JOINT CITY OF SAN JOSÉ

CITY COUNCIL/SAN JOSÉ FINANCING AUTHORITY

 

 

SAN JOSÉ, CALIFORNIA                                                   TUESDAY, SEPTEMBER 24, 2002

 

 

The Council of the City of San José convened in Joint Session with the San José Financing Authority at 4:35 p.m. in City Council Chambers at City Hall.

 

            Present:         Council Members -  Campos, Chavez, Cortese, Dando, Diquisto, LeZotte, Reed, Shirakawa, Jr., Yeager; Gonzales.

 

            Absent:          Council Members -  Williams (excused).

 

 

This Item heard in conjunction with Item 3.5 on the September 24, 2002 City Council Agenda.

 

2          (a)        Acceptance of the report of HVS, International entitled, Market Study, Operational Review, and Cash Flow Analysis: Hayes Mansion Conference Center.

            (b)        Adoption of a resolution by the City Council authorizing the City Manager to negotiate and execute an amendment to the Second Amended and Restated Agreement to lease by and between City of San José and Hayes Renaissance, L.P. (HRLP) to facilitate short term economic relief for HRLP, in a total amount not to exceed $4.85 million, including utilization of the Hayes Mansion Trust Fund and the capital reserve account in the Community Facilities Revenue Fund for payment of the Phase I and Phase III debt service on behalf of HRLP and providing a line of credit to HRLP for necessary operating expenses and further authorizing the City Manager to take other actions related to providing HRLP with economic relief;

            (c)        Adoption of a resolution by the City of San José Financing Authority to clarify and supplement the authorized expenditures of the Hayes Mansion Trust Fund, including the transfer of a portion of these funds to City;

            (d)        Adoption of a resolution authorizing the City Manager to negotiate and execute an agreement with HVS, International for consultant services for the period October 1, 2002 to June 30, 2003, for monitoring and evaluation of Hayes Conference Center operations and related services at a cost not to exceed $112,500.

 

            (e)        Adoption of the following appropriation ordinance and funding sources resolution amendments in the Community Facilities Revenue Fund:

                        (1)        Decrease the Reserve for Hayes Capital Improvements by $1,500,000;

                                    (a)        Establish an appropriation for the Hayes Mansion Line of Credit in the amount of  $ 3,000,000;

                                    (b)        Increase the earned revenue estimate by $1,500,000.

            (f)        Direct the Administration to provide a report to the City Council by December 17, 2002 on the performance of the Hayes Conference Center and the status of lease marketing efforts by HRLP.

            CEQA:  Negative Declaration.  Council District 2.  (City Manager’s Office)

            (Rules Committee referral 9/18/02)

 

            Documents Filed: See City Council Minutes of September 24, 2002 for the following documents pertaining to this issue: (1) Memorandum from Council Member Chuck Reed, dated September 23, 2002, requesting this item be deferred for one week. (2) Memorandum from Senior Deputy City Manager Darrell Dearborn and Director of the Budget Office, Larry D. Lisenbee, dated September 20, 2002, recommending (a) Acceptance of the report of HVS; (b) Adoption of a resolution authorizing the City Manager to negotiate and execute an amendment to the Second Amended and Restated Agreement to lease; (c) Adoption of a resolution by the City of San José Financing; (d) Adoption of a resolution authorizing the City Manager to negotiate and execute an agreement with HVS; (e) Adoption of the appropriation ordinance and funding sources amendments; (f) Administration to provide a report to the City Council by December 17, 2002 on the performance of the Hayes Conference Center and the status of lease marketing efforts by HRLP. (3) Report entitled: Market Study, Operational Review, and Cash Flow Analysis, Hayes Mansion Conference Center, San José, CA. prepared by HVS International, Division of M&R Valuation Services, Inc., for the City Manager’s Office.

 

            Discussion/Action: William Garbett, Kirsten Isaacson, and Pete Campbell addressed the Council. Darrell Dearborn, Senior Deputy City Manager, summarized the scope and cause of the shortfalls over the next several months faced by the Hayes Conference Center, and explained that the Center is facing shortfalls estimated at $3.1 million by June 30, 2003. He reported that Staff proposes Council approve short-term financial relief totaling up to $4.85 million to be funded with restricted monies previously received from operating revenues of Hayes Conference Center that have been reserved until now in accounts of the San Jose Financing Authority for interest rate fluctuation and project risk, and in the Community Facilities Revenue Fund for future capital repair and replacement at Hayes Conference Center. He indicated that repayment of funds would come from sale of the leasehold interest and if Council approves these actions, Staff would be back in December with a status report on the performance of the facility and the marketing efforts of the leasehold interest.

 

            Council Member Reed asked if part of the Staff analysis was to protect the City’s investment, and if any of the debt incurred by the tenant was secured on the City property. Deputy City Manager Dearborn responded that the advances proposed are not secured and that the likelihood of having this repaid is by marketing the leasehold interest. He explained that a separate interest is the operator and that there is value in that contract; and the letter of credit agreement anticipates if that contract were sold, the profits could be used to refund the City’s loan advances. Council Member Reed asked if the tenant had incurred any bills that the City would have to pay because it is secured against the real property; and if the City terminates the lease, would the tenant have to pay its creditors. City Attorney Doyle responded that the only thing the property secures is the bonds; any other debt of the tenant is private debt. Council Member Reed asked how long it would take to get control of the operations if the City were to give notice of default. City Attorney Doyle responded that a seven-day notice is required, plus notice to lender, or approximately 30 days. Council Member Reed asked how much money is in reserves. Deputy City Manager Dearborn responded that $3.8 million is in Financing Authority accounts and $1.5 million in City accounts in the Community Facilities Revenue Fund. Council Member Reed asked how much would be paid up front and where would the funds be used; and if any of the funds would be used to pay owners and partners for what they are owed. Deputy City Manager Dearborn responded that approximately $1.2 million would be the first draw and would be used to pay the outstanding bills of the Conference Center only. He explained that the line of credit agreement includes a condition that Hayes provides the City a monthly estimate of expenses and revenues for the ensuing month and the shortfall, Staff reviews it and approves or approves as modified, and advances the amount of money thus calculated; and at the end of that month they provide Staff with an actual accounting of all uses of the funds that were advanced. Council Member Reed expressed concern with the timing of the notice to the City and the public.

 

            Council Member Cortese stated that he believes he does not have a choice but to support the motion because of the timeline involved, but that receiving information regarding the insolvency of the entity just recently is unacceptable. He indicated that several Council Members had requested meetings with the entity to discuss the organization and business, but were denied, which lead to a memorandum from Council Member Chavez and himself requesting an audit.

 

            Council Member LeZotte asked for an explanation of funding. Deputy City Manager Dearborn explained that $4.85 million is the total amount of potential support for the Center, which includes $1.85 in rent that is due and payable between September 1, 2002 and June 30, 2003; and that under the lease, any successor lessee, if the rent is not repaid, is obligated to repay this rent. He added that depending on the actual sale of the leasehold interest, all of the operating expenses beyond rent that would be advanced through the loan would also be repaid. Council Member LeZotte asked if the partners had drawn from the Center’s revenues. Deputy City Manager responded that they have not received any return since August 2001.

 

            Council Member Dando stated that she believes the Hayes Conference Center is an asset to the City, and that the Council is in a position to reinforce an investment already made and to do whatever it can to make sure the Center is solvent in some manner. Regarding the audit requested by Council Members, she asked if the Auditor saw anything that the Council should have known about sooner. Gerry Silva, City Auditor, responded that the scope of the audit was narrow and included the ground lease for 2001 only. Council Member Dando asked if the City would be implementing changes to prevent this from occurring in future projects or models like the Hayes Center. City Attorney Doyle explained that in large part this is due to the limited scope of the audit that is allowed under the lease; however, the proposed revised leasing would expand the audit powers to allow the City to look at a whole operation, and he is reviewing language with the Auditor’s Office. Deputy City Manager Dearborn explained that the basic business model on which this facility has rested is a sound one, and the manner in which the improvements were funded is sound; the operating risk was borne by the private partner and, until last month, HLRP operated this property and cared for it in an exemplary way. He added that the study underscores the fact that the City is in this circumstance not because the property was mismanaged, not because costs have been uncontrolled, but because the market failed this property as it failed other properties in the Bay Area.

 

            Council Member Chavez, referring to page 15, asked how an assessment is made of their financial capability if they do not provide information. Deputy City Manager Dearborn explained that when the lease was drawn up in 2001, Staff did not foresee a need to assess the individual assets and liabilities of the partners in the general partnership; however, in retrospect, it would protect the City if the lease included the opportunity to require a statement of assets and liabilities, and the ability to require any assets in excess of liabilities to be pledged as securities for these monies. He added that these kinds of rights of the City nor the obligation of partners were not written into the lease. Council Member Chavez stated that she does not believe the word of the partner is good enough, yet the City is being asked to extend resources based on information that has not been provided. Deputy City Manager commented that HLRP was required to invest $9 million of equity in the Center. Council Member Chavez asked if the agreement requires that the leasehold be sold or is that an option. Deputy City Manager Dearborn responded that the line of credit agreement has a number of conditions, one of which is that HLRP market its leasehold interest.

 

            Council Member Reed noted that he had circulated a memorandum requesting that this item be referred for one week; however, the reasons for moving forward have been explained by Staff. He stated that he will not be supporting the item and explained that he believes the City needs to do something different, possibly taking over the Center, taking the money, and continuing to operate it.

 

            Upon motion by Vice Mayor Shirakawa, Jr., seconded by Council Member Dando, and carried, the report was accepted; Resolution No. 71223, entitled: “A Resolution of the Council of the City of San José Authorizing the City Manager to Negotiate and Executean Amendment to the Second Amended and Restated Agreement to Lease with Hayes Renaissance, L.P. and to take Other Actions Related to Providing Economic Relief to Hayes Renaissance, L.P.”; Resolution No. 71224, entitled: “A Resolution of the Council of the City of San José Authorizing the City Manager to Negotiate and Execute an Agreement with HVS International for Monitoring and Evaluation of Hayes Conference Center Operations in an Amount Not To Exceed $112,500”; Resolution No. 71225, entitled: “A Resolution of the Council of the City of San José Amending Resolution No. 71072 Setting Forth the Estimated Sources of Funds for the Fiscal Year 2002-2003 to Adjust Revenues in the General Fund”; Resolution No. SJFA-58, entitled: “A Resolution of the City of San José Financing Authority to Supplement and to Clarify the Authorized Expenditures of the Hayes Mansion Trust Fund, Including the Transfer of a Portion of these Funds to the City of San José”, Ordinance No. 26742, entitled: “An Ordinance of the City of San José Amending Ordinance No. 26674 to Appropriate Monies in the Community Facilities Revenue Fund to Establish an Appropriation for the Hayes Mansion Line of Credit; and Providing that this Ordinance shall become Effective Immediately Upon Adoption”, were adopted, and Council directed the Administration to return to Council in December 2002 with reports on the performance of the Center and marketing efforts of the lessee. Vote: 9-1-1-0. Noes: Reed. Absent: Williams.

 

 

ADJOURNMENT

 

The Joint City Council/San José Financing Authority meeting was adjourned at 5:18 p.m.

 

RON GONZALES, MAYOR

ATTEST:

 

PATRICIA L. O’HEARN

CITY CLERK