DATE: October 13, 2016
SUBJECT:
Title
KONA KAI RESORT AND MARINA, LOCATED AT 1551 SHELTER ISLAND DRIVE, SAN DIEGO, CA
A) RESOLUTION CONSENTING TO ENCUMBRANCE OF CAHUENGA ASSOCIATES II, DBA KONA KAI MARINA AND WESTGROUP KONA KAI LLC, DBA KONA KAI RESORT LEASEHOLD ESTATE BY $54,000,000 DEED OF TRUST IN FAVOR OF PRIME FINANCE, WITH CONDITIONS
B) ORDINANCE GRANTING AMENDMENT NO. 1 TO LEASE WITH WESTGROUP KONA KAI LLC, DBA KONA KAI RESORT TO UPDATE OPTION TO COMBINE KONA KAI RESORT AND KONA KAI MARINA LEASEHOLDS, AND UPDATE CERTAIN LEASE PROVISIONS
C) ORDINANCE GRANTING AMENDMENT NO. 2 TO LEASE WITH CAHUENGA ASSOCIATES II, DBA KONA KAI MARINA TO UPDATE CERTAIN LEASE PROVISIONS AND UPDATING RENT
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EXECUTIVE SUMMARY:
Cahuenga Associates II, dba Kona Kai Marina (Kona Kai Marina) has a 40-year lease1 (Marina Lease) with the District at 1551 and 1901 Shelter Island Drive for a 518-slip marina which expires in 2044. Westgroup Kona Kai, LLC, dba Kona Kai Resort (Kona Kai Resort) which is adjacent to Kona Kai Marina, has a lease2 (Resort Lease) with the District at 1551 Shelter Island Drive (Attachment A - Location Map) for a 129-guest room hotel, including a restaurant, spa, meeting space and parking. The Resort Lease has a 35-year term which expires in 2049, with a 15-year term extension upon completion of phase two of the renovation for a total term of 50 years. The Resort Lease includes an option to combine the Kona Kai Resort and Kona Kai Marina leaseholds (collectively Kona Kai) once certain conditions are met.
Kona Kai has requested District consent to a $54,000,000 loan with Prime Finance secured by a leasehold deed of trust. Staff has reviewed the terms of the loan in accordance with Board of Port Commissioners Policy No. 355 (BPC 355) and recommends the Board consent to the encumbrance of the Kona Kai leaseholds. Consistent with District practice, staff has prepared a lease amendment to the Resort Lease to update certain lease provisions to bring it to the current standard, including updating the attached option to combine the leaseholds. A review of the Resort Lease rent was conducted and two changes are proposed to percentage rental rates for Conference and Banquet Rooms from 7% to 7.5% and Parking Services from 10% to 15%, no changes to Minimum Annual Rent (MAR) are proposed (Attachment B - Existing and Proposed Lease Information Summary - Resort Lease). The Marina Lease is non-standard as it relates to the District’s consent to an encumbrance because it does not include language that allows the District to update the lease and rent as a condition of District’s consent to the encumbrance. However, Kona Kai has agreed to an amendment to the Marina Lease to update certain lease provisions to bring it to the current standard. The next rent review for the Marina Lease is on July 1, 2017, and Kona Kai has agreed to update rent for the rent review early which will result in an increase of the MAR from $978,300 to $1,076,684 and no changes to the percentage rental rates. The adjustment in MAR to the Marina Lease represents 80% of the average percentage rental paid during the last three accounting years of the previous rental period (Attachment C - Existing and Proposed Lease Information Summary - Marina Lease).
RECOMMENDATION:
Recommendation
A) Resolution consenting to encumbrance of Cahuenga Associates II, dba Kona Kai Marina and Westgroup Kona Kai LLC, dba Kona Kai Resort leasehold estate by $54,000,000 deed of trust in favor of Prime Finance, with conditions.
B) Ordinance granting Amendment No. 1 to Lease with Westgroup Kona Kai LLC, dba Kona Kai Resort to update option to combine Kona Kai Resort and Marina leaseholds, and update certain lease provisions.
C) Ordinance granting Amendment No. 2 to Lease with Cahuenga Associates II, dba Kona Kai Marina to update certain lease provisions and updating rent.
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FISCAL IMPACT:
The proposed Board action is not expected to result in any significant direct fiscal impact to the District since only minor changes are proposed to existing percentage rental rates for the Resort Lease and concession rent exceeds the proposed MAR for both the Resort Lease and Marina Lease. Kona Kai Marina has paid an average of $1,345,855 in concession rent over the past three accounting years and the agreed-upon adjustment of the MAR to $1,076,684 per year represents a 10% increase over the previous MAR of $978,300.
There is a potential future fiscal impact due to the addition of the following two provisions in the both lease amendments;
• “Lessor’s Participation in Refinance Proceeds”
• “Assignment Participation Fee”
Both provisions allow the District to receive a 2.5% participation fee in a future encumbrance or assignment depending on certain conditions.
This agenda item is subject to Board of Port Commissioners Policy No. 106 - Cost Recovery User Fee Policy.
Compass Strategic Goals:
This agenda item supports the following Strategic Goals.
• A vibrant waterfront destination where residents and visitors converge.
• A financially sustainable Port that drives job creation and regional economic vitality.
DISCUSSION:
Background
The Marina Lease covers approximately 1,235,218 square feet of water area located at 1551 and 1901 Shelter Island Drive in San Diego. The Lease commenced on July 1, 2004 and has a term of 40 years, which expires on June 30, 2044. The 518-slip marina was reconstructed in 2007 with a total investment exceeding $7 million. The Resort Lease covers approximately 428,927 square feet of land area located at 1551 Shelter Island Drive in San Diego. The Resort Lease commenced on May 1, 2014 and has a term of 35 years, with a 15 year term extension upon completion of phase two for a total term of 50 years expiring on April 30, 2064. The Resort Lease includes an option to combine the Marina Lease and the Resort Lease once certain conditions are met. Both Kona Kai Marina and Kona Kai Resort are owned by Noble House Hotels and Resorts. Once the proposed encumbrance is obtained from Prime Finance, Kona Kai plans to exercise the option to combine the leaseholds. Per the Resort Lease, Kona Kai is required to complete a two-phase renovation project. Phase one was completed in June of 2015 which included the following improvements:
Phase One - Renovation Component
• Renovation of all existing guestrooms and corridors;
• Renovation of and addition of marina support buildings;
• Renovation and reconfiguration of the pool area including the addition of a pool bar;
• Renovation of the existing fitness center with new spa, lockers and fitness area;
• Enhanced point of arrival with new fire and lobby;
• Renovation and enhancement of the existing restaurant;
• Renovation and enhancement of the existing conference space; and
• Enhanced beach area with new cabanas, chaises and a water feature.
Phase two of the renovation has commenced and is required to be completed no later than October 1, 2020 with a minimum investment of $9.1 million to receive the additional 15-year extension to the term. The improvements for phase two include:
Phase Two - Renovation Components
• Construction of two new two-story buildings containing 41 guest rooms;
• Upgrade and enhance the existing landscaping;
• Resurface and restripe the parking lot; and
• Upgrade the existing seawall.
Lease Amendments and MAR Update
Kona Kai has submitted documentation to the District requesting consent to a $54,000,000 loan with Prime Finance secured by a leasehold deed of trust. The proceeds from the loan will be used to pay off the existing loans and fund the construction of phase two of the Resort Lease. Both the Marina Lease and Resort Lease require District’s consent prior to encumbering the leasehold interest. The proposed amendment to the Resort Lease updates the lease and the attached option to combine leaseholds to the current standard (Attachment D - Amendment No. 1 to Resort Lease). A review of the Resort Lease rent was conducted and two changes are proposed to percentage rental rates for Conference and Banquet Rooms from 7% to 7.5% and Parking Services from 10% to 15%, no changes to MAR are proposed. The Marina Lease is non-standard as it relates to the District’s consent to an encumbrance because it does not include language that allows the District to update the lease and rent as a condition of consent to an encumbrance. However, Kona Kai has agreed to update the Marina Lease to the current standard (Attachment E - Amendment No. 2 to Marina Lease). The next rent review for the Marina Lease is on July 1, 2017, and Kona Kai has agreed to update rent for the rent review early. The rent review resulted in no changes to the percentage rental rates and an increase of the MAR from $978,300.00 to $1,076,684.00 which represents 80% of the average percentage rental paid during the last three accounting years of the previous rental period.
Proposed Encumbrance
Kona Kai has requested District consent to a new loan from Prime Finance in the amount of $54,000,000. The loan is equal to 50% of the appraised combined leasehold value of $108,000,000,3 which complies with the maximum 75% loan-to-value ratio required under BPC 355. The loan is summarized on the chart below.
Prime Finance operates as a private commercial real estate finance company. The company originates mortgage, mezzanine, and preferred equity financing; and acquires performing, sub-performing, and distressed debt. It offers various non-recourse loans on office, retail, hotel, industrial, multifamily, mobile home, self-storage, and mixed use properties in various markets around the United States. The company is based in New York with loan and investment origination teams in New York, Chicago, and San Francisco.
Conditions of Loan Approval
Staff has reviewed all of the relevant information required by BPC 355 and recommends that the District consent to the encumbrance with the following conditions:
1. The loan amount will not exceed $54,000,000.
2. The loan term will not extend beyond the current lease expiration date of April 30, 2049, or April 30, 2064 if 15 year extension is exercised.
3. All other terms, conditions, provisions and covenants of the lease shall remain and continue in full force and effect and no further encumbrance of the lease or any part thereof shall be made without the prior written consent of the District in each instance, as provided in the lease.
4. It is understood that the District has not reviewed or approved the terms and conditions of the proposed encumbrance documents, such as the leasehold deed of trust or note secured thereby and is not agreeing to be a party to the leasehold deed of trust, note or other documents.
5. Nothing contained in the conditions of approval shall be construed to modify, amend or waive any provisions of the lease.
6. The District’s consent to the encumbrance shall be null and void and of no further force and effect if Kona Kai does not obtain financing from Prime Finance, as confirmed by receipt of final loan documents signed by both Kona Kai and Prime Finance, within 120 days of District’s consent.
7. Kona Kai acknowledges that it will not seek rent relief as a result of not being able to meet its debt service or debt repayment obligations.
8. The District’s consent to this encumbrance is conditioned upon the leasehold having no further loans in effect, as confirmed by receipt of a full reconveyance recorded in the Office of the Recorder of San Diego County within 120 days of District’s consent.
Conclusion and Recommendation
Kona Kai’s proposed financing is consistent with BPC 355, and both the Resort Lease and Marina Lease would be amended to the current standard. Therefore, staff recommends adopting a Resolution consenting to an encumbrance of Kona Kai’s leasehold estates by a $54,000,000 deed of trust in favor of Prime Finance. Staff also recommends adopting an Ordinance granting Lease Amendment No. 1 to the Resort Lease updating certain provisions, and an Ordinance granting Lease Amendment No. 2 to the Marina Lease, updating certain provisions and updating rent.
General Counsel’s Comments:
The Office of the General Counsel has reviewed Amendment No. 2 to the Marina Lease and Amendment No. 1 to the Resort Lease, and approves as to form and legality.
Environmental Review:
The proposed Board actions would consent to an encumbrance, grant Amendment No. 1 to Lease with Westgroup Kona Kai, LLC., and grant Amendment No. 2 to lease with Cahuenga Associates II to fund construction of phase two at the Kona Kai Resort and Marina. In accordance with California Environmental Quality Act (CEQA) and its implementing guidelines, the potential environmental impacts of construction of phase two were previously analyzed in the Addendum to the Final Mitigated Negative Declaration (MND) for the Shelter Pointe Hotel (Kona Kai Resort) Expansion (UPD #83356-MND-683; SCH; No. 2006071037), which was adopted by the Board of Port Commissioners (BPC) on August 13, 2013 and is on file with District Clerk as Document No. 60670. The activities that would occur as a result of the requested actions were fully contemplated in the Addendum to the Final MND prepared for the project as adopted by BPC. Pursuant to Section 15378(c) of the State CEQA Guidelines, the term “project” refers to the activity being approved, which may be subject to several discretionary approvals by governmental agencies, and does not mean each separate governmental approval. Accordingly, the requested Board actions are not separate “projects” for CEQA purposes but is simply additional governmental approvals required to implement a previously approved project. (CEQA Guidelines § 15378(c); Van de Kamps Coalition v. Board of Trustees of Los Angeles Comm. College Dist. (2012) 206 Cal.App.4th 1036.) Accordingly, the District has determined that Board’s actions are merely a step in furtherance of the original project for which environmental review was performed and no further environmental review is required.
In addition, the proposed Board actions comply with Section 87 of the Port Act, which allows for all visitor-serving commercial and industrial uses and purposes, and the construction, reconstruction, repair, and maintenance of commercial and industrial buildings, plants, and facilities. The Port Act was enacted by the California Legislature and is consistent with the Public Trust Doctrine. Consequently, the proposed Board actions are consistent with the Public Trust Doctrine.
Finally, on September 5, 2013, BPC authorized the issuance of an appealable Coastal Development Permit (CDP) issued for the Kona Kai Resort (CDP-2013-09) and is on file with District Clerk as Document No. 60787. District staff has reviewed the Board actions and found the actions consistent with the CDP. No additional action under the District’s CDP Regulations is required.
Equal Opportunity Program:
Not Applicable.
PREPARED BY:
James Hammel
Asset Manager, Real Estate
Attachments:
Attachment A: Location Map
Attachment B: Existing and Proposed Lease Information Summary - Resort Lease
Attachment C: Existing and Proposed Lease Information Summary - Marina Lease
Attachment D: Amendment No. 1 to Resort Lease
Attachment E: Amendment No. 2 to Marina Lease
1. Lease by and between San Diego Unified Port District and Cahuenga Associates II, on file in the Office of the District Clerk bearing Document No. 47503, filed September 22, 2004, as amended by Agreement for Amendment of Lease, Amendment No. 1, on file in the Office of the District Clerk bearing Document No. 51591, filed March 21, 2007.
2. Lease by and between San Diego Unified Port District and Westgroup Kona Kai, LLC, on file in the Office of the District Clerk bearing Document No. 61760, filed April 30, 2014.
3. Appraisal of Real Property for Kona Kai Marina located at 1561 Shelter Island Drive, San Diego, CA 92106, dated June 29, 2016, prepared for Prime Finance by Colliers International; and Appraisal of Real Property for Kona Kai Resort located at 1551 Shelter Island Drive, San Diego, CA 92106, dated June 14, 2016, prepared for Prime Finance by Cushman & Wakefield Western, Inc.