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Recommendation to authorize City Manager to execute all documents necessary for the assignment of the lease for City-owned property at 600 Queensway Drive from Long Beach Group Inc., a California Corporation, to LBH Land Holding Company, LLC, a California limited liability company, and to execute an Amended and Restated Lease between LBH Land Holding Company, LLC, and the City of Long Beach for development of a 152-room hotel. (District 2)
DISCUSSION
In April 1987, the Board of Harbor Commissioners entered into a lease with Quiet
Cannon Long Beach, Inc., for the operation of a restaurant with a banquet room and
cocktail lounge at 600 Queensway Drive (see Exhibit "A). Subsequently, a number of
lease assignments ensued and in 1994, the Lease was assigned to the current lessee,
Long Beach Group Inc., DBA Naga Restaurant. Per the Lease terms, the City receives
an annual base rent of $32,196 and percentage rent based on gross sales above the
annual base rent. Over the past eight years, the Lease has generated only the
minimum base rental as the restaurant has not achieved the success anticipated. The
Department of Community Development currently administers the Lease.
Long Beach Group has requested the City's consent to the assignment of the Lease to
LBH Land Holding Company, LLC, a California limited liability company (LBH). It is
LBH's intention to enter into an Amended and Restated Lease for the removal of the
existing improvements and the development of a hotel. The proposed hotel, of the
caliber of a Residence Inn by Marriott, will be the only extended stay hotel located on
the waterfront in the Queensway Bay area.
Staff , with the assistance of real estate consulting firms Keyser Marston Associates
(KMA), have reviewed LBH's financial background for assignment of the Lease and for
the development and operation of the proposed hotel. KMA has concluded that LBH
has the financial capability and sufficient background and experience as a hotel
developer and operator to be successful in this proposed development and
recommends' approval. Staff has reviewed the proposed assignment document and
found it to be consistent with the City's requirement for consent to an assignment of the
Lease.
The proposed Amended and Restated Lease with LBH will contain the following major
terms and conditions:
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Lenath of term: The term of the Amended and Restated Lease will be 66 years
commencing on October 1 , 2005, and terminating on September 30, 2071.
Use and Use Restrictions: The use of the premises shall be for the construction,
operation and maintenance of a first-class extended stay hotel. Residential uses are
prohibited by the Coastal Commission.
Prepaid Rent: LBH will prepay the rent for the entire lease term in the amount of
$798,500. This amount is calculated by adding the present value of the base rent
for the remainder of the existing lease term, which runs though 2033, to the present
value of the fair market ground rent for the remainder of the Amended and Restated
lease term, from 2034 to 2071.
For the past eight years, the annual rent has been the minimum of $32,196. The City
assumes receiving minimum rent until 2033. At a 9 percent discount rate, this
represents a present value of $325,700.
Today's fair market land value as appraised by R. P. Laurain & Associates is
$1,845,000. This value is projected to year 2034 at a 3 percent annual increase.
The City anticipates receiving an 8.5 percent annual return on the land value, also
increasing 3 percent per year through 2071, the end of the extended lease term.
The present value of this income stream, at a 9 percent discount rate, is $472,800.
Adding the present value of the remaining lease term to the present value of the
additional Amended and Restated lease term equals $798,500.
Additional Rent: The City shall receive as additional rent, if any, 50 percent of the
amount above the prepaid rent (based on an 8.5 percent rate of the future land
value) for any sublease of the premises for a use other than a hotel. In addition, if
the hotel is converted to any other use, food and alcohol beverage sales shall result
in additional rent, calculated at 3.5 percent and 4.5 percent, respectively, of gross
sales.
Entitlements for Development:
entitlements for the development, including compliance with CEQA.
LBH will be required to obtain all permits and
Alterations: The City will retain the right to review and approve architectural
changes to the leasehold improvements during the lease term.
Required Investment: LBH will be required to invest, or cause the investment of,
approximately $1 7,000,000 in leasehold improvements to construct approximately a
152-room hotel during the first three years of the lease term. The City may
reasonably extend the time to construct the hotel. In the event that the hotel use is
not permitted or construction has not commenced during the first three years of the
lease term, if LBH is not diligently pursuing entitlements, the City may terminate the
lease and refund the prorated prepaid rent.
Maintenance of Fixtures, Equipment and Improvements: LBH shall be responsible
for the leasehold maintenance to include all repairs and replacements of fixtures,
equipment and improvements which are to be kept in good working order at all times.
Utilities, Operation and Maintenance Costs: LBH shall be responsible for all utilities,
operation and maintenance costs.
0 Insurance: LBH will be required to provide insurance to the satisfaction of the City
for the term of the Lease.
LBH shall cooperate with the City to establish a user tax accrual program.
This letter was reviewed by Deputy City Attorney J. Charles Parkin on August 31 , 2005,
and Budget Management Officer David Wodynski on September 9,2005.
TIMING CONSIDERATIONS
[Timing Considerations]
FISCAL IMPACT
[Fiscal Impact]
SUGGESTED ACTION
Approve recommendation.
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Respectfully Submitted,
[Respectfully Submitted,]