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Guest opinion: City deserves portion of Gateway profits

Original post made on Apr 30, 2010

The proposed Menlo Gateway development adjacent to Bayfront Park at the Bayfront Expressway and Marsh Road would be the largest commercial project in the history of Menlo Park. This proposal includes the creation of a new zoning district and a large increase in zoning entitlement.

Read the full story here Web Link posted Wednesday, April 28, 2010, 12:00 AM

Comments (11)

Posted by thank you
a resident of Menlo Park: Allied Arts/Stanford Park
on Apr 30, 2010 at 11:42 pm

Thank you to Commissioner Bressler for pointing out how much money is involved. The city seems incredibly naive or incompetent if the hotel revenue is all it gets for what would be the largest project in Menlo Park's history.
This project with huge office buildings and parking structures that are unlikely to yield any financial benefit to the city (other than the usual fees) is a result of upzoning, if approved. That's because the city is allowing the offices to be filled with professionals, and those businesses don't generate sales tax revenue for the city.
The EIR has concluded that there will be significant environmental impacts that can't be remedied. Seems to me that it's only fair for our community to share in the profits if we have to share in the adverse impacts. Otherwise, why bother.
Other hotel projects, like the one on Sand Hill Rd. and at University Circle don't need all that office space to succeed. Require more from this project, or downsize it significantly so the impacts would be more in line with the financial benefits to the city.

Posted by do the right thing
a resident of Menlo Park: Downtown
on May 1, 2010 at 9:13 am

If you watched or attended the planning commission meeting and the orchestrated "community" approval, it was apparent that money can buy a lot of friends. This project is sized to fit Bohannon's ego, not the site or the needs of our city. It should not proceed unless our city can derive substantial ongoing benefits from it. Allowing Bohannon to pay pro forma lieu fees while pocketing tens of millions and inflicting horrendous traffic and environmental damage on this city would be a travesty!

The planning commissioners and the council members should not be cowed by Bohannon's wealth. I'm glad that at least one person is not.

Posted by Joanne Brion
a resident of another community
on May 3, 2010 at 10:52 am

I would like to take the opportunity 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.” 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 would be far from “free and clear” of any debt.

Second, according to the City’s consultant Cushman & Wakefield, the Project’s return was shown to be “…less than industry target return of 15%.” A 15% 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 HVS, the City’s hotel consultant, found to be marginally feasible without the office. “If we were to deduct a typical entrepreneurial incentive of 15% of development costs there would be no residual value to the land, reflecting the marginally feasible nature of this component of (i.e., the hotel) the project, i.e., 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 TOT, 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.

Lastly, 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. This annual return to the City is equivalent to a cash investment of $28 million returning 5% 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, Brion & Associates
Urban Economist for
Menlo Gateway Project

Posted by Vincent Bressler
a resident of Menlo Park: Linfield Oaks
on May 3, 2010 at 12:11 pm

The spreadsheet sited indicates that:

1) The hotel is sold to pay down debt, not the office
2) The land must be purchased by the developer - not true in this case

I never said that the 50 million in revenue was profit, until and unless the debt was paid off, which happens in 2023, after selling the hotel. All of this according to the spreadsheet.

So, the spreadsheet's story is not the full story. The the developer stands to have better cash flow than indicated here.

Posted by do the right thing
a resident of Menlo Park: Downtown
on May 3, 2010 at 11:31 pm

The numbers can be whatever Bohannon & company want them to be, and the supporters often make ludicrous statements. For example:

"The $1.4 million in revenue a year to the City is a significant benefit...This annual return to the City is equivalent to a cash investment of $28 million returning 5% annually."

But from the other side of her mouth, she insists that the project itself will be lucky to achieve profitability. Absurd.

First, we know that Bohannon wouldn't be proposing this monument to himself if he weren't assured of making a substantial amount of money. The upzoning alone will create an instant windfall of at least $20 million. Second, the costs to the city including the traffic and the required additional housing will likely exceed the financial benefits by a greater and greater margin as the years pass. Representatives of the fire department have repeatedly mentioned the additional expense required to serve the buildings, and there are other service costs that have yet to be factored in. Never mind the toll on the environment.

Let's hope that our city council is more astute than our planning commission is proving to be. With a few exceptions, the commissioners appear to be unwilling to act on behalf of the city's best interest.

Posted by E, Moritz
a resident of Menlo Park: Central Menlo Park
on May 4, 2010 at 1:40 pm

Mr. Bressler argues the city has a right to the “profits” on the Bohannan project because…. “the zoning entitlement that Menlo Park is considering for this project is worth $44 million per year.” Yesterday I received the same argument from another gentleman in Menlo Park. His calculations, however, put the added value from the “entitlements” at $256 million. He also felt the city deserved a cut of the action. He likened it to to the city’s “ownership portion” of the project

I’m not an expert in “entitlements”, and I have not followed the Bohannon project with and intensity, but I have a few questions and comments.

1. Does a city actually have any claim to any of the value of a development project? It would seem that the arbitrary zoning restrictions placed on a piece of property (which seems to be the only thing a city brings to this equation) provides the base for your calculation. In other words, if zoning restrictions were not in place, then what would be the value of the land and the proposed development. I question your assumption that a city should believe it “participates” in value creation brought by a development. It’s a bit of a delusion. That’s because of what’s covered in my second question.
2. If an owner of a piece of property (whatever size) chooses to have the land lie fallow, then what value does it bring to a city? Sure, property taxes would continue, but what would be the lost “opportunity cost” to the city? It would seem that almost any form of development would generate extra tax revenue for a city. The variance in revenue would differ, based on the development that was approved. Under the normal circumstances of a commercial market the city would have the incentive to maximize revenue opportunity. The trade off would come when a development would denigrate the revenue brought from other properties in the city because of the nature of the newly approved development so there is an overall negative impact.
3. The U.S. Constitution provides for property rights for its citizens. This is the basic assumption employed to reach my first two questions. This is reasonably tempered by the issue of denigration that might occur to surrounding property. And I think it certainly precludes a presumption that a city should assume any ownership value in the property (developed or not).
4. What investment risk is being assumed by the city? Usually one would expect an investor (owner) to assume risk in the form of a $$ investment in order to enjoy any return from that investment. Even a bank robber faces the risk of being caught and then spending time in jail. You have to be impressed if a property owner is willing to put $220 million-plus at risk ($32m in property and $188m in construction – could be higher). The future stream of city expenses for services (streets, drainage, security, etc.) should be matched against the immediate mitigation for those services and the stream of future tax revenue.

While I find your reasoning and calculation inventive, I don’t think it’s reasonable to be included in public policy. The city is not an “owner” of private property. It should be a “facilitator” of how that property is developed when proposals are brought forth. Ultimately, this has the potential of resulting in more revenue to support services and the environment of the city.


Edward Moritz

Posted by Vincent Bressler
a resident of Menlo Park: Linfield Oaks
on May 4, 2010 at 2:50 pm

Mr. Moritz,

Thanks for your comment here.

Mr. Bohannon is asking the city to change the zoning on a portion of his land. This action would/will create a lot of extra value. The city is engaged in a negotiation process associated with this action. This negotiation process provides an opportunity for Menlo Park to receive monetary benefit in consideration for the value added by the zoning action.

The question is not whether Menlo Park will receive direct monetary benefit from this, the question is how much.

Unless you are willing to say that zoning rules are an unconstitutional restriction on property rights, there is no legal issue here.

However, I do believe that there is a moral issue here:

As a member of the Planning Commission, I believe that it is my duty to do what I can to make sure that Menlo Park receives as much as possible in this negotiation. Rest assured that Mr. Bohannon is working diligently to get as much as possible for his company from this negotiation.

Vincent Bressler

Posted by Marcy Magatelli
a resident of Menlo Park: Downtown
on May 4, 2010 at 8:53 pm

Mr.Bressler,do you wear a bandana across you nose, during these "negotiations"? Your comment about your "legacy" to Menlo Park, sounds like you see yourself as Robin Hood!How terrified, big land owners here, must feel right now, knowing that elected officials, believe it is their duty to barter, with land owners, about how much a zoning change should be worth, based on what they think the owner stands to gain, rather than what costs & impacts are directly required.In the council meeting I attended, I heard the Fire Dept.'s concerns about needing a ladder truck; fine, ask Mr. Bohanan for a ladder truck, or a special, on going tax, for increased fire protection, but thinking the city deserves a share, in someone's profit, just because the owner stands to gain? OMG! Have you ever owned a piece of commercial property?

Posted by Vincent Bressler
a resident of Menlo Park: Linfield Oaks
on May 4, 2010 at 10:15 pm

Ms. Magatelli,

I suggest that you respond to what I've actually said.

I'll add this. I sincerely hope that Mr. Bohannon's project is successful if it is approved. I hope that he makes a lot of money.

Vincent Bressler

Posted by do the right thing
a resident of Menlo Park: Downtown
on May 4, 2010 at 10:21 pm

You have it backwards, Marcy. Bohannon is the bandit and the one who wants the legacy, a legacy that takes the form of oversized buildings at the entrance to Menlo Park. He doesn't care if his project requires the city to hire additional police officers or firefighters, to overcrowd the schools, or to add housing. He doesn't care if his project creates unbearable traffic problems. By building this project, he's both removing any possibility that the land -- previously zoned for revenue-generating purposes -- will add to the city's tax base and eliminating the ability of his neighbors to upzone.

As the EIR states, the negative impacts of this project cannot be offset. They are simply unmitigable.

Bohannon is a rich man who has tirelessly campaigned for a project that has no intrinsic benefits for our city but will create great wealth for himself. Vincent Bressler, the other members of the planning commission, and the members of our city council, are volunteers who stand to gain nothing from this project. I appreciate their efforts to spend many hours -- hours when they could be home with their families or relaxing with friends -- to help our city.

Posted by thank you Vincent
a resident of Menlo Park: Allied Arts/Stanford Park
on May 5, 2010 at 8:29 am

The real issue is that the city is being asked to significantly modify the current zoning to allow for a hotel and 3 enormous office buildings and large parking structures. These will cause a lot of impacts such as traffic congestion and additional need for housing, on the order of 3,000 units in the region. These are big costs that our community would have to share, so the city does have a right to expect commensurate benefit.
Other hotel projects such as Rosewood hotel and University Circle also had associated office space, but not nearly the enormity of the ones proposed here. If filled with professionals, these buildings will produce the vast majority of the revenue to Bohannon but zero to the city. The Council could prohibit professional office uses so there is at least a chance for sales tax-generating businesses to occupy the buildings. The Council could also take down the size of the offices, to be in similar proportion as other projects in order to reduce the negative impacts of the project. The city does not have to grant everything a developer wants just because they asked.

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