Tuesday, August 26, 2014

#Nanaimo Waterfront Hotel Proposal —
Let's play with some numbers...

$100 million.
How close to this very large number does the total capital Insight could raise if their 300+ room hotel proposal was fully subscribed by owners/investors purchasing individual rooms?
Let’s consider what the investor/purchaser might be offered before a single brick is laid:
• No Development Cost Charges. 
• The City of Nanaimo has agreed to selling adjoining property, currently designated as an alley, to the development rather than adding it to adjoining parkland.
• A 10 year property tax exemption.
• An agreement with the global hotel brand Hilton to operate the finished hotel.
• Control just short of ownership of waterfront parkland (a lease) adjoining the property for utility uses such as delivery bays and for restaurant and cafe patios.
• Generous rezoning allowing for greater height and massing than currently permitted.
• The modest Community Amenity Contribution created by the value lift of the property by the City’s generous actions, is to be spent in the park areas nearest the project.
Pretty nice package even before the investor weighs the merits of the business plan. 
Insight has a very smart idea here and I honestly wish I had thought of it! And is it at the end of the day any of my business? They own the property and I’d defend their right to raise investment capital any legal way they want. However —
Once the project exceeded it’s site, and the zoning restrictions in place, things changed fundamentally. The value that will be put on the market here to small strata owner/investors is provided by 3 pretty big players: Insight Developments who own the property; the Hilton Corporation who we’re told have contracted to operate the hotel; and here’s the thing: a large part of the value of the investment product will be supplied by you and me, that is the City of Nanaimo.
Let’s take a closer look at the investor, the business plan and Insight’s role once, as they’ve said is their plan, they turn over ownership of the building to the strata corporation owned in turn by some 300 small investors. 
Two of the three parties bringing value here, Insight and Hilton, have minimized risk while standing to reap great benefit. Good for them, that’s smart. The third party, the City of Nanaimo, is bringing considerable assets to the table, as listed above, and our potential upside is very difficult to quantify. We risk the loss of parkland, our portion of the cost of park upgrading which may or may not have been a high priority before we became involved in the hotel project, we risk, having given away the uplift value we’ve created, never being able to receive our rightful return on our investment. 
Once the project exceeded its site and existing zoning regulations and if it was accommodated by the City, we would effectively become principals and it’s time we did some due diligence.
We need to know the exact details of the agreement with Hilton and how it extends to the corporation we are in fact dealing with here: a corporation that doesn’t actually exist yet, but when it does, Insight with whom we are dealing now will no longer be a player.
We need the proponent to supply an independent analysis of the viability of the hotel project. I think it’s just prudent to assume that the mom and pop investors who will be enticed to invest in this project will lack the research resources to weigh such macro economic factors as the long and short term forecasts of the Chinese economy and of Asian tourist market trends.
We need to be as savvy negotiators as our experienced partners in this enterprise. We need to withhold any approval of land purchases and park use permits, of rezoning applications until we have satisfactorily concluded win/win agreements that bring the best value to the community. Approving the rezoning applications now leaves the City effectively hampered in negotiating any other outstanding issues. Why would we even consider doing that?
We need to ensure by covenant and or any other means that our concessions are “use it or loose it” and expire in total at the end of a set time frame.
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2 comments:

  1. Frank MurphyAugust 30, 2014 at 6:43 PM

    And this exchange today with Councillor Pattje —

    On Aug 29, 2014, at 4:33 PM, Fred Pattje wrote:

    Hi Frank,

    The other day a question was raised on FB with regards to taxes on the proposed Hilton hotel and this is the response I received:

    The owners of the Hilton property have not yet applied for a Revitalization Tax Agreement. They are likely waiting to see if Council approves the rezoning. If/when they do apply, the agreement must be approved by Council and it will be up to Council to determine whether they will exempt the residential portion of the units as part of the Revitalization Tax Exemption.

    The short answer is that Council has not considered whether a tax exemption will be given to this project and it is not part of the land use discussion at the upcoming public hearing.

    This kind of accommodation is called Strata Accommodation Property and is new to Nanaimo, although common in other areas of BC, particularly resort areas. It is one of the most complicated types of assessment that I have seen.

    Depending on the actual use of each individual room/unit, BC Assessment will assign values to each of the hotel rooms/suites that are split between residential and commercial values, based on actual occupancy. By legislation, a minimum of 10% of each unit will fall into class 1 (residential). Because it is based on actual use, it can take a couple of years to get data. Until that information is available, the full value of the unit is in class 1. This is relevant because commercial tax rates tend to be more than double the residential rates.

    Any portion of the hotel that is not part of the accommodation (e.g., restaurant, spa) would assessed as commercial.

    Our Revitalization Tax Exemption bylaw allows Council to exempt the City’s portion of just the commercial assessment, or both the commercial and residential assessment. Remember, it is only the City’s portion that can be exempted, so under no circumstance could 100% of the hotel be exempted from property taxes (for up to 10 years).

    Hope this explains, for now.

    Cheers,

    Fred

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  2. Frank MurphyAugust 30, 2014 at 6:45 PM

    From: Frank Murphy
    Subject: Re: Hotel/Strata taxes
    Date: August 30, 2014 at 3:28:28 PM PDT
    To: Fred Pattje
    Cc: Mayor&Council , GENERAL MANAGERS , David Witty , Wally Wells

    Fred, this is helpful and thank you.

    Of greater concern to me is the structure of the business side of this project. Insight have made it clear and it’s spelled out in the Staff report to Council that they intend to finance the project through the sale, by strata ownership, of individual rooms as investments. They have every right to do this of course and it’s common practice.

    What should be of concern to the City in my view is that they have said that their intent is to raise not just financing for their project, but to turn majority ownership over to the new strata corporation. I’d defend their right to do this but IMO it alters the City’s relationship with Insight in considering all the benefits and concessions that they have asked the City for. Would it not be an entirely fair question for Council to ask Insight: Why don’t you see this as a long term investment for your company?

    So, I don’t think it’s unreasonable to look at it this way (maybe it is unreasonable, I’d very much like to hear expert opinion on this)—

    The project that Insight has brought forward is not a hotel exactly: it’s an investment product, one based on an impressive list of benefits and values: the ownership of the site, the contract with Hilton, and then the very nice list of items supplied by the City. The likelihood is that with all elements in place, the first step (as is the case I’m sure with any project this size) is to secure financing. The norm seems to be that before a financial institution forwards any funds to begin construction, a percentage (sometimes 80%) of the units have to be sold.

    Let’s consider what will be for sale: not finished hotel rooms of course, but a business plan. concept drawings, architectural and engineering work, a contract (surely Council have been shown this contract for careful study) with the Hilton Corporation and the list of concessions contributed by the City, which I listed in more detail here: http://nanaimocommons.blogspot.ca/2014/08/nanaimo-waterfront-hotel-proposal-lets.html. These have not been approved by the City of course, I’m merely trying to bring some of this into perspective. Simple math tells me that this plan could raise something well on its way to $100 million before a brick is laid.

    So, I guess the question is: is this the business the City wants to be in? Helping to create an investment product which will be on offer to small investors to whom it may look better than it might look to a sophisticated financial institution or investment bank. One that will allow the principal, the developer, to cash out as soon as possible.

    Let’s contrast this with the SSS Manhao Hotel. We’re dealing with an owner/operator, who have applied for little or no variances or rezonings, have made what I consider a gesture of good corporate citizenship in paying market value for the site when they could have taken advantage of the City’s offer to sell it for $10. The advantages to Nanaimo are clear and our risk fairly minimal. The Insight project protects impressively the developer and Hilton from any serious downside risk. The City of Nanaimo has far too much at risk for too little return.

    I hope your colleagues will help you send this back to the drawing board on Thursday. There may be a win / win scenario achievable here, but clearly, this isn’t it. I believe a win / win scenario is possible also in the successful integration with the hotel of a revitalized Georgia Park, but Staff’s suggestion that sections of the park be leased to the developer is hitting a nerve out here. It’s fundamentally offensive to people and completely unnecessary. I have some ideas in this area and happy to discuss.

    Thanks again for getting that question answered.

    Frank

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