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HomeMy WebLinkAboutLetter - Lambert Advisoryramb,p-t AdvIsl-IJ October 18, 2016 Mr. Dan Rotenburg Director City of Miami Department of Real Estate Asset Management 444 S.W. 2nd Ave Miami, FL 33130 Dear Mr. Rotenburg: LambertAdvisory (Lambert) has completed its peer review of the Virginia Key Marina Feasibility Study (VKM Study) CBRE completed as of October 5, 2016. In preparation for the peer review Lambert reviewed the Virginia Key Master Plan, Resource Mapping and Water Depth Survey completed by Olin Hydrological Solutions, as well as in-house research and fieldwork information completed by Lambert over the past two years and more specifically completed forthis review. The VKM report essentially breaks down into four key subparts for purposes of our review: o Market Analysis of the Opportunity to Redevelop the Marinas on Virginia Key; o Physical Conditions/Physical Constraints Based Upon Available Information; o Redevelopment Financial Modeling; and, o Recommendations. We address each of these in order as to the reasonableness of the CBRE findings and conclusions. Overview of CBRE Findings - Market The CBRE market assessment finds that there is adequate demand to support 490 reconfigured wet slips and 648 dry storage slips in a enclosed multistory facility on Virginia Key for a total 1,138 wet and dry slips. The demand for both dry and wet slips is being driven by growing boating registrations at virtually every length of vessel, but particularly in relative terms among boats largerthan 45 -feet which almost exclusively require being docked in the water rather than in dry storage. Likewise, even without accounting for pent up demand, the growth of registered vessels between 32' and 45' means that there are an increasing number of boats which generally cannot be trailered and therefore need to be in a dry storage facility or wet slip marina. The CBRE market assessment found there was virtually no vacancy in competitive marinas and monthly lease rates for the better quality marinas in the market were between $30 to more than $40 per linear foot of boat length/month for wet slips and roughly $25 to $40+ per linear foot/month for dry slips. Based upon current market conditions, the CBRE report indicates that average achievable lease rates in a modern Virginia Key marina would be $40 per linear foot/month for boats in wet slips and $35 per linear foot/month of boats in dry storage given the excellent location of the marina with unimpeded access to open water, as well as the fact that the marina will be a modern amenitized facility. The average length of boat is projected by CBRE to be 60 feet in wet slips and 30 feet in dry slips and achievable occupancy would be 95 percent in both wet and dry facilities. Mr. Dan Rotenburg Our Peer Review Findings - Market Although we believe that it is important that CBRE provide additional guidance as to the mix of slips as it relates to length, as well as detail the type of slip features (i.e. type of electrical service, infrastructure on the pedestal) and appropriate mix of marina amenities so that the City would have a baseline against which to compare private partner proposals or help define a capital plan for its own needs, our data and information indicate that the CBRE conclusions as it relates to monthly rates average , boat length, and occupancy are reasonable. Unlike virtually any other real estate use in the City of Miami, there is a widening gap between demand for slips and dry storage facilities and supply. The permitting and regulatory bar is so high as it relates to the development of new marinas and even the redevelopment of existing marinas that the pace of new marina facilities has not kept up with the growing number of registered vessels in South Florida. Additionally, given that older marinas were built in an era where smaller boats were kept in the water and slips were often designed to accommodate these smallervessels, the need for new slips to accommodate larger vessels (over 60 feet in length) is particularly acute. As a result, we like CBRE have concluded there is adequate demand for a reconfigured wet slip and dry storage marina to accommodate up to 1,138 total vessels. Overview of CBRE Findings — Physical & Environmental Conditions/Constraints As is the case with our firm, CBRF repeatedly states in its report that they do not possess the engineering, environmental and related expertise to assess the physical and environmental conditions which will promote or limit the redevelopment of various elements of the Virginia Key marina and drive what could be substantial mitigation costs. However, based upon data which was provided by the City from what appears to be a credible third party analysis (Resource Mapping and Water Depth Survey completed by Olin Hydrological Solutions), the CBRE report highlights several specific areas associated with the physical and environmental conditions of the basins which are likely to substantially impact design and cost. The first of these is the existing water depth which range from 5 to 8 feet in the South Basin and 5 to 9 feet in the North Basin. CBRE indicates that these depths generally allow forthe docking of vessels up to 80 -feet in length, although limited to areas where 8 or 9 feet depths can be found. As a result, CBRE indicates that any new redevelopment of the South Basin in particular to accommodate larger vessels which is where the greatest gap in supply exists necessitates the dredging of the area to a uniform depth of 8 to 9 feet. However, and based upon CBRE's review of the environmental conditions reports provided by the City, the extensive presence of seagrass throughout the South and North basins are likely to make the permitting of dredging in either of these areas both a very lengthy and very expensive process. Indeed, CBRE raises the issue of the likelihood that completing the necessary dredging may not be possible due to the seagrass constraints. Our Peer Review Findings— Physical & Environmental Constraints After reviewing the same information provided by the City to CBRE associated with water depths we are very much of the same opinion as CBRE as to the need to conduct dredging in both basins to accommodate larger vessels. It is more valuable from a revenue perspective to dock these larger vessels given they cannot be accommodated in dry storage. This is in contrast to the smaller vessels which are docked in the South Basin today and can be more readily and more cost effectively housed in a building on racks given current technology/engineering. likewise, we believe the extensive presence of seagrass throughout the basins is going to make redevelopment exceedingly expensive. Our recent work for Port Miami identified an area of seagrass which was nowhere near as extensive as the one found within the North and South basins, and the cost to mitigate this area and associated dredging to accommodate a marina added $28 million dollars in additional cost making the 2 Mr. Dan Rotenburg development of a marina which could accommodate large vessels infeasible. We do not have the same level of concern as CBRE that the project may not be able to be permitted under any circumstances given the extensive presence of seagrass, but we do believe the relative cost to mitigate could very well lead to the same practical result. Given this, and based upon the information that we have been provided, we question the viability of the RFP's initial program requirements and subsequent proposals which were submitted to the City in response to RFP as it relates to the redevelopment of the slips in the South Basin and extensive wet slip development in the North Basin. It is important to note, that the constraints on wet slip redevelopment and development associated with dredging and seagrass will have little to no impact on developing a more efficient/safe upland dry storage marina. The vessels to be housed in a dry storage facility will have a maximum length of 45 feet (the majority will be less), and when in water draw less than the minimum depths currently found in the basins. As noted earlier, there is significant demand to support dry storage expansion on Virginia Key. Overview of CBRE Findinss , Redevelopment Financial Modelin The CBRE report includes a financial analysis which compares the development of the South and North Basins as proposed by the three respondents to the City's RFP in comparison to a scenario where the City would undertake the redevelopment. Among the RFP respondents, the cost of development ranges from $67 million to $100 million, not inclusive of mitigation and environmental constraints. Utilizing the low end range of the capital costs ($67 million, not including mitigation/environmental), and without consideration of debt leverage, the CBRE report finds that the City would achieve net revenue over a 10 -year period of $31 +/- million; or, the middle range of the three RFP responses. Our Peer Review Findings — Redevelopment Financial Modeling While the CBRE financial analysis is logical and clear in its structure, we believe it is unwise to rely upon the CBRE financial analysis for any decision making by the City given the high level of unknowns with regard to capital costs and mitigation costs which, as CBRE readily acknowledges, is beyond the ability of CBRE to provide or estimate with any precision without more specific engineering or environmental analysis. Even the three private proposals received by the City under the prior RFP process provide little guidance given that they contained great variability in estimated capital costs, ranging from $67 million to $100 million and cost per slip which vary by as much as 72 percent between the proposals. If the City does decide to proceed with its own redevelopment of the marina, we strongly recommend hiring a marine engineer and seagrass mitigation expert to estimate the capital cost of redeveloping the marina per the recommendations of the CBRE market study (with some further detailing of slip mix and amenities/features) and the range of cost and time associated with permitting, mitigating the seagrass and subsequent dredging. The analysis completed by CBRE also did not take into account the benefits of leverage/debt, When comparing between a number of private proposals the relative debt terms are not a factor. However, the potential utilization of tax exempt financing by the City if it were to develop and own the recreational marina without a private partner, all else being equal, could be 3 to 4 percentage points greater than if a private lessee were to develop the marina with taxable debt at lower coverage ratios. Of course, the guiding phrase in the ability to achieve and maintain the additional benefit associated with tax exempt vs. taxable debt are the words "all else being equal." The City would have to maintain the same ability to permit, design and manage the construction, establish market based salaries and achieve market operating costs, and establish a market based fee schedule which would float (no pun intended) with the broader market conditions without being subject to user review and input. Mr. Dan Rotenburg Overview of CBRE Conclusions/Recommendations Based upon the CBRE analysis, CBRE draws several key conclusions and makes several recommendations; • The market continues to be strong and the scale of the project as detailed within the City's earlier RFP and by each of the respondents to the RFP can be supported and perform well from a market perspective; • There is a high degree of risk in the project, not as a result of the market, but as a result of the potential inability and cost to dredge and mitigate the associated impacts on seagrass both in the South and North Basins. The dredging is necessary for redevelopment because the market opportunity for in water slips requires providing broad access to a wide range boats above 40 feet in length which require deeper depths throughout the marina than the marina currently provides; • Given the high degree of risk and associated unknowns, CBRE recommends the City transfer this risk to a private lessee who will be responsible for undertaking the analysis to determine an execution of mitigation, dredging and construction and the lengthy permitting process; and, • The City should ask respondents to submit a set absolute guaranteed rent rather than a base rent plus percentage rent to easily measure comparable financial returns between respondents. Our Peer Review of CBRE Conclusions/Recommendations As noted earlier, we concur with CBRE regarding the strength of the market and ability of the market to absorb an expanded wet slip and dry storage marina on Virginia Key. While we are more agnostic than CBRE as to who develops the marina (private lessee vs. City) considering there are arguments on both approaches as long as the City is able to treat its marina operation as an enterprise function of the City, in this particular case we strongly lean towards the private lessee model given the inherent high risk associated with permitting and unknowns associated with seagrass and dredging costs. The marina market is especially strong not because marina investors have not recognized the market opportunity; the marina market is as strong as it is because of the tremendously high bar regulators have placed on permitting or expanding wet slip (and only to a modest lesser degree, dry storage) which has significantly limited supply. Despite the three proposals submitted to the City indicating broad redevelopment of the existing South Basin and development of a substantial number of new wet slips in the South and North basins, the limited information we have reviewed raises concern that these wet slips will be able to be delivered as proposed. We also caution the City that it should not believe that because it is a municipality, it could have an easiertime working through the County, State and Federal approval processes. If the City were to decide it may want to develop the marina on its own, we would recommend the City engage in discussions with our past municipal clients of Miami -Dade County, PortMiami, the City of Ft. Lauderdale among others to better understand the level of scrutiny the permitting agencies placed on these public entities as they pursued redevelopment or expansion of marine facilities. Given the time and cost of going through the permitting process and a likelihood of not being successful in delivering substantially expanded marina facilities, we concur with CBRE that the time, cost, and effort required would best be shouldered by a private partner rather than by the City. The only place where the City may consider 4 Mr. Dan Rotenburg redeveloping new dockage is related to the dry storage facilities which are likely not dependent upon seagrass removal or dredging. However, even in the case of dry storage, a private operator will view the dry storage as an early program element which can be implemented prior to the wet slip redevelopment and in turn provide cash flow to support the permitting process. Dry storage is likely a necessary aspect of the operators entire business plan. Likewise, the City in order to realize the returns noted earlier, would still need to operate the dry storage as an enterprise, establishing pricing, wage rates, and other costs of operation consistent with the market as opposed to being driven by existing city policies or subject to debate and user input. As it relates to the structure of the agreement between the City and private operator we would recommend the following conditions: In contrast to CBRE, we believe that 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 overthe 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. As it relates to redevelopment opportunities, we recommend the lease include a "reverter clause" after 48 to 60 months to ensure that the wet slips revert back to the City should the private operator be unable to deliver the permits and associated project's redevelopment expansion as proposed. The reverter could apply to the wet slips only if the dry storage has been completed, but given the unknowns associated with seagrass mitigation and dredging, we believe the ability of the City to take back the wet slip elements of the project and rethink its redevelopment/revitalization is important after a reasonable period to obtain approvals and to begin construction has elapsed. The City should likewise insure through its agreements with the selected private partner that the City be provided on a regular basis all correspondence and material associated with the permitting process including any studies and reports produced by the investor group. We thank you for allowing us to prepare this peer review. Should you have any questions, please contact me at any time. Regards, V Paul Lambert Managing Principal cc. LeeAnn Korst, CBRE Michael McShea, CRBE Jeff Carson, CBRE Jason Spalding, CBRE