HomeMy WebLinkAbout20 - TOT Incentive ProgramCITY OF NEWPORT BEACH
CITY COUNCIL STAFF REPORT
Agenda Item No. U
February 13, 2007
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: City Manager's Office
Dave Kiff, Assistant City Manager
9491644 -3002 or dkiff@city.newport- beach.ca.us
SUBJECT: TOT Incentive Program — Crystal Cove Historic District
ISSUE:
Should the City directly assist with efforts to restore some of the cottages in the Crystal
Cove Historic District by returning some or all of the Transient Occupancy Tax ("TOT')
collected at the cottages?
RECOMMENDATION:.
• Authorize the City Manager to execute an Agreement (based on the attached Term
Sheet) between the City and the Crystal Cove Alliance to assist the Alliance with cottage
restoration efforts by returning 100% of the City's share of the Transient Occupancy.Tax
(TOT) to the Alliance.
DISCUSSION:
The City collects a 9% Transient Occupancy Tax (TOT) on stays of thirty , (30) days or less
in the community., The City also levies a Visitor's Service Fee (VSF) of 1% for similar
stays, and passes the VSF revenue through to the Newport Beach Conference and
Visitors Bureau (NB CVB) to assist the NB CVB in promoting tourism and additional hotel
stays in the area (see Title 3, Newport Beach Municipal Code). In March 2004, the City
gave the NB CVB an additional amount of revenue in recent years that increased the
CVB's share of the full 10% visitor - related occupancy taxes to about 18% of the 10 %. .
The City's adopted budget estimates that the City will receive about $8.7 million in hotel
related TOT in FY 2006 -07, with another $1.1 million coming from residential vacation
rentals.
The Crystal Cove Historic District lies in the southeastern part of the community within
Crystal Cove State Park. It consists of 46 cottages that are listed on the National
Register of Historic Places and are owned by California State Parks. On June 26, 2006,
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Phase ,l opened to the public as overnight rentals. As such, the rentals are subject to the
City's TOT and VSF.
CCSP and TOT
February 13, 2007
Page 2
More about the Cottages. On April 5, 2006, State Parks awarded a 20 -year concession •
contract to Crystal Cove Alliance ( "CCA" at www.crystalcovealliance.oru), a local non-
profit "cooperating association" with State Parks. This contract includes the management
of the overnight cottage rentals and 2 food service operations. CCA is the first
Cooperating Association in the history of State Parks to become a concessionaire. These
types of contracts are normally managed by for profit entities. By virtue of the CCA's non-
profit status, CCA and others argue that a much larger percentage of revenue will directly
benefit the Historic District.
Only 22 of the total 46 cottages have been restored. The approved Preservation and
Public Use Plan (PPUP) includes.4 basic components:
• Affordable overnight rentals;
• Educational and interpretive uses,
• State park operations; and
• Food service.
The overnight rentals in Phase I include 13 cottages:.10 individual cottages and 3
dormitory style lodges for a combined total of 108 guests per night. Prices range from
$31 /night for one person (dorm style accommodations) to $165 -179 for an individual
cottage for up to four people. All reservations for cottage rentals are managed by
Reserve America (www.reserveamerica.com). The remaining 24 cottages.. will: require
grant funding and other much needed financial resources before they can be fully •
renovated and made available for public use.
Since the. 13. cottages have been placed on ReserveAmedca.com, rentals have.
consistently stayed at 100% occupancy, 'even during weekdays in wintertime: The:
Alliance reports that over 10,000 people attempt to reserve the 13 available cottages the
first of each month.
Coastal Commission's Perspective. Some have suggested that the Alliance, in order
to more rapidly complete Phase II of the restoration, should raise room rates at the
cottages to "market' rates. Arguably, given the cottages' proximity to the beach and the
unique style of the historic district, room rates could be upwards of $500 to $700 per
night. But raising rates to these levels is, according to Peter Douglas of the Coastal
Commission; contrary to the Commission's wishes and contrary to the funding agreement
whereby the Commission allocated $2.8 million in State funds for the restoration efforts.
Mr.' Douglas sent a letter to the Alliance on October 2, 2006, which reads in part as
follows (letter attached):
Raising rental rates would have to be discussed and agreed to by the Commission.
However, I can assure you we would consider any increase at this time, not to mention
increases to "market rates," (to. be) a violation of our agreement that underlies the prior
transfer of $2.8 million to State Parks for restoration of the cottages. I did not
exaggerate when I told you I know of no other location on the entire California coast that
offers such a unique and affordable opportunity for visitors to spend a family vacation in •
an historic cottage on the beach. The Crystal Cove cottages have been and are again
becoming a special attraction for visitors from throughout the country. I am delighted by
what has been accomplished there and assure you we will continue to be supportive of
CCSP and TOT
February 13, 2007
Page 3
• all restoration and renovation efforts to complete the project. At the same time, we are
opposed to any action that would reduce accessibility to this unique experience for
visitors who cannot afford a stay at the high -end hotels and resorts that now proliferate
along the coast.
What the TOT Incentive Would Generate & Why an Incentive. The Crystal Cove
Alliance is actively involved in fundraising to restore the remaining cottages, despite the
large price tag. As a relatively small organization, they do not have a guaranteed source
of funding for fundraising purposes. Financial assistance through a TOT incentive
program could assist CCA in advancing its restoration efforts more quickly. As a result,
more cottages could come "on -line" and more cottages would generate TOT. Revenue
from this program would provide CCA with additional funds to advance their mission of
restoration for the remaining 24 cottages (estimated to be $20 million).
This Agenda Item proposes an economic development incentive for the Cottages that
Would direct 100% of the TOT generated from the Cottages for a five -year period back to
the Alliance for restoration purposes.
City Costs, City Revenues, City Services. The following questions have arisen in
regards to the Cottages and how their operations within a State. Park relate to the City
and its services:
1.. Q: What taxes or fees does the Crystal Cove Alliance pay the city? A: The Alllance.pays a
• 9% TOT and a 1 % VSF to the City (collected directly from nightly renters).. The Alliance also
pays a business license fee. Further, the City receives a sales and use tax from :the two
restaurants and the Alliance's general store equal to 1% of the gross sales at the store and
restaurants.
2. Q: What taxes or fees does the Alliance not pay that an operator would pay if the Cottages
were operated as. a privately -owned for, profit Hotel?, A: None. Specifically in regards to
property taxes, the Historic District is entirely on State Park.property. State Park property
does not pay property tax (nor Possessory Interest Tax). Therefore, neither a for - profit or
non- profit would pay property tax or PIT at the location.
3. Q: Is the Alliance a for -profit or non- profit organization? A: The Crystal Cove Alliance Is a.
non - profit organization operating under Section 501 (c)(3) of the Internal Revenue Code.
4. Q: What services does the City provide to the cottages? A: We provide fire, emergency
medical, and police response (the latter if called by the Park Rangers on site).
• The NBFD reports 13 calls since June 2006 (1.6 calls a month). Nine of the calls were Emergency
Medical. Of the nine, five have already been compensated In full from the respondee's insurance
provider, the other four are in billing. The State Fire Marshal provides fire inspection services.
• The NBPD responded to 20 calls since June 2006 (2.5 calls a month). They were as follows:
10 ALARM CALLS
3 ANIMAL CONTROL CALLS
1 SUSPICIOUS VEHICLE CALL
1 VEHICLE STOP
2 FIRE CALLS WHERE SOME WIRES WERE SPARKING
1 415 FIGHT THAT MEDICS ALSO RESPONDED ON
1 MEDICAL AID
• 1 THEFT REPORT
CCSP and TOT
February 13, 2007
Page 4
To put this In context; the Fire Department averages 703 calls per month. The PD receives an average
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of 14,583 calls per month (PD- initiated responses on top of that are 6,666/month). Therefore, the 13
and 20 calls at Crystal Cove State Park since June 2006 were (respectively):
• For Fire, 0.22% of total calls citywide in any one month.
• For PD, 0.017% of total calls citywide In any one month.
According to Ken Kramer, CCSP Park Superintendent, `The majority of these responses (Police and
Fire) were handled jointly with State Parks public safety units responding as well. The frequency of
calls for service seems to be about average as compared to the past several years. In other words, I
have not seen a substantial change in the types or frequencies of requests for public safety mutual aid
to the park as a result of the Historic District operation.°
5. Q: What services does the City not provide because the Cottages are part of the state park
system? A: The police response is reduced (see previous question), because the State
Parks Rangers serve.as on -site security and respond first. We also do not provide street
sweeping, trash collection and recycling, lifeguard services, storm drain maintenance, nor
water or sewer. - -
6. Q: Does the revenue the State receives from the Ruby's operations go into restoration of the
Cottages? A: Yes, some does. As a subconcession to CCA, the Ruby's Restaurant Group;
operates the Beachcomber restaurant in one of the cottages as well as the Shake Shack
along East Coast, Highway. CCA pays 2.1% of gross receipts — from the Ruby's
subconcessions and the main cottage rental concession — to State Parks for rent. The
Alliance also pays 12% of gross receipts (again from both the main concession and the
Ruby's subconcessions) into a Facility] m prove m ant Account (FIA) that is jointly managed by
the State and CCA. The FIA account can be used for restoration and maintenance of historic
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facilities.
The NB CVB. As noted above, the NB CVB receives roughly 18% of the TOT generated
in the city limits, with the City receiving the remainder. According to NBCVB president
Gary Sherwin, the Cottages are a "huge" marketing opportunity for the community and
are gaining national attention. Sherwin does not object to the Incentive program
proposed here and agrees that the TOT generated at the cottages can be retumed for the
duration of the proposed agreement without a commensurate payment to the NB CVB.
Here is an approximation of the annual TOT expected to be generated at the.Cottages:
➢ Average monthly rental revenue = $75,000.00
➢ Projected annual rental revenue = $900,000.00
➢ 10% TOT $90,000.00
Staff proposes the following terms for the Agreement:
PARTIES: City of Newport Beach, State of California — Department of Parks & Recreation
California State Parks and Crystal Cove Alliance (CCA);
TOT RETURN: 100% of the 10% TOTNSF generated by rentals of the cottages;
TERM: Five years, extendable at City's option;
USE OF FUNDS: These funds may only be used to restore those cottages that are not restored as of this
date and which will be placed in the rental pool and available for rental by the general •
public.
REPORTING: CCA must provide an annual report to the City Council at the close of each 12 -month
period as to progress made in restoration.
CCSP and TOT
February 13, 2007
Page 5
• Environmental Review: The City Council's approval of this Agenda Item does not require
environmental review.
Public Notice: This agenda item has been noticed according to the Brown Act (72 hours
in advance of the meeting at which the Council considers the item).
Submitted by:
'Dave`P ' T
Assistant City Manager
Attachments: Attachment A — Text of letter from Peter Douglas
Attachment B — Draft term sheet
Attachment C — Map of Historic District
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CCSP and TOT
February 13, 2007
Page 6
Attachment A •
Text of Letter from Coastal Commission Executive Officer Peter Douglas
Laura Davick, President & Founder
Crystal Cove Alliance
3535 E. Coast Hwy. PMB 360
Corona del Mar, CA 82625
Dear Laura:
It was good to see you and be brought up to speed on progress being made to Complete restoration of
cottages and facilities at Crystal Cove Historic DistricL I very much enjoyed the tour and am impressed with
the progress made to date while recognizing there is much left to do.
Because the cottages at Crystal Cove are part of the State Park, I was surprised to learn that guests pay a.
TOT to the City of Newport Beach. I can understand how this might be a "good neighbor" policy but air
concerned that it negatively affects the affordability of these over night accommodations that must be "lower
cost" consistent with past Coastal Commission actions. Notwithstanding that concern, you mentioned that
the City staff has proposed some revenue sharing with the Crystal Cove Alliance by directing a portion of
the TOT to the non -profit for the purpose of contributing to the funding needed to complete renovation of the
remaining cottages at the Park. This is to inform you that the Coastal Commission is strongly supportive of
this proposal because it advances precisely the goal we had in mind when several million dollars in high -
end hotel mitigation funds were dedicated to restoration of the cottages at Crystal Cove for lower cost over-
night visitor use. •
Along the same lines, I understand there is some question whether the Crystal Cove Alliance should charge
"market rates" for over night stays at the cottages. As you well know, working with State Parks and your
organization the Coastal Commission ultimately agreed to a rental rate that we concurred could be deemed
"lower cosy' within the meaning of that term in the Coastal Act and that would comply with conditions of the
transfer of mitigation funds to State Parks. Raising rental rates would have to be discussed and agreed to
by the Commission. However, I can assure you we would consider any increase at this time, not to mention
increases to "market rates," a violation of our agreement that underlies the prior transfer of 2.8 million
dollars to State Parks for restoration of the cottages. I did not exaggerate when I told you I know of no other
location on the entire California coast that offers such a unique and affordable opportunity for visitors to
spend a family vacation in an historic cottage on the beach. The Crystal Cove cottages have been and are
again becoming a special attraction for visitors from throughout the country. 1 am delighted by what has
been accomplished there and assure you we will continue to be supportive of all restoration and renovation
efforts to complete the project At the same time, we are opposed to any action that would reduce
accessibility to this unique experience for visitors who cannot afford a stay at the high -end hotels and
resorts that now proliferate along the coast
Please keep us informed of progress you make in completing the project and how we can be of further
assistance in the future.
Sincerely,
Peter Douglas
Executive Director
cc: Ruth Coleman, Director of State Parks
Richard Rozzelle, District Superintendent , State Parks •
Teresa Henry, South Coast District, Coastal Commission
David Kiff, Assistant City Manager, City of Newport Beach
CCSP and TOT
February 13, 2007
Page 7
• Attachment B
TERM SHEET (proposed)
City - Crystal Cove Alliance TOT Incentive Agreement
PARTIES: City of Newport Beach.
Crystal Cove Alliance/California State Parks
EFFECTIVE DATE: March 1, 2007
TERM: Five years from Effective Date
OPTIONS: One 5 7year Option. At the end of Term and before first .
Option period, City reserves the right to reduce the
percentage of TOT going to the Alliance if City finds that
restoration needs have changed.
CANCELLATION: Cancelable by either party with 60 days notice, without
cause.
AMOUNT: 100% of City's share of TOTNSF.
. LIMITS ON USE OF FUNDS: Alliance may only use the funds to restore those cottages
not yet restored and that will be available to the public for
rental. purposes.
REPORTING Alliance must report annually to the City on the use of the
REQUIREMENTS: TOT Incentive.
AMENDMENTS: Agreement amendable. by either party, with the consent of
the City Council and Alliance board.
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