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HomeMy WebLinkAbout05-30-2008 Council Economic Development Committee AGENDA City of Iowa City City Council Economic Development Committee Friday, May 30,2008 8:00 a.m. Lobby Conference Room Iowa City City Hall 1. Call to Order 2. Consider approval of the minutes of the April 22, 2008 Economic Development Committee Meetings 3. Consider options for Sheraton Hotel 4. Staff time 5. Committee time 6. Adjournment draft MINUTES CITY COUNCIL ECONOMIC DEVELOPMENT COMMITTEE APRIL 22, 2008 CITY HALL, LOBBY CONFERENCE ROOM, 8:00 A.M. Members Present: Staff Present: Others Present: Regenia Bailey, Connie Champion, Matt Hayek Wendy Ford, Jeff Davidson, Tracy Hightshoe Mark Nolte, ICAD; Miles Schulz, ED Intern; Kate Fiegen, Press Citizen; Gigi Wood, Corridor Business Journal; Bob Thompson; Mike Mullenbrook RECOMMENDATIONS Champion moved to approve the CDBG application for Textures Salon as recommended by staff; seconded by Hayek. Carried 3-0. Champion moved to approve the CDBG application for Alfie's Beauty Supply as recommended by staff; seconded by Hayek. Carried 3-0. CALL MEETING TO ORDER: Chairperson Regenia Bailey called the meeting to order at 8:07 A.M. She asked those in attendance to introduce themselves. APPROVAL OF MINUTES OF THE MARCH 26 AND MARCH 27. 2008 MEETINGS: Hayek moved to accept the minutes of both the March 26 and March 27, 2008 meetings as submitted; seconded by Champion. Carried 3-0. DISCUSSION OF CDBG ECONOMIC DEVELOPMENT FUNDS APPLICATIONS: TEXTURES SALON - Tracy Hightshoe provided a review of the application and stated that this is a business that is currently in operation in Coralville. The owner would like to expand operations and is looking for a site in Iowa City. Hightshoe noted that the owner started the salon in 2002, and gave the history of the business since then. She stated that this owner does qualify as a microenterprise under the CDBG program. In her recommendation, Hightshoe noted that the owner stated she would hire one part-time position. Hightshoe stated that required employment would focus on the owner as she qualifies as low-to-moderate income and if the cash flow is not there, she wouldn't be forced into hiring a part-time position based on the agreement. (If a position is created, the position must be made available to a low-to-moderate income person.) In the new facility, the owner will rent out studios for other stylists to operate their own business. Hightshoe spoke with the commercial lender at Hills. By securing CDBG funds, this will enable the owner to enter a private loan with a SBA guaranty through Hills. Hightshoe recommends approval of this loan application at the full request of $35,000. The City will place a UCC lien on all business assets as partial collateral. Champion and Hayek both stated that they like the application, and that the expansion is warranted. Hayek stated that it is ambitious, but not over-reaching, and he feels it is a cautious move forward for the owner. Hayek noted, in the interest of full disclosure, that the applicant's landlord is a client of his in his law practice, and that he will check with the Legal department at the City about whether it would be a conflict of interest for him to vote on this at the City Council level. Hayek added that at the Committee level, there should be no such conflict. Champion moved to approve the CDBG application for Textures Salon as recommended by staff; seconded by Hayek. Carried 3-0. Economic Development Committee Meeting April 22, 2008 ALFIE'S BEAUTY SUPPLY - Hightshoe stated that Alfie's Beauty Supply has been in operation since March 2007 at 400 Kirkwood Avenue. She gave the members a brief history of Alfie's, stating that last year the applicant had sales of $17,535. Hightshoe noted that the owner started this business with her income tax refund, and was also awarded funds through the ROSS Program, through the Iowa City Housing Authority, which she further explained to Members. Hightshoe continued, stating that the owner is working with the Housing Authority to remedy some of her past credit history, but upon speaking with the Housing Authority and her current landlord for the business that she pays rent on a timely basis and has been a good tenant. References from the Housing Authority, business landlord and her past employment specialist at Goodwill have all been extremely positive. To limit risk, Hightshoe stated that she would recommend no more than $5,000 for this application. Hightshoe continued, stating that the owner desires to expand her inventory. In order to do this, the supplier requires an initial minimum purchase of $5,000. Hightshoe stated a concern, as there are no other employees, she questioned who would run the business in the owner's absence. The owner responded that her brother and other family members help out a lot and would continue to do 50. The owner explained some of the inventory problems she has run into, stating that it can be difficult to meet the minimum requirements. Champion stated that she is somewhat concerned about the sales, and she asked if this increased inventory would help that. The owner responded, stating that she believes it will. She stated that when she first opened she had a suggestion box where a lot of people were asking for this particular product. The owner continued to explain her business, noting that on an average day she will sell three wigs, and that she can make two to three times her investment on these products. She also gave the Committee some figures on her clothing sales. Champion asked for some clarification on this loan, and Hightshoe responded to questions. Hayek briefly reviewed the recommendation of $5,000, stating that he is a little uneasy about the amount, but that he is open to it. He added that this fund is intended for this type of assistance. Bailey added that coverage would be a concern for her too, but that it sounds like the family helps a lot. Hightshoe stated a UCC lien would be filed on all business assets for partial collateral. Champion moved to approve the CDBG application for Alfie's Beauty Supply as recommended by staff; seconded by Hayek. Carried 3-0. CONSIDER PROPOSAL FROM SHERATON HOTEL: Wendy Ford introduced Tom Geshay and Ron Kim with Davidson Hotel Company to those present. Jeff Davidson noted that the City has received a request from the new owners of the Sheraton Hotel for several items, and he asked them to address these requests. The new owners addressed the Committee, giving them some background on the Davidson Hotel Company. They currently have 31 hotels in their portfolio. Geshay noted that they have done similar projects in other college communities, and they look forward to working with Iowa City on their proposals. He added that the Sheraton is in a fantastic location, right in the center of town, and that the property needs some rehabilitation. He noted that many groups that used to come to the Sheraton for functions are now staying at the Marriott in Coralville, and that they hope to change this with their proposed rehabilitation. Geshay stated that there are two avenues they could take - cut costs, slim things down, and cut services; or they can try to increase revenues, which improves the bottom line. He stated that they would like to increase revenues and do a more significant rehab. Geshay continued to explain that the hotel is currently in danger of losing its Sheraton franchise here. They hope to turn this around with their plans. PARKING AGREEMENT AMENDMENT - First addressed was the parking agreement. With the changes over the years, Geshay stated that this needs to be looked at and revised. FINANCIAL ASSISTANCE - Geshay noted that they would like to look at the financial assistance that the City offers, such as the TIF. VACATION OF PUBLIC EASEMENT - The final item is the easement that runs along the hotel. Geshay briefly touched on this area, discussing upkeep and maintenance issues. Economic Development Committee Meeting April 22, 2008 Staff then addressed the Committee, stating that it is clear that the property is in need of investment, and that this can be measured by several factors. Davidson noted that the assessed value has declined and that there has been a decline in occupancy and a decline in perception of the hotel. In talking to University officials, Davidson noted that they have completely stopped using the Sheraton, stating that it no longer meets their standards. Davidson noted that that the hotel's proposal be considered and evaluated as a "package." He added that the parking agreement is probably the lesser of the two items. Davidson stated that he went through the current parking agreement with the Parking Superintendent in order to clarify this, and he briefly explained the concept of the agreement. He stated that the parking agreement covers both employees of the hotel and registered guests. Davidson explained the two principal tools that the City has in terms of financial assistance to businesses. He said any TIF agreement can be structured to protect the City. He stated that staff could show some revenue-positive scenarios to the Members for their review. Davidson also noted two options on tax abatement - one being a 1 O-year declining schedule and the other a 3- year 100% schedule that would each net different amounts. Ford noted the main difference between the two abatement options is the time value of money. She also noted a difference between tax increment financing and partial commercial property tax abatement is that with tax increment financing, the City, County and School District debt is protected; and that this is not the case with the commercial property tax abatement program. Ford continued, stating that they did some preliminary calculations based on the increment, which she noted is the difference between the base value of the property and the valuation of the property after renovations. She stated that it is difficult to project what this will be in the future, after the hotel renovations, but she offered a couple of ways to view this. One would be to look at a post-renovation evaluation that is equal to the highest valuation the hotel has had in the past. This number was $12.1 million, according to Ford. The current valuation is $6.7 million, which means a significant decrease in the value of this property, and thus the property tax revenues for the city, county and school district. Ford stated that with $6.7 million as the base value, if the hotel were to increase in valuation to what it had been previously, the City would see a significant increment. In talking with the City Assessor, Ford noted that if he took the current valuation and added back in the obsolescence that has caused the building to decrease in valuation, there is the potential that with renovation the hotel valuation could go as high as $14.7 million. In regards to tax increment financing, Ford noted that the property owners would pay all property taxes due, and then receive a rebate on the portion of taxes related to the improvements (also known as the increment). She stated that if they structured a 7-year tax increment financing package for the hotel, based on a post renovation valuation of $12.1 million, tax increment financing would amount to about $1.2 million, and with the increased valuation in the end, the taxing authorities would be ahead $2.97 million over a 20-year period. She continued, giving Members further examples of the tax revenue that the City would realize in the long run. Davidson stated that before the Committee began their discussion, he wanted to mention the easement issue again. He stated that he was present 25 years ago when this was put into place, and that it was a controversial issue then. He further explained that the easement is hotel property with a designation over it that allows the public to use it. This is a concern to the hotel owners, as they feel they do not have control over this area. He explained how this change would be a fairly significant one, and that public input sessions would need necessary. Davidson stated that there is a monetary value to this easement, and that they would need to look at this, as well. He also stated that if the Members have any specific requests for information on these issues or has a particular direction they would like to go, he asks that they let him and Ford know so they can prepare whatever might be needed. Champion asked about the per room cost of renovations. Geshay stated that it depends on the specific requirements or needs, and that it can run between $7,000 and $40,000 per room. He gave Members some background of the various hotels they have purchased and renovated, Economic Development Committee Meeting April 22, 2008 stating that the average is probably around $20,000 per room. Champion stated that she applauds their desire to improve the hotel. She stated that she does not believe in employee parking being offered free or discounted, and she believes this should not be a factor in such an agreement. The discussion continued, with the owners stating that they are not asking for free parking, that they want to come up with a good agreement for all involved. He noted that they have a large number of employees that this would encompass. Bailey stated that she is interested in seeing this hotel get back into the conference market, and that perhaps having parking for conference attendees would be more important. Hayek stated that his feeling is he is glad the new owners are here and are talking about their plans to upgrade the hotel. He added that in terms of City assistance to help this project along, the question that he feels they have to answer for the community is why this project needs public assistance to become a reality. Hayek stated that in TIF situations, the question is always asked: would this project happen anyway, without the City's assistance. Geshay responded, giving Members some background on the financial makeup of Davidson Hotel Company. He briefly explained why the investment group would need assistance in a project of this magnitude. He added that it also would give the City something to be proud of, and that University and other business would hopefully return with their business to the downtown Iowa City hotel. He noted the City's significant investment already in this area, and that it would be to the City's advantage to have this property rehabilitated to the fullest. Hayek asked if they have a figure in mind that they would spend, if the City did not assist them. Geshay noted that he does not, but that to make this a first-class facility, they would need to seek assistance. Hayek continued, stating that the redevelopment is not one of a blighted neighborhood, but rather the hotel is blighted. He noted the controversial nature of TIFs and the perception of them, as well. Ford stated that another benefit of a healthy hotel is the 7% hotel/motel tax that the visitors pay. The returns that come back to the City are affected by both the occupancy levels and room rates, and that if either or both are low, the tax revenues reflect that. Bailey asked for some discussion on current room rates and occupancy levels, versus what it was at a high point in the past. She stated that she would be interested in some of these accountability measures, as well. Bailey added that she strongly believes this hotel should remain a quality facility within the downtown. She asked the new owners to address some of these concerns. Geshay addressed these concerns, stating that the occupancy has been in the 60% range, but that they would like to bring it back up to its highest levels. Geshay also addressed what national averages have been and what some of the trends are currently. He spoke about properties in Florida and Texas, and that they would expect to see the occupancy levels here increase in the same manner, once the renovations have been completed. Bailey asked what the average room rate is currently, and what they expect it to be. Geshay answered saying that it is currently around $109 and that it would command $149 when rooms are re-done. He noted they would have to honor some contracts that are below that rate and that they would have to ease into those new rates to regain lost business. Geshay continued to address the Members' concerns. He noted the importance of University business. Champion asked how long a renovated room lasts before it needs renovation again. Geshay and Kim responded to questions, noting that each component has a different life span, and that trends also play into when a hotel renovates. He stated that for "soft goods," such as carpeting, drapes and bedspreads, it is typical to get five years of use. Hard surfaces, such as bathrooms, can be expected to last ten to fifteen years. Hayek brought the conversation back to the easement issue, asking if there is anything from the past agreement that they should know about when reviewing the current request. Davidson stated that he is not aware of anything unusual, that it was a pretty standard easement agreement. Champion then stated that she believes it would not be a good idea to get rid of the easement, but that she is willing to discuss other ways of dealing with this. Discussion continued, with Geshay noting what they are proposing for this area and how they believe this will enhance the area. Economic Development Committee Meeting April 22, 2008 Bailey noted that they will need to further discuss this, and she asked Davidson what direction he needs from them. He stated that some direction in terms of formalizing anything or preparing any specific proposals on this would be appreciated, or if there is anything that has not been suggested that the Members would like to pursue. Davidson continued, touching briefly on a couple of the issues discussed. Ford added that the concept drawings shown are just that, and Members could make recommendations if they so chose. Bailey noted that she is not against the easement issue, but noted that Champion is not interested in doing this. Hayek noted that he is not sure if this is the right solution, but that he would not be against it. Hayek also stated that he would like to get more information on the Sheraton being in the "conference market" and what the owners hope to achieve in this area. Kim addressed some of the concerns in possibly refiguring the first floor of the hotel, noting that with some changes here they could expand their conference capabilities. Champion stated that she is open to discussion on all of this, but that she is not ready to make a decision today. Davidson stated that Members should mull this information over, and he asked if they have anything that they would like him and Ford to take care of in the meantime. Hayek stated that he is not ready for any agreements to be reviewed yet, but that he would like to see some numbers, such as proposed investment with assistance and without, and some of the numbers for hotel/motel tax and room rates. Bailey added that she also has an expectation of the occupancy rates, and would like this addressed as well. Champion stated that if they were going to consider a TIF, she would want to have it limited to the life of the improvements. Davidson asked if a majority of the Members would like for them to prepare a preliminary TIF agreement, something to protect themselves, and see if this is something the owners would be interested in. Champion stated that she would also like something more than a concept drawing before she makes any final decisions. Bailey stated that she would like to see something for the City Council to review in May. Champion stated that she does not see the need to rush on this matter, but that she would be willing to have an extra meeting if one is needed in order to expedite this. Davidson noted a meeting on May 20th would give them time to make a recommendation for Council approval at their June meeting. The Committee held a brief discussion about their major concerns are with regard to parking and financial assistance. Bailey noted that she is willing to look at all three requests, and to go from there with discussions. Geshay noted that parking is an issue that can have an immediate impact, and he asked that the Members consider this. He then asked for clarification on the timeline they might expect in reaching an agreement. Davidson reviewed the process of a public hearing and Council readings, and stated that it would most likely take two meetings to pass this. Bailey stated that Council would need some very specific proposals to respond to, in order for this to move along. Davidson stated that they would try to have something more specific for the May 20th meeting, so that when they make a recommendation to Council, it will be more specific. TOWNCREST AREA UPDATE: Ford referred to a memo and map regarding the Towncrest area, which provided as a response to their request at the last meeting. She stated that the map shows the exact area in question. She noted that there is a good distribution of CC-2 and CI-1 zones in the area. Ford noted that outside of the black lines on the map are residential properties. She further explained the Towncrest area, noting that the next step they need to take is to consider the area of study that is desired, and whether or not the entire area would be considered an "urban renewal area." They could widen the scope and include the residential area. Ford noted that they need to know what the Committee wants to see for the redevelopment of this neighborhood - to have it continue as a medical campus, for example, and to know what types of businesses the Members are interested in drawing to this area. Ford stated that public input through neighborhood meetings would be the next step, beginning this summer. Champion stated that she would like to hear what the residents and businesses of Economic Development Committee Meeting April 22, 2008 the area has to say, and Davidson stated that it would make sense to gain this input. These people are definitely impacted by the redevelopment area. Hayek questioned the ability to continue this discussion today, as the meeting has gone on so long. He stated that he believes it has promise, but that he does not know what the best mix would be. Hayek also stated that there is a lot more to this area than medical facilities. Bailey stated that she is comfortable with the area designated on the map, and that in thinking of goals, she is looking at increased tax base. She believes talking with those in the neighborhood is a good step to get the information on what is desired. Members agreed that they would like to see a continued mix of commercial, and also see the residential areas improved, with the goal of an increased tax base. Hayek asked for some clarification on why there is some residential included, but the majority is not. He stated that perhaps they need to view this as a commercial redevelopment. Davidson and Ford noted that some of the multi-family dwellings are in blighted condition and could be considered for redevelopment. Davidson stated that if Members are comfortable with the area identified, they could start a mailing list for a neighborhood meeting, and work towards that process. Members directed staff to move ahead as Davidson has proposed. STAFF TIME: Ford noted that she brought copies of the Small Business Magazine, and she shared an article mentioning Iowa City. Hightshoe noted that FY08 applications (unable to hear). COMMITTEE TIME: None. ADJOURNMENT: Hayek moved to adjourn the meeting; seconded by Champion. The meeting adjourned at 10:07 AM. Economic Development Committee Meeting April 22, 2008 Council Economic Development Committee ATTENDANCE RECORD 2008 TERM ....... ~ w w .r:. - i\3 i\3 i\3 NAME EXP. ....... (J1 to 0> ~ N Regenia 01102/10 X X x X X Bailey Matt 01102/10 X X X X X Hayek Connie 01102/10 X X x x X Champion Key: X = Present o = Absent OlE = Absent/Excused j ~ 1 ~~-s._~.... !~(2SJ!:~ ::::~~aa.' -"II - CITY OF IOWA CITY MEMORANDUM Date: May 27, 2008 To: Economic Development Committee From: Wendy Ford, Economic Development Coordinator Jeff Davidson, Director, Planning & Community Development Re: Sheraton Hotel Proposal for City assistance This memo provides: A. An update to Davidson Hotel's request for public assistance, B. Answers to the questions that arose after the April 22, 2008 Economic Development Committee meeting, and subsequent questions, C. Further clarification of the requests and concepts presented by the Sheraton and options for consideration. A. Update to Davidson Hotel's request for public assistance Upon further study of the Iowa Code, we have discovered that the method for calculating the base value of the increment on a tax increment finance project is to use the January valuation of the year before the first TIF debt was certified in the applicable district. In our case, the TIF district was created in 2001; the first debt was certified in November of 2003 which means the base value for any TIF project in the district will be on the January 2002 valuation. The table below shows the hotel's taxable valuations over the life of the TIF district and the difference between estimated annual rebates using the current valuation and the 2002 valuation. Because the valuation increment would be substantially smaller using the 2002 valuation as a base, the Hotel has decided to change the scope of its request. Lower end valuation & rebate Higher end valuation & rebate estimates using 2002 & 2007 estimates using 2002 & 2007 valuations valuations Actual Sheraton Estimated Valuations Post Increment Estimated Post Increment Estimated {Pre- Renovation {the Annual Renovation (the Annual Year Renovation) Valuation difference) TI F rebate Valuation difference) TIF rebate 2007 $ 6,736,140 $12,100,000 $ 5,363,860 $173,049 $14,700,000 $ 7,963,860 $ 256,930 2006 $ 11,475,800 2005 $ 11,076,200 2004 $ 10,200,250 2003 $ 9,250,000 2002 $ 9,250,000 $12,100,00C $2,850,000 $91,947 $14,700,000 $ 5,450,000 $175,828 2001 $ 12,113,250 May 21, 2008 Page 2 In their attached letter dated May 13, 2008, the Davidson Hotel company answers many of the questions posed during and following the Economic Development Committee meeting of April 22, 2008. These are detailed in the next section. Most notably, they have reduced the scope of assistance they seek from the City to the following: 1) Lease the hotel 80 dedicated parking spaces at market rate. 2) Vacate the Dubuque Street Easement to allow for meeting space expansion and an improved lobby. 3) Provide funding for the new Pedestrian Mall access pathway. B. Information requested during and following April 22, 2008 EDC meeting: 1. Why this project needs public assistance to become a reality. Davidson Hotels has stated that public assistance is necessary for the grander hotel renovations scenario which will ensure retention of the Sheraton franchise flag. The key component to the grander hotel renovation is the main floor lobby area, restaurant and 4,000 square feet of new meeting space. To do the grander renovation, they desire control of the public access easement which runs through the middle of the first floor. With control of the space, they will still provide north and south entrances, and those entrances will be offset from each other. This will eliminate the straight line of circulation through the building as exists now. This plan will enable the hotel to have an expanded lobby and socialization area for guests and meeting attendees to congregate. The new design will replace the existing underutilized bar with a meeting room of nearly 2,000 square feet and an additional meeting room of another 2,000 square feet will be in the northeast corner of the building. Those new meeting spaces add 33% to the marketable meeting space at the hotel and will be able to accommodate between 95 and 180 people each, making a strong addition to the conference product they are able to offer. Without vacation of the easement. the lobby area gets a make-over, but no new space is added. The value added to the property by this component of the renovation will add significantly to the property tax value of the property. With City assistance, the Hotel estimates it will invest $11 million in hotel renovations. Without City assistance, the investment will be between $6 and $7 million. 2. Goals associated with the conference market. The reconfiguration of the lobby, restaurant, bar and meeting space on the main floor demonstrates the commitment of Davidson Hotels to increase meetings and group business at the hotel. A driving force behind the purchase of the hotel is to capture business associated with the University. This business consists of visitors in and out of the University, but also professional associations with whom faculty and staff are involved. The Iowa City/Coralville Convention and Visitors Bureau (CVB) produces lead lists for its members and a cursory glance at it would suggest that the Sheraton could accommodate many more meetings than they have booked. 3. Proposed investment with, and without City assistance. Davidson Hotels have stated that with the City assistance component of the vacation of the easement, they are positioned to invest $11 million in the hotel. Without it, the investment would be between $6 and $7 million. 4. Hotel-motel tax and room rates; occupancy rates. 2 May 21,2008 Page 3 We do not have all these numbers yet, but hope to present more information at the meeting on May 30. 5. More detail on the concept drawings. Attached you will find a new series of floor plans and concept illustrations of the proposed Dubuque Street walkway. Also attached are the proposed site plans of the main floor. You can see how one new meeting room replaces the existing bar and the other is in the northeast corner of the building. The new central meeting room would serve as a pre-function space and serve as a gathering space before and after formal meetings. Also note the placement of the proposed revolving entry doors to the lobby. The proposed revolving doors would be more energy efficient than the existing doors and still allow for the public to pass through one side of the lobby to the other. Also note the proposed enhancements to the Dubuque Street Walkway between the hotel and the building to its west. The formal walkway would begin at the corner of the Dubuque Street Ramp with a covered brick pedestrian walkway from the ramp into the Pedestrian Mall on the north side of the building. The other illustrations in the packet give further detail to the Dubuque Street Walkway enhancement concepts including signage, public art, landscaping, and lighting. 6. Value of easement. A local appraiser from whom we frequently seek advice said that it would be pOSSible to appraise the pedestrian access easement, but that it would be extremely difficult to do. He said their company appraises easements frequently (Le., for pipelines and other utility infrastructure), but that this downtown easement is not in a disciplined market and any two appraisals could easily be vastly different. 7. Easement map See attached. You will note that the actual easement is quite narrow; it does not include the entire area between the hotel lobby and restaurant. 8. Press releases, if any, issued by Davidson Hotels or a related entity concerning the purchase of the property and/or Davidson Hotel's plans for it. Davidson Hotels did not explicitly announce their plans for the hotel. In a Press Citizen article noted below, the general manager was quoted as saying that nearly $10 million worth of renovations are needed, and that the hotel would maintain the Sheraton franchise. http://www.davidsonhotels.com/News.asp?m=P&I=84: This article outlines the company's strategy to increase the number of university related hotels in its portfolio. It notes that this niche market has had little attention and it also highlights the stability that university markets offer. http://www.hawkcentral.com/apps/pbcs.dlllarticle? AID=/20080404/N EWS01/80404016/1 079/NEWS (Press Citizen, 4/4/2008). This article quotes the general manager (Kriewald), that more than $9.5 million in renovations are needed. Also, the article states that the Sheraton will maintain its franchise name. http://www.hotelinteractive.com/h i_i ndex.asp ?page_id=5000&article_id=1 0437 (Hotel Interactive, 4/29/08) This article is about the real estate brokerage firm that assisted Ashford (the former hotel owner) with the sale of the hotel. The article says Ashford wanted to divest itself of non-core assets, while Davidson Hotels wants to double its number of University town hotels from five to 10 in the next two to three years. 3 May 21, 2008 Page 4 9. History on the ownership of the property and the purchase prices. Year Sale Price Notes 2008 $7.125 million The $9.5 million price tag included the value of the agreement March with the Hotel Vetro. 2006 $13.292 million A $19 million purchase price reported was a number that the December owner Ashford used internally and may have included other assets in their portfolio. 1999 $9.672 million March 1992 $10.6 million January 10. Background on this sale: Davidson Hotels had signed an agreement for $11 million in October, 2007, and upon completion of their due diligence, discovered an additional $1.5 million of deferred maintenance. The seller would not reduce the price to $9.5 million. In January 2008, Starwood (brand managers of Sheraton) called the former owners, Ashford, and asked how they were coming on the mandatory Property Improvement Plan. Since Ashford wasn't going to invest the needed improvement funds, and they didn't want to be saddled with a property that lost its brand value, $9.5 million began to sound better and the deal was completed with Davidson Hotels. 11. Can we confirm whether any part of the purchase agreement between the seller and Davidson Hotels made the sale contingent on getting assistance from the City? As far as we are aware based on anecdotal conversations with the former general manager, there were no contingencies in the purchase agreement. C. Further clarification of Davidson Hotel's requests and options Staff has examined these requests and spoken with the owners as to the preference of various options that the City and the owners might consider. At the EDC meeting, let's discuss the options below and prepare to make a recommendation to the City Council about the level of assistance the City may afford Davidson Hotels. Following are the requests and a discussion of options. 1. Provide the hotel with 80 parking spaces at market rate. Sheraton's request In lieu of Davidson Hotel's earlier request to renegotiate the parking agreement and increase their number of preferred rate hours, they now seek only the opportunity to lease 80 parking spaces at market rate to ensure parking availability for their employees. The 80 spaces would be used by the full- and part-time staff that will number approximately 175 people. They seek neither free, nor reduced rate parking and otherwise desire to keep the original parking agreement in place. The City Parking and Transit Director has indicated that 30 monthly permits could be made available in the Dubuque Street Ramp at $65.00 per month, and 50 monthly permits could be made available in the Court Street Transportation Center at $60.00 per month. Options 4 May 21,2008 Page 5 a) Grant the request. b) Do not grant the request. c) Grant a variation of the request, such as fewer monthly permits. 2. Vacation of Public Easement. Sheraton's request The Sheraton Hotel owners have requested that the Public Easement running through the center of the hotel along Dubuque Street be vacated by the City. You will note in the attached figure that the actual easement is narrower than many people assume. The reasons for their request are outlined in their attached letter and include: . They would like to maintain control of the area, particularly at night when the area becomes a gathering place for the bar crowd. . They would like to rearrange and remodel the lobby in accordance with Sheraton's upgraded lobby standards that link bar and restaurant services with the lobby area and provide for a larger, more integrated social area for hotel visitors. . They would like to reconfigure the restaurant and bar locations to make room for additional conference and meeting space, the entry area of which would be approximately where the restaurant entry is now. In return for granting this request: . The Dubuque Street Walkway, next to the hotel on the west, would be reconstructed to provide a clearer delineation of the pathway between the Dubuque Street Ramp and the Pedestrian Mall. This would include an elongated covered pedestrian access between the parking ramp and the Pedestrian Mall. Enhancements to the walkway would include making it ADA compliant, adding signage, public art and landscaping to call attention to the walkway. Hotel security staff would monitor the Dubuque Street Walkway as they do the current easement. . The Sheraton would have more meeting space, adding to their marketability and the related increase in sales, room revenues and visitor-paid hotel tax revenues. Options a) Grant the vacation request with the plan as shown in this packet. Require the upgrade with specific design elements to the Dubuque Street Walkway. b) Do not grant the requested vacation, but allow the hotel to limit access to hotel guests only between 10 pm to 5 am. Require the upgrades to the Dubuque Street Walkway. This option has been discussed with Davidson Hotels and they are of the opinion that it would be a higher risk to their business due to negative public perception of no easement during nighttime hours. c) Do not grant the requested vacation, but redesign the easement such that it takes up the only the space in the actual easement, which is much smaller than the existing area between the lobby and restaurant, (see attached map of easement). This option has been discussed with Davidson Hotels, and would preclude their rearrangement of new meeting space. It is highly undesirable to them because it would further bisect the main floor and give the feeling of a more constricted space. d) Do not grant the requested vacation. 5 May 21, 2008 Page 6 3. Provide funding for Dubuque Street Walkway improvements. Sheraton's request The Sheraton Hotel owners have requested City assistance for the upgrade of the Dubuque Street Walkway. Cost estimates for those enhancements are being prepared; $300,000 to $400,000 may be in the ballpark. TIF is an option to assist in this improvement. Options a) Grant the request and assist in funding the public improvements to the Dubuque Street Walkway provided certain performance measures are met. Performance measures may include such items as design elements in the walkway, completion of the hotel lobby or other specific enhancements, and construction of an additional 4,000 square feet of new meeting space. b) Do not grant the request. eccodev/memos/Sheraton-5-30edmtg.doc 6 IIII 1 )\\11 )')( l\; 11"inl ((lllll \;\ May 13,2008 Ms. Wendy Ford Economic Development Department City of Iowa City 410 E. Washington St Iowa City, IA 52240 Subject: Sheraton Iowa City Follow Up Issues and Proposed Resolutions to the April 22, 2008 Economic Development Committee Meeting May 30, 2008 Dear Wendy, As a follow up to the Iowa City Economic Development Committee Meeting on April 22, 2008 and our subsequent telephone conversations, we are submitting additional information that you requested in order to address your primary concerns with the Sheraton Iowa City Hotel ("Sheraton" or "Hotel") and get resolution to our various Issues. The committee requested information based on the following questions/issues: 1) What is the Product Improvement Plan ("PIP") Sheraton requires to maintain the brand and how much is the investment going to cost? 2) What would we do WITH assistance from the City ofIowa City ("City")? 3) What would we do WITHOUT assistance from the City? 4) What is the historical and projected occupancy and rate for the Sheraton? 5) Discuss how we plan to address the city need for more meeting space and increase group business? 6) Have we worked with other cities that have provided assistance? 7) How many parking spaces are needed for Hotel employees? Question 1 - The scope of our PIP/Renovation budget addresses (1) the Sheraton PIP, (2) the deferred maintenance and (3) the non-PIP, value-add enhancements (which are items that will transform the facility from an ordinary hotel to a premiere, first class facility). The Sheraton PIP includes: · Guestroom and guest bathroom soft goods replacement (carpet, vinyl, drapes, paint) · Installation of flat panel TV's into all guest rooms Corporate Headquarters: 1755-D Lynnfield Rd., Suite 142, Memphis, TN 381 ] 9 Phone: (901) 761-4664 Fax: (901) 821-4106 IIII 1 )\\1 D\( )'\ f1( )Ill C< )\11'\ \ · Replace carpet and vinyl in corridors, paint ceiling and door frames · Renovate meeting rooms to include carpet, paint, new ceilings . Replace lobby furniture · Resurface pool, decking, wall covering and pool fence · Replace carpet and paint in all public areas . Renovate all public restrooms · Clean exterior of building and porte cochere area · Add electronic locking system for all areas of hotel · Clean up back of the house and replace ceiling panels · Ensure life safety compliance . Estimated Cost: $4.5 million Deferred maintenance includes: · Elevator modernization · Roof replacement . HV AC repair/replacement . Kitchen equipment repair/replacement . Laundry equipment replacement · Cooling Tower replacement · Estimate Cost: $3 million Value-Add Enhancements include: · New furniture as well as soft goods in guest rooms · Re-concepting and reconfiguring restaurant and lounge · Adding approximately 4,000 s.f. of meeting space on the lobby level · Expand club level lounge and offerings to elevate rating of hotel . Upgrading meeting offerings · Higher level of finish to guestrooms, public space and meeting space furnishings · Improved lighting, art and sound in public spaces · Renovating the current Dubuque Street Easement ("Interior Easement") area to create an enhanced, contiguous lobby; create a more grand entrance; significantly upgrade the interiors; provide for more efficient climate control and create new group meeting areas and improved flow. · Add a high-tech group and meeting business center · Planning and enhancing the new pedestrian mall access walkway . Estimated Cost: $3.5 million Total Capital Expenditure Investment: $11 million 2 IIII I l)')( ) \: 11(11[1 {'(),\U'\\:\ Question 2 - To reiterate our goals from our first letter, WITH CITY ASSISTANCE, we intend to transform the hotel into a first class hotel and conference facility. This includes a full commitment of the $11 million dollars of capital outlined above to transform the hotel and retain the Sheraton brand. The level of finish for the new interiors will be very high and of the best quality. Our willingness to spend over $11 million, more than doubling our purchase price, demonstrates our level of commitment to the success of the property and to the City of Iowa City. This means recapturing lost business that has gone to the Marriott in Coralville. It also means identifying new revenue sources and providing first class guestrooms and conference and meeting facilities to attract new group and transient business. An investment of this magnitude would require a longer investment hold period to reposition the hotel, stabilize operations and generate a stable return for our investors. Further, if we are able to recapture the Dubuque Street Easement, we can satisfy the City's desire to increase the size of the meeting space. The Hotel currently has almost 12,000 square feet of indoor meeting space. With a vacated easement, we intend to add approximately 4,000 square feet of additional meeting space on the lobby level of the hotel. Question 3 - WITHOUT CITY ASSISTANCE, we will not be able to complete the renovation plan outlined above. Without the vacated easement, we will not expand the amount of meeting space by 4,000 square feet nor create a more guest friendly environment on the lobby level. We will clean up the lobby with new furniture. We will not fully re-concept the food and beverage outlets, we will merely clean up the existing areas with new carpet and paint. We would still repair the deferred maintenance items, and we would clean up the guest rooms and meeting space with new carpet and paint. Replacing all of the furniture most likely will not be included in the renovated guest rooms. The level of quality for new finishes will also be lower. Renovation scope will be scaled back and mayor may not include all PIP items required by Sheraton. This could potentially lead to the loss of the Sheraton flag, although we will work hard to maintain it. This renovation strategy will also include cutting operating costs and most likely shortening the hold period for the investment. Total capital improvement expenditure will be between $6 million and $7 million. Question 4 - What are the occupancy and rate projections for future years? OPEN ISSUE: Please call to discuss. We may change our request for TIF based on the fact that the tax base for the increment is now $9.25mm. We need your input on this. 3 IIII I I j( )f I II )\( )'\ {( )\11'\\,;\ Question 5 - The way to increase meeting business is to provide additional meeting space that is flexible to use. To accomplish this, we would need the Dubuque Street Easement vacated in order to reconfigure the entire lobby level of the hotel. In working with local architects, we have designed a way to add nearly 4,000 square feet of desirable meeting space on the main level of the hotel. This space will be located proximate to the lobby and newly designed restaurant which will allow for maximum flexibility as groups using the space can break for meals into the restaurant and meeting attendees can also use the lobby as a gathering place to expand the use even further. The current hotel meeting space is located on the subterranean level of the hotel so this new, street level space will be a great enhancement. Attendees will also be able to move from the meeting space to the pedestrian mall easily and freely which makes not only the lobby, but the entire downtown experience interactive. The below table summarizes the declining group/catering revenue trend at the Sheraton: Banquet and Catering Revenues 2005 2006 2007 Food 1,243,000 1,193,000 980,000 Beverage 193,000 132,000 103.000 Total Revenues 1,436,000 1,325,000 1,083,000 Revenues per square feet $ 120 $ 110 $ 90 As you can see in the table above, banquet/catering revenues have been declining rapidly with the loss of group business. If we are able to expand the meeting space through the reconfiguring of the easement area, we feel we can get a lot of this business back with the renovated facility. Using the above revenue calculations on a square foot basis, we feel we can generate $125/square foot of food and beverage revenue from the incremental 4,000 square feet of space which equates to $500,000 of incremental catering/banquet revenue annually that sales tax will be paid on. The below table summarizes the capacities of the potential new meeting space: Meeting Space Capacities Meeting Space 1 Meeting Space 2 Total SF 1,876 2,105 Classroom 95 105 Theater 185 210 Banquet 115 130 Reception 160 180 4 IIII I ih) l ! l ht )'\ ('( )\1l'\\I\ Question 6 - We have not worked with a lot of other municipalities to get assistance for property enhancements. It is unusual for us to ask for any assistance. Quite frankly, this is a very unique situation where a property has so much deferred maintenance, has a public easement running through the center of the lobby, is positioned in the center of the downtown core and is located in a market with a very definable rate ceiling. All of these facts limit any potential return for an investor. That is why so many transactions fell apart on this asset and why it continues to change hands so rapidly. We see potential here for a great hotel in a very special community. We would not ask for assistance if it wasn't necessary. That being said, we do have a hotel in another university market that is physically attached to a city owned convention center. The convention center was failing and the city needed an experienced manager to operate it on their behalf to make it a viable business. We structured a deal with that city in which we would take over operations of the convention center in exchange for a $1 annual lease. The convention center and hotel are both now successful and the city is no longer losing money on the facility. We have been involved in that hotel and market since 1997. We are an active partner to both the city and the university. Question 7 - Weare requesting to purchase at market pricing no more than 80 parking spaces for hotel employee use. The Marriott Coralville is able to provide employee parking for free. Providing employee parking at a reasonable cost is a necessity to attract and retain qualified labor. Weare not asking for free parking or even for parking at a discount. Rather, we are asking to be treated fairly and pay the same monthly parking rate that all others pay for deck parking in downtown (monthly rate of $30/month/space (city employees) or $60/monthlspace). In addition, the City granted the hotel Vetro 17,500 hours monthly at a preferred rate when the 56 room hotel was built. That is 312.5 hours/room/month with no meeting space. The Sheraton added 2 floors and 60 rooms to the hotel several years ago and the base preferred parking time was not increased from the original 1983 amount of 60,000 hours per month. The Sheraton parking agreement provides only 256.5 hours/room/month and has 12,000 square feet of meeting space. At a very minimum, our preferred parking hours should go to 77,500 based on precedent. The renovated hotel will drive additional occupancy, and we will be focusing on group business. We need to be able to compete with the Marriott on offering competitive meeting packages to groups which includes the ability to provide affordable parking. 5 IIII I )\\ll )"( )" H(lIl (()\!I'\'-1\ As mentioned in our first letter to you dated March 24, 2008, we proposed the following resolutions: I) Amend the parking agreement. 2) Remove the Dubuque Street Easement ("Interior Easement") and enhance the exterior pathway. 3) Provide tax relief through TIF abatement, exemption or rebate. Given that the TIF may be the most costly to the City and in an effort to cooperate with the City and the local community, we will consider dropping the TIF request. In exchange, we ask that you consider the following: I) Provide the hotel with 80 dedicated parking spaces at a cost of $60/month/space. 2) Vacate the Dubuque Street Easement to allow for the meeting space expansion and an improved lobby experience. 3) Provide funding for the new pedestrian mall access pathway (from City funds available to enhance public works/art). Note: scope of work is currently being costed out. We look forward to working with you on the upcoming Economic Development meeting in late May and most importantly, the City Council meeting in June. We hope that all issues will be resolved no later than June 2008. Regards, r-rt71U; Thorn Geshay Sf. Vice President Davidson Hotel Company Ron Kim Vice President Davidson Hotel Company 6 n F=1 ~ ~~-) :7?>~~ ~ 'r"!'. (I. ~ \I.i.~ ~ ~~>,,, Q) ..;. '.~ -:T"j--l ~J - I .~ '-' ~ r~'~ I t) i I -... I . I _ I i ,t I ~ "J ! <t;. - -- -- ) -.., / ~// #7 ? C;).;sr.~ /(~ ~O, t'J &~ '/ .J.~--_/! P I rJ. ~4s' I G I "' .. ... ... 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