500 SOUTH GRAND AVENUE, SUITE 1480 LOS ANGELES, CALIFORNIA 90071 PHONE: 213 622 8095 FAX: 213 622 5204
1606009.CARP.JAR/KEE:emm
WWW.KEYSERMARSTON.COM 19972.001.001
ADVISORS IN:
R
EAL ESTATE
R
EDEVELOPMENT
A
FFORDABLE HOUSING
E
CONOMIC DEVELOPMENT
S
AN FRANCISCO
A.
JERRY KEYSER
T
IMOTHY C. KELLY
K
ATE EARLE FUNK
D
EBBIE M. KERN
R
EED T. KAWAHARA
D
AVID DOEZEMA
LOS ANGELES
K
ATHLEEN H. HEAD
J
AMES A. RABE
G
REGORY D. SOO-HOO
K
EVIN E. ENGSTROM
J
ULIE L. ROMEY
S
AN DIEGO
P
AUL C. MARRA
DRAFT
MEMORANDUM
Attorney, Client and Work Product Privilege
(Evid. Code, Sec 950 et.seq.; Code Civ .Proc. Sec. 2018
To: Dylan Johnson, City Attorney for Carpinteria
Brownstein, Hyatt, Farber & Schreck
From: Kevin Engstrom
James Rabe
Date: June 21, 2016
Subject: Draft Carpinteria Hotel Financial Analysis
Pursuant to your request, Keyser Marston Associates, Inc. (KMA) evaluated the
developer returns and City revenue potentially generated by a 30-room hotel
development on the Linden Avenue and Fifth Street property (Site) in the City of
Carpinteria. The analysis summarized herein relies on the data collected for the
Carpinteria Hotel Market summary submitted to the City, and KMA’s experience with
similar projects in the region. To test the potential financial viability of a project on the
Site, KMA prepared a pro forma analysis to provide order-of-magnitude estimates of
developer returns. Based on the market performance of a hotel, KMA estimated the
potential revenues to the City.
PROTOTYPE PROJECT
To prepare this analysis, KMA evaluated the feasibility of a 30-room, high quality (three
diamond/three diamond plus) boutique hotel project on the Site (Project). The analysis
assumes the Project would be comparable in quality to the following properties: Hotel
Indigo Santa Barbara; The Wayfarer; Coast Hotel West Beach Inn; and The Upham
Hotel. The Project would include a restaurant component providing dining options for
To: Dylan Johnson, City of Carpinteria June 21 2016
Subject: Draft Carpinteria Hotel Financial Analysis Page 2
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19972.001.001
both guests and the general public. In addition, the analysis assumes the provision of
80 – 100 replacement parking spaces on a nearby site.
It is important to note that the pro forma analysis is conceptual in nature, and should only
be used to gain an understanding of the relative viability of the development being
tested, and an order of magnitude estimate of potential City revenues. It will be
necessary to re-evaluate the results of the analysis if and when a formal development
proposal is submitted for the Site. These development proposals may assume a greater
number of hotel rooms, fewer hotel rooms or a higher service/quality level.
FINANCIAL ANALYSIS
The pro forma analysis is shown in Appendices 1 and 2, with the key findings
summarized in Table 1. KMA prepared two alternative development scenarios:
Scenario One assumes the Project’s performance is consistent with the comparable
hotels (Appendix 1). Scenario Two assumes the Project can generate an average daily
rate (ADR), that is 10% higher than the other properties (Appendix 2). For both
scenarios, the estimated construction costs are the same.
Estimated Construction Costs (Appendices 1 and 2 – Table 1)
The KMA construction cost analysis is based on the following assumptions:
1. Direct Construction Costs:
a. The off-site improvement costs are estimated at $300,000 for the
provision of replacement parking. These costs would not include any
land costs.
b. The hotel on-site costs are estimated at $10,000 per key. These costs
would include parking, landscaping and hardscaping.
c. The direct building costs for the hotel are estimated at $150,000 per key,
or $4.5 million.
d. KMA provided a $30,000 per room allowance for furniture, fixtures and
equipment (FF&E) costs. This reflects a high quality level.
2. Indirect Costs:
a. The indirect cost estimates used in this analysis are based on industry
standards.
To: Dylan Johnson, City of Carpinteria June 21 2016
Subject: Draft Carpinteria Hotel Financial Analysis Page 3
Attorney, Client and Work Product Privilege 1606009.CARP.JAR/KEE:emm
19972.001.001
b. Based on estimates provided by City staff, the public permits and fees
costs are estimated at $11,000 per key.
3. The financing costs are based on the following assumptions:
a. The construction period is set at 18 months, and the interest rate is set at
7.0%.
b. The loan to value ratio is set at 65%, and the loan origination fees are set
at two points.
The total construction costs are estimated at $8.0 million, which equates to $267,000 per
room.
Stabilized Net Operating Income (Appendices 1 and 2 – Table 2)
Based on the potential market conditions and typical operating parameters for small-
scale boutique hotels, KMA estimated the Project’s net operating income (NOI). The
results of this analysis are show in Appendices 1 and 2 – Table 2 and summarized
below:
1. Hotel Operating Income:
a. For Scenario 1 - the average daily rate (ADR) for the hotel is estimated at
$228, and the average occupancy level is set at 76%. The ADR is
consistent with the four comparable properties in and the projected
occupancy level reflects the pioneering nature of the Project. For
Scenario 2, the ADR is estimated to be 10% higher - $251 and the
average occupancy level is also set at 76%.
b. The food and beverage department revenues are estimated at 25% of
gross revenues, which assumes a vibrant dining establishment that
attracts guests, locals and area visitors to the establishment.
c. The revenue from “other” operating departments could include vending
machines, telephone and rentals.
2. Operating Expenses
a. The undistributed expenses are estimated at 21% of gross revenues.
These expenses include: administration, marketing, maintenance and
utilities.
b. Management fees are estimated at 3% of gross revenues.
To: Dylan Johnson, City of Carpinteria June 21 2016
Subject: Draft Carpinteria Hotel Financial Analysis Page 4
Attorney, Client and Work Product Privilege 1606009.CARP.JAR/KEE:emm
19972.001.001
c. The fixed expenses are estimated at 5% of gross revenues, and include
insurance and reserves.
d. Property taxes are estimated at 1.1% of Project costs.
As shown in Appendices 1 and 2 – Table 2, the stabilized net operating income is
estimated to range from $805,000 in Scenario One to $892,000 in Scenario Two.
Estimated Developer Return (Appendices 1 and 2 – Table 3)
The City has the option to seek a ground lease or sale of the property. Typically,
developers prefer to have ownership of the land; however, they will enter into ground
leases for properties in select locations. In particular, hotel developers are willing to
enter into ground leases for properties with coastal locations in Southern California, as
these have traditionally supported lower capitalization rates (higher imputed values) than
inland properties. Reasons for this include: better funding opportunities, greater
resistance to recession and higher ADRs. Typically, the rents will range between 3% to
8% of revenues; however, many hotel developers anticipate having the land contributed
at no cost when entering into a public-private partnership. Reasons for this can include:
city design requirements, uncertain market conditions limited funding options and other
factors that will reduce hotel feasibility. Based on these factors, KMA estimated the
City’s ground rent under three scenarios.
Zero Ground Rent
Ground Rent equal to 3.0% of gross revenue
Ground Rent equal to 8.0% of gross revenue
The table below summarizes the stabilized, annual ground lease revenue to the City:
Potential Annual City Ground Rent
Ground Rent Scenario One Scenario Two
0% of Revenue $0 $0
3% of Revenue $81,300 $89,500
8% of Revenue $216,900 $238,700
To: Dylan Johnson, City of Carpinteria June 21 2016
Subject: Draft Carpinteria Hotel Financial Analysis Page 5
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Over 20 years, the Scenario One ground rent would range from $2.2 million at 3.0% to
$5.8 million at 80%. For the same period, the ground rent in Scenario Two range from
$2.4 million at 3.0% to $6.3 million at 8.0%.
1
The project return to a developer is based on the anticipated development costs and
hotel operating parameters. For public-private partnerships, KMA estimates returns
based on the stabilized NOI generated by the project (less ground rent) compared to its
total construction costs ((NOI-Ground Rent) ÷ Costs). This measure of return is known
as a return on cost analysis (ROC). Essentially, the ROC analysis is a static measure
that incorporates both the cap rate and a reasonable developer profit. The ROC is not
the same as an Internal Rate of Return (IRR) analysis, which measures the project
return over time. Typically, a hotel developer’s profit in an ROC analysis is measured as
a premium of 150 to 250 basis points (1.5% to 2.5%) over the cap rate. For hotel
projects in Southern California, the typical stabilized ROC for hotels ranges from 9.0% to
11.0% depending on the location, quality and risk associated with the project. The table
below summarizes the ROC for the Project under the alternative ground rent and
revenue scenarios.
Potential Developer Return
Ground Rent Scenario One Scenario Two
0% of Revenue 10.0% 11.1%
3% of Revenue 9.0% 10.0%
8% of Revenue 7.3% 8.1%
The returns shown herein indicate the Project should be financially feasible; however,
the potential ground rent revenue to the City is less certain. Recent hotel projects
reviewed by KMA in Newport Beach, Costa Mesa and Pasadena have seen ground
rents of 3% to 4% of gross revenues, which may provide an acceptable return of 9% to
10% for a developer of this Project. Ultimately, these revenues will be influenced by
many factors, including project costs which could be significantly higher, revenues which
are uncertain, operating efficiencies, and the level of risk a developer is willing to
assume to construct a hotel on the Site.
CITY REVENUE SUMMARY
The on-site public revenues generated by the Project are shown in Table 1. The
revenue assumptions are based on the pro forma analyses. The Project would generate
1
Assumes an annual 2.5% increase in ADR after stabilization in Year 3.
To: Dylan Johnson, City of Carpinteria June 21 2016
Subject: Draft Carpinteria Hotel Financial Analysis Page 6
Attorney, Client and Work Product Privilege 1606009.CARP.JAR/KEE:emm
19972.001.001
revenue to the City in the form of transient occupancy tax (TOT), sales tax and property
taxes, as described below.
1. Sales Tax Revenue – The sales tax estimate assumes the City receives 1% of
the total taxable retail sales. For a hotel, the sales tax revenue is generated by
the food and beverage department, with some ancillary revenues generated by
other departments. This analysis only assumes the hotel’s food and beverage
revenues.
2. Property Tax Revenue – The property tax estimate assumes only the general
1.0% rate applied to the Project’s assessed value. The bonded indebtedness
rate above 1.0% is not considered. The analysis assumes the City General Fund
receives approximately 10.1% of the property tax, with the balance going to other
taxing agencies and designated funds.
3. TOT Revenues - The analysis assumes the City TOT rate is 12% of room
revenues. Based on the Project’s ADR and occupancy, KMA estimated the
potential TOT generated for the City.
The stabilized, annual on-site revenues generated by the Project are estimated below.
Potential Annual City Revenues
Revenue Source Scenario One Scenario Two
Sales Tax $6,800 $7,500
Property Tax 8,100 8,100
Transient Occupancy Tax 227,600 250,700
Total
$242,500 $266,300
Over a period of 20 years, the public revenues would total $6.4 million for Scenario One
and $7.1 million for Scenario Two. In addition to these revenues, hotel guests will also
spend money in the City, which will increase the City’s sales tax base. In summary, the
total stabilized, annual City revenues plus ground rent are shown below.
Potential Annual City Revenue Plus Ground Rent
Ground Rent Scenario One Scenario Two
0% of Revenue $242,500 $266,300
3% of Revenue $323,800 $355,800
8% of Revenue $459,400 $505,000
To: Dylan Johnson, City of Carpinteria June 21 2016
Subject: Draft Carpinteria Hotel Financial Analysis Page 7
Attorney, Client and Work Product Privilege 1606009.CARP.JAR/KEE:emm
19972.001.001
The City revenue plus ground rent over a 20-year period is summarized in the table
below.
Potential City Revenue Plus Ground Rent over 20 Years
Ground Rent Scenario One Scenario Two
0% of Revenue $6,428,600 $7,051,100
3% of Revenue $8,589,100 $9,427,200
8% of Revenue $12,189,400 $13,388,000
The KMA analysis indicates the Project may be financially feasible. However, there are
a significant number of cost, revenue, political and risk variables that could affect these
findings. The potential magnitude of these issues could ultimately lead hotel developers
to determine the Project is not feasible. Ultimately, the market and financial feasibility of
a hotel on this Site will be determined through a solicitation of proposals and
negotiations with a developer.
SUMMARY TABLE
HOTEL COMPARISON
CARPINTERIA HOTEL ANALYSIS
CARPINTERIA, CALIFORNIA
Scenario Scenario
One Two
II. Development Costs
Land Costs $0 $0
Direct Costs 6,000,000 6,000,000
Indirect Costs 1,386,000 1,386,000
Financing/Closing Costs 636,000
636,000
Total Development Costs $8,022,000 $8,022,000
Per Unit $267,400 $267,400
III. Room Revenue Summary
ADR $228.00 $251.00
Occupancy Rate 76.0% 76.0%
RevPAR $173.00 $191.00
IV. Net Operating Income
Income $2,711,000 $2,984,000
Distributed Expenses (1,032,000) (1,136,000)
Undistributed Expenses (569,000) (628,000)
Management Fees (81,000) (90,000)
Fixed Expenses (224,000)
(238,000)
Project NOI $805,000 $892,000
V. Potential Ground Rent
No Ground Rent $0 $0
Low Scenario ($81,300) ($89,500)
High Scenario ($216,900) ($238,700)
Estimated Developer Return on Costs
No Ground Rent 10.0% 11.1%
Low Scenario 9.0% 10.0%
High Scenario 7.3% 8.1%
VII. Annual Public Revenues
Sales Tax $6,800 $7,500
Property Tax 8,100 8,100
TOT 227,600
250,700
Total $242,500 $266,300
Annual City Revenues w/ Ground Rent
No Ground Rent $242,500 $266,300
Low Scenario $323,800 $355,800
High Scenario $459,400 $505,000
APPENDIX 1
SCENARIO ONE - LOW REVENUE
APPENDIX 1 - TABLE 1
ESTIMATED CONSTRUCTION COSTS
SCENARIO ONE - LOW REVENUE: 30 ROOM FULL-SERVICE HOTE
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CARPINTERIA HOTEL ANALYSI
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CARPINTERIA, CALIFORNI
A
I. Land Acquisition 30 Rooms $0 /Room $0
II. Direct Costs
Off-Site Improvements $300,000
A
llowance $300,000
On-Site Improvements 30 Rooms $10,000 /Room 300,000
Hotel Shell 30 Rooms $150,000 /Room 4,500,000
Hotel FF&E 30 Rooms $30,000 /Room 900,000
Total Direct Costs $6,000,000
III. Indirect Costs
Architecture & Engineering 8.0% Direct Cost $480,000
Permits & Fees/Impact Fees 30 /Room $11,000 /Room 330,000
Pre-Opening/Working Capital 30 /Room $5,000 /Room 150,000
Taxes, Ins, Legal & Acctg 2.0% Direct Costs 120,000
Development Management 4.0% Direct Costs 240,000
Contingency Allowance 5.0% Indirect Costs 66,000
Total Indirect Costs $1,386,000
IV. Financing Costs
Building Interest
1
$8,022,000 Building Costs 7.00% Interest $505,000
Financing Fees
2
2.00 Points 131,000
Total Financing Costs $636,000
V
. Total Construction Costs $8,022,000
Per Room $267,000
1
Assumes 18 month building period and 60% average outstanding balance.
2
Assumes loan to value ratio of 65%.
APPENDIX 1 - TABLE 2
ESTIMATED STABILIZED NET INCOME
1
SCENARIO ONE - LOW REVENUE: 30 ROOM FULL-SERVICE HOTE
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CARPINTERIA HOTEL ANALYSI
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CARPINTERIA, CALIFORNI
A
I. Income
Rooms 30 Rooms $228.00 /Room $1,897,000
Food & Beverage 25.0% Gross Sales $22,600 /Room 678,000
Other 5.0% Gross Sales $4,530 /Room 136,000
Gross Hotel Revenues $2,711,000
II. Distributed Expenses
Rooms 24.0% of Dept. Sales $15,170 /Room $455,000
Food & Beverage 75.0% of Dept. Sales $16,970 /Room 509,000
Other 50.0% of Dept. Sales $2,270 /Room 68,000
(Less)Total Distributed Expenses ($1,032,000)
III. Undistributed Expenses
General & Administration 8.0% Gross Revenues $7,230 /Room $217,000
Franchise Fees 0.0% Gross Revenues $0 /Room 0
Marketing 7.0% Gross Revenues $6,330 /Room 190,000
Utilities 3.0% Gross Revenues $2,700 /Room 81,000
Maintenance & Property Ops. 3.0% Gross Revenues $2,700 /Room 81,000
(Less)Total Undistributed Expenses ($569,000)
IV. Management Fees 3.0% Gross Revenues $2,700 /Room ($81,000)
V
. Fixed Expenses
Taxes 1.1% Value $2,970 /Room $89,000
Insurance 1.0% Gross Revenues $900 /Room 27,000
FF&E Reserves 4.0% Gross Revenues $3,600 /Room 108,000
(Less) Total Fixed Expenses ($224,000)
V
I. Net Operating Income (NOI) 29.7% Gross Revenues $805,000
1
Assumes stabilization in year 4 of operation and 76% occupancy.
APPENDIX 1 - TABLE 3
PROJECT RETURN
SCENARIO ONE - LOW REVENUE: 30 ROOM FULL-SERVICE HOTE
L
CARPINTERIA HOTEL ANALYSI
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CARPINTERIA, CALIFORNI
A
I. Ground Rent Scenarios
No Ground Rent 0% Gross Revenues $0 Ground Rent
Low Scenario 3% Gross Revenues $81,300 Ground Rent
High Scenario 8% Gross Revenues $216,900 Ground Rent
II. Project NOI Less Ground Rent
No Ground Rent $805,000 NOI
Low Scenario $723,700 NOI
High Scenario $588,100 NOI
III. Estimated Developer Return
No Ground Rent 10.0% Project R.O.C
Low Scenario 9.0% Project R.O.C
High Scenario 7.3% Project R.O.C
APPENDIX 2 - TABLE 1
SCENARIO TWO - HIGH REVENUE
Prepared by: Keyser Marston Associates, Inc.
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APPENDIX 2 - TABLE 1
ESTIMATED CONSTRUCTION COSTS
SCENARIO TWO - HIGH REVENUE: 30 ROOM FULL-SERVICE HOTE
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CARPINTERIA HOTEL ANALYSI
S
CARPINTERIA, CALIFORNI
A
I. Land Acquisition 30 Rooms $0 /Room $0
II. Direct Costs
Off-Site Improvements $300,000
A
llowance $300,000
On-Site Improvements 30 Rooms $10,000 /Room 300,000
Hotel Shell 30 Rooms $150,000 /Room 4,500,000
Hotel FF&E 30 Rooms $30,000 /Room 900,000
Total Direct Costs $6,000,000
III. Indirect Costs
Architecture & Engineering 8.0% Direct Cost $480,000
Permits & Fees/Impact Fees 30 /Room $11,000 /Room 330,000
Pre-Opening/Working Capital 30 /Room $5,000 /Room 150,000
Taxes, Ins, Legal & Acctg 2.0% Direct Costs 120,000
Development Management 4.0% Direct Costs 240,000
Contingency Allowance 5.0% Indirect Costs 66,000
Total Indirect Costs $1,386,000
IV. Financing Costs
Building Interest
1
$8,022,000 Building Costs 7.00% Interest $505,000
Financing Fees
2
2.00 Points 131,000
Total Financing Costs $636,000
V
. Total Construction Costs $8,022,000
Per Room $267,000
1
Assumes 18 month building period and 60% average outstanding balance.
2
Assumes loan to value ratio of 65%.
Prepared by: Keyser Marston Associates, Inc.
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APPENDIX 2 - TABLE 2
ESTIMATED STABILIZED NET INCOME
1
SCENARIO TWO - HIGH REVENUE: 30 ROOM FULL-SERVICE HOTE
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CARPINTERIA HOTEL ANALYSI
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CARPINTERIA, CALIFORNI
A
I. Income
Rooms 30 Rooms $251.00 /Room $2,089,000
Food & Beverage 25.0% Gross Sales $24,870 /Room 746,000
Other 5.0% Gross Sales $4,970 /Room 149,000
Gross Hotel Revenues $2,984,000
II. Distributed Expenses
Rooms 24.0% of Dept. Sales $16,700 /Room $501,000
Food & Beverage 75.0% of Dept. Sales $18,670 /Room 560,000
Other 50.0% of Dept. Sales $2,500 /Room 75,000
(Less)Total Distributed Expenses ($1,136,000)
III. Undistributed Expenses
General & Administration 8.0% Gross Revenues $7,970 /Room $239,000
Franchise Fees 0.0% Gross Revenues $0 /Room 0
Marketing 7.0% Gross Revenues $6,970 /Room 209,000
Utilities 3.0% Gross Revenues $3,000 /Room 90,000
Maintenance & Property Ops. 3.0% Gross Revenues $3,000 /Room 90,000
(Less)Total Undistributed Expenses ($628,000)
IV. Management Fees 3.0% Gross Revenues $3,000 /Room ($90,000)
V
. Fixed Expenses
Taxes 1.1% Value $2,970 /Room $89,000
Insurance 1.0% Gross Revenues $1,000 /Room 30,000
FF&E Reserves 4.0% Gross Revenues $3,970 /Room 119,000
(Less) Total Fixed Expenses ($238,000)
V
I. Net Operating Income (NOI) 29.9% Gross Revenues $892,000
1
Assumes stabilization in year 4 of operation and 76% occupancy.
Prepared by: Keyser Marston Associates, Inc.
Filename: \\fullad1\Employee\kengstrom\My Documents\Carpinteria\Hotel Project\Carpinteria Hotel Pro Formas;Scenario 2;6/16/2016;kee
APPENDIX 2 - TABLE 3
PROJECT RETURN
SCENARIO TWO - HIGH REVENUE: 30 ROOM FULL-SERVICE HOTE
L
CARPINTERIA HOTEL ANALYSI
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CARPINTERIA, CALIFORNI
A
I. Ground Rent Scenarios
No Ground Rent 0% Gross Revenues $0 Ground Rent
Low Scenario 3% Gross Revenues $89,500 Ground Rent
High Scenario 8% Gross Revenues $238,700 Ground Rent
II. Project NOI Less Ground Rent
No Ground Rent $892,000 NOI
Low Scenario $802,500 NOI
High Scenario $653,300 NOI
III. Estimated Developer Return on Costs
No Ground Rent 11.1% Project R.O.C
Low Scenario 10.0% Project R.O.C
High Scenario 8.1% Project R.O.C
Prepared by: Keyser Marston Associates, Inc.
Filename: \\fullad1\Employee\kengstrom\My Documents\Carpinteria\Hotel Project\Carpinteria Hotel Pro Formas;Scenario 2;6/16/2016;kee
