The project last made major headlines in 2010 with the passage of Measure T, which allowed developer David Bohannon to build the nearly 1-million-square-foot office-hotel complex. Sixty-five percent of voters favored the measure. The complex would be built on 16 acres spanning Independence and Constitution drives on the east side of U.S. 101. Features include office buildings, a seven-floor hotel, a restaurant, parking garages and a fitness club.
The development agreement estimates that Menlo Gateway will provide an estimated $1.4 million in annual hotel revenue, and also required a $1.25 million contribution toward Belle Haven and Bedwell Bayfront Park improvements.
There's a catch, of course — to capture hotel revenue, you first have to build the hotel. In the current economic climate, Mr. Bohannon maintains that leasing office space is easier than financing construction of a hotel — but the development agreement specifies that one can't happen without the other.
"We continue to meet with office prospects who have expressed interest in leasing office space. Unfortunately, we have to advise them that, because the office component cannot proceed without the hotel, and the financing of the hotel component remains problematic, we are not able proceed with the project just yet. However, these contacts have encouraged our belief that, when the hotel is able to proceed, we will have the necessary interest from credit(worthy) office tenants to be able to finance the office component," Mr. Bohannon wrote in a memo to city staff on Nov. 21.
"... hotels are still selling at less than replacement cost. For example, as was noted last year, the Four Seasons in East Palo Alto, which cost approximately $450,000 per room to build, sold in early 2011 for under $200,000 per room," the memo notes. "Because of these market realities, financing remains virtually non-existent for hotels outside New York City and Washington D.C. Consequently, industry experts do not anticipate construction of any major new full service hotel in the Bay Area for the next 12 to 24 months."
Meanwhile interest in the complex's office component, particularly by commercial real estate financiers NorthMarq Capital, remains steady, according to the memo. Leisure Sports also still wants to open a Renaissance ClubSport franchise — a combination of boutique hotel with fitness club, bar and spa — on the site.
Staff recommends that, as it did last year, the Planning Commission's annual review determine that good faith efforts to follow through are being made. The development agreement expires in January 2016 unless Mr. Bohannon submits a building permit application for the hotel or pays $300,000 to gain another two to three years.