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Home My WebLink AboutSubmittal-Theodore Guba-Analysis of Rental Calculations-Virginia Key RFP Report(1Iitg of 41lthzmi THEODORE P. GUBA, CPA, CIA, CFE INDEPENDENT AUDITOR GENERAL DATE: February 23, 2017 TO: HONORABLE MAYOR AND COMMISSIONERS FROM: THEODORE GUBA, CPA, CIA, CFE RE: ,uhmitted into the public record fey ite (s) NI On Z 1 Z3 117 . City CIerk Telephone (305) 416-2044 E-Mail: tgubamiamigov.com REQUEST TO PERFORM AN ANALYSIS OF RENTAL CALCULATIONS SET FORTH IN THE VIRGINIA KEY REQUEST FOR PROPOSAL (RFP NO. 16-17-011) REPORT NO. 17-01 On February 9, 2017, a Commissioner requested that we perform an analysis of rental calculations set forth in the Virginia Key request for proposal (RFP NO. 16-17-011). The proposal is for the development and lease of prime City -owned waterfront property in Virginia Key. The goal of the RFP is to create a vibrant recreational marina and restaurant destination with an ancillary ship's store facility for City residents, guests, and visitors. As a part of the analysis, we reviewed the rent required in the most recent draft RFP, as well as the fair market value of rent determined by two appraisals conducted by independent state -certified appraisers as of May 2015 (Waronker & Rosen, Inc., [Waronker] and Joseph J. Blake and Associates, Inc. [Blake]); as well as two fair market appraisals conducted by the same two independent appraisers as of June 2016. We also provided comments from a consultation report on the Virginia Key property dated October 20, 2016 by CBRE-Valuation & Advisory Services; and a peer review of CBRE's study conducted by Lambert Advisory dated October 18, 2016. Analysis of Rental Calculations: We reviewed and analyzed the 2016 Waronker and Blake proposals in light of the 2017 RFP requirements, which are as follows: "The rent shall be inclusive of Base Rent as well as Percentage Rent." • The Base Rent should be greater than or equal to $2,150,000, PLUS a percentage(s) of gross revenues as follows: • The Percentage Rent should be equal to or greater than: O 6% of wet slip and dry storage operations O 6% of fuel sales O 4% of sublease income or other income OFFICE OF THE INDEPENDENT AUDITOR GENERAL, 444 S.W. 2`D AVENUE, 7"' FLOOR, MIAMI, FLORIDA 33130-1910 \C6I\\- 5\)\)14-01/4\- iheocuce ubc1/4,— L0\15'1oC -e,A\0\ Co\co�a ores—U,(1A (61��I � Submitted into the public record Apr it m s) on Le L r I . City Clerk Appraisers Used Different Appraisal Approaches Upon reviewing the 2016 Waronker and Blake proposals, we noted that their respective value opinions of market rent differed (Waronker: $1.9 million; Blake: $3.1 million) because they used different appraisal approaches in order to derive estimated market rent. The Waronker appraisal used the "Income Approach" in order to derive estimated market rent by first performing analyses of comparable marina sales and capitalization rates (cap rates); then, using the formula: Income = Rate x Value (a/k/a the "IRV" formula), Waronker multiplied the derived cap rate of 6% by the comparable sales value of approximately $32 million, and derived estimated market rent of $1.9 million. (See Exhibit 3, Page 7). In contrast, the Blake appraisal did not use the "Income Approach" in order to derive estimated market rent. At the request of the City, Blake estimated market rent based on the plans of the highest ranked proposer, RCI Group (RCI). Accordingly, Blake derived a $3.1 million estimated market rent by using market wet and dry boat slip rates, boat length averages, market upland (retail space) rental rates, market fuel sales, and projected restaurant sales per square foot (See Exhibit 4, Page 7). Comparison of 2015 and 2016 Appraisals We also compared and contrasted the 2016 appraisals with appraisals that were performed in 2015. We noted that the Blake 2015 appraisal estimated market rent using RFP requirements; however, as noted above, the 2016 estimate of market rent was based on RCI's proposed plans which includes an additional 3,000 square feet (for a total of 9,000 square feet) for a second restaurant, as well as increased wet and dry slip rental incomes that were based on increases in average boat lengths and rental rates. Compared to Blake's 2015 projection, these items increased Blake's 2016 projection for market rent by $988,476 as indicated in the schedule below: 2015 Blake Estimate (Est.) - Slips & Restaurants Only Wet Slips Dry Slips Boat Length 45 30 Subtotal Rental Yearly # of Yearly Rev. Rate Slip Rent Slips (Less Loss) $27.50 $14,850 490 $6,912,675 $17.50 $6,300 648 $3,878,280 Rent Rate 15% Est. Rent To City $1,618,643 2015 Est. Slip Revenue (Blake) $10,790,955 Est. Rest. Rev. Sq. Ft 6,000 Sales/SF Yearly Income $500 $3,000,000 7.5% $225,000 Total 2015 Est. Slip and Restaurant $13,790,955 Rev.(Blake) $1,843,643 2016 Blake Estimate (Est.) Wet Slips Dry Slips 53 35 $37.50 $23,850 162 $3,747,789 $32.50 $13,650 973 $12,883,007 15% $2,494,619 Total 2016 Est. Shp Revenue $16,630,796 (Blake) Est. Rest Rev.. Sq. Ft 9,000 Sales/SF Yearly Income $500 $4,500,000 7.5% $337,500 Total 2016 Est. Slip and Restaurant $21,130,796 Rev.(Blake) $2,832,119 DIFFERENCE $988,476 2 Submitted into the public record or it m(s) —� on 1, Z3 L . City Clerk We also noted that the Waronker 2015 appraisal was based on the current usage of the Virginia Key site, which includes the Rickenbacker Marina (leased and operated by Rickenbacker Marina, Inc.) and the Marine Stadium Marina which is solely operated by the City. Waronker estimated the total market rent based on current usage on Virginia Key to be $1.2 million (See Exhibit 1, Page 5). Conclusions and Summary: Our analysis of the 2015 and 2016 appraisals disclosed differences in the Waronker and Blake estimates due to the use of different appraisal approaches. Also, the 2015 Waronker appraisal was based on then current usage estimates and the 2015 Blake appraisal was based on RFP requirements. However, as described above, and confirmed with City staff, significant differences in the Blake 2015 and 2016 estimates are mainly attributed to RCI's plans to increase wet and dry slip lengths. Accordingly, the 2016 Blake appraisal reflects increased slip rental rates based on increased wet and dry slip sizes and boat lengths. Consequently, the amount charged per linear foot and resulting monthly rates, the number of slips, and the total annual slip revenue varied significantly. As shown in the table below, wet slip rent ranged from $343,000 to more than $1 million, and the dry slip rent ranged from $535,000 to more than $1.9 million for three of the appraisals due to different approaches to value, assumptions in monthly rates, and number of slips. Finally, we were informed by City staff that once a proposal is selected by the City Commission, two additional appraisals will be performed in order to assess a market lease rate which will be the basis of lease and development agreement negotiations with the winning proposer. j I I Estimated Rent To City Monthly Rate ....._.._.._......_# Wet Dry of of.._...._..__...... Total Slip Total ..................._.._# Wet Dry Wet Slip Dry Slip Revenue Slip Slip Rent RFP 2017 $2.15 M Waronker E 2015 RMI $1,000 ; $850 ! 190 298 $342,000 ' $364,752 $706,752 ............._.................__....__...._.. ;......................._.... , ._.........._.. 22 296 $990 $170,496 $171,486 $1.24 M ------- Marine Stadium a$25 $400 Waronker 2015 Totals $1,238 $525 212 594 ; $342,990 $535,248 ; $878,238 1 $2.15 M Blake 2015 ; 490 648 1 $1,036,901 ; $581,742 $1,618,643 Waronker 2016 $1.9 M Note: The estimated $1,988 total rent $1,138 was derived by multiplying a 6% cap rate by estimated land value. Blake 2016 ; 162 973 $562,168 I $1,932,451 $2,494,619 $3.14 M a -Transient boaters 3 Submitted into the public record for 3 ern(s) b1. 3 on I I l'] . City Clerk COMMENTS ON RENT BY CITY CONSULTANTS, CBRE AND LAMBERT ADVISORY, DATED OCTOBER 2016 CBRE — "Our recommendation to the City, is to put this project back out for bid and request guaranteed annual incomes and not base rent plus percentage rents. That way, the highest guaranteed net rent bid should win the contract." Lambert Advisory — "In contrast to CBRE, we believe the City's land lease be structured as base, plus percentage rent; or, structured as the greater of base rent or percentage rent. We have read far too many older long term ground leases over the past several years, both private/private leases and public/private leases where base rents with a set increase are wildly off the market 30 or 40 years after they were written. The addition of percentage rent or greater of base or percentage can help protect against this. However, if the City elects to structure the lease as base rent only, then we recommend the lease incorporate periodic rent re -openers to ensure the City is achieving maximum applicable revenue based on prevailing market conditions." We wish to express our appreciation for the cooperation and courtesies extended to us by the Department of Real Estate and Asset Management (DREAM) staff while conducting the review. cc: Daniel J. Alfonso, City Manager Victoria Mendez, City Attorney, Office of the City Attorney Nzeribe Ihekwaba, Assistant City Manager/Chief of Operations Alberto Parjus, Assistant City Manager Fernando Casamayor, Assistant City Manager/Chief Financial Officer Daniel Rotenberg, Director, DREAM Jose Fernandez, Director, Finance Department Jacqueline Lorenzo, Property Management Specialist, DREAM Members of the Audit Advisory Committee Audit Documentation File Analysis conducted by: Lewis Blake, CPA, CIA, Audit Manager Work papers reviewed by: Robyn Sachs, IT Audit Administrator, CPA, CIA, CISA, CISSP 4 Submitted into the public recor�for q i3Th UI,�. on / L City Clerk EXHIBITS - SUMMARY OF APPRAISED RENTS FOR VIRGINIA KEY DEVELOPMENT AND LEASE 1) MAY 2015 WARONKER & ROSEN, INC., APPRAISAL The objective of the appraisal was to estimate the land value and the market rents ($1,242,109, as indicated in the following schedule) based on the property's current usage and number of boat slips (Rickenbacker Marina — 190 wet slips, 298 dry slips; Marine Stadium Marina — 22 wet/transient dockage, 296 dry slips) May 2015 - Waronker & Rosen Appraisal - Based on Current Usage Revenue Center # of Slips Annual Rate Projected Annual Rev. % Rent Rate Projected Rent To City Rickenbacker Marina Wet Slips 190 ;; $12,000 $2,280,000 15% $342,000 Dry Slips 298.., $10,200 $3,039,600 12% $364,752 Subtotal: Rev. 488 from Wet & Dry $5,319,600 $706,752 Slips % of Boat Boat Storage Storage Rev. Rev. Fuel Sales 30% $1,595,880 5% $79,794 Other 43% $5,319,600 $2 287 428 5% $114,371 Subtotal: Rev. from Fuel, Other $3,883,308 $194,165 Square Footage Sales/SF (SF) Restaurant 10,500 $150 $1,575,000 10% $157,500 Rickenbacker Marina Totals $10,777,908 $1,058,417 Marine Stadium Marina Monthly Rate Transient Dockage (Wet) 22 docks $25 $6,600 15% $990 Dry Slips 296 boats $400 $1,420,800 12% $170,496 Subtotal: Rev. from Transient & Dry Slips $1,427,400 $171,486 % of Boat Boat Storage Storage Rev. Rev. Fuel Sales 15% $214,110 5% $10,706 Licenses & Miscell. Inc. Not Applicable $1,427,400 $30,000 5% $1,500 Subtotal: Rev. from Fuel, Other $244,110 $12,206 Marine Stadium Marina Totals $1,671,510 $183,692 Total Projected Revenues & Rents to City $12,449,418 $1,242,109 - Monthly rate of $1,000/slip - Monthly rate of $850/slip 5 Submitted into the public rccor�f�OLt� ��s) on ICity Clerk 2) MAY 2015 JOSEPH J. BLAKE AND ASSOCIATES, INC. APPRAISAL The objective of the appraisal was to develop an opinion of the market rent of the property ($2,150,903, as indicated in the following schedule) according to the requirements of the City of Miami's Virginia Key Marina RFP (490 wet slips, 648 dry slips) May 2015 - Blake Appraisal - Based on RFP Requirements Annual Projected % Rent Projected Revenue Center # of Slips Rate Annual Rev. Rate Rent To City Wet Slips 490 $14,850 $6,912,675 15% $1,036,901 Dry Slips 648 $6,300 $3,878,280 15% $581,742 Subtotal: 1138 Rev. from $10,790,955 $1,618,643 Wet & Dry Slips Tot # of Slips Sales/slip Fuel Sales (per slip) $1,500 $1,707,000 5% $85,350 Other 1,138 $2,300 $2,617,400 5% $130,870 Sublease $200 $227,600 40% $91,040 Subtotal: Rev. from $4,552,000 $307,260 Fuel, Other & Subleases Total Wet & Dry Slip, Fuel, Other & Sublease Rev. $15,342,955 Subtotal $1,925,903 1 Restaurant Square Sales/SF Footage (SF) 6,000 $500 $3,000,000 7.5% $225,000 Total Total Projected Revenue $18,342,955 Projected Rent to City - Average boat length 45' - average rate of $27.50; or a monthly rate of $1,237.50/slip - Average boat length 30' - average rate of $17.50; or a monthly rate of $525/slip - A 5% vacancy/collection loss is factored into the projected slip annual revenue S2.150,903 6 Sales/SF Submitted into the public record fp- i is) 01.i on 2. i City Clerk 3) JUNE 2016 WARONKER & ROSEN, INC., APPRAISAL The objective of the appraisal was to develop an estimate of the market rent for the property by first estimating the market value of the Virginia Key site (approximately $32 million) by comparing sales of similar properties to the site; then, a market -driven capitalization (cap) rate (6%) was estimated by analyzing investor surveys and recent sales of net leased assets. Finally, using the 6% cap rate, the appraiser applied the cap rate to the $32 million estimated land value ($32 million x 6%) and derived an estimated rent of $1.9 million as of June 6, 2016. 4) JUNE 2016 JOSEPH J. BLAKE AND ASSOCIATES, INC. APPRAISAL The objective of the appraisal was to develop an opinion of the market rent of the property ($3.14 million, as indicated in the following schedule) according to the submitted plans of the highest ranked proposal by the RCI Group and adjusting to exclude 151 basin wet slips, resulting in 162 wet slips and 973 dry slips. June 2016 - Blake Appraisal - Based on RFP Requirements Projected % Rent Projected Revenue Center # of Slips Annual Rate Annual Rev. Rate Rent To City Wet Slips 162 $23,850 $3,747,789 15% $562,168 Dry Slips 973 $13,650 $12,883,007 15% $1,932,451 Subtotal: Rev. 1135 from Wet & Dry $16,630,796 $2,494,619 Slips Tot # of Slips Sales/slip Fuel Sales (per slip) $1,500 $1,702,500 5% $85,125 Other 1,135 $2,300 $2,610,500 5% $130,525 Sublease $200 $227,000 40% $90,800 Subtotal: Rev. from Fuel, $4,540,000 $306,450 Other & Subleases Total Wet & Dry Slip, Fuel, Other & Sublease Rev. $21,170,796 Subtotal $2,801,069 Square Footage (SF) 2 Restaurants 9,000 $500 $4,500,000 7.5% $337,500 Total Projected Revenue $25,670,796 Total Projected Rent to City — Average boat length 53'; average rate of $37.50; or monthly rate of $1,987.50/slip — Average boat length 35'; average rate of $32.50; or monthly rate of $1,137.50/slip — A 3% vacancy/collection loss is factored into the projected slip annual revenue $3,138,569 7