markets such as Marin and the SF Bay Area

the growth in demand for lodging accommodations will exceed the change in supply during each of the next two years.

For 2016, PKF-HR is projecting

room rates to increase by 5.5 percent, followed by an even greater 5.8 percent rise in 2017.

And that

At this point in the cycle, the top tier cities are approaching all-time highs, limiting the potential for continued occupancy gains, (and in) the San Francisco market… occupancy level achieved was 90.3 percent.(in 2015)

All this considered, the developers are asking us to believe that the average occupancy rate is all they can achieve. I very much doubt that. If, for example, we increase the occupancy rate by only +5%, to 80% occupancy (vs. 75%), we get an increase in annual gross revenue of almost $600,000.[2]

However, even if we accept the developer’s very conservative occupancy rate of 75%, this project certainly appears to be very profitable. Profitable enough to suggest that a smaller version, Alternative 2, that preserved the pond, would be similarly profitable.

Projected Hotel Value and Cap Rates: Exhibit C shows a “cap rate” of 6%. A cap rate, or “capitalization rate,” is the ratio of the net operating income (“NOI”) to the property’s value. It tells an investor what kind of “yield” the property will provide (the percentage of return on investment based on the project’s value) so he can compare it to other investments.

To get the cap rate, you divide the net operating income by the project value and you get a percentage. So, for example, if a property was listed for $1,000,000 and generated a net operating income of $100,000, the cap rate would be $100,000/$1,000,000, or 10%. Conversely, if you know the NOI and have a rate that you think investors are looking for (the 6% suggested by the Inn developers, for example), you can divide the income by that rate and get a projected value or selling price.

Why does this matter?

It matters because the lower the cap rate, the higher the value of the hotel. And that value, that “equity” in the hotel, just like your house, is basically profit to the developer / owner.

A 6% cap rate may be a reasonable number for a developer to submit to a lender when they’re trying to get financing. But again, it’s only an average for hospitality properties in Marin. In the Southern Marin market, however, it’s likely that the actual value of this brand new, premium hotel, located on a triple “A” hotel site, could be higher and therefore, the cap rate could be lower (perhaps 5.75%) and the profits significantly greater.

If, for example, we use a slightly more aggressive 5.75% cap rate, we get about $4,500,000 more in property value for the developer, and more than $100,000 in additional cash flow profit per year.

The bottom line: Even if we use the developer’s financial assumptions, there is nothing that suggests that the redevelopment of the hotel is not very profitable. When this project is completed, there will really be nothing like it in Southern Marin.

Again, this would suggest that the smaller hotel alternative that preserves the pond will be equally profitable and financially feasible. Yet, for some unexplained reason, it seems that no at the Town Planning Department or the Planning Commission ever asked the developers to disclose their financial feasibility analysis of Alternative 2!

A Financial Analysis of Alternative 2:

Alternative 2 is a proposal to build a 147 room hotel that saves the pond. We’ll use the same metrics that the developer used for the previous analysis.

Net building area: 104,235 square feet. (131,180 sf / 185 units x 147 units)

Number of rooms: 147

Average room rate: $175/night.

Occupancy rate: 75%.

This gives us:

Gross annual revenue: $7,042,188

Operating expenses: $4,429,556 (62.9%)

Net operating income: $2,612,632

Cap Rate: 6%

Project Value: $43,543,873[3]

Frankly, there is nothing about these results that suggests that Alternative 2 (147 rooms) is not financially feasible. So why isn’t the Corte Madera Planning Department asking the developer for better information so they can determine for themselves exactly what is financially feasible and what is not?

Good question.

To answer that we have to keep digging.

By Bob Silvestri

Editor of The Marin Post

Read Part I here

Read Part III here

Read Part IV here


[1] There are actually other ancillary revenues associated with hotel operations such as concessions and vending machines, concierge referral fees, etc., but we’ll ignore those for now.

[2] $175 per night multiplied by 185 rooms multiplied by 292 days (80% of 365 days a year) of rental we get $9,453,500 vs. $8,862,656 = +$590.844.

[3] Construction costs, soft costs, taxes, and interest are all proportionate.