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SC Coast Hotel project--Sentinel article analysis

On January 16th, the Santa Cruz Sentinel published a series of articles and editorials on the Santa Cruz Coast Hotel and conference center project for which public meetings are coming up on Tuesday and Wednesday. One article "Pro and Con" was published. I have inserted comments throughout commenting on the information presented.


Things are heating up as the hotel conference center proposal heads to City Council public hearings on Tuesday. With the heat comes the likelihood of less accurate "information" flying around the community.

BECKY: Less than accurate "information" can come from both sides.

For instance, letters on these pages recently claimed approval of the proposed hotel conference center means the city will be giving the hotel owners a bunch of money. This is incorrect.

BECKY: The proposal is for the City of Santa Cruz to go $30 million in debt to pay for the city's part of the project.

Here’s the real situation. If approved, the hotel owners will build the hotel with their own resources. The city will build and own the conference center and parking structure. The hotel owners have agreed to pay substantial rent to the city every year to use the parking structure. The hotel also would collect an extra 4 percent tax on guests that would go to the city. And, with the new hotel, there would be increased revenue from existing taxes, such as hotel and sales taxes. Clearly, the city will be taking in much more revenue than it does now.

BECKY: This is all dependent of the project being a success. Not all conference centers around the country are successful. Currently Chaminade conference center is NOT booked fulltime. There is no guarantee this one will be a success.

The city will use a chunk of this new revenue to pay for construction of its part. Still, conservative estimates by multiple independent experts show the city will have a net gain of at least $500,000 per year in the early years of the new hotel. It will grow substantially from there.

BECKY: Okay, let's do the math. $30 million divided by $500,000 = 60 years and that's not considering the interest on the debt! 60 years to break even???? Who knows if it will "grow substantially" from there? What if, with the internet and tele-conferencing, big conventions are going to be a thing of the past?

Then, there are claims about the proposed buildings. Here are some simple facts: All of these "massive" new buildings would be noticeably shorter than the current eyesore. The new hotel would have less shadow on the beach. The parking/conference center building would be about the same height as the condominiums right across the street. It’s fine for someone to object if they don’t like the look or placement of the buildings, but let’s not get carried away with exaggeration.

BECKY: This sounds like conspicuous consumption to destroy a perfectly usable hotel to rebuild an even bigger, possibly less ugly, hotel on the spot.

Important concerns have been raised about traffic. This project will generate more visiting cars. But a project like this also generates "mitigations" or solutions to problems. The prospect of additional cars at, for instance, the intersection of Bay and West Cliff in the summer is certainly a concern. It becomes less of a concern knowing the hotel owners will pay the lion’s share of a new traffic light there. Currently, during the summer months, that intersection often functions at a level traffic experts rate as "F." With the traffic light that comes with the project, the intersection will rate an "A."

BECKY: A couple of traffic lights are not going to mitigate a huge influx of traffic to the city. They will not mitigate traffic in other parts of the city or the noise or pollution generated. Increased traffic to our city reduces our own enjoyment of our city.

The project already includes several of these hotel-funded mitigations proposed by city staff. And local residents can go to the council meeting this week and suggest their own mitigations. Before the council finishes, it will probably have several more. Instead of telling the council you are against the project because of a concern, you could say, "If you fix this problem as part of the final package, I will be OK with the project."

BECKY: I will be in favor of the project when there is no public money invested in it.

We often forget projects like this bring tangible benefits to the entire community. Besides the new revenue I mentioned, here’s what I see in this project:

It fulfills a "dream" many in the community have shared for a long time: the removal of the old Dream Inn building.

BECKY: My dream priorities put this issue really really low on the list.

It would create a lot of union jobs both during the construction and in the ongoing hotel operation. This project has binding commitments to union labor and union pay scales.

BECKY: Don't believe these "binding commitments". Ask the residents of De Anza and Clear View Court what happened to the "irrevocable" leases they signed with the City which guaranteed rent control "in perpetuity." NOTHING is set in stone!

The hotel owners have committed to create the building utilizing environmentally sound "green" building practices.

BECKY: Let's see. Tearing down a huge building and building an even bigger building right on the edge of the ocean. Yes, I can see how environmentally sensitive this is!!

The hotel owners have agreed to tax their customers extra to generate extra revenue. Many locals have wanted visitors to bear a greater responsibility for the costs of tourism in our community and this project makes that happen.

BECKY: How economically viable will this project be when people booking conventions have to pay an extra 4% for any hotel room here. Why don't they go somewhere else where the cost of the rooms is cheaper?

The project increases public parking in the beach area. We know visitors park in residential neighborhoods when we don’t offer enough parking.

BECKY: Parking for the hotel and convention visitors. How much more parking will be available for beach visitors? Hasn't the city recently taken lots of public parking away by instituting permit parking thoughout the city???

Many of us have a divided vision for our community. We want it to be small, a bit funky and out of the mainstream. And we also want it to be diverse, healthy economically and have good community services. We can turn down every proposal for physical change in hopes that this will preserve what we like about Santa Cruz. But that doesn’t really work.

BECKY: So progress for the sake of progress? Has the Gateway Shopping Center brought us the increased revenues they promised us? Again, I can agree to the project if there is no public money going into it.

If we don’t allow a certain amount of physical change, we will be choosing other undesirable changes by default. We’ll have less affordable housing, fewer good job opportunities and less revenue to meet the need for public services and essential community organizations. All of this "no change" adds up to a less diverse and less economically healthy community.

BECKY: We are GUARANTEED less revenue with this project having to service our debt with an extra $2.2 million a year! Only if the rosy predictions of the "experts" the RDA hired (and the RDA will get a HUGE chunk of the money so cannot be considered unbiased in their predictions). As for affordable housing, how does this project generate any? By using RDA money for a for-profit venture INSTEAD of investing in affordable housing. Lane is really being disingenous here.

Santa Cruz has been so bold in so many ways. Yet when it comes to developing a healthy economy we have been surprisingly timid. When we look at the local economy and the local revenue situation, I would say simply "We can’t afford to be timid."

BECKY: How about taxing the Boardwalk to get our share of the revenue???

Former Mayor Don Lane works for a local nonprofit organization.

There is a natural difference of opinion on traffic impact, aesthetics and other facets of the proposed Coast Hotel and Conference Center. However, we all agree the project should generate additional tax revenue for the City of Santa Cruz. Thus, the financial assumptions and projections are a critical element of the proposal.

The Redevelopment Agency made this information available for the first time starting Dec. 10. The timing was unfortunately late, even though these reports were completed months prior to their posting. The Planning Commission had already stopped accepting public input, and the posting date is only a month before the council is to hold public hearings.

BECKY: Lots of work on this project has taken place behind closed doors. People should ask how much city money has been spent already on this project.

The two reports posted on the city’s Web site were of interest to me because I worked for 15 years as a consultant to the travel and hospitality industries.

My areas of expertise were forecasting demand, occupancy, average daily rate and group (conference) business. These topics are the essence of the two reports released by the Redevelopment Agency.

The report by PKF Consulting forecasts demand and revenues for the new hotel. The market analysis for these forecasts neglects three important hotels next to the conference center in Monterey. It uses an average of nine other hotels from Napa and Sonoma to Monterey instead of a property-by-property comparison.

BECKY: So the books are cooked. Big surprise.

The average occupancy is forecast to be 75 percent of the total rooms in the hotel. What is the source of this new demand? The beach and Boardwalk are the major Santa Cruz attractions in the summer. But how does Santa Cruz compare to other conference destinations in the off-season when the conference bookings are needed? Unlike Monterey, we are not considered a golfing destination. Nor do we have year-round attractions like the Monterey Bay Aquarium, Cannery Row, 17-Mile Drive, and nearby Carmel.

One of the main components of the project revenues is the assessment of a 4 percent "Resort Fee" to guests of the new hotel. Several years ago hotel/motel owners rejected a 2 percent increase in the Transient Occupancy Tax (TOT) because it would drive away business. With the Coast Hotel project, the resort fee increases the effective TOT by 4 percent. Why won’t this drive away even more business? Why is a 4 percent increase acceptable when a 2 percent increase is not?

BECKY: The 75% occupancy rate is based on wishful thinking and without considering that these hotel rooms will be MORE EXPENSIVE than hotel rooms at other nearby conference centers.

The report by Keyser Marston Associates (KMA) assesses the ability to pay off $25 million to $30 million in bonds. The report released by the city does not mention other important revenue losses to the city. Examples are the loss of property tax and sales tax during construction, or costs of traffic mitigation. Nor is there a corresponding year-by-year cash-flow analysis.

BECKY: I'm reminded of when Elizabeth Vogl was showing us how the Dolphin/Lee project which became the Nueva Vista housing project in the beach flats was as cost-effective as hiring a for-profit developer. She gave a dog and pony show to the city council in which she failed to include either the cost of demolition OR the cost of purchasing the property in her analysis. That project ended up destroying 55 units of affordable housing to rebuild 48 units and cost us $17 million. This was another Redevelopment Agency project. Cynthia Matthews called me a "career malcontent" and said I was "cynically manipulating facts for my own benefit" because of my objections. I, of course, did not benefit in any way from the project. The RDA made out like a bandit.

It is said there are two things that are certain in life: death and taxes. To this list we have to add the revenue forecasts by these consultants. There are no "what-if" analyses, e.g., what if revenues are 200 percent or 250 percent of current revenue instead of the forecasted 290 percent of current revenue? This forecast is necessarily based on many assumptions and models. A prudent approach is to evaluate the impact to the city of different scenarios to account for uncertainty in the assumptions. This has not been done.

BECKY: Why bother? Its only taxpayer money they are spending. Its not like THEY will owe it back.

Needless to say, I felt these were important issues that needed to be addressed. I wrote the Redevelopment Agency on Dec. 13, and received a reply on Jan. 6. This is less than two weeks before the council is to hold hearings and take action on this project. I have previously submitted commentary to the Sentinel, then asked that it be withdrawn until I had a chance to review the city’s response.

In the responses provided by the city, PKF Consulting said they did a property-by-property analysis. Even so, their room rate forecast is based on the average of the nine hotels inflated by 3 percent per year. KMA said they had done the year-by-year analysis, yet the city has not released that information. We still do not know the additional costs to the city that are a result of this project.

BECKY: Please remember that cost overruns are the rule not the exception. The $6 to $7 million police station ended up costing us $13 million.

In summary, the publicly available financial information on this project lacks justification for the critical assumptions being made. It does not provide answers to obvious questions. And only a single revenue scenario is considered. This is an insufficient basis for making an informed decision about the financial viability of the project.

The city needs to make a profit with this project, just like a corporation. But no corporation I know would make a $30 million bet on the basis of information currently available to the public. The council shouldn’t either. If you feel the same way, contact council members and attend this week’s public hearings.

Renwick E. Curry is a Santa Cruz resident.

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