By Linda Taaffe
Money conflicts appear to have been the deal breaker for the downtown Los Altos hotel project slated for the city-owned property on First and Main streets. The Los Altos City Council broke negotiations with Apricot Inn Associates May 27 after the development company rejected the city’s final lease terms for the .78-acre site.
The city wanted a larger share of rent and profit-sharing options than Palo Alto developer Roxy Rapp was willing to pay, according to city documents.
Rapp said the city’s demands would have based the hotel group’s ground lease payments on unrealistic formulas rather
than actual annual revenues, making the project financially impossible.
“What (city) staff is asking for is a guarantee that if the economy sags, the city will be guaranteed an increase … It would be ludicrous for a businessperson to go into that. We would go bust,” he said.
The city’s final negotiation terms required Rapp to provide the city a minimum base rent of 9 percent of the property’s appraised value at the time of the project’s groundbreaking or profit-sharing returns of 4 percent on every dollar of the hotel’s gross receipts from occupancy if it is larger than the minimum rent.
The city would increase the hotel’s minimum rent every 10 years to equal 80 percent of the average rent from the previous three years. The city would also collect a 10 percent transient occupancy tax on all occupancy revenues.
This means if the land were appraised for $3 million, Rapp would pay an annual base rent of $270,000. If revenues rose above the base rent, the city would collect the higher amount. Assuming revenues were $7 million, the city would collect $280,000 in profit sharing, rather than the base rent, as well as $700,000 in occupancy tax. If the average rent remained at $7 million during years eight, nine and 10, the city would raise the minimum rent to $280,000 in year 11.
Rapp said under those conditions, he would be required to pay a higher minimum rent even if revenues slumped significantly in later years. Rapp said he offered to pay the city a higher occupancy tax based on actual revenues so the city would receive a greater share of the hotel’s profits during good years.
Rapp also took issue with the appraisal time line. He said the land would be worth much more after his company made improvements in preparation for the project. If the city were to appraise the land after the improvements, Rapp would not be compensated for time and costs associated with preparing the land for the project, he said.
Rapp said he asked the city to appraise the land before and after improvements and split the difference between the two. The city refused, according to Rapp.
Officials said because the city would assume much of the risk involved in the project, it does not make sense for Rapp to profit from an early appraisal.
City officials said their offer is a reasonable deal that is in line with other hotel projects of similar scope and will hold out for another developer who is willing to meet their terms.
“If the hotel continues to do well, the bump in rent will not impact the project revenues since strong revenues ensure an adjusted rent above and beyond the base rent.
However, if the hotel does not do so well, the city will still be guaranteed a competitive return on its property,” according to a city report based on comments from city real estate consultant Tim Kelly.
Maintaining a market rate over time will also provide incentive for the business owners to maintain the property - something that will protect the city’s investment, Veeser added.
“The city is not looking for profit,” she said. “This is a city asset. We want to make sure we’re using it as appropriately as possible and we get the appropriate returns.”
The city recruited Rapp three years ago following an extensive selection process to build a hotel-retail project that would provide an anchor business to the Main Street gateway.
Rapp offered to purchase the property for $3 million and build a three-story, 85-room hotel with retail space on the bottom floor.
