successor agency to the redevelopment agency of the city of san jose memorandum

103 Pages·2016·3.94 MB·English

OVERSIGHT BOARD AGENDA: 4/28/16
ITEM: 6.4
SUCCESSOR AGENCY TO THE REDEVELOPMENT AGENCY OF
THE CITY OF SAN JOSE
MEMORANDUM
CLARA'S APPRAISAL ON LAND UNDERNEATH THE HILTON
HOTEL
RECOMMENDATION
Adopt a resolution directing Successor Agency staff to either:
a. Reject the County of Santa Clara's ("County") request to acquire the real property
underneath the Hilton Hotel at its appraised value and offer such real property for sale using
an open solicitation process; or
b. Request a second appraisal be commissioned by the County for such real property with the
requirement that the real property be appraised by a company qualified in the valuation of
long-lived financial assets.
BACKGROUND
The Successor Agency owns the real property situated under the Hilton Hotel (300 South
Almaden Boulevard) (the "Hilton Land"). Pursuant to the Dissolution Legislation and the Long
Range Property Management Plan the property must be sold.
On September 17, 2014, Successor Agency staff sent a letter to all affected taxing entities
requesting their interest in purchasing certain Successor Agency owned properties using the
Direct Sale process approved by the Oversight Board. In October 2014, the County of Santa
Clara (County) responded positively indicating its interest in acquiring the Hilton Land, together
with other interests of the Successor Agency. The County subsequently hired Valbridge
Property Advisors/Hulberg and Associates Inc. ("Valbridge"), one of eight Oversight Board
approved appraisers, to complete an appraisal for the property.
OVERSIGHT BOARD
APRIL 22, 2016
Subject: Report on County of Santa Clara's Appraisal of Real Property Underlying the Hilton Hotel
Page 2
Valbridge's appraisal of the Hilton Land is $96,000 as of August 15, 2015. A copy of the
appraisal report is attached to this memorandum as Attachment A.
On January 12, 2016, the County Board of Supervisors ("Board of Supervisors") approved a
delegation of authority to the County Executive for the purchase of the Hilton Land.1 County
staff has requested that the Successor Agency prepare a Purchase and Sale Agreement for the
Hilton Land.
ANALYSIS
County staff followed the Oversight Board approved Disposition Process for Direct Sale
acquisition of assets. However, Successor Agency and City staff ("Staff') do not believe that the
appraisal prepared by Valbridge for the Hilton Land is reflective of the fair market value of the
property. As such, we do not believe that the Successor Agency should sell the Hilton Land to
the County at the value indicated in the appraisal prepared by Valbridge.
The Hilton Land is encumbered by a long-term ground lease ("Ground Lease") which was
originally executed in February 1991 and has been subsequently amended. The Ground Lease
was originally signed in February 1991 and was amended several times. The current tenant under
the Ground Lease is West Hotel Partners, L.P. The Ground Lease provides for a first class hotel
with a ground rent of One Dollar ($1.00) per year. The initial lease term is 55 years, expiring
March 12, 2046 and it includes four (4), 10-year options which could extend the term another 40
years. Given the low rent for the land, it is likely that the options will be exercised. The likely
lease term, therefore, will extend to March 12, 2086. There are approximately 70 years
remaining on the Ground Lease term.
Staff has analyzed the discounted cash flow approach ("DCF") utilized by Valbridge for the
valuation of the Hilton Land and agrees that Valbridge's use of a current site valuation of $10.4
million is reasonable. We believe, however, that the discount rate of 9.5% utilized by Valbridge
in its DCF may be substantially higher than that which would be used by potential purchasers of
the property. Staff notes that this discount rate is only marginally lower than the discount rate
(10%) utilized in the Carneghi and Partners appraisal of the Central Place Garage and criticized
by Oversight Board members as being too high (for an asset with substantially more operational
risk than the Hilton Land). Staff also believes that the land value growth rate (2.5%) utilized by
Valbridge may be lower than a growth rate that would be used by potential purchaser of the
property.
The challenge of valuing the Hilton Land is the nature of the asset - one that produces no income
until 2086 - 70 years from today, at which point the property has a large reversionary value. In
1 Report to the Santa Clara County Board of Supervisors -
http://sccgov.iqm2.com/Citizens/Detail LegiFiIe.aspx?ID=79519
OVERSIGHT BOARD
APRIL 22, 2016 '
Subject: Report on County of Santa Clara's Appraisal of Real Property Underlying the Hilton Hotel
Page 3
order to appropriately value this asset, staff believes it is necessary to consider the types of
buyers who would have interest in such an asset - trusts, endowments, and entities with
extremely long-lived liabilities which they are trying to asset match. These investors are likely
to have a very different approach to valuation of this asset than the types of real estate investors
that are reflected in the surveys utilized by Valbridge.
The following two charts highlight the sensitivity of the valuation to changes in discount rates
and the land value growth rate. The first chart shows changes in valuation at different discount
rates assuming a 2.5% annual growth in land valuation (consistent with the Valbridge appraisal)
The second chart shows changes in valuation at different discount rates assuming a 3% annual
growth rate in land valuation.
Discounted Hilton Land Value
2.5% Annual Land Value Escalation
3,000,000
2,500,000
2,000,000
= 1,500,000
(0
>
1,000,000
500,000
0
9.50% 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% 5.00%
Discount Rate
OVERSIGHT BOARD
APRIL 22, 2016
Subject: Report on County of Santa Clara's Appraisal of Real Property Underlying the Hilton Hotel
Page 4
Discounted Hilton Land Value
3.0% Annual Land Value Escalation
3,000,000
2,500,000
2,000,000
w
|i,s oo,ooo pp ed
A raiS
>
1,000,000 Value
T
500,000
0
9.50% 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% 5.00%
Discount Rate
Fundamentally, however, staff believes that the DCF approach is inappropriate for the valuation
of the Hilton Land, and more insight may be gained from the application of option valuation
modeling techniques. Such techniques are commonly used in the financial markets and can be
used effectively in the valuation of options to purchase and/or develop real estate (see
Attachment B, "Options in Real Estate Valuation" from The Appraisal Journal. summer_2013).
Staff believes that appropriate application of such techniques would lead to a significantly higher
valuation of the Hilton Land than seen in the DCF analysis. It is worth noting that the
implication of the Valbridge analysis is that the value today of having the right to control the
Hilton Land seventy years from now is less than 1% of today's land valuation.
Finally, we note that the Comity Assessor's Office has assessed the Hilton's possessory interest
(the right to use the land for the term of the Ground Lease) at $5,341,551. As discussed above,
Valbridge has concluded that the total value of the Hilton Land as of the appraisal date is $10.4
million. As this total value should be the sum of the possessory interest and the present value of
the reversionary interest (the right to control the Hilton Land at the expiration of the Ground
Lease in 2086), this assessment implies a valuation today of the reversionary interest of
approximately $5 million.
In conclusion, staff believes that the assumptions utilized in Valbridge's DCF analysis do not
take into account a more diverse group of potential buyers, that their methodology may be
inappropriate for the nature of the asset, and that the appraisal therefore does not represent the
fair market value of this asset.
Conclusion
Based on the review and analysis of the Valbridge appraisal report by City and Successor
Agency staff, staff is of the view that the current appraisal does not accurately reflect the fair
market value of the Hilton Land. Two options are presented for the Oversight Board's
OVERSIGHT BOARD
APRIL 22,2016
Subject: Report on County of Santa Clara's Appraisal of Real Property Underlying the Hilton Hotel
Page 5
consideration. These options include rejecting the County's request to acquire the asset and
proceeding with an open solicitation process or allowing the County to commission a second
appraisal by a firm qualified in the valuation of this property so the issues raised in this staff
report can be adequately addressed. Approval of one of these two options will ensure that the
Hilton Land is sold at fair market value based on the unique nature of this asset.
COORDINATION
This item was coordinated with the City Finance Department and the City Attorney's Office.
/s/ /s/
JULIA H. COOPER RICHARD A. REIT
CHIEF FINANCIAL OFFICER MANAGING DIRECTOR
Attachments
For more information, contact Derek Hansel, Assistant Director of Finance at [phone].
Appraisal Report
Hilton Hotel Site
300 South Almaden Boulevard
San Jose, Santa Clara County, California 95110

Report Date: August 19, 2015

FOR:
County of Santa Clara
Jenny DeAngelis
70 West Hedding Street, 11h Floor
San Jose CA 95110

Valbridge Property Advisors |
Hulberg and Associates, Inc.
One North Market Street
San Jose, CA 95113
408.279.1520 phone Valbridge File Number:
408.279.3428 fax CA02-15-0288-001
valbridge.com
One North Market Street
San Jose, CA 95113
408.279.1520 phone
408.279.3428 fax
valbridge.com

August 19, 2015

Yvonne J. Broszus, MAI
408.279.1520 x7135
[email protected]
Jenny DeAngelis
County of Santa Clara
70 West Hedding Street, 11h Floor
San Jose, CA 95110

RE: Appraisal Report
Hilton Hotel Site
300 South Almaden Boulevard
San Jose, Santa Clara County, California 95110

Dear Ms. DeAngelis:

In accordance with your request, we have performed an appraisal of the above referenced property.
This appraisal report sets forth the pertinent data gathered, the techniques employed, and the
reasoning leading to our value opinions. This letter of transmittal is not valid if separated from the
appraisal report.

The subject property, as referenced above, is located on the southeast corner of South Almaden
Boulevard and West San Carlos Street and is further identified as Assessor’s Parcel Number (APN)
264-29-109. The site measures approximately 1.08 acres or 47,250 square feet. The subject is a
rectangular site in the San Jose Downtown Core with a prime corner location next to the San Jose
Convention Center.

The site is under a long-term ground lease. We have appraised the leased fee or land owner’s
interest in the property. The rent during the remaining lease term, which will likely extend another 71
years (through the exercise of options) is only $1 per year. The value of the land owner’s interest,
therefore, is mostly tied to the future value of the land upon expiration of the lease, discounted to
the present day.

We developed our analyses, opinions, and conclusions and prepared this report in conformity with
the Uniform Standards of Professional Appraisal Practice (USPAP) of the Appraisal Foundation; the
Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal
Institute; and the requirements of our client as we understand them.
© 2015 VALBRIDGE PROPERTY ADVISORS | Hulberg and Associates, Inc.
Jenny DeAngelis
County of Santa Clara
Page 2

The County of Santa Clara is the client in this assignment. The intended user(s) of this report are the
County of Santa Clara and the Oversight Board. The intended use is for decision making purposes
regarding a possible purchase of the property by the County. The value opinions reported herein are
subject to the definitions, assumptions and limiting conditions, and certification contained in this
report.

The acceptance of this appraisal assignment and the completion of the appraisal report submitted
herewith are contingent on the following extraordinary assumptions and/or hypothetical conditions
which may have impacted the assignment results:
Extraordinary Assumptions:
 None.
Hypothetical Conditions:
 None.

Based on the analysis contained in the following report, our value conclusions are summarized as
follows:

Value Conclusion
As Is
Value Type Market Value
Property Rights Appraised Ground Leased Fee
Effective Date of Value August 13, 2015
Value Conclusion $96,000

Respectfully submitted,
Valbridge Property Advisors | Hulberg and Associates, Inc.

Yvonne J. Broszus, MAI Norman C. Hulberg, MAI
Director Senior Managing Director
California Certified License #AG019587 California Certified License #AG003542

© 2015 VALBRIDGE PROPERTY ADVISORS | Hulberg and Associates, Inc.
HILTON HOTEL SITE
TABLE OF CONTENTS

Table of Contents
Cover Page
Letter of Transmittal
Table of Contents ....................................................................................................................................................................... i
Summary of Salient Facts ....................................................................................................................................................... ii
Aerial and Front Views ............................................................................................................................................................ iii
Location Map ............................................................................................................................................................................. iv
Introduction ................................................................................................................................................................................. 1
Scope of Work ............................................................................................................................................................................ 3
Regional and Market Area Analysis .................................................................................................................................... 5
City and Neighborhood Analysis ..................................................................................................................................... 10
Site Description ....................................................................................................................................................................... 15
Subject Ground Lease ........................................................................................................................................................... 20
Improvements Description ................................................................................................................................................. 21
Subject Photos ......................................................................................................................................................................... 22
Assessment and Tax Data ................................................................................................................................................... 23
Market Analysis ....................................................................................................................................................................... 25
Highest and Best Use ............................................................................................................................................................ 27
Appraisal Methodology ....................................................................................................................................................... 29
Land Valuation ......................................................................................................................................................................... 30
Leased Fee Valuation ............................................................................................................................................................ 48
Summary of Valuation .......................................................................................................................................................... 59
General Assumptions and Limiting Conditions .......................................................................................................... 60
Certification – Yvonne J. Broszus, MAI ........................................................................................................................... 66
Certification – Norman C. Hulberg, MAI........................................................................................................................ 67
Addenda .................................................................................................................................................................................... 68
Glossary ................................................................................................................................................................................. 69
Qualifications ...................................................................................................................................................................... 75
Qualifications of Yvonne J. Broszus, MAI ................................................................................................................. 76
Qualifications of Norman C. Hulberg, MAI .............................................................................................................. 77
Information about Valbridge Property Advisors
Office Locations

© 2015 VALBRIDGE PROPERTY ADVISORS | Hulberg and Associates, Inc. Page i
HILTON HOTEL SITE
SUMMARY OF SALIENT FACTS

Summary of Salient Facts
Property Identification
Property Name Hilton Hotel Site
Property Address 300 South Almaden Boulevard
San Jose, Santa Clara County, California, 95110
Latitude & Longitude 37.329293, -121.890634
Assessor's Parcel Number 264-29-109
Property Owner Successor to San Jose Redevelopment Agency
Zoning DC
FEMA Flood Map No. 06085C-0234H
Flood Zone X
Land Area 1.085 acres
Building Area 284,500 s.f.
No. of Hotel Rooms 353 rooms
Year Built 1991; renovated circa 2007
Valuation Opinions
Highest & Best Use - As Vacant High rise development with hotel, office or residential use
Highest & Best Use - As Improved Existing use
Reasonable Exposure Time 9 to 12 months
Reasonable Marketing Time Less than 12 months

Value Conclusion
As Is
Value Type Market Value
Property Rights Appraised Ground Leased Fee
Effective Date of Value August 13, 2015
Value Conclusion $96,000

Extraordinary Assumptions:
 None.
Hypothetical Conditions:
 None.

© 2015 VALBRIDGE PROPERTY ADVISORS | Hulberg and Associates, Inc. Page ii