CARLSBAD, CA—Grand Pacific Resorts has leased a 3.15-acre property next to the Crossings at Carlsbad golf course and plans to add 71 hotel rooms to the Sheraton Carlsbad Resort & Spa's existing 129 rooms, conference center, restaurant and lobby area to rebrand the hotel as a Westin. The additional rooms will be built on the western portion of the property.

The planned expansion and rebranding are the result of the Carlsbad City Council approving in December 2014 a ground-lease option agreement with the resort developer for a prime piece of City-owned real estate that will generate new ongoing revenue to help fund city services for the next 65 years or longer. The property is zoned for tourism-related commercial development.

According to assistant city manager Gary Barberio, “The city initially explored selling this excess property, which was created as part of the development of the Crossings golf course. When we crunched the numbers, we found that a long-term lease had the potential to generate a steady stream of new revenue to the city that would be far greater than what we could get from a one-time sale.”

The option anticipates an initial lease term of 65 years with two 10-year extension options. The annual rent starts at $159,965 a year, with agreed-upon increases over time. The total rent to be paid through the first 55 years is in excess of $15 million. The City will also collect tax on the hotel-room nights, called transient occupancy tax, as well as sales and property taxes. The land is currently appraised at between $1 million and $3 million.

Under the terms of the lease agreement, Grand Pacific has up to 36 months to complete environmental review of the proposed project and obtain building permits. Once this step is complete, the ground lease option will be exercised. The, Grand Pacific Resources has 18 months to complete construction of the new hotel, at which point the new lease rent payments will begin. A second phase, which would include either a minimum of 32 timeshare units or 32 additional Westin hotel rooms on the eastern portion of the property, is also part of the deal.

The property, called the Crossings at Carlsbad West View Lot 9, is actually two parcels. A 2.7-acre parcel owned by the City was created as a developable lot during the construction of the Crossings golf course in 2007. At that time, the City planned to use the property to generate revenue that could be used to help fund city services. The other portion is a .45-acre lot owned by the Carlsbad Municipal Water District, a subsidiary district of the City that is a separate legal entity.

Barberio, who participated in the complex lease negotiations for the City, says the agreement is good for Grand Pacific and for city taxpayers. “This property has huge potential, and the City Council was clear in its direction to the negotiating team. Instead of offering subsidies, we were able to leverage our property in a way that maximizes the return to city taxpayers while ensuring a high-quality project that will complement our strong tourism economy.”

Hotels are making big news in the real estate industry lately. As GlobeSt.com reported last week, CHM and Warnick + Co. have merged together to form CHMWarnick, the world's largest hotel asset management company. The combined company has an asset management portfolio of 54 properties, totaling 23,000 rooms, and valued at $8 billion.