City Council Report

 

City Council Meeting: March 8, 2011

Agenda Item: 3-D

To:               Mayor and City Council 

From:           Andy Agle, Director of Housing and Economic Development

Subject:        Viceroy Hotel: Assignment of Lease

 

 

Recommended Action

Staff recommends, subject to satisfaction of the Labor Peace Provision of Section 6.11 of the Lease, that the City Council:

 

1.     authorize the City Manager to review and execute consent documents associated with the sale and assignment of the Lease Agreement with Roscoe Real Estate Limited Partnership, a Delaware limited partnership, to Seaside Hotel LP, a Delaware limited partnership, for the Viceroy Hotel located at 1819  Ocean Avenue, Santa Monica;

 

2.     authorize the City Manager to review and execute consent documents associated with the Sublease between Seaside Hotel, L.P, and Seaside Hotel Lessee, Inc.; and

 

3.     authorize the City Manager to execute other documents required to affect the sale and assignment of the Lease Agreement and Sublease.

 

Executive Summary

The City leases property at 1819 Ocean Avenue to Roscoe Real Estate Limited Partnership, which owns the Viceroy Hotel. Roscoe intends to sell its interest in the hotel and ground lease to Seaside Hotel, LP, a Delaware limited partnership, for approximately $80 million. Seaside Hotel, LP will, in turn, enter into a sub-lease with Seaside Hotel Lessee, Inc. The sub-lessee will enter into a management agreement with KHM Viceroy Hotel Santa Monica, LLC, the current operator of the hotel.  The Amended and Restated Lease requires City approval of the lease assignment, sublease and management agreement.  In addition, the City is entitled to a transfer premium of approximately $500,000.  Seaside Hotel LP, the new owner, is an entity created by LaSalle Hotel Properties, a publically traded Real Estate Investment Trust (REIT) which specializes in hospitality properties.

 

 

Background

The City first entered into an 82-year ground lease with Royal Inns of America, Inc. in 1966 for development of a first class hotel, now known as the Viceroy Hotel. On September 19, 2000, Council authorized approval of an Amended and Restated Lease.  The Amended and Restated Lease extended the lease term by 17 years, to September 25, 2065, adjusted the percentage rent to be paid to the city, and required significant upgrades to the property.

 

Discussion

The terms of the Amended and Restated Lease require the City to approve any assignment of the lease, sublease or management agreement.  Roscoe Real Estate Limited Partnership, current owner of the 162-room Viceroy Hotel, seeks the City’s consent for the transfer of the leasehold interest and sublease to subsidiaries of LaSalle Hotel Properties.  LaSalle Hotel Properties is a publically traded REIT which owns 35 hotels with 9,100 rooms, including the Hilton San Diego in the Gaslamp District of San Diego and the Chamberlain in West Hollywood. As a REIT, LaSalle Hotel Properties cannot directly manage the hotel.  Additionally, to comply with other requirements of the US Tax Code prior to the close of escrow, LaSalle Hotel Operating Partnership LP will assign its interest to Seaside Hotel LP, who will become the owner of the hotel and Lessee. Seaside Hotel LP will enter into a sublease with Seaside Hotel Lessee, Inc. This entity will enter into a management agreement with KHM Viceroy Santa Monica, LLC, the current operator of the hotel who has managed the hotel since 2000. The sale price is estimated to be $80 million.

 

When Council approved the Amended and Restated Lease in 2000, an issue of concern was the hotel’s labor practices. The Amended and Restated Lease includes Section 6.11, Labor Peace, which provides: “Notwithstanding any other provisions of this Agreement, in order to protect the City’s proprietary interest in revenues under the Agreement from adverse economic effects of labor disputes, an amended Agreement or any City approval of any assignment or transfer of this Agreement may not be executed on behalf of the City until the Developer has submitted to the City a fully-executed, valid Labor Peace agreement (in the form of a collective bargaining agreement, organizing agreement or other contract under 29 U.S.C. Section 185) with any labor organization seeking to represent Developer’s employees and until the City Council approves such agreement as meeting the requirements provided in this section.”

 

The operator of the Viceroy Hotel, KHM Viceroy Santa Monica, LLC, entered into a Collective Bargaining Agreement with UNITE HERE Local 11, for a term commencing August 1, 2006, through July 31, 2009, and extended by its terms for an additional year to July 31, 2010.  The seller and purchaser are currently in negotiations with Local 11 regarding the Labor Peace provisions required by Section 6.11 of the Lease.  Staff will report on the status of the negotiations at the City Council meeting.   

 

Financial Impacts & Budget Actions

The Amended and Restated Lease provides for a Transfer Premium representing two percent of the net sale proceeds.  The anticipated one-time Transfer Premium payment to the City will be approximately $500,000, and subject to audit by the City. The Transfer Premium will be deposited into Account No. 01224.404170.

 

 

Prepared by: Miriam Mack, Economic Development Manager

 

 

 

 

Approved:

 

Forwarded to Council:

 

 

 

 

 

 

Andy Agle, Director

Housing and Economic Development

 

Rod Gould

City Manager