DATE: August 18, 2020
SUBJECT:
Title
PRELIMINARY PROJECT REVIEW FOR STAY OPEN SAN DIEGO, LLC TO DEVELOP AND OPERATE LOWER COST OVERNIGHT ACCOMMODATIONS, AUTHORIZATION TO COMMENCE ENVIRONMENTAL REVIEW, AND DIRECTION TO STAFF, AS NEEDED
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EXECUTIVE SUMMARY:
As a part of its efforts to provide lower cost overnight accommodations to ensure that all Californians and visitors from a variety of backgrounds and incomes are able to enjoy a full range of coastal experiences on and around San Diego Bay, staff issued a Request for Proposals (RFP) for the development and operation of lower cost overnight accommodations on January 22, 2019. The RFP included up to three acres of land on Pacific Highway in the City of San Diego, which included an existing 10,000 square foot vacant space within the District’s Annex Building and the parking lot (Site) (Attachment A). After a competitive public process, in May 2019, the Board of Port Commissioners (Board) selected STAY OPEN San Diego, LLC (STAY OPEN) as the successful proposer (Attachment B).
Since last May, an Exclusive Negotiating Agreement (ENA) was executed and on-site due diligence was completed. In January of this year, STAY OPEN submitted a project description (Attachment B) for a proposed shared accommodations hotel that would offer up to 226 PODS and up to 17 private or family rooms, lobby bar and café, and a rooftop restaurant and bar that would be open to the public during business hours (Proposed Development).
As another step toward our goal of providing lower cost overnight accommodations, staff is now requesting 1) feedback from the Board on the Proposed Development through the preliminary project review process; and 2) direction to commence the necessary environmental review under the California Environmental Quality Act (CEQA) for the Proposed Development. As part of this preliminary project review, the Board may provide feedback on the Proposed Development, including without limitation, relating to the architecture, public features, connectivity, and any other considerations concerning the Board’s vision for the Site. The Board will not be approving the Proposed Development, or the design or project description of the Proposed Development. The feedback provided by the Board on the Proposed Development will not be binding on the District, and the Board reserves its sole and absolute discretion to approve or disapprove any project on the Site, and adopt all feasible mitigation measures, a project alternative, including the no project alternative and a Statement of Overriding Considerations, if applicable, in the future.
If the Board directs staff to commence environmental review, staff would engage with the appropriate consultants and expects to return to the Board in August 2021 for consideration of the environmental document and direction to submit a Port Master Plan Amendment (PMPA) to the California Coastal Commission (Coastal). We would then expect to return to the Board for consideration of the PMPA in late 2022 with a Coastal Development Permit (CDP) and a lease for consideration in early 2023.
RECOMMENDATION:
Recommendation
Receive Staff’s Presentation on the Preliminary Project Review for STAY OPEN San Diego, LLC, Authorize Staff to Commence Environmental Review, and Provide Direction to Staff, As Needed
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FISCAL IMPACT:
This agenda item has no direct fiscal impact at this time. If the Board authorizes staff to commence environmental review, the costs will be borne and payable by STAY OPEN pursuant to the ENA and Board Policy No. 106 - Cost Recovery User Fee Policy.
Compass Strategic Goals:
As a part of its efforts to provide lower cost overnight accommodations, and at the Board’s direction, staff initiated a public solicitation process in January of 2019 for development and/or operation of the Site. The provision of lower cost visitor and recreational facilities, including without limitation, overnight accommodations, is a shared goal of the District and Coastal to ensure that all Californians and visitors from a variety of backgrounds and incomes are able to enjoy a full range of coastal experiences on and around San Diego Bay. With a variety of lower cost accommodation types emerging, it was vital to assess the market through a competitive process, from which STAY OPEN was selected in May of 2019 as it was the project that was most consistent with the District’s goals.
This agenda item supports the following Strategic Goals.
• A Port that the public understands and trusts.
• A vibrant waterfront destination where residents and visitors converge.
• A Port with a comprehensive vision for Port land and water uses integrated to regional plans.
• A Port that is a safe place to visit, work and play.
• A financially sustainable Port that drives job creation and regional economic vitality.
DISCUSSION:
Background and In-Lieu Mitigation Fees for Lower Cost Overnight Accommodations
In 2013, after an appeal, Coastal issued a CDP for the Lane Field Hotel Development on the North Embarcadero. Special Condition #2 of the CDP required the hotel developer to pay a “lower cost overnight accommodations mitigation fee” in the amount of $6,000,000 - $3,000,000 for the Lane Field North hotel tower and $3,000,000 for the Lane Field South hotel tower. Each fee was due prior to the hotel tower receiving its certificate of occupancy. In April 2014, the District and Coastal entered into a Memorandum of Agreement (MOA) that provide the framework by which the funds were to be collected, managed, and expended by the District. Per the MOA, the funds were earmarked for the establishment of “lower cost overnight accommodations such as hostel beds, tent campsites, cabins or campground units, at appropriate locations on Port Tidelands within the City of San Diego.” Expenditure of any of those funds requires written approval from Coastal’s Executive Director.
Pursuant to the terms of the MOA, the $6,000,000 was collected and deposited into an interest bearing account at the District. Further, the MOA states that “if any portion of the fee remains five years after it is deposited, the Coastal Commission may require that the funds be transferred to another entity that will provide lower cost visitor amenities in the County of San Diego coastal zone jurisdiction” - which would be January 21, 2021 for the $3,000,000 associated with Lane Field North and July 26, 2023 for the $3,000,000 funds associated with Lane Field South. Under the MOA, the District has identified that the project is consistent with the terms of Special Condition #2 and received written concurrence from Coastal (Attachment E) that the Proposed Development is eligible to receive funds from the in-lieu account, conditioned upon approval and issuance of a CDP. Therefore, if the Board authorizes staff to commence environmental review today, we will initiate discussions with Coastal about extending the expenditure dates in the MOA.
Additionally, the CDP for the Shelter Pointe Hotel (Kona Kai Resort) Expansion Project, which was issued by the District in 2013, required that the permittee pay an in-lieu fee for lower cost overnight visitor accommodations at a rate of $31,000 per room for 25% of the new hotel rooms, which totals approximately $307,500 for the proposed 41 new rooms. Payment of this fee to the District by Kona Kai Resort occurred in 2018. Thus, the District is currently holding approximately $6.3 million in in-lieu fees in an interest-bearing account for the development of lower cost overnight accommodations on City of San Diego Tidelands.
Given the availability of funds for the establishment of lower cost overnight accommodations, at the December 5, 2017 Board meeting, staff recommended the Board direct staff to pursue an intrinsically lower cost overnight accommodations facility on the Site. At that Board meeting, the Board directed staff to issue an RFP for lower cost overnight accommodations at the Site.
RFP Process
On January 22, 2019, staff issued RFP 18-19ME: San Diego Bay Development Opportunity for the development and/or operation of lower cost overnight accommodations on the Site adjacent to the District’s Administration Building. After a comprehensive national marketing campaign that reached nearly one million people, the RFP was downloaded by 79 parties and, on March 7, 2019, the District received four proposals, three of which were deemed complete. Staff visited representative sites and conducted interviews, and the Board ultimately selected STAY OPEN as the successful proposer in May 2019.
Shortly after the Board’s selection, staff negotiated a due diligence agreement which allowed STAY OPEN and its team access to the Site to conduct preliminary testing to better understand whether the project was feasible. In parallel, staff negotiated an ENA with STAY OPEN. While STAY OPEN experienced some delays during the due diligence and requested extensions on deliverable dates, they have met all milestones in their ENA to date.
Ownership Updates
Team Updates
The STAY OPEN team selected in May demonstrated a balanced level of experience between the team members from CaRE Development in Los Angeles and JUCY Snooze in New Zealand. CaRE Development has experience in hospitality development, including adaptive reuse similar to the proposed project, in Southern California. JUCY Snooze has a depth of experience in providing unique experiences to travelers through their camper van business and the development of the JUCY Snooze shared accommodations in Australasia. Since May of 2019, there have been some changes with the individual partners that make up STAY OPEN San Diego, LLC (Attachment D); however, staff believes the expertise, experience and financial capability of the team members from CaRE Development and JUCY Snooze, for which the team was selected, remains in place.
On the CaRE Development side, the two team members were the Co-Founders, Chief Executive Officer, Steve Shpilsky and Chairman, Michael Palmer. Michael Palmer has transitioned into retirement but is replaced by Andrew Swerdloff, VP of Investments, Acquisitions and Development who has been an active member of the team throughout the process and serves as staff’s primary point of contact. Andrew has stepped up as a partner on the STAY OPEN San Diego team and is also serving as STAY OPEN’s Chief Operating Officer.
In February of 2020, JUCY Snooze was acquired by Event Hospitality & Entertainment Limited, (Event), a publicly listed Australian Company. Due to the COVID-19 global pandemic, Event committed to its shareholders that it would focus solely on its operations in New Zealand and Australia. Further, Tim Alpe, who stayed on as the CEO of JUCY Snooze is precluded from owning hotel real estate assets outside of New Zealand and Australia, which precludes Tim from remaining a team member on the STAY OPEN project. Tim’s father, Chris Alpe, who founded and is Executive Director of JUCY Snooze and lives in Los Angeles is able to remain a member of the San Diego team.
Finally, SO Ventures San Diego LLC, owned and control by a high net worth family, is now an owner and investor in the Development Project. The owners of SO Ventures San Diego LLC previously invested in CaRE Development’s LAX Hyatt Hotel project, an approximately $130 million, 401-room hotel and has an established strategic relationship with STAY OPEN to help fuel its growth.
The previous ownership structure and new ownership structure are reflected in Attachment D. As outlined above, with the changes, the STAY OPEN team retains the expertise, experience, and financial capabilities for which STAY OPEN was originally selected for development of the Development Project. As such, staff believes that the reorganization will not impact implementation of the Development Project and acknowledged and consented to the reorganization, also in Attachment D.
Proposed Development
The most significant milestone in the ENA to date was submittal of a project description sufficient to commence environmental review, which was received in January. This presentation was delayed as the respective project team navigated the COVID-19 pandemic. STAY OPEN remains committed to the project and is now in position to move forward.
The Proposed Development is an adaptive reuse of the 10,000 square feet of vacant space in District’s Annex Building, use of the Annex Building rooftop and partial use of the existing parking lot located at 3125 Pacific Highway, San Diego, CA as a STAY OPEN Hotel. A second story would be added to the rooftop of the Annex Building and the roof would be extended on the west and south sides to increase the building area. The proposed project area includes up to approximately 31,000 square feet of building area, about half from the existing and vacant Annex Building, and up to 47,000 square feet of parking lot area.
The Proposed Development would include a STAY OPEN branded shared accommodations hotel. The hotel will offer shared rooms with POD beds, private rooms with and without bathrooms, family rooms with and without bathrooms, and shared bathrooms; the hotel would offer up to 226 PODS and up to 17 private and family rooms. The hotel will feature a lobby bar and café, and rooftop restaurant and bar open to the public during business hours. The café and restaurant areas would include open patio areas on the ground and second floors, where guests would enjoy food and drink service. The indoor and outdoor restaurant areas would be available for private parties and other special events featuring music. The ground floor indoor/outdoor bar and café will offer service for up to 286 guests and visitors, with the rooftop restaurant and bar serving up to 179 guests and visitors.
To serve the visitors of STAY OPEN, 88 parking stalls are also proposed with designated parking for shared transportation vehicles such as scooters, bicycles, and cars. Additionally, the parking lot would also provide space for pop-up events and food trucks.
The Proposed Development would construct a light-weight, steel structure on top of the Annex Building rooftop to create a second story and would expand the lower roof on the west and south sides. The building footprint would remain nearly the same but structural strengthening, including strengthening of the existing roof slab at the lower roof level, retrofitting approximately 30% of the existing piles by adding supporting micropiles, retrofitting the west and south side shear walls, and framing the new roof expansion with concrete filled metal deck, WF beams, and steel pipe columns supported on micropiles, would be required to increase the ductility and strength of the overall structure. The overall building height would increase by up to 32 feet over the height of the existing structure, from approximately 18 feet to approximately 50 feet.
Recommendation
In the last year, STAY OPEN has proven its ability to achieve the milestones set forth in the ENA. Despite the global pandemic and economic recession, the team remains committed to the project and is prepared to invest the time and money into the next steps to move the project forward. Coupled with the District’s goal of offering lower cost overnight accommodations on tidelands, staff recommends the Board provide any feedback they have on the Proposed Development and authorize staff to commence environmental review.
Next Steps
If the Board authorizes staff to commence environmental review today, we would move forward with retaining a CEQA consultant and project manager under a three-party agreement with STAY OPEN. Given Staff’s anticipated level of environmental analysis, a preliminary schedule for the Proposed Development is as follows:
• April 2021: Complete preparation of Draft CEQA document
• May 2021 Public review of CEQA document
• July 2021 PMPA Notice of Completion
• August 2021: Board consideration of CEQA document and PMPA approval
• August 2022: Coastal consideration of certification of PMPA
• October 2022: Board consideration of PMPA adoption, CDP authorization,
concept approval, term sheet approval
• January 2023: Coastal final action on PMPA
• February 2023: CDP issuance and lease approval
Based on the draft schedule, staff will also initiate discussions with Coastal about extending the expenditure dates in the MOA for the use of the in-lieu mitigation fees, as necessary to support the District’s effort and project.
General Counsel’s Comments:
The Office of the General Counsel has reviewed this agenda sheet as presented to it and approves it as to form and legality.
Environmental Review:
This agenda item would provide STAY OPEN preliminary project review feedback from the Board of Port Commissioners and potentially provide direction to District staff to commence environmental review for the proposed STAY OPEN San Diego Project. The Proposed Development does not constitute a “project” under the definition set forth in California Environmental Quality Act (CEQA) Guidelines Section 15378 because no direct or indirect changes to the physical environment would occur. CEQA requires that the District adequately assess the environmental impacts of projects and reasonably foreseeable activities that may result from projects prior to the approval of the same. Any project developed as a result of the preliminary project review that requires the District or the Board’s discretionary approval resulting in a physical change to the environment will be analyzed in accordance with CEQA prior to such approval. CEQA review may result in the District, in its sole and absolute discretion, requiring implementation of mitigation measures, adopting an alternative, including without limitation, a “no project alternative” or adopting a Statement of Overriding Consideration, if required. The preliminary project review in no way limits the exercise of this discretion. Therefore, no further CEQA review is required.
The preliminary project review complies with Section 35 of the Port Act, which allows the Board to do all acts necessary and convenient for the exercise of its powers. The Port Act was enacted by the California Legislature and is consistent with the Public Trust Doctrine. Consequently, the preliminary project review and direction to staff to commence environmental review is consistent with the Public Trust Doctrine.
The proposed preliminary project review and direction to commence environmental review does not allow for “development,” as defined in Section 30106 of the California Coastal Act, or “new development,” pursuant to Section 1.a. of the District’s Coastal Development Permit (CDP) Regulations because they will not result in, without limitation, a physical change, change in use or increase the intensity of uses. Therefore, issuance of a Coastal Development Permit or exclusion is not required. However, development within the District requires processing under the District’s CDP Regulations. Future development, as defined in Section 30106 of the Coastal Act, will remain subject to its own independent review pursuant to the District’s certified CDP Regulations, PMP, and Chapters 3 and 8 of the Coastal Act. The preliminary project review in no way limits the exercise of the District’s discretion under the District’s CDP Regulations. Therefore, issuance of a CDP or exclusion is not required at this time.
Equal Opportunity Program:
Not Applicable.
PREPARED BY:
Penny Maus
Department Manager, Real Estate
Attachments
Attachment A: Site Map
Attachment B: STAY OPEN 2019 Proposal
Attachment C: Proposed Project Description
Attachment D: STAY OPEN Organization Structure
Attachment E: Coastal letter dated January 7, 2020