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E!.!Y of San Leandro Marina Lodging Development Page 13 annually for a 25-year term loan at 8.0 percent interest, compounded monthly. Given the estimated net operating income of $500,000 to $600,000, debt service obligations of $150,000 are supportable by the income produced by the proposed restaurant. G. ECONOMIC FEASIBILITY FOR THE RECOMMENDED DEVELOPMENTS In order to analyze the economic feasibility of this project, we have made the following assumptions as to financing and ownership. · The total development cost for the project would be $44,000,000 in 2006-value dollars, as outlined in the preceding text. · Financing for the project has been calculated at current market terms, and, we have assumed that the City of San Leandro would contribute the site for the conference center hotel development through a preferential lease arrangement with no rental payments in the initial years of operation. We also have assumed that a developer could obtain a construction and takeout loan for 60.0 percent of the project cost prior to financing points ($26,400,000) at an interest rate of 8.0 percent with a 25-year amortization period. The balance of the project cost of 40.0 percent ($17,600,000) would be funded through equity investment. · We have further assumed that the development group would hold the project for 10 years and then sell the development. The sales price of the project was estimated based on an 11.0 percent capitalization rate. Based on our ten year forecast of the potential operating income and the above- indicated equity investment of $17,600,000, the Internal Rate of Return (IRR) on the equity investment on a leveraged basis is roundly 14.0 percent. This indicated in the Table Four on page 16. As a point of reference, investors in lodging projects typically demand an IRR on equity invested, on a leveraged basis, of close to 25 percent. Therefore, an IRR of approximately 14.0 percent is not sufficient to attract investor interest in the proposed conference center hotel. 1. Overview of Typical City Participation in Lodging Projects As a result of the need to equate a desired internal rate of return (IRR) to the high development costs of hotels, City participation in a project is frequently required to attract a private group to develop lodging projects of a specific, desired nature, particularly higher end projects. With regard to the proposed conference center hotel at the San Leandro Marina, as a result of the foregoing low return, City participation, in addition to the contribution of the site, would be required to attract a group to develop the proposed project. Common forms of participation for this type of project include the following.