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HomeMy WebLinkAboutStaubach Info::70.;74ir Slick . R> f R One book sent to: Office of the Mayor Office of the City Manager The Department of Public Facilities (3 each) !27207 Table of Content ■ Introduction ■ Knight Center Utilization/Competitive Venue Analysis ■ Asset Management Strategies • Next Steps ntroduction ▪ In mid 2006, The City of Miami (the City) retained The Staubach Company (Staubach) as a real estate advisor to review the Knight Center assets • The "North side" assets (north of the I95 ramp) include the G4 parking structure, owned by the City and operated by the Miami Parking Authority, and the air rights leases to Blue Capital for retail space and office space pertaining to the Bank of America Tower, built above the G4 garage. The North side assets are cash producing properties, and would have the most value in the market as a consolidated acquisition opportunity for an investor. ■ The "South side" assets are comprised of the Knight Center auditorium and meeting space (owned by the City) and the ground under the Hyatt Regency Hotel (leased to Hyatt through the year 2070). These assets together produce only minimal cash flow. Accordingly, the South side assets have maximum value not in the operating businesses but in the underlying land. As a disposition candidate, the South side assets are a redevelopment opportunity, appealing to a different purchaser than the North side assets. • This report thus addresses the Knight Center assets as two different strategic/potential disposition opportunities for the City. • _ d {' K r'rr l E,. _, r 1 Knight Center Utilization/Competitive Venue Analysis • From fiscal year end 2004 through fiscal year end 2006, the number of events held at the Knight Center increased at a compound annual rate of 10.2%, from 75 events in 2004 to 91 events in 2006. However, revenue per event decreased at a compound annual rate of -5.6%, from 59,090 per event in 2004 to $8,093 per event in 2006. ■ Of the events held at The Knight Center from January 1, 2005 through November 30, 2006, for which Staubach was provided attendance data, 53% had attendance lower than 2,000; accordingly, one-half of the events at the Knight Center utilized less than half of the seating capacity. • During this same time period, the average attendance for events held at the Knight Center was 2,318. This average attendance is within the seating capacity of six of the seven competitive venues. ■ Knight Center Utilization/Competitive Venue Analysis • Of all the events held at the Knight Center from January 1, 2005 through September 30, 2006, three competing venues could have hosted every event, and four other venues could have hosted 46% to 59% of all events. • Of the 85 events (with attendance data) held at The Knight Center during this time period, approximately 45 were ticketed events. It is reasonable to project that all of these events could be accommodated in the other venues, particularly The Carnival Center, The Miami Dade Auditorium and The BankUnited Center. • Based on market research, the following findings/conclusions can be reached: • The vast majority of events occurring at the Knight Center have the potential to be held at other like venues. • The Knight Center is not a "low cost" venue; the costs are comparable to other venues in the Miami market. • The Knight Center is a venue that is functionally obsolescent, and. configurationally hampers event operations. Asset Management Strategies The Staubach Company team has identified a number of feasible scenarios for the City's review. 1. Status Quo or "Do Nothing" approach - The City continues to hold the assets "as is". The financial analysis of this scenario looks at the value of the cash streams being produced from the City's perspective, using the City's cost of capital and appropriate discount rates. — Benefits: No action needed by City. - Risks/Drawbacks : North side assets will continue to produce cash flow, but will not generate the cash needed to cover yearly bond payments; South side assets will continue to be underperforming, with operating losses from the arena essentially "zeroing out" existing cash flow from the Hyatt ground lease, resulting in a net "no value" for South side assets. The net operating income from the South side assets currently produces only a minimal return on land value, without factoring in the yearly bond payments that are required. The City additionally faces a minimum of $7.3M in capital expenditures associated with maintaining the Knight Center over the next 24 - 36 months. Asset Management Strategies 2. Cash Flow/Asset Sale of Air Rights Leases and G4 Garage - City takes this group of assets to the market, with existing rights/easements in place for the current garage users (the arena, hotel, University of Miami, and Bank Tower tenants). Benefits: - North side assets have probably reached the apex of real estate cycle in terms of value, based on dearth of comparable parking and high occupancy in the Blue Capital office building (Bank of America Tower), leading to high demand and the ability to boost rates, occupancy, and value. We estimate that the City will be able to access funds sufficient to retire the revenue bonds. In addition, the garage would become part of the City's tax rolls for the first time, and parking surcharge fees to the City will increase. — Risks/Drawbacks: City will lose operating control of the garage, but the net effect of this is probably minimal given existing easements/use agreements. City will have to get at least three market bids for the property to avoid referendum (charter) issues. Asset Management Strategies 3. Market Sale of Knight Center (as operating arena) and Hyatt Ground Lease In this scenario, the City sells the South side assets independently of Hyatt, with the primary goal of divesting the Knight Center arena and its operating losses. The City mandates that the Knight Center continue to be operated by the subsequent purchaser as an arena. Benefits: If a buyer could be located and a sale consummated, the City could theoretically withdraw from the yearly losses of the arena. Risks/Drawbacks: The South side assets have a very large inherent value due to the underlying land. However, the value of the Hyatt ground lease alone (leased fee value), as a separate and distinct disposition, is less than 50% of the value of the underlying land. Selling the arena as an "operating concern", with its $450,000+ per year operating loss, will negate the value that can be achieved in a market sale of these two assets. As such, there is very little to be gained under this scenario. r u.; kcal Asset Management Strategies 4. Market Sale (through RFP) and Redevelopment of South side Assets -- The City and Hyatt both agree to sell their interests in the South side assets, with Hyatt receiving a share of the proceeds from the disposition. The disposition could be either an outright fee disposition, or a new 50+ year ground lease from the City to a developer (or other entity). Hyatt could either exit the property with cash, or re-enter the property in a partnership with the developer as the operator and/or owner of a new hotel. 1 his redevelopment scenario could result in new construction of a first class hotel, conference, and meeting space of the size and quality envisioned by both the City and highly desired by the Greater Miami Convention and Visitors Bureau. Benefits: As discussed above, the South side assets have a large inherent land value, which could be accessed through a disposition. The City could also "steer" a disposition to a redevelopment concept they would support for downtown Miami, and in the meantime realize a large cash payment or a solid stream of future GL payments due to strong land values. Additionally, Hyatt has indicated that their preferred asset path for the hotel is not further investment, but disposition. This strategy allows the City to access the high value of the land under the South side assets, and is thus the preferred alternative for these assets. — Risks/Drawbacks: Clearly, the City would no longer have the Knight Center as an operating venue. However, we believe there are sufficient alternative venues ivailable to provide a reasonable Location for most if not all events. • Asset Management Strategies 5. Restructuring of Hyatt Lease In this scenario, the City and Hyatt negotiate a restructuring of the Hyatt ground lease to improve each party's position in the South side assets. Hyatt has indicated that if other aspects of a renegotiation were acceptable, they would continue to operate the arena on a dedicated function basis (with Hyatt on site employees), with no events that required ticket sales. Benefits: This scenario offers the next best alternative for the South side Assets, with the City removing the operating losses of the arena from its balance sheet while providing an opportunity to preserve the arena as a venue for non - ticketed events, should this be desired. An upgraded Hyatt Regency, with new and expanded conferencing space, would clearly generate vastly increased ground lease payments, providing ongoing value to the City. Risks/Drawbacks: Given City Charter section 29B, it may be necessary to conduct a referendum to gain the necessary authority to renegotiate (solely) with Hyatt. This effort will potentially have a better chance of success if the revenue bond is defeased prior to the negotiations or referendum effort. In addition, Hyatt has indicated that any strong commitment by Hyatt to the complex will require that the City remove the University of Miami. If Hyatt assumes the operations of the arena and eliminates ticket events the City will additionally lose its current ticket surcharge revenue, estimated at $160,000 for 2007. Next Steps We recommend the following next steps: • Confirm with the Bond Trustee that a disposition of individual or bundled assets is allowable in an effort to create a pool of funds to effect an "in substance defeasance" of the revenue bonds. • Continue to view the assets as "North side" and "South side" properties to maximize their value in a potential disposition (North side are cash flow assets, South side represents a development opportunity). ■ Take the North side assets to the market, with a consolidated package to sell the G4 garage, retail air rights lease, and office air rights lease. • While marketing efforts are underway for the North side assets, commence discussions with Hyatt regarding Asset Management Strategies 4 and 5 (outlined above). Determine the level of post disposition "payout" Hyatt will require for the ground lease to be eliminated following disposition to a developer. Proceed with either strategy 4 or 5 based on the response.