HomeMy Public PortalAbout2016-02-16 Final Jefferson City Truman Hotel But-For
Truman Hotel Project
City of Jefferson, Missouri
But-For Determination Report
February 16, 2016
1 EXECUTIVE SUMMARY ....................................................................... 1
2 PURPOSE .......................................................................................... 3
3 THE PROJECT.................................................................................... 5
4 ASSISTANCE REQUEST ...................................................................... 8
5 RETURN ANALYSIS .......................................................................... 10
6 CONCLUSIONS ................................................................................ 14
Mission Statement
Springsted provides high quality, independent financial
and management advisory services to public
and non-profit organizations, and works with them
in the long-term process of building their communities
on a fiscally sound and well-managed basis.
Table of Contents
Executive Summary 1
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
1. Executive Summary
The City of Jefferson has retained Springsted to review the proposed Truman
Hotel Tax Increment Financing Redevelopment Plan to determine if the
proposed development would reasonably be anticipated to be developed without
adoption of the requested financial assistance. The proposed development
would provide for the redevelopment of the existing Truman Hotel and
Conference center with the construction of a 121-room Holiday Inn & Suites,
the construction of a 145-room Courtyard by Marriot, and the renovation,
upgrading and modernizing of the existing conference facility. The developer is
the Puri Group of Enterprises, (the “Developer”).
The measurement index to determine the need for assistance is the return on
investment given similar developments, termed the internal rate of return, (the
“IRR”). Springsted reviewed Project costs, operating revenue and expense
information, and the requested assistance revenues to determine the Project’s
need for assistance. Springsted reviewed ten-year cash flow projections
provided by the Developer and tested the revenue and cost assumptions
prepared by the Developer. The testing compared the Developer’s
representations to industry benchmarks. We determined the following:
The projected IRR without assistance to the Developer falls below the
current range expected within the marketplace, and the Developer’s
own return requirement. Based on the projected level of return without
assistance we conclude the Project is unlikely to be undertaken without
the requested public assistance.
The development would have to realize either savings in project costs,
increases in project revenue, or a combination of the two for the Project
to be undertaken without the requested assistance.
The base return without assistance is illustrated in Table A below, along
with the rate at which assumptions would have to change for the Project
to be considered feasible without assistance.
Table A
Internal Rate of Return (IRR) – Return Analysis
Analysis Change Necessary
to be Feasible*
Return without
Subsidy
Base Developer Return N/A 7.27%
Decreased Costs 13% Decrease 9.24%
Increased Project Revenue 15% Increase 9.25%
Combined Cost Savings
& Increased Project Revenue
7% Decreased Costs
7% Increased Revenue 9.26%
*The feasibility threshold for purposes of our sensitivity analysis was defined as an internal rate
of return of 9.20% per our modification to the Developer’s return as discussed in the return
calculation portion of this report.
Executive Summary 2
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
For purposes of performing our sensitivity analysis we have utilized an
unleveraged return of 9.20% based on our modification to the
Developer’s base pro forma, to calculate the return on an unleveraged
basis for the two combined phases of the project. The Korpacz/Price
Waterhouse Cooper Real Estate Investor Survey identifies the range of
returns for a project of this nature as: 8.50% to 13.00%, with an average
return target of 10.48%. We have utilized the lower of these two
returns as this represents the most conservative assumption.
Purpose 3
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
2. Purpose
The City of Jefferson has retained Springsted to review the proposed Truman
Hotel Tax Increment Financing Redevelopment Plan. The proposed
development would provide for the redevelopment of the existing Truman Hotel
and Conference center, a 233-room non-flagged convention hotel. The
Developer is proposing the project will include the demolition of the existing
hotel buildings, the construction of a 121-room Holiday Inn & Suites, the
construction of a 145-room Courtyard by Marriot, and the renovation and
remodeling of the existing conference facility. Additionally, the Developer will
undertake the necessary site work improvements as part of the development.
The Developer is requesting assistance in the form of Tax Increment Financing
(“TIF”).
The Developer is proposing the redevelopment will occur in two phases, with
the first phase consisting of the 121-room Holiday Inn and Suites and on-site
restaurant and the second phase consisting of the 145-room Courtyard by
Marriot and the renovation of the conference facilities. The Developer is
proposing the creation of individual Redevelopment Project Areas (“RPA”) for
each phase of the project, with the activation of each RPA timed to coincide
with the start of each phase. The Developer anticipates construction on RPA 1
(Holiday Inn Suites and restaurant) will begin in 2016, with completion
expected in the fall of 2017. RPA 2 (Courtyard by Marriot and conference
facilities) is projected to begin in the fall of 2018, with completion expected in
the spring of 2020.
The City has requested this analysis to determine the need for the requested TIF
assistance, based on the cost and operating pro forma information provided by
the Developer. The analysis that follows examines whether the proposed
development would reasonably be anticipated to be developed without the
adoption of the requested financial assistance. For the purpose of our review,
we are basing our analysis on the development as a whole, collectively referred
to as the “Projects,” and not by individual RPA.
The report that follows is pursuant to Missouri Statutes 99.800 et seq. relative to
a determination that the proposed Projects within the proposed TIF
Redevelopment Plan would reasonably be anticipated to be developed without
the adoption of the Plan.
We have approached this determination based on the proposed plans regarding
development costs, outcomes, financing sources, and timing, to develop a
measure of the Developer’s expected return when compared to the amount of
risk. If the development is owned and operated as an investment, a measure of
return is calculated considering the time value of money and involves an
assumed sale of the property at a price appropriate in the market place. This
analysis is termed the internal rate of return. The final determination is based
on whether or not the potential return is reasonable without the requested
assistance, within the current marketplace and at the present time.
Purpose 4
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
The Developer is requesting the following assistance:
- Statutory TIF - One hundred percent of the incremental increase in ad
valorem property tax revenues (“PILOTS”) along with 50% of the
incremental increase in economic activity tax revenues (“EATS”) which
will be captured and re-directed to pay for new eligible reimbursable
redevelopment project costs incurred by the Developer
Project 5
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
3. The Project
The proposed Projects consist of the development of; a five-story 121-room
business class hotel with an indoor pool and restaurant, a four-story 145-room
business class hotel and redevelopment of the existing conference facilities.
The Developer will construct the Projects in two phases, with the first phase
occurring between 2016 and 2017 and consisting of the 121-room hotel and
restaurant. The second phase will consist of the 145-room hotel and the
conference facilities, which will be constructed between late 2018 and early
2020.
In addition to the hospitality components of the development, the Developer
also intends to undertake all necessary improvements to develop the site
including demolition of the existing buildings, reconfiguring of parking lots and
ingress/egress, landscaping and lighting, new signage and other on-site
improvements.
The Developer has provided the following redevelopment project budget broken
down into the following categories: land acquisition, site construction costs,
building shell costs, grocery furniture, fixtures, & equipment, soft costs, and
hard cost contingency.
Table B
Project Costs Category Total Project
Cost
% of Total
Costs
Developer
Costs
TIF Reimbursable
Costs
Property Acquisition $4,250,000 7% $4,250,000 $-
Demolition and Site Improvements 9,620,000 17% 5,070,000 4,550,000
Building Costs 27,253,000 48% 26,953,000 300,000
Studies and Professional Services 7,440,000 13% 4,850,000 2,590,000
Financing Costs 2,550,000 5% 1,750,000 800,000
Contingency 5,685,300 10% 5,035,300 650,000
Total Redevelopment Project Costs $56,798,300 100% $47,908,300 $8,890,000
Land Acquisition
The Developer’s land acquisition cost is $4,250,000, which is approximately
7% of the total redevelopment project budget. The amount is based on the
Developer’s July 2013 purchase price for the property. The Developer is not
seeking reimbursement for costs associated with the acquisition of the
development site.
Hard Costs
The Developer prepared a total budget for demolition, landscaping and common
area improvements of $4,550,000, which represents approximately 8% of the
total project cost. Additionally, they prepared a budget for the construction of
the new buildings and Furniture, Fixtures, and Equipment (FF&E) which totals
$32,323,000, and represents approximately 57% of the total project cost. Table
C below provides the breakout of the individual costs which we have
categorized as hard costs.
Project 6
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
Table C
Hard Costs Phase
One
Phase
Two Total Costs % of Total
Costs
Developer
Costs
TIF
Reimbursable
Costs
Demolition $300,000 $450,000 $750,000 1.32% $- $750,000
Landscaping 75,000 125,000 200,000 0.35% - 200,000
Public Space FF&E 1,845,000 3,225,000 5,070,000 8.93% 5,070,000 -
Common Area Improvements 1,700,000 1,900,000 3,600,000 6.34% - 3,600,000
New Buildings 10,685,000 16,568,000 27,253,000 47.98% 26,953,000 300,000
Total Hard Costs $14,605,000 $22,268,000 $36,873,000 64.92% $47,908,300 $4,850,000
The largest of the hard costs is the $27,253,000 associated with the construction
of the two new hotel buildings and the redevelopment of the conference center
facility within phase two. The total cost of constructing the building, after
factoring in the FF&E costs, totals $32,323,000, which equates to a per square
foot cost of $140.53; when broken down by the individual projects, the per
square foot cost for RPA 1 is $147.41, while the cost for RPA 2 is $136.50.
The Developer is seeking reimbursement for approximately $300,000 of costs
associated with the construction of the vertical improvements and no assistance
for FF&E expenses.
To analyze the Developer’s cost assumption for the construction of the vertical
improvements, we compared the cost estimate to the RSMeans Square Foot
Estimator for construction costs for the proposed building types in the Jefferson
City metro area. The RSMeans data provides a range of cost estimates for the
construction of vertical building improvements. The RSMeans estimate for the
building size proposed for RPA 1, range from $142.49 to $161.49; while the
estimate for the building size proposed for RPA 2, range from $137.61 to
$152.66. Based on this review it appears the Developer’s building cost
assumptions are reasonable.
In regards to costs associated with demolition, landscaping and common area
improvements, the total costs for these categories is $4,550,000, which is
approximately 8% of the total budget and equates to approximately $19.78 per
square foot. For these expenses, the Developer is seeking reimbursement of
100% of the anticipated expense. If the Developer is reimbursed with TIF
proceeds on an as incurred basis, in the event there are project cost savings in
these areas and if the TIF budget is adjusted accordingly, then these savings
would not result in an increased benefit to the Developer.
Soft Costs
Table D below provides the breakout of the individual costs which we have
categorized as soft costs:
Table D
Soft Costs RPA
One
RPA
Two Total Costs % of Total
Costs
Developer*
Costs
TIF*
Reimbursable
Costs
Architecture, Engineering, Survey $450,000 $590,000 $1,040,000 1.83%
Insurance, Permits, & Inspections 300,000 500,000 800,000 1.41%
Project 7
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
Administrative/Overhead 300,000 450,000 750,000 1.32%
Legal 250,000 300,000 550,000 0.97%
Developer Fee 1,500,000 2,800,000 4,300,000 7.57%
Total Soft Costs $2,800,000 $4,640,000 $7,440,000 13.10% $4,850,000 $2,590,000
*The Developer did not provide an itemized breakout of the specific line-items
they were seeking assistance for, just the total amount applicable to these
collective line-items.
The individual line-items we have categorized as soft costs total $7,440,000,
which equates to approximately 13% of the total project costs. Out of these
total costs the Developer is seeking assistance for $2,590,000, though they did
not identify the specific soft cost line-items for which they are seeking
reimbursement. The largest of these costs is the Developer Fee which is
$4,300,000 and represents approximately 7.57% of the total project cost.
Financing Costs/Construction Interest
The Developer’s estimate for financing costs and interest incurred during the
construction period of both phases is approximately $2,550,000. This cost
equates to approximately 5% of the total project cost. The Developer is seeking
reimbursement for approximately $800,000 of costs associated with this
category. Construction cost interest equating to 5% of the total project costs,
and the assumption that construction is going to take place over multiple years,
indicate this is a reasonable cost estimate.
Hard and Soft Cost Contingency
The total project contingency cost estimate is $5,685,300; with $3,687,300
attributable to hard cost contingency and $1,998,000 attributable to soft cost
contingency. The Developer is seeking $650,000 in TIF reimbursement for cost
associated with this category.
The hard cost construction contingency amount is based on 10% of the total
hard costs, which is a reasonable estimate. The soft cost construction
contingency amount is based on 20% of the soft costs and interest expenses.
The soft cost contingency amount may be slightly overstated due to the
Developer applying the 20% contingency factor to the proposed Developer fee
of $4,300,000. As a result approximately 43% of the total soft cost contingency
line-item is applicable to a cost (the developer fee) that is not subject to
potential cost overruns and variability. If the soft cost contingency calculation
was adjusted to remove the application of the contingency to the soft cost line-
item, the total project costs could be reduced by $860,000 or approximately
1.5%.
Assistance Request 8
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
4. Assistance Request
The Developer is seeking assistance in the form of statutorily available TIF
revenues, PILOTS and EATS, which will be captured and re-directed to pay for
eligible redevelopment project costs. The requested TIF assistance will be on a
pay-as-you-go basis with the Developer initially funding all redevelopment
project costs and receiving reimbursement for eligible redevelopment project
costs as the TIF revenues are captured and re-directed. The Developer is seeking
reimbursement with TIF revenues for redevelopment project costs in an amount
of approximately $8,890,000 plus financing costs and interest.
The Developer is seeking reimbursement of approximately $3,578,000 in
project costs applicable to RPA 1. The Net Present Value (NPV) of the RPA 1
projected TIF revenue stream is $3,577,853 when calculated at the Developer’s
assumed borrowing rate of 5.25%. For RPA 2, the Developer is seeking
reimbursement of $5,312,000 in project costs. The NPV of the RPA 2 projected
TIF revenue stream is $5,311,615 when calculated at a 5.5% interest rate. The
Developer will bear the risk that the TIF revenue stream is sufficient to
reimburse the eligible costs, plus interest.
The Developer will fund their portion of the Project costs through a mix of
Developer equity and private debt. The anticipated private financing terms were
not provided. In addition to the private costs, the Developer will also be
responsible for initially privately financing the $8,890,000 of redevelopment
project costs that are anticipated to be reimbursed through TIF revenues.
Return Analysis 9
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
5. Return Analysis
The Developer provided two individual 10-year operating pro forma for each
RPA, which included the build-out and operating revenue and expense
assumptions. The Developer demonstrated the potential return through an
unleveraged internal rate of return (IRR) calculation. The return realized by the
Developer is a result of the assumptions used in the creation of the operating pro
forma. Therefore, a number of steps must be performed to analyze the
reasonableness of the assumptions used.
The first step in analyzing the return to the Developer is to determine if the costs
presented are reasonable. We have discussed a portion of the costs above. If
cost savings for the Developer’s share occur absent any other changes, the
Developer would realize a greater return than projected. In the sensitivity
analysis below we examine the impact of cost savings on the projected rate of
return without assistance.
The second step in calculating the return to the Developer is to determine if the
operating revenues and expenses of the proposed development are reasonable.
The Developer has projected an initial Annual Daily Rate (ADR) for the
RPA 1 hotel of $108 in year 1, with increases of approximately 5%
annually until year 8 when it stabilizes at $152.
The occupancy assumption for the RPA 1 hotel starts at 45% in year 1,
and increases 5% annually until stabilization at 65% in year 5.
The gross operating income ratio for the RPA 1 hotel is approximately
72%.
The net operating income ratio for the RPA 1 hotel (before debt-service,
depreciation and property taxes) is 43%.
The Developer’s assumption for the RPA 2 ADR begins at $108, with
increases of approximately 5% annually until year 6 when it stabilizes
at $154.
The occupancy assumption for the RPA 2 hotel starts at 50% in year 1,
and increases 5% annually until stabilization at 68% in year 5.
The gross operating income ratio for the RPA 2 hotel is approximately
65%.
The net operating income ratio for the RPA 2 hotel (before debt-service,
depreciation and property taxes) is 37%.
The Developer indicated their assumptions were based on their experience
developing and operating comparable products.
Data provided by the Jefferson City Convention and Visitor’s Bureau indicate
that in 2015, the average occupancy for Jefferson City hotels was 56.3%. The
average ADR was $86.73 for an average Revenue Available Per Room
(RevPAR) of $48.83. However, the Jefferson City CVB data does not separate
hotels by market segment. Therefore, we also utilized market information
prepared for both the Kansas City and St. Louis markets to use as a comparison.
Return Analysis 10
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
The Kansas City market information indicated the average ADR for limited
service hotels is $90 and occupancy is 68%, resulting in a RevPAR amount of
$61.20; while the average ADR for full service hotels is $130 and occupancy is
65%, resulting in a RevPAR of $84.50.
The St. Louis market information indicated the average ADR for limited service
hotels is $90 and occupancy is 70%, resulting in a RevPAR amount of $63;
while the average ADR for full service hotels is $130 and occupancy is 70%,
resulting in a RevPAR of $91.
In comparison, the Developer’s Year 1 RevPAR assumption is $48.60 for the
RPA 1 hotel, and $60.50 for the RPA 2 hotel. It should be noted that these
assumptions are based on the initial occupancy for each
Phase starting at 45% and 50%
respectively. If we were to use
the stabilized occupancy
assumptions for each hotel of
65% and 68%, along with the
year 1 ADR, the hotels would
have RevPAR of $70.20 and
$82.28.
This comparison indicates that, in the event that occupancy for each hotel ramps
up at a faster rate than expected, the Developer would potentially realize a
return greater than currently projected.
The third step in analyzing the return to the Developer is to determine if the
assumptions for a sale of the asset are reasonable. The return analysis to the
Developer should factor in a hypothetical sale of the asset at the end of ten years
of operations. A critical assumption when valuing the asset at the time of the
hypothetical sale is the capitalization rate. The available net operating income
divided by the capitalization rate results in the assumed fair market value of the
asset. The Developer has used a capitalization rate of 8.0% for the project to
calculate the hypothetical sale value. In reviewing historical cap rate trends for
commercial retail developments, we feel 8.0% is a reasonable assumption.
The Developer provided individual 10-year base pro forma illustrating the rate
of return, on an unleveraged basis, for each individual RPA. Table E below
illustrates the Developer’s base pro forma with the rate of return with and
without assistance, on an unleveraged basis:
Table E
Hotel RevPar
Jefferson City Hotels $48.83
Kansas City (Limited Service) $61.20
St. Louis (Limited Service) $63.00
RPA 1 Hotel (Year 1) $48.60
RPA 2 Hotel (Year 1) $60.50
Return Analysis 11
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
Base Developer
Pro Forma
Without
Assistance
With
Assistance
RPA 1 7.90% 9.69%
RPA 2 5.96% 7.87%
To provide a comparison of the Developer’s return without assistance, an
unleveraged IRR calculation is utilized in order to compare the potential return
to the Developer based on the Price Waterhouse Cooper (PWC)/Korpacz Real
Estate Investor Survey, Third Quarter 2015, which provides a market
comparison against which project feasibility can be considered. This survey
provides a resource for comparing the Developer’s rate of return to a market
benchmark to help determine feasibility. According to the developers surveyed,
the typical unleveraged market return necessary to pursue a project of this
nature falls in a range from 8.50% to 13.00%, with an average return of 10.48%.
In order to provide an understanding of the potential return realized by the
Developer as a result of the development of the site as a whole we prepared a
modified pro forma to calculate the return on an overall basis following the
completion of both Redevelopment Projects. We utilized the baseline
information provided by the Developer to prepare this modified pro forma.
Table F below illustrates our modified rates of return, both with and without
assistance, for the combined Redevelopment Projects:
Table F
SI Combined
Pro Forma
Without
Assistance
With
Assistance
Both RPAs 7.27% 9.20%
In order to answer the question “is the development likely to occur without
public assistance” we analyzed the without incentive scenarios, using the base
developer pro forma without assistance as the basis of the assumption. We
performed a sensitivity analysis in order to understand the magnitude at which
project costs would have to decrease, or conversely project revenues would
have to increase, for the project to be considered feasible. For this sensitivity
analysis we used the 9.20% return with assistance from our modified pro forma
as a benchmark for performing our sensitivity analysis as this return represents a
more conservative threshold than the 10.38% from the Price Waterhouse
Cooper (PWC)/Korpacz Real Estate Investor Survey.
To understand the impact of the project cost assumptions, we performed a cost
sensitivity analysis to determine the rate at which costs would have to be
reduced for the projected rate of return to be in excess of our feasibility
benchmark without assistance. Table G illustrates the development would need
to realize a 13% reduction in project costs in order to be feasible without
Return Analysis 12
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
assistance. Given a 13% reduction in costs the project would have a rate of
return of 9.24%.
Table G
Project Costs
Sensitivity
Reduction
in Project
Costs
Rate of Return
without assistance
13% 9.24%
To understand the impact of increased revenues, we have performed a
sensitivity analysis to determine the rate at which project revenues would have
to increase for the projected rate of return to be in excess of our feasibility
benchmark without assistance. Table H illustrates the development would need
to realize a 15% increase in project revenues in order for the project to be
feasible without assistance. Given a 15% increase in project revenues, the
project would have a rate of return of 9.25% which falls into the reasonable
range.
Table H
Project
Revenue
Sensitivity
Increase
in Project
Revenue
Rate of Return
without
assistance
15% 9.25%
As a final step in the sensitivity analysis, and to understand the impact of a
combined change in project costs and project revenues, we have performed a
sensitivity analysis to determine the rate at which these areas would have to
change for the projected rate of return to be in excess of our feasibility
benchmark without assistance. Table I illustrates the development would need
to realize a combined 7% decrease in project costs and a 7% increase in project
revenues for the project to be feasible without assistance. Given these changes
in assumptions the project would have a rate of return of 9.26%.
Table I
Combined
Sensitivity Reduction in
Project Costs
Increased
Project
Revenues
Rate of
Return
without
assistance
7% 7% 9.26%
The three tables above (Tables G, H, and I) indicate the magnitude at which
project assumptions would have to change for the project as a whole to have a
rate of return in excess of the 9.20% feasibility benchmark used in the
sensitivity analysis. Absent changes of the magnitude outlined above, the
project would not have a sufficient return to draw market investment. Only by
assuming either increases in project revenues, decreases in project costs, or a
Return Analysis 13
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
combination of the two does the return increase to a feasible level without
public assistance. However, we project changes of the magnitude outlined
above are unlikely to be realized, which indicates the proposed project, when
viewed as a whole, would not likely be completed through private enterprise
alone.
Conclusions 14
City of Jefferson, Missouri. Truman Hotel Project: But for Determination
6. Conclusions
The proposed development contemplates the construction of a 121-room
Holiday Inn & Suites with on-site restaurant, the construction of a 145-room
Courtyard by Marriot, the renovation and remodeling of the conference and
event center and other necessary site work and soft costs. The Developer will
bear all the risk until project completion and permanent financing is in place and
continued operating risk thereafter. This level of risk demands a positive return
with a comparable national market range of 8.50% to 13.00%, with an average
of 10.74% as indicated in the PWC/Korpacz study. However, as the Developer
indicated through their pro forma that a total project return of 9.20% would be
acceptable, we utilized this rate in our sensitivity analysis.
As detailed above, the projected IRR to the Developer without assistance, falls
below the current range expected within the marketplace and in comparison to
the return with assistance.
A Blight Study prepared by Valbridge Property Advisors dated October 1,
2015, and an affidavit signed by the Developer dated December 11, 2015 state
that the redevelopment area is a blighted area and has not been subject to growth
and development through investment by private enterprise and would not
reasonably be anticipated to be developed without the adoption of tax increment
financing. Based upon the Blight Study, Developer affidavit, and upon our
analysis, Springsted concludes that the proposed Project, without assistance,
would not likely be undertaken at this time without the requested assistance