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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