Who’s Side are out Council Members On? DWP Struggle About to Get Dicey!

(THIS IS ANOTHER IN A SERIES OF NOTICES BY A LARGE GROUP OF LOCAL CITIZENS TO KEEP ALL OF US ADVISED ON WHAT THE COUNCIL IS TRYING TO FORCE THROUGH TO BENEFIT THE DEVELOPERS OF THE DWP PROPERTY.  WE’VE BEEN ADVISED BY A 3RD PARTY THAT A DEVASTING DOCUMENT WILL BE INTRODUCED TONIGHT TO THWART THOSE EFFORTS….IF THE COUNCIL ALLOWS IT TO BE INTRODUCED AS EVIDENCE.)

Dear Friends,  We really need to be heard at the Plannning Commission on Wednesday, May 2nd at 7PM  This is public trust land and we need to stand up

Please come and be heard.  Seal Beach is not an accident!  It took hard work to make this city what it is. WE need you to show up and let the council know that no matter how much they keep putting off  the DWP problem….WE’RE NOT GOING AWAYf …….PLEASE !!!

1) First, we’re  not sure why a feasibility study is relevant given that the developers bought the land with the zoning for a hotel already in place.  The feasibility of the hotel is their issue, not the public’s.  Why does it matter if they decide later it’s not feasible.

2) Even if “feasibility” is somehow relevant, the studies are completely flawed in both set up and in the actual calculation.

Set up

– A feasibility study would not include the historical cost of the land purchased. A feasibility study would be used to determine if hotel can be built, and then to back into what price one could afford to pay for the land.  Doing it the other way is not “feasibility” ……it is simply calculating profitability, retroactively.  A developer’s profitability is certainly not the public’s concern, unless they were planning to share their profits with the public if they got  a good deal.

–  Even if  their historical land cost is somehow relevant, including a return for their “sunk cost” of the past 10 years of holding the land in the cost-basis is simply unreasonable in a “feasibility” study.  And it’s even more unreasonable when land values generally declined over that period.  Again, how is their return or their “opportunity cost” of any concern to the public?

Calculations

First, the financial models done by Kosmont are simply wrong.  They made a couple math errors that invalidate the entire analysis.

Math errors:

– Interest expense is held constant throughout the entire 10 projection period on all the scenarios.  Obviously that’s incorrect, as interest expense will vary with debt balances.  Balances will increase as they lose money and will decrease as they pay down debt.  In their first scenario, for example, the effect is so dramatic that in year 10 projected interest expense is $1.3 million more that it would be.

– They make the same mistake in calculating Terminal Enterprise Value. They assume the debt balance is the same at the end  of the 10 years,when in fact it would have declined from $$21.5mm to only $5.0mm, in scenario one for example. Similar for all the other scenarios.

– The IRR in scenario 1, using THEIR numbers, but correcting the math mistake, would make the projected IRR go from 16% to 26%.

– Interest expense in couple of the scenarios appear to simply be wrong.  And it reduces the returns dramatically.

Unrealistic Assumptions:

– Kosmont assumes that the interest rate would stay the same for all 10 years.  Naturally, when the hotel gets to a steady state, as projected by year 5, they would be able to refinance at better rates.

– Requiring a 20% IRR over 10 years is not realistic.   Once the hotel gets to a steady state, the required return is much lower, which is why “cap rates” for hotels in the stock market are only 7% right now.  A 5 year window of start-up risk is more appropriate for a 20% return.  In scenario one, if the developer sells the hotel at year 5, they would achieve a 30% IRR.

– The 8% cap rate assumed in the analysis is conservative, given where the market is right now.

Results

Correcting the math errors alone leads to several scenarios that are over 20% IRR. If we slightly adjust a few assumptions to more realistic ones, like cap rate, refinancing rate, using actual cost on the land (which shouldn’t even be included at all in our opinion), then almost every scenario becomes feasible with 16%-30% IRR ranges.

JOIN YOUR NEIGHBORS TONIGHT!