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HomeMy WebLinkAbout01 - Additional CorrespondenceNEWPORT REACH — RENTAL RA'Z'ES FOR COMMERCIAIL MARINAS OVER CITE' - MANAGED TIDELANDS PRESENTATION September 12, 2012 I. Overview fl - % -12-12 We agree the City should charge "fair market rent" for the public tidelands portion of the water. So why is there controversy? I will try to boil it down to a few points. 1. First, there is no competitive and open market in Newport Harbor. There is a single landlord for the water parcels, and the adjacent marina owner is the only tenant. This is a bilateral monopoly. The tenants are not able to make decisions that represent an open market exchange. What is the impact? The current permittee /tenants are compelled to pay the rent (despite it being in excess of FMV) in order to retain control and use of their existing improvements, including docks and utilities. This action to compel is very harmful to marina owners of all sizes, and particularly tough on smaller operators. 2. The water parcel is what we are valuing. As an independent site, the water parcel is severely restricted because it has no access to the uplands for utilities or marina - supporting land uses such as parking, restrooms and showers. 964198.01/OC 372154- 00002 /9- 12- 12/gsm/mel 3. The Netzer and Rasmusson appraisals posted for review contain numerous factual errors and, until they are corrected, the conclusions cannot form the basis of value. 4. Although the Harbor commercial owners and two highly - qualified experts opine the Committee proposal in the staff report is significantly above FMV, 'THERE IS NO RECOURSE AVAILABLE. Given the substantial investment in marina improvements, the marina owners are being compelled to pay rent, which our two experts opine is significantly in excess of Fair Market Value. 5. There is a solution. There is a validation method to properly determine value in a closed market, and my clients have submitted proposals, and other owners have had a City - approved appraiser submit an opinion. 11. 'There is no Competitive and Open Market A. There is no open market. There is only one landlord and one tenant. This is a bilateral monopoly. Why is this important? Because this means that the definition of Fair Market Value is not satisfied. A critical component in determining the appropriate information to rely upon in forming an opinion of value is that the data conform to key definitions of market value. In particular, it is essential to confirm that the buyer and seller were "each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus." The test fails. B. A thorough analysis of these special issues in the market are essential to form a credible opinion of value. This critical analysis was not done by the City. 964198.01/OC 372184- 00002 /9- 12- 12/p./.d -2- III. Value for the Independent Parcel is the Issue to Resolve A. In Newport Harbor, the uplands are privately owned and provide access to the water. Private investment has built parking, restrooms, docks, seawalls, ramps, guardrails and utilities. B. In addition, private water, in many cases, abuts the privately - owned land parcel. See Map. C. The water parcels have no direct land access. The highest and best use of the water parcels, as an independent site, is severely restricted by its lack of access to the uplands for support of any commercial use. The water parcels could potentially be used for offshore moorings; however, lack of uplands parking, restrooms and dingy launching facilities would present problems of approval from local citizens' groups and certain regulatory agencies. Therefore, as an independent site, the water parcels have limited economic value. IV. Appraisal Problems A. History of Appraisals: 1. The City commissioned an appraisal to value tidelands in 1989 and 2001. These appraisals properly analyzed the unique characteristics in the Harbor. 2. I have submitted a letter to the City dated August 30, 2012 which should be part of the record. My letter identifies numerous problems with the City appraisals, but let me identify a few critical issues: a. The City uses two county leases as the basis for its decision that FMV in the Harbor should be 20 %. The water -only lease data the Committee says should be the market value are from county 964198.01/OC 372184- 00002/9- 12- 12 1win/mel -3- leases at Bayshores and Swales. The City appraiser describes these as renewals with no appraisal, and the tenants said there was little room for negotiation because they had invested considerable money in leasehold improvements. As stated before, the bilateral monopoly drives a decision of a tenant to be compelled to pay in order to protect its private investment. This is not a comparable deal to be used since it does not meet FMV requirements of the appraisal institute. Please refer to the Jones appraisal, pages 55 -59, for further support that the county leases do not meet the standards of an open market transaction. b. All of the appraisals show a combined water parcel and land parcel together have a 25% total rent figure. The City proposes that 80% of the total value of a combined land -water parcel be allocated to the water. Our experts and common sense tells you there is no way the number is correct. The water alone with no access to land is, at best, a mooring field. 3. The 'Residual Formula" Rasumusson sets forth starting on page 31 of his appraisal is a good approach to help frame FMV. My letter, which is in your package, illustrates on Exhibit B the impact on the FMV if you use the corrected Harbor facts. Despite using a few components in the calculations that need correction, Rasmusson concludes FMR is 13 %, which is significantly under what the City if proposing. Please use the formula with the corrected facts below. Do your own math. 964198.01 /OC 372184- 00002 /9- 12- 12 /gsm/mel -�%- Land values — 250 -275 (Netter) Vacancy — 5 -10% Land to Water Ratio — 28% Average Slip Size — 33 -35 feet V. Conclusion Please do not compel the Harbor owners to pay more than FMV. Please work with them. 964198.01/OC 372184 - 00002 /9- 12- 12 /gsm/mel. -5- " HEIVED AFTER AGENDA HINTED:" Rieff, Kim From: Doug Salisbury [doug @pelican1.netj Sent: Tuesday, September 11, 2012 3:24 PM To: mhenn@newportbeach.gov Cc: Dave Salisbury; keith.curry @cui.edu; Selich, Edward; Rieff, Kim; Daigle, Leslie; Hill, Rush; parandigm @aol.com; Kiff, Dave; Gardner, Nancy Subject: Proposed Dock Tax Mike, As you know, I've spent my entire life in Newport Beach and also own, with my brother, the Newport Landing Marina development. We have owned and managed this waterfront development for 25 years, however, the last 5 years has been a huge struggle and a fight to keep our project afloat. Our fuel dock has been out of operation for more than two years and the balance of our waterfront tenants have had an extremely difficult time due to the economy. The project next door, Edgewater Place, has remained 65 %+ vacant over the last decade. It has not been an easy time for any of us. It is my understanding that you and the Council intend to vote on an increase to the commercial pier permit fees tomorrow night. This proposal is not only to increase the existing fee (36 cents per square foot per year) by 400% over the next three (3) years, but to also tack on a percentage (10% to 20 %) of gross revenues generated from the Tidelands in the event the percentage would be greater which, in nearly every instance, would be substantially greater than the minimum fee being proposed. We have scheduled some substantial improvements to our property and marina over the next several years. If the Dock Tax, in its present form, is approved, we will not only have to eliminate the capital expenditures from our business plan, but we will most likely lose our marina tenant base, not be able to attract and maintain a new tenant for our fuel dock (which is only 1 of 3 fuel docks left in the harbor), and perhaps have to give up our existing development altogether as we simply cannot afford the additional tax on our business as it is being proposed. We would reluctantly agree to a per square foot fee of $.75 per year and see it increase an additional $.25 per year for the next four (4) years, which would represent an increase in today's fee of 386% over a five (5) year period, but we simply will not be able to absorb the percentage proposal and survive. As our local representative, I hope that you will strongly oppose the percentage of revenues approach and only support the proposed substantial increase to the current rates for the commercial pier permits. Our harbor is the city's main asset. If we lose the businesses that serve to promote the harbor — we will all lose in the long run. Respectfully, Douglas L. Salisbury Newport Landing Marina Newport Harbor Market Rent Determination Comments on the Rasmuson and Netzer Appraisals Questions by Allen Matkins Responses by James Netzer Q1) The Netzer appraisal of the market rental value of the commercial marina parcels is more remarkable for what is missing than for what is present. The analysis relies purely on a comparison approach to reach the conclusion that the market rent is 20% of collected slip revenue. Despite attending a meeting at City Hall where the need for an economic analysis was discussed, despite being presented with written material documenting the rationale for such an analysis, and despite the conclusion by Mr. Rasmuson that such an analysis was not only necessary but that it warranted equal weighting with the comparison analysis, Mr. Netzer performed no such analysis whatsoever. This fact alone invalidates the Netzer appraisal as support for a reasonable determination of the market rent for the City's water parcels. It is disconcerting that the "Scope of Work- Bullet Points" noted in the Netzer appraisal report beginning on page 70 includes many of the items raised by the marina owners and their representatives at the meeting attended by Mr. Netzer, but conspicuously excludes any mention of the following points discussed at the meeting: the need for an economic analysis of marina operations, the need to study the impact of the highest and best use of the adjacent uplands, the need to study the opportunity cost of using these uplands for marina support uses, and the need to study the economic impact of independent use of the water parcels for open - water mooring. R1) True the report is based more on the Sales Comparison Approach and much of the analysis is based on the conditions that are unique to the harbor. Newport Harbor is unique and the rates that other operators in the harbor are willing to pay, and actually paying, are very relevant to the analysis. 1 did not complete the same economic analysis as Mr. Rasmussen and his is different from the economic analysis presented in prior reports completed by George Jones, suggesting that there is no specific methodology that should be employed. The analysis completed is a "test of reasonableness" to determine if the slip fees, occupancy rate and percentage rent conclusion result in an economically feasible rent per square foot relative to what other operators are paying in Newport Harbor. I also compare the tideland rent to the upland rent being paid for parcels that have been sold in the harbor. As can be seen from the responses included as Exhibit B, if just small changes are made to the economic analysis presented the results can be skewed to reflect rent per square foot from -$0.55 to $1.77. They also appear 1 to suggest that the "economic analysis" should be applied to specific properties and not on a hypothetical marina. Q2) The Netzer report contains materially different information regarding several items of market data. For example, Mr. Netzer states that the pending lease transaction in Glorietta Bay in San Diego County between the Port District and the City: of Coronado was based on 22 %,.then will be adjusted pro rata based on land area (in his example, if the land area is one - fourth of the total combined area, the rent for the water would be reduced by one -fourth to 16.5 %). Not only does this make no sense whatsoever due to the value difference between the land and the water parcels on a unit basis, it is inconsistent with Mr. Rasmuson's statement that the actual water rent in this transaction is 11 %, half of the total 22% figure for combined land /water marina leases. Mr. Rasmuson reported that the second pending water -only lease deal in San Diego Bay (Coronado Yacht Club} is also at 11 %; Mr. Netzer states that no such deal has been reached. Based on the discussion in the Rasmuson report, it appears that Mr. Netzer may be confusing the lease between the State of California and the Port District with the sublease between the Port District and the Yacht Club; the latter is the 8.25% (start rate) to 11% (step -up rate) indication described by Mr. Rasmuson, and it is the relevant indicator as the Yacht Club would be the end user, R2) The "materially different information" that was supplied appears to be a misunderstanding by the person making the comment. In my discussion with the Port District regarding the "water only" lease between the Port and the City of Coronado it was explained that the 22% rental rate for marinas would be allocated on a pro -rata basis based on the square footage of the upland and tidelands area. It was not disclosed by the Port what the upland and tideland areas were and the pro -rata percentage figure was not provided. I included an example to illustrate the point using a hypothetical 100,000 square foot parcel that was 25% upland and 75% tideland that resulted in a 5.5% upland /16.5% tideland pro -rata allocation. Mr. Rasmuson confirms this "pro- rata" allocation and states on Page 21 of his report: The negotiated new rent basis reportedly considered that the water area was about 50 percent of the total site area and a total slip rent rate for land and water lease is 22 percent, so they took 50 of this number and got 11 percent — % to the water leased area. This statement supports my statement and the example presented — 50150 land to tidelands and 50% of 22 %, or 11 % applied to tidelands. During my discussion with the Port regarding this transaction it was noted that this transaction is between two public agencies and that it benefits both 2 parties as it provides greater public access to Glorietta Bay. The impact of the public benefit" to both public agencies needs to be taken into consideration in the analysis of this lease. With regard to the "second pending water only lease" that is identified in the second paragraph, the representative of the State Lands Commission and the Commodore of the Coronado Yacht Club both reported to me that this transaction is dead and not going to be consummated. 1 am aware that the Port would lease the tidelands from the State and then sublease the tidelands to the Yacht Club. I believe the reviewer is mistaken that there is a sublease between the Port and the Yacht Club that provides a graduated percentage rent. I believe the lease that the reviewer is referring to is the three year lease (a copy was provided to me by the Commodore of the Yacht Club) between The Port and the Coronado Yacht Club that commenced November 1, 2011, The lease is for the existing Yacht Club property that includes 675,376 square feet of land and water area (Parcel 1) and 39,858 square feet of land area (parcel 2) that the Port leases from the City of Coronado. The lease restricts the use of site to a "non- profit private yacht club of approximately 264 slips for the promotion of San Diego Harbor and navigation, for recreational activities such as aquatic sports, regattas, and other boating- related events ". There is no minimum or base rent and the percentage rent for this lease is set forth as follows: 11/1/2011 to 12/31/2011 @ 8.25% of gross income 11112012 to 1213112012 @ 8.80% of gross income 11112013 to 1213112013 @ 9.35% of gross income 11112014 to 111312014 @ 9.90% of gross income The "gross income" includes all sources of revenue (upland & tidelands) with the exception of fees associated with the junior sailing program. This may be a "relevant indicator" if the assignment was to estimate the percentage rent associated with the combined uplands and tidelands associated with a "non- profit" but is less instructive in estimating the market rent for a commercial marina. Q3) The Netzer appraisal report contains no recognition that the County of Orange leases in Newport Harbor (Bayshore and Swales) were both a continuation of prior leases where the tenants had extensive investment in improvements that would have 3 been lost had the leasehold been awarded to another operator. While thiE discussed repeatedly in the Rasmuson report, it was ignored in the Netze such, it appears that the impact of this fact on the resulting percentage re considered in any way by Mr. Netzer. R3) I discussed both the Bayshore and Swales leases on pages 45 report and state that The Irvine Company was the prior operator of the Bayshore Marina, and while it may not be set forth throughout the report it was taken into consideration. As discussed on Page 45, the lease for the former Swales Marina was a new lease. The Farwell family leased the upland parcels from The Irvine Company and leased the tidelands from the County_ The Farwell family developed and operated the apartment and the marina until their leases expired in 2011. The current tidelands Lessee (Palmc) acquired the leased fee interest in the upland parcel from The Irvine Company in the 1990's. At the expiration of the ground lease, the apartment building (Swales Landing) reverted to the Lessor ( Palmo). The tidelands agreement between the Farwell family and the County also expired. Palmo had no investment in the prior construction, maintenance or operation of the marina improvements and entered into a new three year agreement with the County at a fixed annual rent ($72,000 or $1.44 per square foot of tidelands). Based on the rent that the Farwell family was paying, the "fixed" rent equates to 20- percent of the gross slip fees. Given the history of the property and the fact that the new Lessee ( Palmo) had no prior interest in the marina this transaction is judged to reflective of a new lease. Q4) Mr. Netzer's analysis of the market rent per square foot is a purely circular computation, where he starts with his concluded 20% water parcel rent figure and applies it to several marina operations.- For this reason, this analysis is not helpful. However, it should be noted that Mr. Netzer made a material error in his calculation regarding Bayshore Marina; he divided the indicated rent figure by only the area of the leased parcel and ignored that there is a significant privately -owned water parcel included in the marina operation. His analysis reallocates all of the revenue away from the owned water parcel and gives it to the public water parcel. R4) A portion of the rent per square foot analysis is circular as it is a "check of reasonableness" to determine what rent per square foot would result based on the percentage rent conclusion. The analysis is based on the current slip 4 fees and occupancy rates for marinas in Newport Harbor and the resulting rent per square foot is compared to the actual rent per square foot being paid by others in Newport Harbor. 1 used the tideland area that is set forth the The Irvine Company's lease with the County for the Bayshore lease as all of the improvements except the gangways are in the leased tidelands. While I don't necessarily agree with the methodology, if you include the strip of fee owned tidelands (24'x ±1,100' = 26,400 Sq.Ft.) the total tidelands is 126,457 square feet and the indicated initial minimum rent is reduced to $1.30 ($165,000 -:- 126,457 Sq.Ft.), the current percentage rent equates to $2.45 per square foot ($310,000 -:- 126,457 Sq.Ft.), and the pro -forma rent per square foot equates to $2.71 ($342,999 -:- 126,457 Sq.Ft.). These indications are within the range reflected by the other comparable data. Newport Harbor Commercial Marina's Market Rent Determination Comments on the Rasmuson Appraisal Questions by Allen Matkins Responses by Gary Rasmuson Q1) Mr. Rasmuson did not value any particular property. Rather, he valued two generic benchmark tidelands" properties. The first is a "larger" parcel, which he defined as a water parcel located near the upper - middle of Newport Bay, near Mariner's Mile, and containing 70,000 square feet with a depth of 100 feet. The second is a "smaller" parcel which was presumed to contain 15,000 square feet. The Rasmuson appraisal report does not state the presumed depth of the smaller water parcel. R1) I was asked to provide a benchmark value so I did not value any particular property as per your request and the scope of my assignment. Q2) Mr. Rasmuson's analysis is subject to the extraordinary assumption that an upland parcel is available through joinder for future development of the water parcel as a marina (the presumption Is that required parking and an office /restroom building would be provided on the upland parcel). The report states at least three times (including on pages 16, 18, and 49) that, absent an available upland parcel, the highest and best use of the water parcel would be different, and the resulting market rent would be ((significantly reduced ". However, the treatment of this issue by Mr. Rasmuson is of great concern. Although Mr. Rasmusonls report repeatedly states that the water must be combined with the land parcel in order for it to be devoted to its most valuable use, the report also states that the highest and best use of the upland parcel may not be as a 5 marina (page 49). At best (from the perspective of the water parcel) this situation creates a bilateral monopoly, a situation in which both parties have to compromise to reach an equitable result. Unlike in a true bilateral monopoly, however, Mr. Rasmuson concluded that the upland parcel may have the same value, or even a higher value, without the attachment of the water parcel and the necessity to devote it to marina support use. The result is that there is a tremendous increm.ent in the rental value of the water parcel if it is devoted to marina use in conjunction with an upland parcel, but no increment in value to the upland parcel. Stated another way, Mr. Rasmuson has effectively concluded that the water parcel needs the upland parcel, but that the upland parcel does not need the water parcel. The problem is that, rather than analyze the impact on market rent of this situation, Mr. Rasmuson simply assumed it away by imposing the referenced extraordinary assumption. In so doing, Mr. Rasmuson reallocated 100% of the economic benefit of the doubt regarding the availability and economic significance of an upland parcel to the water parcel; none of this benefit was allocated --6 the upland parcel. This is a highly significant factor of the Rasmuson appraisal as it states on page 18, "A mooring field was considered and may be a possible use if joinder with an adjacent land parcel is not available; however the rental rates and density of boats per square foot is less than as a marina use and therefore has not been considered in this benchmark valuation as a primary use." The conclusion does not follow from the statement made - it is precisely because the water parcel has far lower utility as an independent parcel (but not vice versa) that the benefits of the combination to the water parcel should be allocated in part to the upland parcel. R2) 1 made the extraordinary assumption that the water parcel will be tied to the upland parcel for leasing purposes, consistent with the scope of the assignment and consistent with the proposed lease agreement. I analyzed the impact of the lack of this tie and the obvious highest and best use for the water area is as part of an adjacent land use. My residual rent allocation process is one way to attempt to reflect the land use rent requirements and the residual rent to the water area. The market approach considering leases for water -only marinas is a more direct way to analyze market rent, but is limited by available data. So, both methods were employed, each having their weaknesses in an imperfect market. 1 do note that land sale data for parcels adjacent to the harbor sell for significantly higher values than parcels directly across the street with no water access. I believe that at least some of this value increment is due to the ability to use the water parcel (under a lease) as a marina, even though a marina is not the primary use of the land parcel in most instances. It is difficult to tell how much land value increment is due to water proximity versus an unobstructed water view. At least one land sale reviewed for this assignment was purchased by a buyer who reportedly wanted the adjacent water area to park his large yacht. Q3) Mr. Rasmuson's valuation analyses were based in part on his review of a "sample lease agreement ". This agreement was not provided for review, but it was described as containing "42 pages plus addendums and exhibits ". While it is unclear what is 0 contained in the bulk of the document, there are several elements of Mr. Rasmuson's description of the supposed lease (and his assumptions regarding its terms) that are highly significant to value: a) Mr. Rasmuson assumed that the lease agreements would be at least 20 years and no longer than 50 years in length. Although Mr. Rasmuson did not address the impact on rent if the lease term is shorter than 20 years, it is obvious that the rent would have to be lower to permit amortization of the required marina improvements in this shorter time period. R3a) 1 did not evaluate varying lease terms, but rather the primary term indicated in the sample lease provided. It was not within my scope to analyze a short term lease agreement. b) Mr. Rasmuson's description of the assumed rent adjustments (page 17) is unclear. The report contains two headings, "Periodic Base Rent Adjustments" and "Fair Market Adjustment of Rent ", but the report does not describe the relationship between these two items. Although the former describes a five -year term, there is no mention of what methodology would supposedly be used to adjust the rent or the length of time between the market rent adjustments. In addition, the report notes that the "Lessee shall pay for all Lessor's cost of a market rent adjustment ", this is a highly unusual lease provision. As written, the tenant would be exposed to market rent adjustments at undisclosed intervals based on an undisclosed methodology, and would be responsible for unlimited costs incurred by the lessor to impose these adjustments. This lease provision would reduce the market rent of any property subject to its terms. R3b) /noted the periodic rent adjustments called for in the sample lease agreement. These are considered typical in the marina leases I reviewed and therefore I did not feel any adjustment to the rent rate conclusion was warranted. c) The lease contains a restriction on transferring or assigning the use of the adjoining upland parcel separately from the leased water parcel. As described, this restriction could preclude redevelopment of the upland parcel during the entire lease term, even assuming that the marina support facilities would be maintained. Mr. Rasmuson described this as a "unique condition ". R3c) I did not interpret the restriction on transfers of the adjoining land parcel as limiting or extinguishing the redevelopment potential for these parcels. If this is the case, further consideration may be needed. Q4) Mr. Rasmuson used two valuation approaches, a market data (comparison) approach and an economic analysis. The market data approach relied on two categories of marina leases. The first group is leases of combined upland/water parcels in San Diego Bay, Mission Bay, Newport Harbor, Huntington Harbor, Port of Los Angeles (San Pedro and Wilmington), and Marina Del Rey. The second group is water - only parcels located in San Diego Bay, Newport Bay, Huntington Harbor, and at Santa 7 Catalina Island. While some of the upland /water parcel leases are for new or rebuilt marinas, all but one of the water -only leases are renewals of prior leases where the tenants have extensive investment to protect. On page 31, Mr. Rasmuson described the two Newport Harbor leases from the County of Orange (Bayshore and Swales, both of which -are reportedly leased at 20% of revenue) as the "best market data ". These leases were further described as renewals where the tenants had "significant investments in leasehold improvements ". The report states several times, including on pages 31 and 49, that there was "little room for negotiation" given this fact, and that these leases "require consideration for the circumstances under which the leases were negotiated" (page 31). In fact, these leases fail the requirements of the definition of market rent included by Mr. Rasmuson on page 3, which requires a 11 Competitive and open market ". They also violate the definition of market value included on page 2, which requires that the parties be "typically motivated ". R4) I believe that the Orange County water -area only leases are the best available market data and gave due consideration to the strengths and weaknesses of this data. 1 recognize that they were negotiated where the tenant had existing leasehold improvements and the lease was a renewal. 1 understand an argument can be made that some consideration be given to this 'unbalanced' negotiating position with the Lessor. However, I looked to areas where 1 had the most market data in order to find whether there is a difference in the marketplace where a lease is negotiated for a new marina on a vacant land parcel or where a lease is negotiated for a renewal and the tenant had an existing investment in marina improvements. Several leases were found where a new marina was to be developed and the negotiated lease rate (percentage rent rate) was the same as for an existing renewal lease. This is the best evidence to me that no adjustment is due for this factor. Q5) In the analysis and reconciliation discussion on page 31, Mr. Rasmuson described a pending lease renewal for a water -only parcel leased to Glorietta Bay Marina in San Diego Bay. This deal is reportedly at 11% (half of the typical 22% figure for land /water parcels), but it suffers from the same concerns regarding the tenant's investment in leasehold improvements. Missing from this analysis, however, is a discussion of the only new water -only lease found by Mr. Rasmuson. As described by Mr. Rasmuson on page 20, the Coronado Yacht Club is proposing to redevelop its facilities and expand the marina into a water -only property that is not currently leased (and not currently under the jurisdiction of the San Diego Unified Port District). The proposed transaction involves leasing the water parcel to the Port District from the State of California, then subleasing the parcel to the yacht club. The report states that the State has not determined what rent it will charge the Port District, but the sublease for the new water parcel will "start at 8.25 percent of slip rental income and step up to 11 percent." This transaction is highly significant in that it demonstrates the actions of the market in a situation where the adjacent user desires to use, but does not need, a water parcel. It is unclear why Mr. Rasmuson failed to analyze this transaction in the summary and reconciliation discussion. N R5) Regarding the proposed new water area only lease for the expanding Coronado Yacht Club, no lease rate was revealed to me for this water area, either between the club and the Port, or the Port and the State of California. My discussion of the rent rate structure of 8.25 percent going to 11 percent was for the existing land and water parcel currently leased to the club for the yacht club and marina use. The San Diego Port District discounts the percentage rent for yacht clubs as they are non - profit and the Port wants to support this type of use. I do not believe that this rent structure necessarily applies to the new water area to be leased, although it may. It will still be considered a land and water lease since it will be tied to the adjacent leased parcels. The new water area only lease would be between the Port District and the State of California. This lease rate is not currently known or disclosed. Q6) In the economic analysis, Mr. Rasmuson repeated the "key assumption" that an adjacent water parcel will be available for combined use with the water parcel {page 31). He further stated, "Key to this formula is that the uplands and tidelands are assumed to have a common highest and best use, which in this case is as a commercial marina1l (page 32). This is a highly significant and questionable assumption, particularly given his statement on. page 49 that the highest and best use of the upland may not be as a marina. Again, however, Mr. Rasmuson just assumed away this problem. R6) See my discussion regarding the highest and best use issue in #2. 1 do not have anything additional to add at this point. Q7) Mr. Rasmuson's economic analysis starts with the conclusion that the total market rent for the combined upland parcel and water parcel would be 25% of slip rental revenues. Mr. Rasmuson then assumed that the generic larger marina would have 50 slips with an average length of 40 feet. After analyzing published rental rates, he concluded that the average rate would be $40.00 per linear foot per month. The then analyzed the implied revenue necessary to provide an adequate return on the value of the upland parcel; this amount is deducted from the total rent to indicate the residual rent to the water parcel. When divided by the collected income, a percentage rent for the water parcel only is indicated. While this analysis is appropriate and necessary, there are significant problems with its application by Mr. Rasmuson, as noted in the following paragraphs. a) Mr. Rasmuson's average slip length of 40 feet is longer than three of the four marinas he analyzed (Bayshore, a portion of Bayside, Swales, and Ardell); the weighted average length of a slip at these marinas is about 35.8 feet. This is significant due to the dear trend toward higher rents with larger slip lengths. While Mr. Rasmuson's concluded average slip size may be achievable on his optimally - sized and shaped generic parcel; it may not be achievable on many of the actual water parcels to be leased. R7a) I believe that my analysis of an average slip size around 40 feet is appropriate considering the assumption that the water area is vacant and a new L9 development would attempt to maximize revenue. Longer slips are in demand and achieve higher rates than for shorter slips. b) As stated in the report, Mr. Rasmuson relied on published rental rates. It is well known that marina owners are competitive, and frequently offer free rent or other concessions, especially in soft markets like the one currently being experienced. As an example, a quick search of the Web site for the Newport Dunes marina discloses that they were offering 15 %- 20% off their published rates earlier this summer for full -year leases. As such, it appears that Mr. Rasmuson overstated the actual slip rental that could realistically be achieved. R7b) I reviewed published rates and interviewed marina owners and operators regarding lease rates and practices. I believe that any discounts offered recently would be short -lived and not reflect a long -term stabilized condition in this market where I have been told that historical occupancy rates have been close to 100 percent. This relates to the discussion of a stabilized vacancy rate used in my analysis which will be discussed in the next item. c) Mr. Rasmuson stated that the current vacancy rate range for the Newport Harbor marinas is about 0% to 15 %, with most in the range of 10 %. Despite this fact, he used a vacancy rate of 3% in his analysis; this analysis is unreasonable, especially in light of the overstated slip rent noted above. The vacancy rate he used in this analysis is particularly improper in light of his statement on page 44 that, 'The average vacancy rate in the current Newport Harbor market is between 5 -and 10 percent. In my opinion, the current market rent rate should reflect these conditions [emphasis added] ". The use of a higher vacancy rate significantly affects the results of the economic analysis, as will be demonstrated later. R7c) While the current vacancy rate is from 0 to 15 percent, historically this market has had very few vacancies. Appraisers commonly apply a stabilized vacancy rate when appraising property in markets where the actual vacancy for a given parcel or larger market may be different. This is appropriate valuation methodology and allows an estimate of a benchmark rent rate in a normalized or stabilized market condition. Adjustments may be appropriate for a rent rate per square foot basis, but a percentage rent rate has a built -in adjustment when revenues have declined, such as the current market. It is possible that temporary relief can be considered for extreme market condition changes, but it is expected that over a lease term such as 20 years or more the benchmark rate should be based on a stabilized market assumption. d) To determine the implied land rent that must be deducted in the analysis, Mr. Rasmuson first estimated the size of the land parcel that would be needed to support the hypothetical marina. The methodology he used understated the land area needed by a considerable margin. First, despite stating that the average land area needed for a parking space is 290 to 350 square feet, Mr. Rasmuson used only 300. In addition to being at the low end of the range, this figure does not include buffer areas and landscaping. Mr. Rasmuson then added 400 square feet for an office /restroom building. Again, however, no buffer area was included. The result of 101 Mr. Rasmuson's analysis is a supposed necessary land area of only 11,800 square feet, which equates to 236 square feet per slip and 5.9 square feet per linear foot of slip space. These figures can be compared with the actual figures for Bayshore Marina, a larger, efficient marina with no office space or other non - marina uses. Based on measurements taken from an aerial photograph using Google Earth, Bayshore Marina has about 35,000 square feet devoted to parking, landscaping, and restrooms; this equate -s to 265 square feet of land area per slip (12% higher than the figure used by Mr. Rasmuson) and 8.2 square feet of land area per linear foot of slip (39% higher than the figure used by Mr. Rasmuson). Finally, on page 38, Mr. Rasmuson notes that his conclusions result in a land area to water area ratio for the hypothetical marina of 17 %. This figure should be compared with Bayshore, where the figure is actually 28.2 %, including both owned and leased water areas. Using the actual Bayshore figures results in indications of the actual required land area for the hypothetical subject marina as follows: Item Bayshore (Actual) Indicated Land Area for Subject Area per slip 265 13,250 Area per LF of slips 8.2 16,400 Land to water ratio 28% 19,600 The required land area indicated by this analysis ranges from about 12% to 66% higher than the area used by Mr. Rasmuson. Using the rounded average of these three figures, 16,400 square feet, and accepting all of the other inputs used in Mr. Rasmuson's analysis solely for purposes of this computation, results in a residual market rent to the hypothetical water parcel of $81,100, more than 34% below the figure concluded by Mr. Rasmuson. This results in an indicated market rent for the water parcel of 8.7% of collected income (compared to the 13.3% figure determined by Mr. Rasmuson) and $1.15 per square foot of water area (compared to Mr. Rasmuson's conclusions of $1.77 based on his economic analysis and his ultimate concluded market rent of $1.50 per square foot). The appraiser is clearly aware of the size inconsistency regarding Bayshore, as the issue is noted on page 42 of the Rasmuson appraisal report. R7d) I was aware of the actual land parcel size for the Bayshore Marina and considered it in my analysis. I believe that given the high land values associated with harbor frontage parcels, a prudent developer would allocate only the minimum required area for parking and related marina use. 1 used my estimates for allocated land areas based on this assumption and recognize that if more or less were to be allocated, it would have an impact on the residual rent result. 1 believe that my estimates are reasonable. e) One of the inputs to the Rasmuson economic analysis that was not changed for the adjusted economic analysis described above is the land value per square foot for the assumed upland parcel used for joinder by Mr. Rasmuson. While his conclusion of land value was $185 per square foot, Mr. Netzer, the appraiser who performed the 11 second appraisal for the City, concluded that the appropriate land value was actually $275 per square foot. Applying a higher land value in the Rasmuson economic analysis would significantly lower the indicated market rents, both on a percentage basis and a rent per square foot basis. R7e) /made my own estimate of land value based on the available data and believe it to be reasonable. Variations in this number obviously will change the residual results and this is one area of potential weakness in the theoretical residual technique. f) Mr. Rasmuson performed a second analysis to determine the market rent per square foot (see page 42 of the report). First, it should be noted that there is a significant error in the Rasmuson calculations regarding the Bayshore Marina. While the analysis in the report shows that the indicated water rent for this marina is $1.75 per square foot, he incorrectly divided by only the leased tidelands parcel and ignored the owned tidelands parcel. The correct figure indicated by the Rasmuson analysis for Bayshore is $1.41 per square foot. R7f) The residual rent rate per square foot for the Bayshore Parcel on page 42 should be $1.41 per square foot when considering the entire water area including the fee -owned area. This would be consistent with my calculations for the other marinas used for comparison. g) Far more significant than Mr. Rasmuson's computational error is two other errors in the analysis, the assumed associated upland area and the vacancy rate. The land area figures used in Mr. Rasmuson's analysis on page 42 are determined by calculating the required number of parking spaces at 0.75 space per slip, rounding up to the nearest whole number, multiplying by 300 square feet per parking space, and adding 400 square feet for an office /restroom building. The flaws in this analysis are discussed above, particularly in light of the actual figures for Bayshore Marina, which are far higher than what is indicated by Mr. Rasmuson's analysis. The vacancy issue was also discussed above- despite Mr. Rasmuson's statement that most marinas are operating nearl0% vacancy, and despite his statement in the report that current economic conditions should be considered in determining the market rent for water parcels, he inexplicably used a 3% vacancy figure in the rent per square foot analysis. This is particularly egregious given that Mr. Rasmuson was aware of and reported the actual vacancy rate for three of the four marinas included in this analysis earlier in his report (on page 34) to be 10 %. Mr. Ra.smuson's analysis was recreated with changes made only in the two analysis parameters described in this paragraph. For purposes of this revised analysis, the actual size of Bayshore Marina was used, and the actual vacancy rates of Bayshore, Bayside, and Ardell were used. Because the land areas of Bayside, Swales, and Ardell are not known, the actual Bayshore land to water ratio (about 28.2 %) was applied to all four marinas. Because Mr. Rasmuson did not report the actual vacancy rate for Swales, the 10% rate reported by Mr. Rasmuson for the other three marinas and stated by him to be typical was used for this analysis. The following table summarizes the results of this revised analysis. 12 As shown, the impact of Mr. Rasmuson's land area and vacancy rate methodologies are highly significant; the 10% to 14% percentage rent range calculated by Mr. Rasmuson falls to essentially 0% to 6.6 %1 while the rent per square foot range of $1.41 to $1.87 falls to essentially $0.00 to $0.92. R7g) This discussion relates to vacancy and land parcel sizes as previously discussed. l have no additional discussion to add to this item. h) Page 43 of the report contains a sensitivity analysis in which Mr. Rasmuson applied vacancy rates of 3 %, 5 %, and 10% to the prior rent per square foot analysis. While it is reasonable for Mr. Rasmuson to have performed an analysis recognizing that the 3% rate used in the original analysis is far too low to reflect current economic conditions, and that the market rents should reflect the actual current conditions to determine a current market rent (that would be subject to adjustment over time)) the figures shown by Mr. Rasmuson are still significantly overstated due to the land area issue. Further, it is unclear why Mr. Rasmuson performed this sensitivity analysis for the rent per square foot, but not in the determination of percentage rent; as was shown in the adjusted analysis described above, the vacancy rate affects both figures. R7h) 1 used the sensitivity analysis to show how the resulting residual rent will vary given different assumptions in vacancy rates. When a rent rate per square foot is to be used, / would assume that this rate will be a benchmark base rate, to be adjusted periodically to reflect market conditions at the time of the lease renewal or renegotiation. Under these conditions, it would be appropriate to consider a market vacancy rate at the time of the assumed date of lease. The benchmark percentage rent rate will directly adjust the rent charged the tenant as vacancy goes up or down over time, so no adjustment to the rate is needed. i) While not discussed here in detail because the issues are essentially the same, Mr. Rasmuson's economic analysis of the market rent for a smaller marina is similarly flawed and results in an overstated market rent. Q8) Mr. Rasmuson performed no analysis of the market rental value of the water parcels as freestanding facilities (for open -water mooring purposes). As noted, Mr. Rasmuson instead overtly assumed that adjacent uplands are available for use with every water 13 Ba shore Ba side Swales Ardell Rasmuson conclusion -% of EGI 10.0 % 14.0 % 10.0% 13.0% Corrected calculation -% of EGI 5.7% 4.5% 6.6% -0.5% Rasmuson conclusion -Water rent/SF $1.41 $1.87 $1.46 $1.44 Corrected calculation -Water rent /SF $.078 $0.57 $0.92 ($0.05) As shown, the impact of Mr. Rasmuson's land area and vacancy rate methodologies are highly significant; the 10% to 14% percentage rent range calculated by Mr. Rasmuson falls to essentially 0% to 6.6 %1 while the rent per square foot range of $1.41 to $1.87 falls to essentially $0.00 to $0.92. R7g) This discussion relates to vacancy and land parcel sizes as previously discussed. l have no additional discussion to add to this item. h) Page 43 of the report contains a sensitivity analysis in which Mr. Rasmuson applied vacancy rates of 3 %, 5 %, and 10% to the prior rent per square foot analysis. While it is reasonable for Mr. Rasmuson to have performed an analysis recognizing that the 3% rate used in the original analysis is far too low to reflect current economic conditions, and that the market rents should reflect the actual current conditions to determine a current market rent (that would be subject to adjustment over time)) the figures shown by Mr. Rasmuson are still significantly overstated due to the land area issue. Further, it is unclear why Mr. Rasmuson performed this sensitivity analysis for the rent per square foot, but not in the determination of percentage rent; as was shown in the adjusted analysis described above, the vacancy rate affects both figures. R7h) 1 used the sensitivity analysis to show how the resulting residual rent will vary given different assumptions in vacancy rates. When a rent rate per square foot is to be used, / would assume that this rate will be a benchmark base rate, to be adjusted periodically to reflect market conditions at the time of the lease renewal or renegotiation. Under these conditions, it would be appropriate to consider a market vacancy rate at the time of the assumed date of lease. The benchmark percentage rent rate will directly adjust the rent charged the tenant as vacancy goes up or down over time, so no adjustment to the rate is needed. i) While not discussed here in detail because the issues are essentially the same, Mr. Rasmuson's economic analysis of the market rent for a smaller marina is similarly flawed and results in an overstated market rent. Q8) Mr. Rasmuson performed no analysis of the market rental value of the water parcels as freestanding facilities (for open -water mooring purposes). As noted, Mr. Rasmuson instead overtly assumed that adjacent uplands are available for use with every water 13 parcel. In doing so, he further inherently assumed that the highest and best use of those adjacent uplands was to devote it to marina support use, despite his statement that this may not be the case. R8) 1 did not present a detailed analysis of water parcel use for open water mooring with no land connection, but did enough analysis in my report preparation to determine that this use would not generate income comparable to that of a marina use when associated with a land parcel. While numbers could be generated for this analysis to show the discrepancy between these two uses, I do not believe that it would have changed my conclusion. I felt that an extraordinary assumption was needed due to the unique circumstances that exist between the connection required for a commercial marina to have joinder with an adjacent land parcel for access and parking. Although there are some small marinas where no parking area support is provided by the joinder parcel, if considered as if vacant and available for new development current zoning code would require parking support. My analysis was made on a generic benchmark basis and not property specific. This analysis assumes land and water as if vacant and available for development to their highest and best use as a joined entity. This means that development as a marina on the water parcel would require associated parking provided on the land parcel, Q9) The Rasmuson appraisal ultimately concludes that the market rent for water parcels is 17% of collected slip revenue, or $1.50 per square foot per year ($1.40 for a smaller marina). In reaching the percentage rent conclusion, Mr. Rasmuson stated on page 50 that the economic analysis was given "about equal weight to the comparable market data method indicators ". Given the noted flaws in both approaches (both of which overstated the results), the actual market rent on a percentage basis is significantly below 17 %. Given the noted flaws and the error in Mr. Rasmuson's analysis of the rent per square foot, the stated conclusions are similarly overstated. R9) 1 believe that my analysis was based on reasonable assumptions and recognize that if variables or inputs change, the result will also change. This is a general weakness of this theoretical approach and why it should be balanced with actual market data. 14 STAKEHOLDER'S RECOMMENDATION September 12, 2012 1. Lease Term 5 to 25 years. (need to review lease agreement) 2. Rent per square foot(psf) of Tidelands will be as follows: a. 2013 $0.75psf b. 2014 $1.00psf c. 2015 $1.25psf d. 2016 $1.50psf e. 2017 $1.75psf f. 2018 -2022 $2.00psf g. 2023 -The rental rate will be $2.00psf adjusted for the difference in any increase or decrease between the Newport Harbor Marina Index (as constituted today) for the period 2018 and 2022. The Newport Harbor Marina Index is the formula used in the City owned Balboa Yacht Basin. h. Subsequent rate adjustments every 5 years based upon the marina index difference for the past 5 year period. 3. Provide the owner an option at the end of the lease term to renew the lease for a period of time and establish the fair market rent for the next term using the multiple appraiser method including arbitration. Total Water 51 Total Est Gross Total Est 20% of G Total Est 18.5% of Gross 1,662,429 $ 20,165,676 $ 4,033,135 $ 3,730,650 Price per SF if 20 %Equiv or 13.5% Equiul 2.43 1 $ 724 20% 18.50% 1,062,640 12,791,284 $ 2,558,257 $ 2,366,388 1,289,640 14,203,560 $ 2,840,712 $ 2,627,659 1,055,506 13,389,096 $ 2,677,819 $ 2,476,983 of all 12 of yellow Index of Blue Index. Z. 'ZG �.s7 Cohvefting, 209/o of e to Squzife Footqge of e• o e Marina Name BYB Index Benny Index Dave Index Tidelands or WateiweySF Estialdre Gtas 3G% oh Ell Gross i6.5 % or Ell G,os "id, 20%of Grosz b2W.(Wate, 1a5 %o( Gmss by SF Of Water Notcs American Legion 36,632 $ 300;000 $ 60,000 $ 55,500 48 $ 1.64 $ 1.52 Legion rent is 40% of Gross Ardell;i't', 56,000 $ 884,412 $ 176,882. $ 163,616 50 $ 3.16 $ 2.92 - Balboa Yacht Basin (City) 235,000 5 1,478,670 $ 295,734 $ 273,554 172 $ 1.26. $ 1.16 fJetxerestmotes 1.63 /SF at BYB. SF includes more thanjust tideland ;izan e>dmam. Bayshores Marina (Cal -Rec, County) y j 100,057 $ 1;801,951 $ 360,390 $ 333,361 134 $ 3.60 $ 3.33 - BaysideMarina(Cal -Rec) __. 34,500 $ 1,926,451 $ 385,290 $ 356,394 102 $ 2.86 $ 2.65 ..� Bayside Village De Anza Mann 78,806 $ 2,174,997 $ 434,999 $ 402,374 226 $C2.43 $ 2.2 of tidelands- private Pareel(5F isaneztimatel Curet MID Yacht Anchorage _ _ 204,000 $ 4,578,240 $ 915,648 $ 846,974 251 $ 4.49 7 4.15 Harbor TOwerS Marina 54,885 $ 889,200 $ 177,840 $ 164,502 52 $ 3.24 $ 3.00 C,,,,$53Kis35 %ofmarinam... TOtalrentfWdis$151.4Klestl Lido arena age } 93;600 $ 1,867,320 $ 373,464 $ 345,454 75 $ 3.99 $ 3.69 Newport Dunes Marina (County) y. - - 510,774 $ 3,804,787 $ 760,957 $ 703,886 450 $ 1.49 $ 1.38 D es lease says 25% of marina revenue to County. SF is an esnmace ofihe madnaarea•s waters. Newport Marina(Swayles, County) (I,. _.'.:✓ 50,175 $ 393,254. $ 78,651 $ 72,752 56 $ 1.57 $ 1.4 Port Calypso 8,000 $ 66,394 $ 13,279 $ 12,283 7 $ 1.66 $ 1.54 5omething odd here - must have some private waterways m accommodate 50 slips. Total Water 51 Total Est Gross Total Est 20% of G Total Est 18.5% of Gross 1,662,429 $ 20,165,676 $ 4,033,135 $ 3,730,650 Price per SF if 20 %Equiv or 13.5% Equiul 2.43 1 $ 724 20% 18.50% 1,062,640 12,791,284 $ 2,558,257 $ 2,366,388 1,289,640 14,203,560 $ 2,840,712 $ 2,627,659 1,055,506 13,389,096 $ 2,677,819 $ 2,476,983 of all 12 of yellow Index of Blue Index. Z. 'ZG �.s7 r . . u. {y� � � 2r ,p t _ +r r.� s � ,x r-8� !•CIS• r NS x f � `Y'r TnMf)q'V fiy �.yj'! ♦ h Aw iii i - l••��M -ti r ;l. � 1:rR Im- r� a �� u h ` ` 1 t4. •' �•'! � 44 ; T 3r I 1i 1 i r _ ^ac e`YyS y� a'-" ® + r✓J ,�� 6D 1 . 8 1' r. s � TL `"Z CSC. t` � i r •T , M� {. -. 'v ae i 1 t„ O - i r�j.�: Jr..j � y 3 i r;� n s• � \ o .a d 'ter y W I 1 s- W, MOM Newport Dunes 150 300 P`Q � •L���'"�a s J X �r�'�i:�r �> .�`� ^kn � - � f !� � r . r I �C: ' r � T Newport Dunes SP and 20% of Gross Equivalent Page 1 of 1 Newport Dunes SE and 20% of Gross Equivalent Kiff, Dave Sent: Monday, September 10, 2012 1:11 PM To: Henn, Michael; Selich, Edward; Rosansky, Steven Attachments: NewportDunesDockSgFt.pdf (1 ME) I've had GIS do a 15' strip around the docks at Newport Dunes. Using this SF (three areas add up to 510,774 SF) and the reported gross from the County for 2011, 20% of Gross Equivalent in SF for the Dunes is $1.49/SF. Dave https://webmail. newportbeachea.gov /owa/ ?ae= Item &t= IPM.Note &id= RgAAAABOhxndQ... 9/12/2012 Finally Is Other proposals submitted, even as late as Friday. Is Some summarized in Staff Report 09/12/2012 Other Proposals — "SF Equiv to 20% of Gross" ...... ......... ............................... . . . . . .. . . . . .. . .. ..... ............................... ► How this Marina Index works (example only): o Phase in to $2.16 /SF to 2017. 0 Setting rent for 2018, use up to 7 marinas where we know or can effectively estimate gross slip revenue and tidelands /waterways used to support marina. Calculate 20% of Gross Slip Revenue for each, average all 7 (A) Calculate tidelands /waterways, average all 7 (B) r Take over B (A/B = assume $2.52/SF). In 2018, amount goes from $2.16 /SF to $2.52/SF (note: rents year - to-year are estimates using 1012 dollars. Gross revenue in index likely to move each year, . and may result in higher (or lower) prices per SF. •. nai�n ev +ala •r ev 20°h of Gross to Per PottPer av $ 0.36 $ 0]Z $ LOB $ 160 5 180 m°m $P EAUivalent i,5`xsxi intle+ %°IG�°v 511°Neeenue ry/q N/q N/N N/A N/A N/A N/A NIA 11 11 CITY - MANAGED TIDELANDS PRESENTATION September 12, 2012 1. Overview We agree the City should charge "fair market rent" for the public tidelands portion of the water. So why is there controversy? I will try to boil it down to a few points. 1. First, there is no competitive and open market in Newport Harbor. There is a single landlord for the water parcels, and the adjacent marina owner is the only tenant. This is a bilateral monopoly. The tenants are not able to make decisions that represent an open market exchange. What is the impact? The current permittee /tenants are compelled to pay the rent (despite it being in excess of FN W) in order to retain control and use of their existing improvements, including docks and utilities. This action to compel is very harmful to marina owners of all sizes, and particularly tough on smaller operators. 2. The water parcel is what we are valuing. As an independent site, the water parcel is severely restricted because it has no access to the uplands for utilities or marina - supporting land uses such as parking, restrooms and showers. 964198.01/OC 372184- 00002 /9- 12- 12 /gsm/mel 3. The Netzer and Rasmusson appraisals posted for review contain numerous factual errors and, until they are corrected, the conclusions cannot form the basis of value. 4. Although the Harbor commercial owners and two highly - qualified experts opine the Committee proposal in the staff report is significantly above FMV, THERE IS NO RECOURSE AVAILABLE. Given the substantial investment in marina improvements, the marina owners are being compelled to pay rent, which our two experts opine is significantly in excess of Fair Market Value. 5. There is a solution. There is a validation method to properly determine value in a closed market, and my clients have submitted proposals, and other owners have had a City - approved appraiser submit an opinion. II. 'There is no Competitive and Open Market A. There is no open market. There is only one landlord and one tenant. This is a bilateral monopoly. Why is this important? Because this means that the definition of Fair Market Value is not satisfied. A critical component in determining the appropriate information to rely upon in forming an opinion of value is that the data conform to key definitions of market value. In particular, it is essential to confirm that the buyer and seller were "each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus." The test fails. B. A thorough analysis of these special issues in the market are essential to form a credible opinion of value. This critical analysis was not done by the City. 9G4198.01/OC 372184- 00002/9- 12- 12 /gsm /mel -2- 11I. Value for the Independent Parcel is the Issue to Resolve A. In Newport Harbor, the uplands are privately owned and provide access to the water. Private investment has built parking, restrooms, docks, seawalls, ramps, guardrails and utilities. B. In addition, private water, in many cases, abuts the privately - owned land parcel. See Map. C. The water parcels have no direct land access. The highest and best use of the water parcels, as an independent site, is severely restricted by its lack of access to the uplands for support of any commercial use. The water parcels could potentially be used for offshore moorings; however, lack of uplands parking, restrooms and dingy launching facilities would present problems of approval from local citizens' groups and certain regulatory agencies. Therefore, as an independent site, the water parcels have limited economic value. IV. Appraisal Problems A. History of Appraisals: 1. The City commissioned an appraisal to value tidelands in 1989 and 2001. These appraisals properly analyzed the unique characteristics in the Harbor. 2. I have submitted a letter to the City dated August 30, 2012 which should be part of the record. My letter identifies numerous problems with the City appraisals, but let me identify a few critical issues: a. The City uses two county leases as the basis for its decision that FMV in the Harbor should be 20 %. The water -only lease data the Committee says should be the market value are from county 964198.01/OC 372184- OD002 /9- 12- 12 /gsm/mel -3- leases at Bayshores and Swales. The City appraiser describes these as renewals with no appraisal, and the tenants said there was little room for negotiation because they had invested considerable money in leasehold improvements. As stated before, the bilateral monopoly drives a decision of a tenant to be compelled to pay in order to protect its private investment. This is not a comparable deal to be used since it does not meet FMV requirements of the appraisal institute. Please refer to the Jones appraisal, pages 55 -59, for further support that the county leases do not meet the standards of an open market transaction. b. All of the appraisals show a combined water parcel and land parcel together have a 25 % total rent figure. The City proposes that 80% of the total value of a combined land -water parcel be allocated to the water. Our experts and common sense tells you there is no way the number is correct. The water alone with no access to land is, at best, a mooring field. 3. The 'Residual Formula" Rasumusson sets forth starting on page 31 of his appraisal is a good approach to help frame FMV. My letter, which is in your package, illustrates on Exhibit B the impact on the FMV if you use the corrected Harbor facts. Despite using a few components in the calculations that need correction, Rasmusson concludes FMR is 13 %, which is significantly under what the City if proposing. Please use the formula with the corrected facts below. Do your own math. 964198.01/OC 372184 - 00002/9- 12- 12 /gsm /mel -4- Land values — 250 -275 (Netzer) Vacancy — 5 -10% Land to Water Ratio — 28% Average Slip Size — 33 -35 feet V. Conclusion Please do not compel the Harbor owners to pay more than FNW. Please work with them. 964198.01/OC 372184. 00002/9- 12- 12 /gsm/me1 -5- Commercial farina Dental Fates September 12, 2012 City Counoil Chambers City of Nr.,cport Beach What this meeting is NOT about Gas Docks Shipyard docks � H As docks � Sportfishing, Charters Yacht Clubs � Guest Docks for restaurants Residential Piers It's about setting rental rates for commercial marinas renting slips. What We'll Cover � Committee Recommendation Other proposals Discussion /Action City's Obligation Charge Fair Market Value for use of the tidelands - two reasons. First reason: These are the State's lands. The State Lands Commission grants them to us: Via legislation, set forth a trust agreement with the State of California (via Chapter 74 of the Statutes of 1978). Newport Harbor's tidelands are subject to the Public Trust Doctrine. If the City does not manage these lands appropriately and fairly, the tidelands grant can be revoked. City's Obligation Charge Fair Market Value to all Tidelands Operations — second reason: Not doing so can be a Gift of Public Funds, specifically prohibited by the California Constitution (Article XVI, Section 6): "The Legislature shall have no power to ... to make any gift or authorize the making of any gift, of any public money or thing of value to any individual, municipal or other corporation whatever" Committee Background & Role Committee on Harbor Charges Formed July 27,20 10 Members: Mr. Selich, Mr. Henn, Mr. Rosansky Tasked to examine. Fees based on cost -of- service Onshore and offshore mooring rents BalboaYacht Basin rents (slips, apartments, garages) Commercial Marinas Other Commercial uses (gas docks, shipyards, etc) Committee Background & Role Committee Formed July 27,20 10 Members: Mr. Selich, Mr. Henn, Mr. Rosansky D Examinee Fees based on cost -of- service — completed November 2010 Mooring rents — completed November 2010 Balboa Yacht Basin rents (slips, apartments, garages) — completed December 2010 Commercial Marinas — under review now Other Commercial uses (gas docks, shipyards, etc) — appraisal underway. � Not under Committee's purview = residential piers About Commercial Uses in the Harbor About 65 on year -to -year Commercial Pier Permits Several others on leases: Balboa Bay Club Bahia Corinthian Yacht Club American Legion Two marinas on County leases � Commercial Pier Permit uses include: Large and small marinas Restaurant guest docks Shipyard docks Gas docks Yacht clubs, community associations Charter boats � Rent for permits is $0.36 /SF of Tidelands Rented Process for Commercial Marinas Review: BIB Municipal Code, Council Policies Tidelands Trust (Beacon Bay Bill) Past & recent practices of City, County, State Lands Commission Existing City and County leases, permits Known appraisals Initial proposal, then meet with largest stakeholders Proposed 20% of Gross Slip Revenue and $1.20 SF rent Move those on permits to leases Revised proposal, met with stakeholders Conduct/update 2 appraisals (Netzer, Rasmuson) Two public workshops with 2 appraisers P Revised proposal More about Communications Stakeholder Meetings with Council Committee Initial Stakeholder meeting with Commercial Marina Owners 23- Feb -12 2nd Stakeholder meeting with Commercial Marina Owners 5- Apr -12 Initial Stakeholders meeting with Appraisers 13- Jun -12 2nd Stakeholders meeting with Appraisers 1- Aug -12 Committee Members' public speaking events Newport Harbor Chamber of Commerce's Marine Committee (Henn) 10- April -12 Newport Harbor Chamber's Gov't Affairs Committee (Rosansky) 5- April -12 More about Communications Communication Material Distribution Posted Commercial Marina Appraisals on City website and notified all interested parties via email 22- Aug -12 FAQ for Harbor Charges posted to website 22- Aug -12 Posted ad hoc Committee's draft rental recommendation on web page 29- Aug -12 Council Meeting Presentations Study session outline of Ad -Hoc Council Committee on Workplan for Harbor Charges 13- Mar -12 Commercial Marina Rental Rate proposal for Council review 12- Sep -12 0� 0 C 0 n I F� I How to Set Rent N BMC § 17.60.020(E) ... rental or lease ... reflective of fair market value ...as established by appraisal. selected appraiser. How to Set Rent (cont'd) Council Policy F -7(A) Whenever a lease .... regarding income property is considered by the City, an analysis shall be conducted to determine ...market value of the property. This analysis ...conducted using appraisals or other techniques to determine the highest and best use of the property and the highest value of the property. Original Lease Proposal Term: 5 years - 30 years — (lease term linked to slip /pier useable life) Option to Renew. One or more renewals OK (total must be less than 50 years) with Option Fee Rent: 20% of Gross of Slip Rental Revenue Base Rent: Greater of $ 1.20 /SF or 75% of 20% of Percentage Rent, whichever greater. Updated every five years. � Participation Rent — a portion of proceeds from sale or refinance paid to the City. Capital Improvement Set - Aside: Lessees must deposit with City 4% of gross in Capital Improvement Account for their specific marina. Revisions to Original Lease Proposal D Term: 5 years - 25 years D Option to Renew: One or more renewals OK (total must be less than 50 years) with Qptkm+-Fee D Rent: 20% of Gross of Slip Rental Revenue D Base Rent: Greater of $4-.2-0- 1.45 /SF or 7-5%-ef-20% of Percentage Rent, whichever greater. Phase in over three years. Updated every five years. n Appraisal results Mr. Netzer - 20120 25% of Gross Slip Revenue for Tidelands Joined to Uplands 20% of Gross Slip Revenue for Tidelands separate from Uplands Per SF = $1.45 � Mr. Rasmuson - 2012 25% of Gross Slip Revenue for Tidelands Joined to Uplands 17% of Gross Slip Revenue for Tidelands separate from Uplands Per SF Large Marinas $1.50 Smaller Marinas $1.40 Where the 20% lands e e o Newport Harbor Marina Rental Comparison, Appraisals Marina Rent % of Gross Revenue American Legion — tidelands joined to uplands 40% Arches Marina (Harbor Towers) —tidelands joined to uplands 35% Balboa Bay Club — tidelands joined to uplands 31% Newport Dunes (County Lease) —tidelands joined to uplands 25% Netzer 2006 Appraisal — tidelands joined to uplands 27% Netzer 2012 Appraisal — tidelands joined to uplands 25% Netzer 2006 Appraisal — tidelands separate from uplands 22% Netzer 2012 Appraisal — tidelands separate from uplands 20% Bayshores Marina (County Lease) — tidelands separate from uplands 20% Newport Marina (County Lease) — tidelands separate from uplands 20% (equiv) Rasmuson 2012 Appraisal —tidelands joined to uplands 25% Rasmuson 2012 Appraisal —tidelands separate from uplands 17% Bahia Corinthian Yacht Club— tidelands separate from uplands 9% 1 1, �� F..+, c-F e-F �; ��y N i � O. , � �i �� �; � � � �' �, i �, A?ry. � N I �� ., ©, O` �' _ N? � Committee recommendations Rent should be based ono Percentage of Gross Slip Revenue With a base rent per square foot. Move from permits to leases. � Rent should be re -set every five years. � Adopt Template Lease Committee Recommendation on Rent Percentage Rent of 20% of Gross Slip Revenues, with base rent of 1 e45 /SF, whichever is higher, � Phased in over three years. 2012 (current) 2013 2014 2015 Base Rent (An amount per SF of $0.36/SF $0.75/SF $1.15/SF $1.45/SF tidelands /year) Percentage N/A 10% of 15% of gross 20% of Rent gross slip slip rental gross slip rental revenue rental revenue revenue Other Proposals - stakeholders' A, B, C Stakeholder Croup: Proposal Rent Based on... 2012 2013 2014 2015 2016 2017 Stakeholder Price per SF $ 0.36 $ 0.75 $ 1.00 $ 1.25 $ 1.50 Adjust by BCYClndex Proposal A(9 -7 -12) %of Gross Slip Revenue N/A N/A N/A N/A N/A N/A Stakeholder Price per SF $ 0.36 $ 0.75 $ 1.15 $ 1.45 Adjust by Adjust by BCYClndex BCYClndex Proposal B(9 -7 -12) 1% of Gross Slip Revenue N/A N/A N/A N/A N/A N/A Stakeholder Price per SF $ 0.36 $ 0.64 $ 0.92 $ 1.20 Assume CPI Assume CPI Proposal C (9 -4 -12) %of Gross Slip Revenue N/A N/A N/A N/A N/A N/A � How the BCYC Index works: Pick seven marinas — that's the index Figure out what average slip rental price is for index in Year 1. Figure out what average slip rental price is for index in Year 2. Determine the change in the index between Year I and 2 (assume this is 4 %) In Proposal A, $1.50 /SF in 2016 would go to $1.56 /SF in 2017. Other Proposals - "20% of Gross Equiv" � Committee Considered: Proposal Rent Based on... 2012 2013 2014 2015 2016 2017 20% of Gross to Price per SF $ 0.36 $ 0.75 $ 1.15 $ 1.45 Adjust by Adjust by Marina Index Marina Index Per SF Equivalent of Gross Slip Revenue N/A N/A N/A N/A N/A N/A � How this Marina Index works (example only): Phase in to $1.45 /SF to 2015. In 2016, use up to 8 marinas where we know or can effectively estimate gross slip revenue and tidelands /waterways used to support marina. Calculate 20% of Gross Slip Revenue for each, average all 8 (A) Calculate tidelands /waterways, average all 8 (B) Take A over B (A/B = assume $2.25/SF). In 2016, amount goes from $1.45 /SF to $2.25/SF Other Proposals - Stakeholders' D � Stakeholder Group (9 -10 -2012) Proposal Rent Based on... 2012 2013 2014 2015 2016 2017 2018 Price per SF $ 0.36 $ 0.64 $ 0.92 $ 1.20 $ 1.50 $ 1.75 Adjust by Proposal D (9- 10 -12) BCYClndex %of Gross Slip Revenue N/A N/A N/A N/A N/A N/A N/A � How the BCYC Index works: Use seven marinas — that's the index Figure out what average slip rental price is for index in Year 1. Figure out what average slip rental price is for index in Year 2. Determine the change in the index between Year I and 2 (assume this is 4 %) In Proposal D, $1.75 /SF in 2017 would go to $1.82 /SF in 2018. Other Proposals - "18.5% of Gross Equiv" Proposal Rent Based on... 2012 2013 2014 2015 2016 2017 2018 Adjust by 18.5% of Gross to Price per SF $ 0.36 $ 0.75 $ 1.15 $ 1.45 $ 1.60 $ 1.75 Marina Index Per 5F Equivalent N/A N/A N/A N/A N/A N/A N/A %of Gross Slip Revenue � How this Marina Index works (example only): Phase -in to $1.75 /SF to 2017. In 2017, use up to 8 marinas where we know or can effectively estimate gross slip revenue and tidelands /waterways used to support marina. Calculate 18.5% of Gross Slip Revenue for each, average all 8 (A) Calculate tidelands /waterways, average all 8 (B) Take A over B (A /B = assume $2.05 /SF). In 2018, amount goes from $1.75 /SF to $2.05 /SF PTA 0 CD e-+ F--s • F ®r More Informati ®n � City ebsite: www.newportbeachca.gov "Projects and Issues" "Harbor Charges" (appraisals, recommendations, etc) � City Staff: Dave Kiff, City Manager dkiff&newportbeachca.gov or 949 - 644 -3001 Michael Torres, Assistant City Attorney mtorres@newportbeachca.gov or 949 -644 -3131 Chris Miller, Harbor Resources Manager cma_ iller&newportbeachca.gov or 949 - 644 -3034 - - -, r Marina Name Tidelands or Waterway SF y Gross (may be estimated ) 20% of Gross 20% of Gross by SF of Water We know SF We know gross We estimate gross, know SF Notes Ardell 56,000 $ 884,412 $ 176,882 $ 3.16 V V Known SF, estimated gross based on SLC So Ca Marina Index Bayshores Marina (Cal- Rec,County) 100,057 $ 1,801,951 $ 360,390 $ 3.60 V V Known SF and Gross - County Lease Bayside Marina (Cal-Rec) 134,500 $ 1,926,451 $ 385,290 $ 2.86 V V Known SF, estimated gross based on SLC So Ca Marina Index Curci (Lido Yacht Anchorage) 204,000 $ 4,578,240 $ 915,648 $ 4.49 V V Known SF, estimated gross based on SLC So Ca Marina Index Harbor Towers Marina S4,885 $ 605,714 $ 121,143 $ 2.21 V V Known SF and Gross - City & Private Owner Lease Newport Dunes Marina (County) 510,774 $ 3,804,787 $ 760,957 $ 1.49 V Known Gross - County Lease Newport Marina (Swayles, County) 50,175 $ 393,254 $ 78,651 $ 1.57 V V Known SF and Gross - County Lease 1,110,391 13,994,810 $ 2,798,962 $ 2.52 Weighted SF Average of Marina Index