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CVP Comments on the revised alternatives for the Corte Madera Inn Rebuild Proposal

Posted by: Bob Silvestri - May 23, 2017 - 1:09 PM PDT

The following comment letter on the newly proposed alternatives for the Corte Madera Inn Rebuild project, has been submitted to the Corte Madera Planning Department and the members of the Corte Madera Planning Commission.

Dear Corte Madera Planning Commissioners:

Please consider the following comments in your deliberations regarding the latest revised project proposal by Reneson Hotels for the rebuild of the Corte Madera Best Western Inn property.

Summary of comments

Procedural Issues:

The Staff report characterizes this Planning Commission meeting at a “special meeting.” However, it would be more correctly noticed as a “study session” or a “workshop,” because the applicant is submitting an entirely new proposal, which we are all seeing for the first time. In addition, the Staff Report indicates that there will be information presented at the hearing, by biological consultants Jim Martin and Steve Foreman, which the public will have no opportunity to evaluate, prior to its presentation at the hearing.

The Staff Report suggests that this is potentially a decision making hearing, stating that one of the options before you is to approve the new project. Such a decision would be improper since it would give the public no time to prepare its comments about what might be presented.

For this reason, this hearing should not be noticed as a decision making hearing but should be noticed from the outset as a study session, and any approval or disapproval should be held off until a future hearing date.

CEQA:

The Staff Report suggests that the Planning Commission has sufficient information before it to approve the proposed new alternative plan (Staff Report, page 5, Conclusion).

However, the new proposal being put forth is significantly different from any past alternatives presented. The partial loss of wetlands and the proposed reconstruction of the wetlands that remain have never been scientifically analyzed nor have its impacts been adequately assessed. One might argue that the impacts of this partial destruction of the wetlands is less than the total destruction previously proposed, however, there is no actual study or evidence to support that assumption (it may present new, unforeseen impacts). CEQA requires an evidence based decision making process.

Also, please keep in mind that the previous proposal’s FREIR was never voted for recommendation to the Town Council, by the Planning Commission, nor has it been certified. CVP has challenged and continue to challenge the FREIR’s adequacy under CEQA.

Therefore, this new proposal must be considered as a “new” alternative, and must be subjected to the requirements for assessment and analysis under CEQA. The Planning Commission should not move forward on approving this project until a new Revised EIR is prepared and circulated for public comment. There should not be any decision to approve this new proposal until that new CEQA process is completed and all public comments have been considered.

Public comments at the April 11, 2017 hearing:

Attachment 1, Minutes of Regular Planning Commission Meeting, April 11, 2017, contains a spectrum of comments from residents, both pro and con, regarding the proposals that were submitted as of that date. However, the substantive issues before the Planning Commission remain predominately ones of legality and regulations, not subjective opinion. I ask that the Commission please keep that in mind in their discussions.

As I noted in my comments at that hearing, this is not about wanting or not wanting a hotel. It is generally agreed by all that an appropriately designed hotel is the preferred use on that property. The issues are whether or not the applicant has submitted proposals that are approvable under governing regulations and in compliance with local, regional and federal oversight agencies.

To date, no proposals, including this new proposal (except for Alternative 2) is compliant with the RWQCB’s or the Army Corps’ 401 permitting guidelines.

Staff Report

The tone of the Staff Report in general and in particular in its section entitled “Analysis” (page 2 to page 5), takes a highly prejudicial view of the proposal in favor of the applicant and shows bias. Frankly, it reads like a marketing brochure for the developer rather than an objective assessment on the part of the public’s interests, which Staff is duty bound to serve.

By using terms such as “internationally recognized,” to describe the applicant’s paid consultants, gives the impression that their analysis is somehow superior to your own judgment or the comments of other real estate professionals who have commented throughout this project’s history. I might ask, for example, why my own comments are not prefaced by saying “Bob Silvestri, an acknowledged expert in real estate development?” Obviously, this is silly. As noted above, a person’s credentials do not extinguish the requirements for evidence based decision making required by CEQA and under the Town’s General Plan guidance.

That aside, a serious question before you is why is the Planning Staff of Corte Madera continues to act as if it were a marketing and public relations arm of the developer and the Marriott Corporation, rather than a fiduciary of the residents of Corte Madera?

In addition, why does the Staff Report make no mention of the most significant finding from the April 11th hearing? At that hearing Xavier Fernandez, a senior environmental scientist and the permitting manager for the Regional Water Quality Control Board, explained quite clearly that the pond is a wetlands and must be preserved, that the Burdell, off-site mitigation credits were not apples to apples offsets and therefore were unacceptable, that the applicant’s alternatives analysis failed to demonstrate that less environmentally damaging alternatives do not exist, and therefore that at 404 grading permit to fill the pond (or any portion of it) could not be issued.

Why does the Staff Report completely ignore this reality and ask you to make decisions and “move the project forward” as if these facts do not exist? As we have pointed out before, such a discussion is required under CEQA. See Banning Ranch Conservancy v. city of Newport (2107) 2 Cal. 5th 918.

The following are my comments on the Submittal in Response to Planning Commission Direction by Reneson Hotels.

“Financial Feasibility”

The applicant continues to present a rehash of the same arguments they have been made since the beginning with regard their projections in what they are calling “financial feasibility.” These arguments continue to proffer conclusions that are erroneous.

In addition, the applicant and their consultant, CBRE, have been orchestrating a “slight of hand” regarding financial feasibility. As we have previously noted in our comment letter of April 9, 2017, the documentation they have submitted is not a financial feasibility analysis as the term is understood in the real estate investment industry.

A financial feasibility analysis is an investment analysis. It is not a “market study” or an “opinion of values.” Therefore, the application must be considered incomplete because the applicant has never submitted a proper financial feasibility analysis, as required. CBRE is a real estate market research and consulting company. They are not developers or investors or investment managers. That is probably why their study is bereft of any methodologies or standards of practice employed by professional real estate investors.

Real estate investments are not analyzed on static and simplistic appraisals of values at one moment in time. The CBRE study shows us only a small percentage of the information required to properly determine if an investment makes sense or not. For example, the CBRE opinion of value notes that it arrived at its estimates of “Price” using a discounted cash flow method. However, that analysis is not provided. This is not a minor oversight. The assumptions of that cash flow model are the crux of the decision.

As noted in our April 9, 2017 letter, in determining whether or not to invest in a real estate or business venture, some of the considerations that affect value include the loan to value ratio and the debt to equity ratio (how much cash do I have to put up), and the terms of that debt (years, interest rate, etc.). Other considerations would typically include depreciation and how long the investor intends to hold the asset and the various tax benefits involved. It is not a simplistic decision.

For example, many commercial real estate transactions are predicated on prescribed holding periods to accrue depreciation benefits, followed by a 1031 tax free exchange that allows the process to begin again.

The CBRE analysis does not even consider debt or tax benefits. Yet, hardly any real estate investments are made without significant leverage or considerations of “exit” strategies and tax consequences. It fact, leverage and tax benefits are the life blood of the business and at the core of most transactional decisions. The real estate investment world is also predicated on “cap rates,” return on investment (“ROI”) and internal rate of return (“IRR” – discounted cash flow), which are all derived from the data missing from the CBRE opinion of value.

In other words, if invest $5 million or $500 million and get a 30% tax adjusted IRR over a 10 year holding period and then do a 1031 tax free exchange, which preserves my equity, do I necessarily even care if by some fluke of nature there is zero appreciation in the market for that entire holding period and the end value is at break-even? With interest on 10 year US Treasury bonds at 2.4%, I’d probably make that investment in a heartbeat.

Without these levels of analysis, which the applicant has failed to disclose, it is impossible to determine financial feasibility.

CBRE’s opinion of value makes no sense

The CBRE “financial feasibility” study would be more correctly called an “opinion of value.” That opinion of value, on its own merits, makes no sense. For example, from the outset (see Financial Feasibility, page 3, Hotel Feasibility Analysis) their analysis makes leaps of logic that are unsubstantiated even by its own analysis.

Page 1 shows the following:

Price

(Discounted Cash Flow Value)

147 room extended stay hotel $50.2 million

175 room dual branded hotel $60.8 million

Development Costs

147 room extended stay hotel $38.6 million

175 room dual branded hotel $44.4 million

Value to Family

147 room extended stay hotel $11.6 million

175 room dual branded hotel $16.4 million

Even if one where to accept their estimates of “Price” and “Development Costs” for a moment -- neither of which are substantiated by any actual cost breakdown data, which is typically what one would want to see as a developer, at this stage of decision making – the figures presented for “Value to Family” are unsupported by any reliable data.

The Study then states:

“The difference between the “price” and “development costs” represents the estimated value of each project after the new hotel is constructed. The value comparison between the two alternative is $4.8 million ($16.4 million less $11.6 million), and represents a significant value difference for the local family ownership group.”

“These results should not be surprising. We believe the market can easily absorb 175 rooms and thus the revenue stream associated with a larger project is greater. Moreover, larger projects provide lower building costs per room because fixed costs in foundation and soft costs are similar for both projects.”

This makes no sense with regard to “Value to Family.” The “Price” variable of the two proposals is 16.6% less. The “Cost” variable is 13%. This would account for the difference in sizes of the two proposals and would reflect the resultant economies of scale noted by the consultant. We also assume the terms of financing are the same.

How then, without supporting facts, can the Study state that “Value to Family” variable is a whopping 30% less?

Normally, one would anticipate that the Value to Family difference would be generally in line with the two others. This would suggest it should be approximately 14% or $2.7 million not $5 million, as shown. All things being equal (they are both Marriott hotels of equal construction quality, on the same parcel of land, etc.), such a glaring difference would typically indicate to a development professional that the underlying assumptions must be incorrect. Yet, here the consultant simply pulls it out of thin air with no real evidence to support it.

That notwithstanding, the so-called “value” difference of $2.3 million is only 3.7% of the development’s “price,” which at his mile high level of analysis is a construction contingency differential or a financing rounding error.

This “value” conclusion by CBRE is not based on specific project analysis (see Construction Costs below) but rather on nothing more than industry averages. As such, CBRE’s conclusions about valuation are inherently unreliable to begin with, much less adequate to use as the basis of an entire financial feasibility (or “desirability” as it is called) argument.

Any seasoned developer knows these generalized financial assumptions have very little to do with how one actually decides on whether or not to undertake an investment.

This “new” analysis again fails to provide any actual, local surveyed average room rates upon which to project revenues. Regarding anticipated revenues, CVP has already submitted a Market Study, based on actual room rate canvassing that interviewed operators then analyzed every single competing hotel in the market area, and correlated that with standard industry data from STR reports and other reputable and “internationally recognized” sources. The findings of that study directly dispute the consultant’s conclusions by a wide margin (see CVP January 3, 2017 comment letter, attachment, Exhibit 5, Market Study & Financial Feasibility Evaluation by RHSW LLC).

Similarly, the Occupancy and ADR projections shown for the Residents Inn in the consultant’s study are portrayed as being only 9% more than the antiquated Corte Madera Best Western Inn. At the ADR rate of $190 shown by CBRE, they are asking us to believe that they will at best achieve a room revenue rate that is approximately 25% below its closest competitor’s audited average ADR’s, today. Yet, the entire analysis that follows is based on accepting this premise.

The consultant’s analysis and the conclusions are presented without specific citations other than the applicant’s and CBRE’s assertions. They are simply based on average statistics, which bear very little relationship to the economic realities of this particular site in this particular county. For example, a similar site that is not in such close proximity to the freeway (this site has a freeway off ramp and on ramp at its doorstep) would have a significantly lesser value. This is why valuation can only be determined through a careful and comprehensive certified property appraisal, based on comparable sales.

The applicant has not submitted that.

The consultant’s “fly-over view” methodology that pervades the entire analysis and acceptance of the developer’s cost figures without any substantiating documentation (construction cost breakdowns) strains credulity and makes it hard to believe that the consultant didn’t start at the end result desired and work backwards to craft the premises required.

Everything presented to date, continues to appear to be a lengthy rationalization for the developer’s personal preferences, the developer’s own definition of what is profitable enough or not, and most importantly, the developer’s unwillingness to objectively divorce their “analysis” from the demands and requirements of the Marriott Corporation.

Real estate development financial feasibility is not an abstraction. It needs to be grounded in specific and granular analysis. CVP has already submitted an accurate and fact-based financial feasibility analysis, which was included in our January 3rd and April 11th comment letters, and which is incorporated herein by reference, including all their exhibits and attachments.

Market Demand

If one reads the consultant’s Market Demand Study, one realizes that the consultant has simply resubmitted an edited version of the same information submitted by the applicant, more than a year ago (under their former name, PKF Hospitality Research). Yet, the Staff Report presents it as if it was new information.

Why the marketing spin by Staff? Why doesn’t the Staff Report just honestly state what I just stated above?

Most oddly, the applicant and the consultant have gone to great effort and expense to continue to try to prove something that is generally agreed upon: that there is high demand for quality hotel rooms in Southern Marin. Why? There is no argument among local hotel operators (and CVP has interviewed many of them) that Marin is very underserved by quality hotels, or that quality hotel sites, such as this one are in short supply.

Yet, somehow the applicant continues to try to argue that this is a risk factor rather than an upside bonus to value and profitability. In addition, the applicant’s argument that this market demand justifies their necessity to build 175 rooms is illogical for the following reason.

If a developer wanted to ensure profitability, they would not maximize the development of rooms to completely meet an estimate of market demand, but would do the opposite. They would build slightly fewer rooms than the perceived market demand, which would better ensure full occupancy at all times, and thus higher rental rates. It is scarcity that creates value not abundance.

CVP has already submitted a more accurate and fact-based Market Analysis, which convincingly disputes the consultant’s opinions, and which was included in our January 3rd and April 11th comment letters, and which is incorporated herein by reference, including all its attachments and exhibits.

Why only Marriott Corporation?

Since its inception, the applicant has argued that all of the parameters for development, the number of rooms required, the types of structures, the branding and marketing requirements must be driven by parameters set by the Marriott Corporation. The developer has never considered discussing this redevelopment proposal with any other hotel developer or operator. Why?

Of more immediate concern, why has the Town of Corte Madera continued to be complicit in allowing the demands of the Marriott Corporation to define the project’s purpose to the point that it has become a burden on the public?

There is no question that the Corte Madera Inn site is one of the best hotel sites in all of Southern Marin County. There is no question that many of Marriott’s competitors would be quite eager to have a chance to develop a hotel at that location, and that they would all have different proposals if allowed to do so.

If Reneson Hotels is so circumspect in its risk analysis and so bottom line oriented in its analysis, why haven’t they looked at what competitors might offer, under the same limitations and constraints? And, if they are really interested in knowing the value of their existing property, why are they still not allowing their real estate listing broker to provide information or consider offers from qualified hotel developers?

Could it be because those offers would represent the best assessment of financial feasibility and that assessment would show that their consultant’s “analysis” to be incorrect?

One has to wonder what is really going on here. This “loyalty” to Marriott is highly unusual for someone who claims that the resultant hotel will remain locally owned and operated.

However, even this is not the important question here. Developers are entitled to do what they want. The important question is why is the Corte Madera Planning Staff so intent on enabling this? Isn’t it the town’s responsibility to work for what is best for the town, instead of what’s best for Marriott?

CVP has recently been told by an anonymous source that there may be other benefits the applicant will enjoy if he can secure this 'deal" for Marriott. We will continue to investigate these allegations, which if proven to be true, might shed some light on these unanswered questions.

Land Costs matter

The applicant insists on applying hypothetical land values to their “financial feasibility” analysis. In doing so, the applicant is depending on an opinion of value by CBRE. This is insufficient. Value can only be arrived at through appraisal by a licensed appraiser. CBRE’s “opinion of land value” is not an appraisal of value, based on comparable sales and project costs, which is the only standard of value recognized in the real estate industry.

Although one of the signatories to the consultant’s study is a licensed appraiser, CBRE’s study and analysis are not a “certified” appraisal of value, which needs to be based on comparable sales data, and signed and otherwise stamped or sealed by that licensed appraiser.

That said, we do not agree with their consultant’s guesstimate of land value. In addition, let’s please keep in mind that a parcel of land is only as valuable as what you can build on it. If you give it entitlements to build 175 units, then it is more valuable than if you give it entitlements to build 150 units. But the staff report is letting the applicant argue this backwards for the applicant’s own benefit.

Even with that aside, the applicant’s “feasibility” argument about land value “costs” is illogical.

The applicant contends that they must include a land value to evaluate their proforma “investment” feasibility test in order to evaluate their risk. However, that is a slight of hand. Unless they intend to build the project and then immediately sell it, the fact that they really don’t have any land cost is a major reason they can in fact build a slightly smaller hotel and be profitable: more profitable in fact, than any other buyer / developer.

Unless one is intending to “flip” a property, owning land actually decreases investment risk because is amortizes that cash value investment risk over a longer time period. A plan to hold for the long term also provides greatly reduced tax consequences, which increase the overall internal rate of return on investment, a concept fully explained in our comment letter of April 11, 2017.

Construction and development costs are design specific

The applicant continues to rely on "financial analysis" methodologies, which are nothing more than contrived guesstimates to arrive at predetermined conclusions. Every professional real estate development professional to which CVP has shown CBRE’s “financial feasibility,” has simply rolled their eyes. CVP has even had discussions with an individual in charge of Western United States acquisitions and development for the Marriott Corporation for more than 10 years. In a word, she called the applicant's feasibility analysis "bullshit."

Financial feasibility in the real world is based on actual costs, which are a derived from long lists of detailed expenses, hard and soft costs, line item by line item, trade by trade, subcontract by subcontract, and product specification by product specification. These costs are inseparable from the specifics of the architectural and engineering design, the materials and products specified, and so forth.

The applicant has never provided any such data.

The applicant has essentially asked the Planning Staff to “trust me,” which they have done without any objection or objective analysis. For example, based on the applicant's feasibility analysis, the Staff Report states that “Alternative 4 is not "feasible" because it’s too bulky” and “Alternative 2 is not feasible because of "economic factors." But, these statements have never been factually established in any way other than that the applicant has said so.

In all these years, why hasn’t the planning staff

(1) Asked the developer to produce actual construction cost preliminary estimates, or

(2) Gotten an objective third opinion of the feasibility of developing a hotel on the site?

The 401 permitting process

The new project alternative proposal still fails to be compliant with the RWQCB and Army Corps 401 permitting regulations, and therefore, cannot be approved because it cannot be built. Why would the Town want to grant property rights that can never be utilized?

What is or is not feasible for the applicant to develop or to meet Marriott’s preferred dual-branded marketing plans has nothing to do with the development’s feasibility under the required 401 permitting approval process. And, since the new proposal still contemplates destroying half of the pond, those tests must still be met. Yet, as noted above, the Staff Report does not even acknowledge these facts, as established by Mr. Fernandez at the last hearing, and in his written response to the applicant’s 401 permit request.

Why is that?

Summation

Why does the town staff continue to present unquestioned and unexamined "analysis" and "economic factors" as if they are facts? Why does the staff continue to accept the developer’s owns narrow definition of the “project” and what is profitable enough under Marriott’s model?

Why hasn’t the Town simply asked the applicant to consider pursuing the development of an appropriately sized, specialty boutique hotel (which preserves the entire pond), an approach that has proven particularly profitable for local hotel operators in Marin?

And, why is the town continuing to let the applicant define the project requirements instead of demanding that the applicant adhere to the spirit and letter of the General Plan?

These are some of the questions before you.

Thank you for your consideration and this opportunity to submit our comments.

Sincerely,

Bob Silvestri

President