Chambers Bay Hotel-Resort Ground Lease Agreement
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CHAMBERS BAY HOTEL-RESORT GROUND LEASE AGREEMENT INFORMATION PACKAGE Prepared by: DON ANDERSON, Senior Counsel Office of the Pierce County Executive February4, 2019 Page 1 of 70 Chambers Bay Hotel-Resort Ground Lease Agreement Information Packet Table of Contents Issue What is the financial reality of the Chambers Bay Golf Course and how will Pg. 3 it improve with approval of the Ground Lease for a hotel/resort project? Issue Does the Ground Lease provide a substantial net economic benefit to the Pg. 6 County on a long-term basis while protecting against inflation? Issue Does the County need to conduct an additional third party review of the Pg. 12 ground lease? Issue Does a change to the golf course subject the County to a claim of Pg. 19 copyright violation by the designer? Issue Will the terms of the Ground Lease initially allowing month to month rental Pg. 26 of golf villas inhibit the future award of a major golf tournament? Issue How do the Chambers Creek Properties Master Site Plan and Design Pg. 29 Standards interface with the provisions of the ground lease? Issue Are the boundaries of the Ground Lease and placement of the Pg. 44 Hotel/Resort complex consistent with the Chambers Creek Properties Master Site Plan? Issue What are the County’s obligations under the Rights of First Offer and Right Pg. 52 of First Refusal contained in the Ground Lease? Issue How does the developer plan to satisfy its obligation to provide publicly Pg. 57 accessible outdoor amenities including a new public plaza and enhanced recreational trails pursuant to Section 1.05.1 of the Ground Lease? Issue What is the developers’ proposed construction schedule and what Pg. 60 assurances does the County have that the hotel project will be completed? Issue Will changes to the upper 9th tee detrimentally impact Chambers Bay as a Pg. 65 championship course? Issue Do provisions of the Ground Lease allowing the Tenant to use new public Pg. 67 plaza improvements, construct a fire road, use parking outside of the Ground Lease Area and use the tradename “Chambers Bay” without additional cash consideration constitute an impermissible gift of public funds? Issue Will the Ground Lease permit casino gambling or allow the Executive to Pg. 68 unilaterally approve gambling on the leased premises? Miscellaneous Concerns Pg. 69 Page 2 of 70 Issue: What is the financial reality of the Chambers Bay Golf Course and how will it improve with approval of the Ground Lease for a hotel/resort project? Answer: Golf course operations have required injection of over $1,000,000 per year from other sources to cash flow. The ground rent and tax revenue generated by the hotel/resort project will substantially reduce that subsidy. Discussion The relative benefit of the Ground Lease to the County should be viewed in the context of the financial history of the Chambers Bay Golf Course. The 930 acre Chambers Bay Property was purchased in 1992 by the sewer utility for $33,000,000. The Council at the time approved a bond issue of nearly $20.8 Million for the construction of the golf course, underwritten with sewer utility revenue. Land utilized by the golf course cost over $8,000,000 but was not included as an expense of development. In 2007, the County represented that the construction cost was $21,177,251 . A golf maintenance building and common improvements benefiting the golf course were built with sewer utility funds. This made the true cost of construction $25 Million: exclusive of the cost of land. Exhibit A. The golf course has never made money. At the end of 2008, the public was told that the first year of Chamber's Bay operations resulted in a profit of $45,212. This depiction did not accurately reflect the course operations. The golf course's 2008 financial statement represented a positive cash flow in that amount because a one-time $930,000 advance from the USGA was booked as 2008 revenue while the associated costs were booked in 2009. By 2011 the accumulated negative cash flow reached $3,433,175. At the end of 2011 a retroactive "in lieu of maintenance" payment of $3,431,250 was made by the sewer utility to the golf course. The County's investment in the Chambers Bay Golf Course is now nearly $40 Million, exclusive of land. Exhibit A. The $20.8 Million bond debt has been paid down by $6 Million. After accounting for debt reduction, golf course operations have lost an average of $1 Million a year. Unattributed indirect expenses such as depreciation and administrative overhead make the true loss larger. A hotel, restaurant, casitas/villas and an event center have always been anticipated to be essential elements of the Chambers Bay Golf Course project. Exhibit B. As explained in greater detail in the accompanying documentation, the ground lease has the potential to substantially mitigate the ongoing financial burden the golf course imposes on Pierce County taxpayers and sewer utility ratepayers. Together with enhancements to the course which address concerns regarding playability and spectator flow, the ground lease will benefit the long-term viability of the course as an iconic and internationally recognized championship venue. Page 3 of 70 EXHIBIT A Finance Department ~--------Chambers Bay Costs as of January 2019 COURSE COST COMPONENTS AMOUNT Direct Costs of Construction Golf Course Construction $18,563,906 Pro Shop, Grill, and Storage $2,613,345 Subtotal Direct Golf Development $21 ,177,251 Building D Golf Maintenance - paid by Sewer Utility $2,222,907 Common Site Infrastructure (with park) $1 ,629,481 Entry Drive Road $1,441,111 Common Improvements at 50% $3,070,592 --~~-$1,535,296 Subtotal Construction Costs Attributed to Others $3,758,203 Direct Cost Total $24,935,454 Subsidies from Other Funds Sewer Utility Maintenance Subsidy 2011-2019 $10,300,821 General Fund Appropriations for Operations - 2015 $650,073 General Fund Cash Flow - 2017 $500,000 General Fund Payoff of lnterfund Loans to Cover Losses - 2018 $2,725,210 Resurfacing of Greens - LTAC funded - 2018 $150,000 Resurfacing of Greens - General Fund - 2018 $84,722 Subsidies Total $14,410,826 Total Costs $39,346,280 Not Included: Cost of 233 acres which was used for the golf course Depreciation of personal property assets 2018 General Fund for lost revenues during greens replacement- $800,000 2018 General Fund towards greens replacement- $500,000 Page 4 of 70 EXHIBIT B TABLE 1 SUMMARY OF EXISTING, ADOPTED, AND NEW USES Existing implemented MSP uses and projects underway: . Playfields . Buffers . Environmental Services Building (wastewater, surface water, water, and solid waste utilities offices) . Golf Course . Labyrinth . Mining and Reclamation . Urban and Nature Trails . Production Nursery . Concessions . Water Production . Water Reclamation Additional future site uses identified in the adopted MSP: . Administration/Maintenance . Arboretum . Boat Launch . Commercial Offices . Expansion of Existing Site Uses . North Meadow . Open Space . Play and Picnic Areas . Shoreline Public Access (north and south docks) . Urban and Nature Trails . Restaurants . Visitor Center/Environmental Education Center . Off-Leash Dog Area(s) MSPUpdate Addition of: . Boardwalks for Shoreline Access . Environmental Institute (research, laboratory, and meeting facilities) . Lodging (casita-style units and small lodge to support the golf course) . Central Meadow Revisions To: . Location of Arboretum . Location of Environmental Education Center . Square footage and parking for some adopted site uses including restaurants and concessions and increased parking for a number of areas of the Properties Deletion of: . Area 4 (sold to the City of University Place) . Botanical Garden . Railroad relocation Phasing out of: . Bus Storage and Maintenance Facility February 200713 Page 5 of 70 Issue: Does the Ground Lease provide a substantial net economic benefit to the County on a long-term basis while protecting against inflation? Answer: Yes. Discussion There are multiple direct economic benefits to Pierce County that arise from the Ground Lease, only one of which is guaranteed rent. These include: 1. Guaranteed minimum base rent; 2 Percentage rent, an inflation hedge and potential sharing of success; 3. One-time revenues from construction sales tax and sewer impact fees; 4. Sales tax from ongoing operations; 5. Leasehold excise tax; 6. Real property tax on improvements; 7. Lodging tax on hotel room rentals; 8. Increased greens fees from overnight guests: 9. Avoidance of the economic risk of restaurant operations; and 10. Avoidance of capital expenditures necessary to replace existing temporary buildings. It is estimated that the Ground Lease and the Hotel/Resort project will have a net benefit to the County treasury of $2,511,966 in the first five years of the Ground Lease and a stabilized net annual benefit of $957,796 by 2024. These cashflow estimates are itemized in Exhibit C. This is after deduction of $300,000 per year from expected revenue representing the net cashflow of the present restaurant operation. That net restaurant cashflow is actually overstated as it -does not consider building depreciation or the County's administrative overhead. Due to increasing costs and price resistance, the restaurant cashflow is not improving. The starting point for negotiating ground lease rent is normally an appraisal of the land at its highest and best use, followed by the application of an agreed capitalization rate representing the landlord's required return on investment. The highest and best use of the subject property would entail a sale for high end single family residential development, a use that is not allowed by present County policy. That resulted in negotiation of a rental rate at a level that is more subjective, but which is generally in line with commercial and hotel ground lease rents in general. The minimum and estimated percentage rent under the formula negotiated for the Ground Lease is attached as Exhibit D.