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HomeMy WebLinkAboutCRA-R-16-0026 Backup 3/30/16March 9, 2016 Mr. Clarence E. Woods Executive Director, SEOPW CRA 819 NW 2nd Ave., 3rd Floor Miami, FL 33136 Dear Mr. Woods: We have completed a draft of our review of various financial operating and funding aspects of the proposed Miami Marriott Marquis Hotel & Expo Center Project (Project). This review is based on information provided to us, which has not been audited or otherwise verified. Specific information reviewed include the following. • Analysis of cash flows available for debt service and income taxes. • Estimates of project rate of return. • Analysis of various tax increment calculations and other tax revenue implications. • Concept drawings and sellable space totals for the Project. • Summaries of funding for other large hotel projects nationally. We note that square footage totals included in documents provided to us reflect 400,000 square feet of Meeting/Pre-Function Space. However, specific sellable space components (exhibit, meeting and ballroom space) have not been provided. Actual space totals may impact cash flow projections. Cash Flow We have not prepared a detailed analysis of specific cash flow line items, however working with colleagues in the hospitality industry, several high-level comments have been prepared. Conventions, Sports & Leisure International 520 NicolletMall • Suite 440 •Minneapolis, MN55402 • Telephone 612.294.2000 •Facsimile 612.294,2045 Mr. Clarence E. Woods Page 2 of 4 • Rate and occupancy reflect the significantly positive hotel economic conditions in the market. As there will be a reliance on group demand, there may be a downward pressure on rate that could be reflected in more conservative assumptions. • The high food and beverage revenue is reflective of the significant amount of sellable space. Significant changes to the space program may impact these revenues. • Assumptions indicate a significant amount of minor operated departmental and spa net revenue. Scenarios with slightly more conservative assumptions in these areas have been developed. • Marketing expense at two percent may be low. • Replacement reserves could be as high as 4 percent in later years. These comments are based solely on a cursory review. Importantly, given the public financing request (portion of project TIF), there don't appear to be any impacts on the City associated with the actual financial operating performance of the project. Costs Hotel project costs are presented as $409,022,914, with $290,720,000 for the conference facilities and $50,257,741 for structured parking. Combined project costs stated as $750,000,665. The per -room hotel costs are approximately $227,235. If we assign a portion of the conference costs to the hotel to account for a typical hotel development package, per -room costs could approximate $307,991, and $321,951 per room if one-half of the parking costs are included. It is prudent to prepare financial assessments that consider the possibility of these totals being somewhat low for a project of this type. A slightly more conservative scenario showing a 10 percent increase in hotel costs has therefore been prepared. Funding Development of large convention hotels requires significant capital investment, lengthy construction periods, and a level of risk that is greater than for smaller hospitality projects. At the same time, the public sector in many U.S. markets sees significant value in these large projects in terms of generating new visitation and associated economic impact. As a result, nearly all large convention hotel projects (including the proposed hotel adjacent to the Miami Beach Convention Center) incorporate some level of public financial support. In some eases (Dallas, Denver and Houston, for example) a fully public corporation is formed to issue bonds to fund and own the project. In other cases Mr. Clarence E. Woods Page 3 of 4 (Nashville, Indianapolis, for example), private development and ownership of the hotel is retained, with some form of public financial support, often including TIF financing. In documents we have reviewed, the hotel construction costs are estimated at $409.0 million, with a cost for the conference facilities of $290 7 million. At a 65 percent TIF contribution, this represents approximately 18.5 percent of the project, (or 12.2 percent if the community benefits are considered). The level of public support can also be viewed as a percentage of the hotel costs (13.2 percent). In this context, the public support is less as a percentage of construction costs than convention hotels developed in Houston, Indianapolis and Nashville. Very importantly, none of those projects included event space as large as that planned for the downtown Miami Project. As a percentage of the total Project cost, the assumed 65 percent contribution of TIF equates to 7.2 percent. This level of public support for a high -impact generating project is relatively low considering other large convention hotel projects nationally. Return The cash flow analysis and various cost estimates yield an unlevered internal rate of return (1RR) of 12.73 percent, dropping to 11.48 percent without the CRA TIF contribution at 65 percent of collections. We have also prepared a revised analysis showing several adjustments to cash flow reflective of comments above and hotel costs at 110 percent of current estimates. Under these conditions, the unlevered IRR is 8.05 percent, or 6.71 percent without TIF contribution. We have also prepared a high-level hypothetical estimate of levered IRR assuming 55 percent debt, 6 percent cost of borrowing and a 30 year term. Cash flow, Project cost and terminal sale value assumptions are taken from the original analysis, and are not adjusted for the conservative scenario. The resulting leveraged IRR approximates 14.9 percent with TIF, and 12.8 without. These figures drop significantly under the conservative scenario. These return on equity figures could be considered somewhat low given the cost and risk associated with the project. It is also useful to compare unlevered IRR statistics to a weighted average cost of capital, assuming a 21 percent return on equity and a borrowing rate of 6 percent. If we assume 45 percent equity financing and 55 percent debt, the weighted average cost of capital is approximately 12.8 percent. Under the original assumptions presented to us, unlevered IRR is roughly equivalent to WACC with the TIF, and less than WACC without the TIF. Unlevered IRR is significantly less than WACC using the somewhat more conservative assumptions. This type of analysis highlights the risk position of the investor in a very large scale and complicated project. Mr. Clarence E. Woods Page 4 of 4 Based on the accumulation of assessments presented above, the concept of public support for the project in the form of a TIF would be very consistent with comparable major market convention hotels developed in the past several years, the actual financial contribution would result in a lower percentage of public participation compared to other headquarter hotel projects reviewed, and would not result in IRR levels unreasonably high for the developer. We appreciate the opportunity to provide our assistance during your evaluation of the Project. Please don't hesitate to contact me with any questions or comments you may have as the review process continues. Sincerely, John T. Kaatz CSL International