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The City of Oceanside, California May Invest $27 million to Help Developer
 S.D. Malkin Properties Inc. Build a $187 million Westin Resort

By David Sterrett, North County Times, Escondido, Calif.McClatchy-Tribune Business News

Aug. 13, 2006 - OCEANSIDE ---- A tentative agreement to bring a 300-room beach resort to Oceanside is not just about dollars and cents, but also about how the project will fit into the city's downtown and spur development, officials said last week.

Under the proposal going before the council Wednesday, the city will have to invest $27 million ---- which is about three times higher than originally expected ---- to help developer S.D. Malkin Properties Inc. build a $187 million Westin resort across from the pier.

The Malkin project will cost the city nearly twice as much as the $15 million city contribution that developer Doug Manchester requested to build a 475-room hotel in the late 1990s. Manchester's project faced strong opposition from residents, and opponents attacked the proposed city subsidy for the resort.

But almost no one was criticizing the Malkin deal Friday, or its price tag.

Oceanside council members and staffers said a higher contribution than originally proposed for the Malkin property was justified because of soaring construction costs and design restrictions placed on the resort.

City officials said they laid out strict building requirements for Malkin's resort so it receives broad support from the community and avoids facing the same groundswell of opposition as the Manchester project.

Politicians and community groups need to work together to get a four-star resort near the city's pier because it will spark development downtown and change the perception of Oceanside, city officials said Friday.

"The time is right," Councilman Rocky Chavez said. "It's critical we build this hotel now and it's time for us to catch the wave and move this city forward."

When the council selected Malkin to build the resort in April 2005, the developer proposed a 302-room project with 72 time shares that would need $9.9 million from the city. Malkin's proposal now includes building on 336 hotel rooms, 48 time shares, 600 underground parking spots and 30,000 feet of meeting space on 2.75 acres the company will lease from the city.

It's not surprising the figure has increased because the resort is slightly larger than originally proposed and projects usually get more expensive when conceptual plans are turned into more detailed drawings, said Jane McVey, the city's economic development and redevelopment director.

McVey was part of a team of consultants and city staffers that spent the last year negotiating the deal with Malkin; she said the increase is not just an arbitrary number.

The two sides studied how much it would cost to build the hotel and what type of profit it would create, she said. The city's contribution is needed to make the project profitable enough for the developer to want to spend the time to build the resort the way the city wants.

She said city consultants have reviewed all of the numbers and the developers aren't just raising the price to increase profits.

"Everyone can see everyone else's cards during the negotiations," McVey said. "The number is what it is."

She said the main reason the number is higher than originally expected is because construction costs have increased dramatically since the original figures were created more than 20 months ago.

A building boom in China, rising oil prices and the high demand for materials to rebuild the Gulf Coast after Hurricane Katrina have led to dramatic increases in the cost of steel and concrete, said Robert Rauch, a professor of tourism and hospitality at San Diego State University and general manager of the Homewood Suites in Carmel Valley.

He said it cost him about $100 a square foot to build the Carmel Valley hotel in 2005, while a hotel right next to the first one, which is expected to break ground next month, will cost about $125 a square foot.

"Construction costs have gone nuts in the last three years," Rauch said. "They have caused project costs to soar."

While the city has agreed to help offset the costs, Oceanside has only committed to contributing $200,000 in redevelopment money to the developer before the start of the construction.

McVey said all of the money the city will contribute to the project will be created by increased property and hotel taxes from the resort.

Rauch said the city needs to put in money to make money, and cities such as Chula Vista and Escondido are also looking to help contribute money to hotel projects.

"It's extremely unusual that a city can do an anchor hotel project like this and not provide a subsidy," Rauch said. "The projects just don't have the returns on the investment without a subsidy."

"I think this will be a great project for Oceanside."

Rauch, who studies tourism, said Oceanside wasn't ready for a four-star resort five years ago, but with the city's continued development and growth, it's now ready to support a downtown beach resort.

Malkin's proposed project will also receive more support than the one Manchester originally proposed in 1998, Rauch said.

"The timing is much better and Malkin is the perfect developer for Oceanside," Rauch said. "I can't think of a developer with a better reputation than Malkin and he has no hidden agenda."

"This will be a much better deal for Oceanside."

The city ended up paying Manchester $2.2 million in 2003 to settle lawsuits that were filed after the California Coastal Commission rejected the developer's plans for a 12-story, 475-room hotel.

Manchester's plans needed approval from the Coastal Commission because it would have closed Pacific Street and Mission Avenue, graded beach bluffs to make way for a restaurant and torn down the beachfront amphitheater.

In contrast, Malkin's proposal will leave all the streets open and will only develop two blocks bounded by Seagaze Drive, Pier View Way, Myers Street and Pacific Street.

"The biggest difference is Malkin's project is doable and Manchester's was never doable," said Councilwoman Shari Mackin, who spearheaded opposition to Manchester's project. "But comparing the projects is apples and oranges."

Manchester offered to build his 475-room hotel with a $15 million investment from the city while Malkin is requesting $27 million.

City officials said Manchester's proposal, however, would have also required Oceanside to give the developer the 465-acre El Corazon property planned as a humongous park in central Oceanside.

"As we develop El Corazon it will be more valuable than $27 million," Councilwoman Esther Sanchez said. "I also seriously doubt if Manchester would really only need $15 million because he never got past the point of doing watercolor pictures."

Manchester would have built a much larger and grander facility than the currently proposed resort, said Councilman Jack Feller, who supported Manchester's project

Feller said the increase in money needed from the city for a hotel shouldn't just be blamed on higher construction costs because the price of staying in rooms and everything else has also risen.

"Higher construction costs is just a mantra everyone uses to spend government money," Feller said. "I also don't think I have ever run into a deal yet, where the developer has not come back and said it's going to cost more."

Feller said the higher costs can be contributed to the restrictions places on the developer.

City officials have limited the developer to seven or eight stories, compared with Manchester's 12 stories, and prevented the company from building anywhere except on the two blocks. At the request of the city, the hotel will also include more than 30,000 feet of meeting space, including a large ballroom the community can rent out.

These design requirements have helped the project gain support from community groups. For example, on Friday a group called the Oceanside Community Coalition announced it supported the tentative agreement with the developer. The coalition that includes groups such as the Chamber of Commerce, MainStreet Oceanside and Citizens for the Preservation of Parks and Beaches said the deal was "a win-win for all involved."

Citizens for the Preservation of Parks and Beaches is the group that appealed the Manchester project to the state Coastal Commission in 2001.

"This hotel will fit the scale of the city, and the quality and reputation of the developer makes a difference," said Marva Bledsoe, spokeswoman for the coalition. "We feel like the community has been listened to this time."

But council candidate Jerry Kern said he was "disappointed because the subsidy started at $10 million and is now $27 million."

"On the surface the Manchester deal looks better," Kern said. "But the people who got rid of Manchester are going to support this no mater what the cost, because they don't want to look like they ran someone out of town and got a bad deal.

Still, Kern said, if he were elected he would support the Malkin deal.

Broad support for the project should help it succeed and avoid suffering a similar fate of the Manchester project, said former Mayor Terry Johnson, who opposed the Manchester project.

"This developer did it the right way and came to the community for input instead of forcing a vision down the community's throat," Johnson said. "It's time to put partisan politics aside and it's time to get a decent hotel built for this city."

Johnson said the City Council seems to have more political will than its predecessors to work together and bring a hotel to the downtown.

He said this commitment to bringing a resort to town gives the developer a lot of leverage.

"This council is going to have to give the developer whatever he wants because (the members') public and political careers depend on it," Johnson said. "Everyone wants to say they are the ones that finally got the hotel built."

Oceanside has attempted to get a downtown resort for the last 25 years and there have been at least four failed attempts with developers.

The developer still needs to submit formal plans and do environmental studies for the project, and the earliest the resort would open would be at the end of 2009, city officials said.

A beach resort will be a centerpiece for the entire downtown, said Mayor Jim Wood.

"This is going to be the shot in the arm needed for downtown," Wood said. "No doubt this will change the entire downtown."

Once the hotel is built, San Diego developer CityMark, is expected to build several developments combining shops, condominiums and offices on five blocks it owns in the downtown area.

The hotel will bring in more than $2.5 million a year in hotel taxes and should bring more tourists to spend money in Oceanside, said Rauch, the hotel industry expert.

"This going to be an economic engine for Oceanside and will create a whole new level of tourism," Rauch said. "Oceanside has the ability to have a successful hotel."

The hotel won't just bring more tourist to town, but will also provide a great meeting space for weddings or business meetings, city officials said.

The council members said they want the hotel to be a place residents want to go to eat dinner or enjoy a cup of coffee.

"This hotel needs to be supported by the entire community," Mackin said. "For this to be successful, it has to be a place the community wants to go to spend their dollars."

-----

To see more of the North County Times, or to subscribe to the newspaper, go to http://www.nctimes.com.

Copyright (c) 2006, North County Times, Escondido, Calif.

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