The state Coastal Commission is being asked this week to again review the proposed Treasure Island development on the Laguna Beach coast, and its decision could have repercussions well beyond the 30-acre project site.
Frequent beach closures due to contamination from urban runoff have led to heightened scrutiny of development plans by environmentalists up and down the coast. At least one of the appeals of the Treasure Island project is based on concerns about runoff, and if the commission agrees to re-hear Treasure Island, it could set a precedent for revisiting other coastal development plans. This would threaten delays at the least and could mean plan changes. These, in turn, could jeopardize financing arrangements, especially in price-sensitive hotel sectors.
Already several years into the planning stage, the combination hotel and residential property has undergone many public hearings, one local referendum and approval of the Coastal Commission on a 10-1 vote in 1998. The developer, Phoenix-based Athens Group, purchased the property last year for $37 million from Merrill Lynch and has made numerous adjustments to the plan. Now calling for 275 hotel rooms, 17 homes and 14 rental condos, the plan received the City Council’s blessing last month.
But opponents of the project, among them Orange County CoastKeeper, the South Laguna Civic Association and Village Laguna, have appealed the project to the Coastal Commission, which was scheduled to review the appeals Tuesday to determine whether new public hearings should be held.
The property is near Aliso Beach, which has suffered several closures in the past year as the result of runoff-borne bacteriological contamination. Late last year, the San Diego Regional Water Quality Control Board ordered a cleanup of the heavily polluted Aliso Creek, which drains at Aliso Beach.
Some observers say the handling of the runoff issue in Laguna Beach could set a precedent for other projects throughout the state.
Earlier this year, the Irvine Co. revised its Crystal Cove development and submitted a new drainage plan after runoff concerns surfaced. The Irvine Co. also has coastal permits on another phase of its Newport Coast development pending before the Coastal Commission.
A separate, $23 million resort proposed by the state to replace cottages at the Crystal Cove State Park was scaled back last year and still needs approval by the Coastal Commission.
The 121-acre Dana Point Headlands project,once slated for as many as 400 hotel rooms and 370 homes,was reduced to 125 homes and 65 hotel rooms in response to concerns about runoff and the water quality in Dana Point Harbor.
Hotel Market Sensitive
Hotel developers may have more to lose than others if the Coastal Commission signals this week that it is willing to go back to the drawing boards on coastal projects.
Though industry sources say there’s still a strong demand for luxury-class properties, it’s no secret that financing hotel projects has become increasingly difficult in the past year, and recently interest rates have been creeping up, making the financial picture even tighter for these projects.
“Capital markets are still pretty tight. (They’re) not doing backflips for hotels,” said Jim Burba, managing director for Insignia/ESG Hotel Partners in Costa Mesa. “A point or so with a development like (Treasure Island) is a lot of money,” he said.
Development costs for Treasure Island are estimated to be in the vicinity of $100 million. And though the developer declined to comment on the cost of obtaining approvals to date, the developer of a similar-size project recently told the Business Journal approval costs for that project were into seven figures.
But for Treasure Island, at least, financing does not appear to be a major issue, because the Athens Group has a history of strong financial partners.
Still, a delay in construction or reduction in size of a property would naturally not be well-received by the developer or financiers, according to Michael Mahoney, managing director of hospitality and leisure consulting for PricewaterhouseCoopers in LA. And one source, who asked not to be identified, said if the Coastal Commission decides to review the entire project again, “they’d probably want to shoot themselves.”
Shifting Fundamentals
Mahoney said the fundamentals of the luxury hotel market are very different today from those of the late ’80s and early ’90s.
“Most transactions have more equity than they have historically had,” he said.
Industry sources say lenders today might expect anywhere from 20% to 40% equity for financing, a far cry from the days when 100% of the cost of construction or anticipated value was borrowed.
And as costs spiral, so does the dollar amount for the equity required. Of course, all coastal projects aren’t in the luxury sector. One industry source said there are only 30 resorts in the U.S. that have a five-star status, and a few recently have lost that designation. But even those that are not can expect to be asked for 20% to 30% equity to obtain financing.
That could mean delays would have a bigger effect on hotel sectors more sensitive to minor fluctuations in occupancy. And for those, the pending deals may not make as much sense financially if the Coastal Commission sends them back to square one. n
