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Condos Are Essential to Building Santa Monica's New Luxury Hotels, Developers Say

Santa Monica Real Estate Company, Roque and Mark


Rusty's Surf

Harding Larmore Kutcher & Kozal, LLP  law firm
Harding, Larmore Kutcher & Kozal, LLP

By Jason Islas
Staff Writer

This is the second in a series exploring the impact of luxury condo development in Santa Monica.

July 30, 2013 -- Santa Monica, nestled between the Pacific Ocean to the west and one of the largest and most commercially vibrant metropolitan areas in the country to its east, is a prime location for hoteliers and developers to invest in property.

With a robust tourist industry, it's no surprise that three of Santa Monica's biggest tenants want to invest millions to reinvigorate their properties along the Ocean Avenue by building modern luxury hotels, which would be a financial winfall for the owners and for the city.

But some members of the community have balked at the plans for three five-star hotels, largely because of the height of each proposed project -- ranging from 195 feet to more than 300 feet -- needed to accomodate the luxury condos in all of the pending projects. ("Proposed Luxury Condos Spark Debate about Santa Monica's Character," July 29)

So why do all three -- the Wyndham Hotel across from the Santa Monica Pier, the proposed Gehry tower at Santa Monica Boulevard and the 86-year-old Fairmont Miramar Hotel north of Wilshire Boulevard -- include condos as part of their plans?

Because, developers say, without the condos, there would be no projects.

“With all the demands for services and amenities from customers, the cost of building new luxury hotels has skyrocketed,” said Alan Epstein, lead negotiator of MSD Capital, one of the owners of the Miramar Hotel.

Epstein and his partners have proposed a $255 million redesign of the Miramar property that would replace two old buildings with three new ones -- including a 300-foot tower with up to 120 condos -- on the a four-acre campus just north of Wilshire Boulevard overlooking the Palisades bluffs.

“Given the risk profile of such projects, construction lenders have become quite cautious," Epstein said. "As a result, financing has become difficult without a residential component."

Four blocks south, the Wyndham Hotel, owned by Felcor Lodging Trust, wants to undertake a similar project.

The proposed overhaul of the Wyndham Hotel would replace the current seven-story box-like building built in 1967 with three towers, ranging from five to 15 stories tall.

“A project like this is not financeable unless you have the condos,” said Debra Feldman, president of Felcor Lodging Trust.

The proposed remodel of the property, which currently has no beach-facing windows, would cost about $160 million, Feldman said, and would place 25 condos -- estimated to sell for about $4 million each -- on the top floors of the tallest building.

In order to get investors on board for a project like that, a developer needs to guarantee a return of $80 to $85 million or more, she said.

“You're never going to get loaned more than 30 to 35 percent,” Feldman said. That's what the condos are for.

According to PKF Consulting's analysis of the proposed Wyndham overhaul, investors would see some $82 million in returns once the condos have been sold, compared to an estimated $10.9 million from room rentals during the revamped hotel's first year.

Those condos could house “local residents who become empty nesters” or people whose business or personal interests bring them to the area frequently, Epstein said.

And, if developers want to build condos, they are required by the City to contribute to Santa Monica's affordable housing pool. The Miramar project proposes as many as 40 affordable units across the street from the main hotel.

It's a win-win situation, developers say, arguing that if built as proposed, the new hotels would pump an additional $12 million in to the City's coffers annually, a particularly resonant argument at a time when the City faces a $13 million structural deficit in the next two years.

Despite the economic argument, some residents of Santa Monica are uncomfortable with the idea altogether, partly because of the extra height required for the condos.

Former mayor Michael Feinstein warned that the City's zoning standards and character shouldn't be altered to serve the needs of investment capital.

“I've governed,” Feinstein said. “I know there's a need for income. I don't think we have to kiss the first boy or girl who smiles at us.”

Still, Santa Monica has been able to weather the country's recent economic slump largely due to its symbiosis with local hotels and an unflagging tourism industry.

Roughly 14 percent of the City's $306 million General Fund comes from the Transient Occupancy Tax while 16 percent comes from sales tax. Last year, tourists spent $1.53 billion in the city. ("Tourists Boost Downtown Santa Monica Business," July 22)

Opponents of the projects have argued that the City has a strong bargaining position and should use it to leverage more concessions from the developers, including smaller projects.

PKF Consulting Senior Vice President Bruce Baltin agrees that Santa Monica is in a strong position. “The reality of it is, Santa Monica is in a unique position,” he said.

“It's one of the few places in the country where people are really looking actively to build (new) hotels without getting any public incentives,” Baltin said, adding that in many cities, local governments offer developers tax rebates and other discounts to draw projects and the revenue that comes with them.

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