09/12/2017 - City Council Finance CommitteeFINANCE COMMITTEE MEETING
Tuesday September 12, 2017
10:30 AM
Eagan Room
Eagan Municipal Center
Agenda
I. AGENDA ADOPTION
II. NORTH EAST EAGAN DEVLEOPMENT UPDATE
III. OTHER BUSINESS
IV. ADJOURNMENT
MEMORANDUM
To:City of Eagan
From:Tammy Omdal and Rusty Fifield
Date:September 9, 2017
Re:Response to Question on Financing of Hotels and Conference Centers
We have been asked to provide additional information about a hotel and conference center (a
“HCC”) in the Vikings Lake Development based on a series of questions prepared by City Staff.
This memo addresses the following question:
“Please provide a primer on hotel financing that addresses how large hotels and conference
centers are typically financed. What are the roles of the developer, investor/s, and flag/brand?
What are typical investors and sources of financing? What is the typical financing term? Does
the developer obtain construction financing and, if so, when does the permanent investor
financing come into play? Hotels typically have a 2- to 3-year stabilization period. How does
that affect short- and long-term financing?”
Overview
At the outset, it is important to note that a HCC consists of three interrelated, but separate,
elements: hotel, conference center and parking facility. While the three elements are
interdependent, each element has different implications for private investment and City
participation. The recent study completed by the consultant CSL (Convention Sports & Leisure)
for the City concluded that the demand for a conference center is not feasible without a full
service, upscale hotel. Both facilities require adequate spaces in a structured parking facility.
The development of a HCC is complicated and involves many different players and areas of
professional expertise. Different than other real estate transactions, a HCC project is unique in
its complexity and intensive management requirements, including financial leverage, time to
stabilization, and capital markets liquidity. There are numerous complex agreements involved
with these projects, including operator agreements, development contracts, franchise
agreements, and land lease, as just a few examples.
It is important to note that the information provided as part of this memo is very general in
nature and is not specific to any project or potential terms for a project. Understanding all of
the various financial, construction, and operational aspects inherent in a HCC project will
require a combination of expertise of different professionals that specialize in these types of
developments and real estate transaction.
Conference Center and Hotel
September 9, 2017
Page 2
1.What are the roles of the developer, investor/s, and flag/brand in the development of a
conference center hotel?
The roles of those involved in the development of a hotel will vary depending on the
specifics of a project. Provided below is some general description of those that may be
involved. The list is not intended to be exhaustive of all of the various professionals and
expertise involved.
a)Owner – The owning company which also may be the developer, an equity investor,
investment conduit, operator, government, or a combined joint-venture of any of the
above.
b)Developer – The entity actively managing the overall development process for the owner.
Developer may be the owner.
c)Operator – The hotel company that holds a management agreement and normally, a
technical services agreement with the owner. The operator also may be an owner or
joint-venture partner or developer.
d)Franchiser (Flag)– The hotel company that holds a franchise agreement with the owner,
as franchisee.
e)Lender – Institution or entity providing primary debt financing. May include
commercial banks, life insurance companies, private credit companies, and pension
funds.
f)Investor - May be the owner, investment conduits. Investment conduits may include real
estate limited partnerships, real estate investment trusts, and commercial mortgage-
backed securities.
g)Construction lender – Institution providing temporary financing until construction is
complete.
2.What are typical investors and sources of financing for a conference center hotel?
The investor and sources of financing will vary depending on a HCC project. The owner
may be the investor and act to secure other investors and a lender. The owner or other
investors may be an investment conduit investing in the project. Investment conduits may
include real estate limited partnerships, real estate investment trusts, and commercial
mortgage-backed securities.
Cities are not typically involved directly in the ownership, operation and financing of a
hotel. Other aspects of HCC developments may, and often times does, include government
involvement, either in ownership or participation in the financing of a HCC and parking
facilities. Government financial participation helps make the project financially feasible for
private investment. City participation may also be designed to achieve other public
objectives/benefits.
Conference Center and Hotel
September 9, 2017
Page 3
3.What is the typical financing term? Does the developer obtain construction financing
and, if so, when does the permanent investor financing come into play?
The financing terms will vary depending on the project, including the use of equity versus
debt. (The market has seen fewer loans for these types of large scale projects and more
institutional equity involved.) A construction loan is a short-term loan made during the
period in which a project is under construction. The construction loan may be interest only
with personal guarantees and completion bonds required by the lender. Permanent
financing comes into play after the project is completed and has been in operation for a
period of time. The period of time will vary, but may be closer to three to five years (than
two to three years), and the borrower is able to attract more favorable terms from a
permanent lender.
4.Hotels typically have a 2- to 3-year stabilization period. How does that affect short- and
long-term financing?
As noted above as part, under question three, permanent financing may come into play after
the project is completed and been in operation for a period of time. The terms and period of
time depends on the project, the owner, and the financing terms. The performance of the
hotel during the stabilization period will determine the terms and interest rate of the
permanent financing.
Provided below are website links to several articles, of varying dates and scope, that the City
may find informative. If the City would prefer to have paper copies, we will provide upon
request:
A.“Preston Hollow Capital Announces $115 Million Financing Transaction for Irving Convention
Center Hotel”, April 2017, Business Wire,http://www.irvingchamber.com/2017/04/preston-
hollow-capital-announces-115-million-financing-transaction-for-irving-convention-center-hotel/
B.“Oklahoma City Council agrees to public financing for convention center hotel” July 18, 2017,
The Oklahoman,http://newsok.com/article/5556754
C.“Experts Differ on Convention Center Hotel Financing”, September 1, 2017, The Daily News,
https://www.memphisdailynews.com/news/2017/sep/1/experts-differ-on-convention-hotel-
financing/
D.“Public financing of renovations at big hotel is part of one-two KC convention punch”,
September 28, 2017, Kansas City Business Journal,
https://www.bizjournals.com/kansascity/news/2016/09/28/public-financing-of-renovations-at-kcs-
biggest.html
E.“The Great Convention Center Bailout” December 2012, GOVERNING – The States and
Localities,http://www.governing.com/columns/urban-notebook/col-great-convention-center-
bailout.html
F.“Convention Centers: It’s a Race to the Bottom”, July 11, 2012, Strong Towns,
https://www.strongtowns.org/journal/2012/7/11/convention-centers-its-a-race-to-the-bottom.html
MEMORANDUM
To:City of Eagan
From:Tammy Omdal and Rusty Fifield
Date:September 9, 2017
Re:Public financial assistance for hotel and conference center
This memo provides general information in response to the following question prepared by the
City of Eagan (the “City”) staff regarding City participation in the financing of a hotel and
conference center (the “HCC”).
The report prepared by CSL suggests that the construction costs for a 300-room hotel and
conference center could be $90 million with a gap of $30 - $35 million for the hotel and conference
center itself, excluding any structured parking. Please provide information on the sources available
to the City to assist with construction/financing costs for the hotel/conference center structure and
the feasibility (i.e., legal constraints, fiscal risk, and political concerns) of doing so.”
Public-Private Partnerships
Nationally when project costs of convention center hotel developments have exceeded levels
supported by an investment return, cities have proven willing to provide public subsidies. The
assistance has involved direct cash and/or loans, contribution of land, tax abatements,
infrastructure development, and parking facilities, for example. Exhibit A provides a listing of
example public-private partnerships for these types of projects. Exhibit B provides information
on communities considering subsidies to encourage hotel development.
The public financing that a city may provide is often limited or regulated by different state
statutes. The City of Eagan is limited by Minnesota statute in its ability to provide assistance to
the HCC. Based on the potential revenue sources available to the City, participation in the
financing of the parking improvements, and/or other public improvements required of the
HCC, may be the best option.
Information on specific revenue sources that could be available to the City to provide financial
assistance to the HCC are included below. The list also includes revenue sources that could be
available to assist the financing of a parking structure.
Exhibit C provides a chart on the public-private partnership options for funding the estimated
$90 million HCC (not including parking structure). Exhibit D provides detail on the amounts
that could be generated from the potential public revenue sources for assisting the HCC and
construction of a parking structure.
Conference Center Hotel
September 9, 2017
Page 2
Property Tax Abatement
The City has the authority to approve city property tax abatement for the HCC and could
request the county and/or school district to participate. The term of the property tax abatement
is limited to 15 years if all three taxing jurisdictions were to participate otherwise the term is
limited to 20 years.
Lodging Tax
The City may seek special legislation for authority to increase the lodging tax collected and the
use of the revenue collected. With special legislation the lodging tax revenue could be used to
assist the HCC.
Tax Increment Financing
The HCC will not qualify for tax increment financing based on existing State statute.
Special Service District (SSD)
A SSD can be used to finance improvements and services within a defined area of commercial
property. The City may issue general obligation bonds to pay for “improvements” within the
district. The improvements are defined by the ordinance establishing the district and are not
tied to the definition of improvements for special assessments. The SSD bonds are payable
primarily out of the proceeds of the “service charge” based on net tax capacity imposed, or from
any other special assessments or nontax revenues available to be pledged for their payment
under statutory authority, or from two or more of those sources. Service charge may be spread
based on property value or on factors, except it cannot be based on “the receipts from the sale of
intoxicating liquor, food, or lodging”. Further legal analysis will be needed as to how the hotel
may pass a SSD charge along to its customers (i.e., as part of the hotel room charges).
The SSD may be used to finance services in the district not currently provided by the City or for
existing services provided at a higher level. The City may not act to establish a service district
or impose a service charge without a petition from property owners in the district. These actions
are also subject to property owner veto. These requirements are less problematic when dealing
with a planned commercial district owned by a single developer.
The advantages to the owner (developer) of a SSD charged compared to a special assessment is
that it may allow for a broader base of property owners paying the SSD charge. It also has can
provide an ongoing source of revenue to pay for services (that will benefit the development)
that are not ordinarily provided throughout the City from the general fund revenues of the
City, or to provide at an increased level than for the rest of the City.
Special Assessments
The City has the authority to levy special assessments to pay for certain public improvements,
such as a public parking ramp. Like the special service district fee, the special assessment is an
additional cost to the property owner in addition to the ad valorem property taxes payable. The
Conference Center Hotel
September 9, 2017
Page 3
City has the authority to issue bonds supported by the special assessments to pay for public
improvements. The amount of the special assessment is subject to requirements and limitations
of State statute and terms of a potential petition and agreement with the benefited property
owners.
Parking User Fees
The City or owner of the parking ramp may be able to charge a user fee for parking for certain
events or determine to collect a charge as part of the hotel room charge. Charging for parking
in suburban areas is not as common but there may be options to do so in this area and for
certain events.
Location Year Flag Size (rooms) Public Financing Comments
Lubbock (TX) 2009 Overton 303 10% Equity
53% Bank loan
17% City bonds
17% Grants
3% Naming Rights
Bonds supported by combination of new property taxes, hotel
occupancy tax and sales tax
Raleigh (NC) Marriott 400 $20M Grant City obtained 14,000 sf of public meeting space and below market rate
parking
Overland Park (KS) 2001 Sheraton 412 3 revenue bonds ($87M) issued by Overland Park
Development Corporation
Annual appropriations shortfall agreement with City for first two series
of bonds
Myrtle Beach (SC) 2001 Radisson 404 $41M Senior Lien Revenue Bonds
$23.5M Subordinate Lien Revenue Bonds
Annual appropriations limited guarantee with City to replenish debt
service reserve for Subordinate Lien Bonds
Marshall (MN) 2017 Marriott Courtyard 101 Negotiations stopped in May when feasible plan for public financial
assistance could not be established
Des Moines (IA) 2016 Hilton 330 $30M loan from Polk County
Missoula (MT) 2017
Proposed
200 $15.3M Tax Increment Bonds City will buy conference center and parking facility after construction
Denver (CO) 2014 Hyatt 1,100 $355M First Tier tax exempt revenue bonds Includes 70,000 sf of meeting space
Nashville (TN) 2017 Omni 800 $25M upfront supported by TIF
Property tax abatement valued at $2.9M annually
Includes 80,000 sf of meeting space
Houston 2003 Hilton 1,200 $247M Hotel Revenue Bonds
$53MSubordinate Bonds
Includes 90,000 sf of meeting space
City debt service guarantee of $7 million (25% of debt service) from
proceeds of City hotel tax collections
Oklahoma City 2017 Omni 600 $85.4M TIF Bonds
Baltimore 2008 Hilton 767 $300M Hotel Revenue Bonds
Denton (TX) 2016 Embassy Suites 300 $54M Details of assistance not found
Includes convention center
Aurora (CO) 2018 Marriott 1,500 $81.4M Details of assistance not found
Frederick (MD) Proposed Marriott 183 $5M State grants
$18M TIF
Assistance plan not final
Bloomington (MN)2 2011 Radisson Blu 501 $40.3M Economic Recovery Zone Facility Bonds
(Hennepin County allocated to Bloomington)
$14.5M TIF Bonds for 509-stall parking ramp
Connected to the Mall of America
Bloomington (MN)2 2011 JW Marriot 342 $34M TIF Bonds for 600-stall parking ramp Connected to the Mall of America
Cleveland (OH) 2016 Hilton 600 County sales tax bonds Details of assistance not found
Note
1. Source of information is from publicly available reports or news publications. Final size and terms of financing and agreements may be different than what is included in this summary.
2. These two hotels are part of a retail (and office) complex, the "Mall of America", and may not necessarily be found to be equivalent to other conference center hotels.
3. Public conference centers have been built in Minnesota in the cities of Mankato, St. Cloud, Duluth, Rochester and Bemidji without a conference center hotel.
Example of Public-Private Partnerships for Conference Center Hotels 1
EXHIBIT A
9/9/2017 Exhibit A
9/7/17 Exhibit B
EXHIBIT B
Communities Considering Subsidies to Encourage Hotel Development
(From Report Dated 8/6/2014 1)
1 Source: From report dated 8/6/2014, Cornell University School of Hotel Administration, The Scholarly
Commons, CREF Working Papers, Center for Real Estate Finance: The Impact of Publicly Subsidized Hotels in
the United States on Completing Properties, Robert R. Nelson Ph.D., Robert R. Helson Ph.D. University of
Delaware, Jan A. deRoos Ph.D., Cornell University, and Russel Lloyd Ph.D., Cornell University.
Notes:
1. Options B, C, and D will require special legislation for lodging tax.
2. The City property tax abatement is estimated at approximately $2M based on an estimated $30M taxable market value of the HCC.
EXHIBIT C
3. The consideration of structured parking may increase the City property tax abatement available from other development.
0% 20% 40% 60% 80% 100%
Option A: Cityproperty tax abatement on HCC
Option B:City propertytax abatement on HCCand
use of 3%Lodgingtax collectedfrom HCC
Option C:City propertytax abatement on HCCand
use of 1%increase in citywideLodgingtax
Option D: Citypropertytax abatement on HCCand
use of 2%increase in citywideLodgingtax
City of Eagan
Hotel and Conference Center (HCC)
Public-PrivatePartnership Options for Funding $90M HCC in Eagan
No StructuredParking
Citypropertytax
abatement
Lodgingtax
Private funding
9/9/2017 Exhibit C
Totals
Project Assumptions
Number of Hotel Rooms 300
Parking Stalls 1,476
Office Space Square Footage 200,000
Construction Costs:
300 Room Hotel and Convention Center $90,000,000
Parking Ramp $36,900,000
Potential Revenue Options, Present Value of Cash Flow 1
City tax abatement on HCC Only $1,911,343
City tax abatement on HCC and office space $3,008,045
Special Service District Fee:
$5.75 equivalent per room per day $3,100,000
Special Assessment (SA):
50% of parking ramp costs assessed, equivalent to $14.91 per room per day $18,725,000
Parking Revenue:
Average Daily Parking Revenue Per Stall at $1.00 per stall $7,321,652
Lodging Tax (Special Legislation Required):
3% Lodging tax from convention center hotel $4,428,707
1% Increase in lodging tax from all hotels in City $10,517,937
2% Increase in lodging tax from all hotels in City $16,607,166
Notes:
EXHIBIT D
Tax Abatement, City Taxes Only
3. The special service district fee is shown as equivalent to a fee per room per day for information
purposes only. The fee may not be levied on a per room basis.
2. Special legislation required for lodging tax revenue as shown.
1. Revenue estimates based on present value of 20 year cash flow period.
City of Eagan
Public Revenue Sources for Hotel and Conference Center (HCC) and/or Parking
Structure
9/9/2017 Exhibit D
Notes:
2. Term of City property tax abatement is limited to 20 years.
3. Total annual debt service and maintenance expense of $3.3M includes $2.8M for debt service and $0.5M for maintenance expense.
5. Scenario C includes parking revenue estimated based on average daily parking revenue per stall of $2.63.
6. Scenario D includes use of 3% lodging tax collected from HCC for parking ramp.
7. Scenario E includes an increase in the citywide lodging tax from 3% to 4% and use of the 1% increase in citywide lodging tax for the parking ramp.
4. Scenarios A, B, and C do not require special legislation. Scenarios D and E require special legislation.
1. Scenarios A, D, and E include City property tax abatement for the hotel and convention center (HCC) only with estimated taxable market value of $30M. Scenarios B and C also
include City property tax abatement on 200,000 SF of office with estimated taxable market value of $20M.
8. Scenario A and B include a special service district fee that may be levied on commercial property pursuant to requirements of existing State statute. The fee based on a per
hotel room equivalent charge is $29 for Scenario A and $28 for Scenario B. The fee may not be levied on a per room basis. The equivalent charge per room is provided for
information purposes only.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Scenario A
Scenario B
Scenario C
Scenario D
Scenario E
City of Eagan
Public Parking Ramp - 1,476 Stalls
Scenarios for Funding $3.3M of Annual Debt Service and Maintenance
Lodging tax
City property tax
abatement
Special
assessments
Special service
district fee
Parking revenue
9/9/2017 Public Parking Ramp Financing Scenarios
PARKING RAMP FINANCING SCENARIOS
Key Factors for Scenarios Base Factors
Base Factors
with 200,000
SF Office 1 Base Factors
Number of Convention Center (CC) Hotel Rooms 300 Number of CC Structured Parking Stalls 1,476
Estimated Taxable Market Value of Property (Pay 2020) $30,000,000 Construction Cost Per Parking Stall $25,000
Taxable Market Value Per Room (Pay 2020) $100,000 Total Project Construction Cost $36,900,000
Cost of Financing (1.5%) $550,000
City Annual Property Tax $140,640 $224,971 Par Amount of Bonds $37,450,000
County Annual Property Tax $105,349 $168,519 Term of Bonds 20
School Annual Property Tax $83,872 $134,164 Average Coupon of Bonds 4.00%
Fiscal Disparity Annual Property Tax $334,694 $535,384 Average Annual Debt Service Per Parking Stall Per Month $156
Other Annual Property Tax $346,457 $554,222 Total Annual Debt Service Expense $2,755,637
Total Annual Property Taxes $1,011,013 $1,617,261
Annual Maintenance and Operating Cost Per Stall $350
CC Hotel Annual Revenue Per Room Subject to Lodging Tax $36,208 Total Annual Maintenance Expense $516,600
CC Hotel Annual Revenue Subject to Lodging Tax $10,862,400 Total Annual Expense $3,272,237
Assumptions for Revenue Sources Scenario A Scenario B Scenario C Scenario D Scenario E
Lodging Tax Rate 3.00% 3.00% 3.00% 3.00% 4.00%
CC Hotel Lodging Tax Used to Support Project No No No Yes Yes
Other Hotels Logging Tax Increase Used to Support Project No No No No Yes
% of Costs Paid by Special Assessments (SA)0% 0% 50% 86% 72%
Term of SA (Interest rate plus 2% bond rate)20 20 20 20 20
Special Service District Charge (shown as equivalent $/room/day)$29 $28 $0 $0 $0
Abatement Limited to Hotel/CC Yes No No Yes Yes
City Tax Abatement Yes Yes Yes Yes Yes
County Tax Abatement No No No No No
School Tax Abatement No No No No No
Average Daily Parking Revenue Per Stall $0.00 $0.00 $2.63 $0.00 $0.00
Total Annual Revenue Sources:
Lodging Tax from CC Hotel $0 $0 $0 $325,872 $434,496
Increase in Lodging Tax from Existing Hotels $0 $0 $0 $0 $339,432
Tax Abatement - City $140,640 $224,971 $224,971 $140,640 $140,640
Special Assessments $0 $0 $1,632,531 $2,805,725 $2,357,668
Special Service District $3,131,597 $3,047,265 $0 $0 $0
Parking Fees $0 $0 $1,414,735 $0 $0
Total Annual Revenue $3,272,237 $3,272,237 $3,272,237 $3,272,237 $3,272,237
Notes:
City of Eagan
Analysis of Expenses and Revenues for Hotel and Conference Center (HCC) and Parking Ramp
3. Scenarios C, D, and E do not require special legislation. Scenarios A, B, and C require special legislation.
1. The base factor includes taxes for the HCC, assuming a $30M taxable market value. The alternative factor also includes the annual taxes collected on 200,000 SF of office space
over a 20 year period, with construction completion in 2019, assuming a $20M taxable market value.
2. Other Annual Property Tax includes the State property tax and other tax capacity based taxes, and referendum based taxes. There is no authority in State statute for an
abatement of these taxes.
9/9/2017 Parking Ramp Financing Scenarios
Notes:
2. Term of City property tax abatement is limited to 20 years.
3. Total annual debt service and maintenance expense of $3.3M includes $2.8M for debt service and $0.5M for maintenance expense.
4. Scenario A includes City property tax abatement on the hotel and conference center (HCC) only with estimated taxable market value of $30M.
1. No special legislation required for the scenarios shown.
5. Scenarios B includes City property tax abatement on the HCC and City property tax abatement on 200,000 SF of office space with estimated taxable market value of $20M.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Scenario A: City Tax
Abatement on HCC and
SpecialService District
Established
Scenaro B: City Tax
Abatement on HCC and
200,000 SF Office Space
andSpecial Service
District Established
City of Eagan
Public Parking Ramp with 1,476 Stalls
Scenarios for Funding $3.3M of Annual Debt Service and Maintenance
City property
tax abatement
Special service
district fee
9/9/2017 Scenarios for Financing Public Parking Ramp