Viewpoint - May 5, 2010

Guest opinion: Correcting the record on Menlo Gateway project

by Joanne Brion

Last week, The Almanac ran a guest opinion by Vince Bressler, a sitting Menlo Park planning commissioner, concerning the Menlo Gateway project. In the article, Mr. Bressler mistakenly interprets some figures from the city's financial analysis to support the contention that the Menlo Gateway project will be "free and clear of debt" by 2023. I would like to correct the record as to Mr. Bressler's misinterpretation of the city's financial analysis.

First, the $50 million per year in net income cited by Mr. Bressler is not "profit." In fact, a significant portion of this $50 million in annual revenue must be used to pay debt service on the $400 million development costs required upfront.

Thus, contrary to Mr. Bressler's assertion, the project is not "free and clear of debt" by 2023. Rather, the table cited by Mr. Bressler reflects an actual sale of the property in 2023, at which time the debt would be repaid and/or refinanced by the next buyer. In the absence of a sale (or even with a sale), debt payments are likely to continue for another 20 years or more, so Menlo Gateway in actuality would be far from "free and clear" of any debt.

Second, according to Cushman & Wakefield, the city's own consultant, the project's return was shown to be "... less than industry target return of 15 percent." A 15 percent or higher return is necessary to finance and undertake a project of this scale and risk relative to much safer and secure investments. Without a minimum return, no developer would undertake the project, and the land would remain in its current state without providing any public benefits, including the $1.4 million in annual revenues created by the project.

Third, the revenue from the office component is needed to support the hotel/health club component, which, according to the city's hotel consultant, was found to be marginally feasible without the office.

According to the consultant's report, "If we were to deduct a typical entrepreneurial incentive of 15 percent of development costs there would be no residual value to the land, reflecting the marginally feasible nature of this component (the hotel) of the project. The developer must earn his profit from the office component."

This means that the city's fiscal revenue stream from the project is from the hotel's transient occupancy tax, which would not be feasible by itself. The office component of the project funds the hotel, which in turn funds the city's revenue stream.

Finally, the benefits that the city derives from the Menlo Gateway project are substantial, and require no investment or financial risk on the part of the city. The $1.4 million in revenue a year to the city is a significant benefit, especially in light of the city's recently projected $1.3 million budget shortfall, and should not be dismissed.

Indeed, this annual return to the city is equivalent to a cash investment of $28 million returning 5 percent annually — not a bad profit to the city, considering it has no funds at risk.

In addition, the city receives a number of other tangible benefits that are critically important to the Menlo Park community, not to mention the jobs and economic development benefits, and the secondary revenues these jobs and income would generate for the city.

Joanne Brion of Brion & Associates is the urban economist for the Menlo Gateway Project.


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