There is a new bright red fence near the intersection of Shattuck Avenue and Center Street in downtown Berkeley, signaling that construction of a 16-story hotel is about to start.
The hotel at 2129 Shattuck Ave. will have 334 guest rooms, a 14,500-square-foot conference center and outdoor patio, a private 12th-floor bar, a second-floor parking garage with 113 valet spaces, a new Bank of America branch, and three public restaurants, including a third-floor one with a terrace. It will be a LEED Gold building and should be completed by Center Street Partners LLC in the spring of 2020, according to Glen Elkes, the vice president of development for the Pyramid Hotel Group, which is managing the development and which will operate the hotel. It will be a Residence Inn, one of Marriott Hotel’s brands, with rooms priced around $245 a night.
The start of the build-out is three years later than the developer had originally anticipated but is extraordinary in its own way. The developer has come back to Berkeley city officials twice — once in 2016 and the latest time in February — to get some economic concessions because, it said, its profit margin was so thin it threatened the financing and feasibility of the project. Construction costs for the union-built hotel went from $107.4 million in July 2016 to $125 million in February 2018 because of the region-wide building boom, according to documents the developer submitted to the city.
“In February 2018, Pyramid Hotel Group notified the City Manager that the project was at risk of cancellation due to increased costs,” City Manager Dee Williams-Ridley wrote in a recent memo to the City Council.
Berkeley officials have long wanted a hotel in the city core and near the UC Berkeley campus, both because it would add vitality to downtown and tax dollars to the city coffers, so they agreed twice to allow the developer to defer some of its payments to reduce its startup costs. Since the passage of Prop 13, hotels are a rare way to generate funds for a city’s general fund. Guests pay a 12% transient occupancy tax on every room they rent and another 1% towards Berkeley’s Tourism Improvement District.
“This project is going to bring huge community benefits to the city of Berkeley in the form of $4 million a year for decades to come,” said Jordan Klein, the city’s economic development manager. “It’s no secret how valuable hotel projects are, especially given Prop. 13.”
The overall financial benefit to the city will be around $37 million in the 10 years after its completion, and $5 million a year after that, according to a memo written by Klein and submitted to the City Council by Williams-Ridley. In addition, the developer is spending $18.6 million in community benefits including using unionized labor to build the hotel (a $5.6 million cost) and using union labor to run the hotel once it opens (which adds $7.9 million to the overall cost of running the business). Once the hotel is open, it will directly generate 110 jobs and indirectly create another 103 jobs, according to city officials.
Buildings allowed under Downtown Area Plan finally going up
In 2010, Berkeley residents voted to adopt the Downtown Area Plan, which was codified into law by the Berkeley City Council in 2012. DAP allowed the construction of three 180-feet-high buildings, including one hotel, and four 120-feet high buildings. Two of the latter were reserved for UC Berkeley.
The university has already built one of its buildings, Berkeley Way West at 2121 Berkeley Way. It opened in May and holds the Graduate School of Education, School of Public Health and Cal’s psychology department.
The hotel will be the first tall city structure built under the Downtown Area Plan. The Berkeley City Council approved the construction of a 180-foot-high apartment complex at 2211 Harold Way in December 2015, but the developer, Joseph Penner of Hill Street Investments, has been unsuccessful in his attempts to sell the entitlement and has never applied for a building permit. Berkeley has extended the deadline to start construction at least twice.
Mill Creek Residential intends to build a 180-foot-tall apartment complex with 274 units over the existing Walgreens at 2190 Shattuck Ave. The developer has not yet gotten city approval and the Landmarks Preservation Commission in April approved the landmarking of the view from Campanile Way, a step that city staff says is legally questionable but which could potentially impact the project. (The decision has been appealed to City Council.)
And, just last week, Grosvenor Properties filed a plan to build a 12-story, 156-unit apartment building at 1951 Shattuck Ave., on the corner of Berkeley Way. The family that owned that lot, the Nassers, had previously sought permission to build a structure there called L’Argent, but sold the project to Grosvenor.
The developer has been eyeing the land for a long time
Berkeley has wanted a new downtown hotel for years and the man who is behind the current plan, Jim Didion, has been working to develop this particular parcel for a decade. A former CEO for major developer CB Richard Ellis, Didion acted as a consultant to former UC Chancellor Robert Birgeneau in attempting to bring in a hotel developer for this parcel. A few years ago, Carpenter & Company had plans to build an upscale hotel like the Charles Hotel, one they built in Cambridge, MA, but the plan folded when the economy tanked in 2008.
Didion stopped advising the university after that, but kept his eye on the parcel, he said. He started to negotiate with Bank of America, which owns the land, after 2008. The bank was interested but said it could not vacate the space it occupied on Shattuck Avenue and Center Street. Didion, who had formed Center Street Partners LLC by 2013, hired Ed McFarlane, the principal of JRDV Urban International, who came up with a plan to assuage the bank’s concerns about closing during construction. McFarlane proposed building a one-story structure on the bank’s parking lot and moving the Bank of America into it temporarily while construction of the hotel was underway. The bank was then expected to move into a prominent ground-floor space in the new tower, and the one-story building would be converted into a restaurant.
That plan was set aside when 2151 Shattuck Ave., across the street, became vacant in 2017 after Games of Berkeley moved out. The Bank of America branch moved there in May. When the hotel is completed, the bank will move into a new space that fronts Shattuck Avenue.
In 2015, Didion partnered with the Pyramid Hotel Group to build the project, bringing vast experience to the development. Pyramid is the fourth largest independent hotel group in the United States with 73 properties across the nation, some of them under the Hilton, Marriott and Doubletree brands. Pyramid has 8,100 employees and 1.5 million square feet of meeting space. Pyramid managed the Claremont Hotel for seven years and has managed the Doubletree by Hilton Berkeley Marina since 2014.
The downtown Berkeley hotel has gone through different incarnations since Didion first proposed it in 2013. At one point it was going to have office space, but no conference center. Then it was going to be 18 stories high with 40 condominiums. At one stage the garage was only going to have 70 parking spaces and the developer planned to pay an in-lieu fee or rent out 180 spaces in the new garage going up further west on Center St. The final plan includes 113 spaces.
At one point Didion stopped all work on designing the hotel because then-City Councilman Jesse Arreguín and others, including Sophie Hahn, now a City Councilwoman, advocated putting a measure on the 2014 ballot that would have added significant new requirements for new buildings over 60 feet. The proposal, Measure R, was soundly defeated with 63% of Berkeley voters voting against it and Didion jumpstarted the hotel project again.
“The hotel is going to be a welcome addition to Berkeley,” Didion said Monday. “We haven’t had a new hotel of substance in Berkeley in a long time. I feel good about it. I think it is going to have a substantial, positive impact.”
Profitability has long been an issue in securing hotel financing
In May 2016, the Zoning Adjustments Board approved the hotel’s final design. Two days later, Didion and Center Street Partners asked the Berkeley City Council for a deferral of $11 million in transient occupancy tax.
The issue was the profit margin on the hotel. In order to get financing, hotels must generate an 8% to 10% return, according to city staff documents. But the project was only slated to generate a 6.7% return. The $11 million in rebates, however, would bring the project’s projected returns to 7.6%, which would make it more economically feasible, according to city documents. Berkeley hired two independent financial analysts who agreed with the developer’s assessment. In July 2016, the City Council voted to rebate 50% of the transient occupancy tax up to $13.1 million, which factored in inflation costs.
Then, in February, the developer once again approached Berkeley and asked for the deferment or waiver of $9.6 million in permit and impact fees. The 16.4% increase in construction costs in the last two years had dramatically decreased the project’s rate of return. The total project cost had gone from $169.5 million in 2016 to $194 million in 2018, according to a developer letter sent in April.
“The increased project cost results in a significant decrease in the projected return on cost to 5.8%, well below the range of what is considered financially feasible for a project of this type,” Williams-Ridley told the City Council in a memo for its June 12 meeting. “One of Pyramid Hotel Group’s equity partners declined to continue with the project, resulting in a gap in the project’s financing plan.”
City officials did not agree to give Center Street Partners the $9.6 million in waivers it wanted. Instead, city staff recommended that the City Council defer $4.35 million in public works/transportation fees. The city manager also agreed to defer $1.56 million in childcare and affordable housing mitigation fees, bringing the total deferment to $5.9 million.
“A deferral of impact fees owed by the project will reduce the total initial project cost and the developer’s equity gap,” Williams-Ridley wrote.
The City Council approved the concept, which was on the consent calendar on June 12.
The vote won’t ultimately mean less money for Berkeley, said Klein. It just postponed when the developer will have to pay the fees to the city.
“We didn’t give anything away with this action,” said Klein. “We just ‘restructured’ the payments.”
While Berkeley will ultimately recoup the waiver fees, delaying the payment will have an immediate impact. Money from the hotel project had been earmarked for the Shattuck Avenue Reconfiguration Project and to study turning Center Street into a pedestrian plaza. City staff has identified $1.625 million in “backfill funding” for the Shattuck project but has not yet identified $450,000 for the pedestrian project, according to Williams-Ridley’s memo.
Some of the financial backers for the project include the Pyramid Hotel Group, which has invested “quite a bit of capital,” according to Didion. Others include Marriott, Barings Real Estate Advisers and Didion, who termed himself a minority owner.
Energizing the north side of Center Street
While the hotel is 16-stories tall, the façades facing Center Street and Shattuck Avenue are just four stories tall, an attempt to create a pedestrian-friendly feeling. The building permit issued by Berkeley requires the developer to do this, and also to configure the project so it maintains the potential for a pedestrian-oriented Center Street.
The hotel entrance will be on Center Street. There will be a café and full-service restaurant on the street, too. The main entrance to the Bank of American branch will be on Shattuck Avenue but there will be a 24-hour ATM area with an entrance on Center Street.
The Berkeley Art Museum and Pacific Film Archive, located next door to the hotel, opened in January 2016, further enlivening the north side of Center Street. The south side of the block contains one of Berkeley’s highest concentration of restaurants. The sidewalks are extra wide there, too, so many of them have outdoor tables and chairs.