March 14, 2005
Questions/Answers from February 2=
8,
2005 Meeting
The
purpose of this document is to provide answers to questions raised during t=
he
Port Angeles Boat Haven (PABH) Rate Review conducted on February 28, 2005.<=
span
style=3D'mso-spacerun:yes'> The questions have been identified=
from
a review of the meeting minutes.
In
general, the more marinas that are included in a survey, the better the
indicators, such as average moorage rate.&=
nbsp;
This approach is exactly the opposite of arbitrarily picking the mar=
inas
to be included based on their rates and then trying to justify the selectio=
ns. Secondly, the market survey was on=
ly done
to assure that the moorage rates recommended are within market parameters.<=
span
style=3D'mso-spacerun:yes'> The actual moorage rates recommend=
ed are
generated by the estimated construction costs of the reconfiguration
recommended by the PABH advisory committee.
The
rate recommended in the PABH Master Plan was $4.83/lf/mo. The calculations presented in the =
Master
Plan were based on data from 2003 and focused solely on the reconfiguration
construction recommended by the advisory committee. The recommendations presented at t=
he
February 28, 2005 meeting ($5.23/lf/mo and $5.65/lf/mo) included
acknowledgement of existing profit being earned at PABH and the need for
capital expenditures at the West End of PABH in addition to the Master Plan=
.
Please
note attached exhibit A, which is page 6-7 from final PABH Master Plan. On this page PABH advisory committ=
ee
supports moorage rate of $4.83/lf/mo.
4. =
Advisory committee members’ sur=
vey
“indicated that PABH users are satisfied with PABH rates”
The
survey in question only focused on what rates PABH would like to see. It would be most surprising if any=
PABH
tenant would have responded by asking for increased rates. The survey needs to be placed in
perspective with the PABH advisory committee’s Master Plan which
represented a study done over several years of the needs of PABH and how to
fund those needs.
A
moorage rate of $4.10 will not pay the debt service required to do the
reconstruction recommended by the PABH advisory committee.
Furthermore,
the February 28, 2005 calculation for a rate of $5.23 was based on a 4 %
ROI/Interest Rate. The intere=
st
rates indicated in two attachments recently prepared by Seattle Northwest
Securities are (1) 4.4 % on Limited Tax General Obligation bonds; (2) 7.0 %
(after adjusting for reserve requirements) on Revenue bonds; and (3) 5.0 % =
if
reserves are used.
Therefore,
the rate of $5.23/lf/mo will not be sufficient to service debt requirements=
and
the final recommendation on February 28, 2005 for a moorage rate of
$5.65/lf/mo.
The
moorage rates recommended are an outcome of the recommendations of the PABH
advisory committee.
The
average vacancy rate at PABH is 21 %.
However, this simplistic interpretation of vacancy rates ignores the
structural vacancy issues that the PABH advisory committee was trying to
address in their recommendation to the commission.
Attached
is a graph and table of PABH vacancy rates ordered by slip size. It shows the vacancy rate in 20=
217;
slips is 53 % while vacancy rates for 50’ slips and 60’ slips a=
re 2
% and 00 %. It is this struct=
ural
problem of not having enough 40’, 50’, and 60’ slips that=
the
PABH Master Plan addressed.
The
Port never likes to lose tenants; however, the problem of not having the ri=
ght
mix of slips available at PABH will not simply go away. The PABH Master Plan does help in
rectifying an issue that has been developing over the last decade.
The
PABH Master Plan recommendations cost $5,000,000 and the cost of capital dr=
ives
the required moorage rates to those levels discussed at the February 28, 20=
05
meeting.
The
reality of a project such as PABH reconfiguration is that many costs will be
incurred long before construction actually occurs. For instance, significant permitti=
ng,
design, and engineering costs will be incurred long before any pilings are
driven. These costs will be p=
aid
out of operating revenues of PABH and cash flow at the current $3.32/lf/mo =
level
will not pay these costs.
If
the commission wishes to fund these “soft costs” and ramp up to=
a
moorage rate of $5.65/lf/mo and then issue bonds for the major construction,
the following schedule might be appropriate. Noted beside this ramp up approach=
are
the rates already approved at the
|
Year |
|
Port Townsend (40’ boat) |
|
|
|
|
|
2005 |
$4.10/lf/mo |
$5.25/lf/mo |
|
2006 |
$4.87/lf/mo |
$5.63/lf/mo |
|
2007 |
$5.65/lf/mo |
$6.02/lf/mo |
As
presented on February 28, 2005, allocating the actual cost of $5,000,000 ov=
er
30 years means that each year $166,667 will be recaptured to reimburse for =
the
capitalization; and all of the Return on Investment (assumed to be 4 % on
February 28) will go to repaying the interest on the bonds issued for the
project. Amount assumed f=
or
ROI/Interest on February 28 was $200,000.
As
noted in answer 5 above, a ROI/Interest Rate of 4 % is too low and
corresponding moorage rates will need to increase above $5.23.
The
Port simply doesn’t make enough money from its’ normal operatio=
ns
(aside from property sales) to establish set aside funds for every
division. Furthermore, there =
are
operations in the Port that are operated for the public good that don’=
;t
make enough money to support themselves, e.g. airport. Because of this the Port operates =
with
one general fund that co-mingles cash inflows and outflows for all operatio=
ns.
Looking
forward, in 2016 the debt from John Wayne Marina will be completely paid
off. When that happens, the c=
ash
flow from John Wayne Marina will help pay for some of the debt service
associated with the PABH reconfiguration.
In
the February 28 meeting strong emphasis was placed on comparisons with
The
reality is that
Therefore,
it seems that comparing rates at a marina in Port Townsend with one in
Jefferson County/Clallam
|
|
|
|
|
Number of Resident=
s, 2004 |
27,000 |
65,900 |
|
Average Wage, 2003=
|
$25,879 |
$26,947 |
|
|
|
|
|
|
|
|
Source: Clallam
The
key here is that the Port will not be making repairs. This is a total rebuild in a
reconfigured design. Piling w=
ill be
in different locations and design of floats will be different. It is not physically possible to m=
ove
one float closer to another and still fit boats on either float.
The
Port maintenance crews are not trained in such major construction projects =
and
the Port does not own the equipment to do such work. In addition, the Port does not wis=
h to
compete with the private sector on such a project.
The
additional costs of trying to do construction, if it were even possible, in
stages would include: additio=
nal
mobilization costs, additional design costs, and higher costs due to inflat=
ion.
The
reconfiguration approved by the PABH advisory committee in the PABH Master =
Plan
is not a 5 star project. Many
variations were studied over many months by the committee and the $5,000,000
project represents the basic, or minimum, reconfiguration alternative.
The
best list of improvements is contained in the PABH Master Plan on pages 5-3=
and
5-4. Copies of those pages are
attached.
15. Cus=
tomers
at Elliot Bay are not the same as tenants at PABH.
We
absolutely agree that no other tenants are as good as PABH tenants. In the presentation on February 28=
16. Con=
cerned
about progressive rates.
The
concept of progressive rates was introduced for 4 reasons: (1) increased trend toward such a =
rate structure
at other marinas over the last decade; (2) the movement toward need for lar=
ger
boat slips has made it difficult to fill 20’ slips – a progress=
ive
approach tries to make additional accommodation for smaller boats; (3) the =
additional
space in terms of both slip size and fairway turning area necessary for lar=
ger
boats; and (4) additional wear and tear on floats and piling generated by
larger boats.
As
mentioned above, the driving force behind the recommended rate increases is=
the
financing of PABH Master Plan recommendations. The cost of $5,000,000 of improvem=
ents
is driving these presentations.
The
difficulty with this chronology is the issuance of bonds is dependent on
showing that the Port has some source of revenues with which to pay debt
service. Investors will requi=
re
proof that revenues are already in place to pay debt service. As shown on estimates provided by
Seattle Northwest Securities, annual debt service runs about $395,000 on a =
LTGO
bond.
At
a moorage rate of $3.32/lf/mo, the Port could not borrow an amount necessar=
y to
fund the improvements. As pre=
sented
at February 28, 2005 meeting the PABH funds available to pay debt service r=
ight
now range from $52,300 to about $92,300 (if depreciation is backed out).
Secondly,
delaying improvements will only raise the likely cost of improvements and c=
ost
of borrowing.
There
are no excess general revenues with which to do this. The Port’s Income Statement =
for
2003 shows a bottom line income of $2,936,336 – however, there are two
items of revenues which either will not continue or are restricted in their=
use
and are not available to pay for PABH projects: (1)
the $3,629,386 of gains on sale of property to Washington State
Department of Transportation and to Westport Marine will not be continuing =
on
an annual basis; and (2) $541=
,147
in grant revenue may only be used at Fairchild International Airport (FIA) =
and
may not be used for PABH. The
Port’s 2004 Income Statement will also show the Port with a net loss =
if
the final increment of revenues from Washington State Department of
Transportation is backed out because the revenue will not continue into the
future.
There
are several divisions within the Port which will continue to generate negat=
ive
cash flows into the future: F=
IA and
John Wayne Marina. Thus the P=
ABH
cannot expect other divisions in the Port to support debt service.
As
explained in another answer, if Port reserves are used to finance this proj=
ect,
there is a significant opportunity cost associated, namely the annual inter=
est
revenues which could be generated with long term investments.
A
review of the financing options available to the Commission for the project=
is
attached. It does indicate th=
at the
Port’s current debt capacity of $7,714,000 would be reduced to $2,714=
,000
if a project of $5,000,000 is funded through bonds. The analysis also discusses other
options such as Revenue Bond financing and Port Reserves financing.