Costly regulations putting some California coastal hotel projects over the financial tipping point

Costly regulations putting some California coastal hotel projects over the financial tipping point

By Patricia Kirk | Dec 6, 2023 8:00am

California’s coast is a popular tourist destination that attracts visitors globally year-round, making it a lucrative hospitality market. But hotel investors and developers considering projects along the California coast should do their homework before entering this market.

California is well known among developers for high barriers to entry, which include local government entitlement and permitting timetables that can hold up projects for a couple of years or more. But developing in coastal zones adds another layer of scrutiny and bureaucracy that increases the time and cost of projects, as they are subject to restrictions, requirements, and approval by the California Coastal Commission (CCC). 

The CCC is an independent, quasi-state agency, which was established in 1972 by a voter initiative, to plan and regulate water and land use in the coastal zone, as well as to ensure coastal access to all residents, regardless of their economic means. The CCC is responsible for overseeing and enforcing the Coastal Act, which broadly defines development activities, including construction of buildings, divisions of land, and activities that change the intensity of land use or public access to coastal waters. 

With the high cost of financing and construction right now, fees and other requirements of local jurisdictions and the CCC pose a heavy financial burden for hotel developers.

Extra costs

A fairly recent example of additional costs associated with hotel development along the California coast is the redevelopment of the century-old Fairmont Miramar Hotel in Santa Monica, which was originally proposed in 2013, according to a Real Deal report. Phoenix-based developer, the Athens Group, acting on behalf of the owner, New York-based MSD Partners, won CCC approval in March 2022 to completely redevelop the hotel, which is located on a 4.5-acre, block-sized site overlooking the Pacific Ocean. The plan will expand the hotel from 300 to 312 hotel rooms and add 60 rentable condominiums, 18,000 sq. ft. of ground-floor shops and restaurants, and a 428-vehicle garage.

But approvals by the City of Santa Monica and the CCC came at a hefty price, as the developer had to agree to pay for construction of at least 42 affordable housing units on a nearby site and provide $5.34 million for social programs and transportation improvements. Additionally, the CCC required an additional in-lieu fee of $6.477 million, which may be used to help build a public campground in Malibu that would host inner-city kids or an economy hotel in nearby Topanga State Park, reports the Santa Monica Outlook.

The CCC’s inclusionary lodging policy, which requires 15 – 25 per cent of new hotel rooms to be priced to fit lower- and middle-income visitor budgets or payment if in lieu fee, has put some planned projects in limbo or out of the question.

Alan Reay, president of Atlas Hospitality Group, a California hotel marketing and advisory firm, for example, cites a proposed 130-key boutique hotel and 136-room and economy surf lodge in Orange County’s Dana Point Harbor marina, which is undergoing redevelopment, that are at a standstill because the projects no longer pencil.  Reay says that the developer, locally based RD Oslon Development, had agree to build the surf lodge to obtain CCC approval for a luxury hotel, but due to increased financing and construction costs, the $150 million budgeted for the projects is no longer is sufficient to cover costs.

Reay also notes that the Coastal Act requires developers to replace lower-cost lodging room-for-room or pay an in-lieu fee when destroying or replacing economy-priced lodging with luxury product. Failing to do so can have dire consequences, as one Santa Monica hotel owner/operator found out when he violated the Coastal Act, reports the Los Angeles Times. Sunshine Enterprises was fined a record $15.6-million by the CCC for razing two older, lower-cost motels to build the pricey Shore Hotel on Ocean Avenue near the Santa Monica Pier, where room rates range from $300 – $800 per night, without the proper permits and an agreement to replace the economy lodging lost.

“When the cost of inclusionary lodging is added, nothing will get done,” says Robert Rauch, a long-time San Diego County hotel developer/operator. He notes that the combination of high interest and construction costs already has the cost for hotel development at the tipping point.

Rauch says that three planned hotels projects in downtown San Diego, including a Ritz Carlton proposed by Cisterra Development on a parking lot owned by city, have already been canceled. He also suggests that the CCC’s inclusionary requirement may kill the Port of San Diego’s plan to redevelop the 40-year-old Seaport Village on the San Diego Bay in downtown to a modern resort-entertainment complex. “I don’t see how that will get done considering this requirement,” he says.

Plans for the Seaport Village redevelopment, however, include seven hotel properties with 2,050 hotel rooms and include a hostel, and low-budget “micro hotel.”  

Projects underway

Despite current financial constraints, six other major hotel projects besides the Fairmont Miramar have been recently completed or are underway in Santa Monica alone, reports The Business Journals, Los Angeles, but only one is a ground-up project. A 120-room hotel is part of a new mixed-use development underway by Worthe Real Estate Group on Ocean Avenue, which also includes 100 residential units, retail shops and restaurants, and a museum honoring Architect Frank Gehry’s work.  

The five other projects involve updating or restoration of existing hotel properties.

The former Loews Santa Monica Beach Hotel at 1700 Ocean Avenue is rebranding under IHG’s Regent Hotels and Resorts flag and updating the 342 guest rooms and introducing a new concept restaurant in collaboration with a celebrity chef.

The Viceroy, a boutique hotel at 1819 Ocean Ave., received a $21 million renovation to upgrade the lobby, restaurant, amenities, meeting rooms and outdoor spaces in 2020 and now is undergoing a complete renovation guest rooms and other common spaces.

The Pierside, the former Wyndham hotel at 120 Colorado Ave. that faces the Santa Monica Pier, reopened earlier this year after a $38-million renovation that enhanced guest rooms and amenities.

The 175-room, beachside Le Merigot Santa Monica, formerly owner by J.W. Marriot, was acquired by Stockdale Capital Partners and is being updated and rebranded an Autograph Collection by Marriot.

Built in 1933, The Georgian Hotel on Ocean Avenue also reopened earlier this year after a restoration and upgrade of this historic, art deco structure by a partnership of owner Blvd Hospitality and ESI Ventures. The hotel includes 84 guest rooms and 28 suites. 

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