Recommendation

(a) Approval of an agreement with Hayes Renaissance, L.P. setting forth the terms of the transition of the operation and management of the Hayes Mansion Conference Center to a new operator

(b) Adoption of a resolution authorizing the City Manager to negotiate and execute agreements related to the transition of the operation and management of the Hayes Conference Center:

1. a line of credit agreement with Comerica Bank-California in an amount not to exceed $7,000,000;

2. an agreement with Devcon Construction Incorporated to assume repayment of the principal of a loan made to Hayes Renaissance, L.P. in the amount of $1.2 million on a subordinated basis from Hayes Mansion Conference Center net revenues; and

3. a temporary operating agreement with Hayes Renaissance, L.P. for the operation and management of the Hayes Mansion Conference Center until the new operator assumes management and at a cost not to exceed a monthly fee of $15,000

1. Establish a Hayes Mansion Conference Center Line of Credit Security Earmarked Reserve in the amount of $5,000,000; and

2. Decrease the Workers’ Compensation/General Liability Catastrophic Earmarked Reserve in the amount of $5,000,000.

Background

There are a number of actions required for the orderly transition of the operation of the Hayes Mansion Conference Center. The background for these actions is set forth in a separate memorandum related to the outcome of the Hayes Mansion RFP process, elsewhere on this Council agenda

ANALYSIS

This section of the report is divided into several sections describing the elements of the Transition Plan for the Hayes Mansion including: Transition Agreement with Hayes Renaissance, L.P. (HRLP) with a an overview of the Transition Agreement terms; Line of Credit (LOC) Agreement with Comerica Bank; Deferred Loan Agreement with Devcon Construction Incorporated; and the Temporary Operating Agreement with Hayes Renaissance, L.P.

Transition Agreement with Hayes Renaissance, L.P. (HRLP)

City staff and HRLP have negotiated the proposed terms of a Transition Agreement for Council approval to facilitate a smooth transition of the operation and management of the Hayes Mansion Conference Center to a new manager:

Overview of Transition Agreement Terms

Under the proposed Transition Agreement, both parties agree to terminate the lease of the Hayes Mansion Conference Center and the line of credit agreement. HRLP is responsible for transferring all of its assets at the Hayes Mansion Conference Center to the City and generally cooperating with the transition of the Hayes Mansion Conference Center to the new operator. In addition, Network Conference Company (“NCC”, the operator of the Hayes Mansion Conference Center under contract to HRLP), agrees to transfer its client database to the City. The City, in turn, assumes certain obligations on HRLP’s behalf. An overview of the terms of the Transition Agreement is set forth below:

HRLP to transfer all current assets at the Conference Center to the City
HRLP to transfer all fixed assets at the Conference Center to the City (furniture, equipment and leasehold improvements)
City to assume current liabilities, Comerica line of Credit, Devcon and Greater Bay Bank loans and capital and equipment leases.
City to receive proprietary client and contact database from Network Conference Company through transition at no cost to City.
City to pay $0 to HRLP for equity contributions
City to enter into transition management agreement with HRLP to manage Hayes for a management fee of $15,000 per month until transition complete.
HRLP agrees to cooperate with the City through the transition period.
City to “forgive” all amounts due from HRLP to City for line of credit, deferred rents (base rent, grounds rent and percentage rent) including interest.
City to negotiate $7 million line of credit with Comerica to assume payment of HRLP’s line of credit, and fund HRLP’s Greater Bay Bank loan up to $149,500.
No severance package to be paid by City to HRLP or NCC management staff.
No payments to be made to HRLP or NCC in connection with the transition (other than the management fee noted above).
Loan to HRLP from Devcon Construction Incorporated in the amount of $1.2 million to be assumed by City provided that the terms are renegotiated and restructured so that City assumes only repayment of the principal amount of the loan (deferred at 0% (zero percent) interest on a subordinated role.)

The attached Schedule provides the amount of the assets and liabilities of the Hayes Mansion as of August 31, 2003 as well as the total amount due the City for deferred rent, line of credit and interest that would otherwise be due the City from HRLP from future operating revenues of the Hayes Mansion if the transition to a new Manager was not in place. It should be noted that the schedule provides the amounts as of August 31, 2003, the most recent information available, and the final amounts will be different based upon the timing of the actual transition date. The Transition Agreement is contingent upon execution of the Line of Credit Agreement with Comerica Bank, the deferred loan agreement with Devcon Construction Incorporated and a temporary operating agreement with Hayes Renaissance, L.P.

Line of Credit (LOC) Agreement with Comerica Bank

In conjunction with the Transition Plan noted above, the City is in the process of negotiating a Line of Credit (LOC) with Comerica Bank. HRLP, in conjunction with the construction of the Phase III Renovation to the Conference Center, obtained a loan in the amount of $2 million from Imperial Bank, now Comerica Bank, of which approximately $1.7 million is currently outstanding. Comerica Bank has a secured interest in the Lease of the Hayes Mansion and has the right to pursue various remedies during the 30 day period following issuance of the City’s Notice of Default. Following the first 30 days, Comerica Bank may continue to pursue its remedies for an additional 120 days assuming that Comerica makes lease payments to the City. Under the proposed LOC, the City will use the LOC funds in order to repay HRLP’s loan and Comerica Bank, in turn, will release its security interest in the Hayes Mansion Lease, including any personal property at the Conference Center.

Based on operating cash flow projections for the Hayes Mansion, it is necessary for the City to secure a line of credit facility to provide on-going operating cash flow needs for the operations of the Hayes Mansion (including the City’s debt service costs for the Hayes), pay off HRLP’s line of credit debt with Comerica, as described above and HRLP’s loan with Greater Bay Bank.

Finance staff has been negotiating terms with Comerica. Comerica has issued a commitment letter to the City with the following key terms:

$7,000,000 revolving line of credit.
The borrowing rate will be either a floating rate at Comerica Bank Prime Rate less 1.25% (currently 2.75% based on prime of 4.0%), or fixed rate option of LIBOR plus 0.75%, fixed for periods of 30, 60, 90, 180, or 360 days (range from 1.87% to 2.08% based on current LIBOR rates), (at the City’s option per determination by City’s Director of Finance upon each draw down of the LOC.)
Fees: None.
Term: 48 months.

· Interest payable monthly for the first 3 years of the term of the credit facility. Beginning in year 4, monthly principal payments of $30,000/month, plus interest, to be made for the remainder of the term of the loan.

· City to establish and appropriate a $5,000,000 designated Hayes Mansion reserve within the City’s general fund. This appropriated reserve will remain in place for the term of the loan. Reserve to be utilized under the amortization/repayment conditions noted above to repay interest plus any outstanding principal balance at the end of the term of the loan, in the event that (1) the City and/or Comerica elect to terminate the agreement; and (2) there are insufficient net revenues from the Hayes Mansion Conference Center to repay the outstanding balance.

City’s obligation to repay the line of credit is limited to the net revenues (after City’s Hayes Mansion debt costs) from the operations of the Hayes Mansion Conference Center and the special reserve fund described above.
City to maintain a minimum credit rating of AA- by at least one of the three national rating agencies (Moody’s, Fitch, or Standard & Poor’s).
City will maintain a “set-aside” account with the Bank, with a minimum collected balance of $50,000.
City will pay the Bank’s loan costs associated with establishing the LOC with the City.
City will enter into an affirmative covenant that the Hayes Mansion Conference Center will remain in operation for the term of the loan.
The Hayes Mansion Conference Center to remain unencumbered, except for previously existing liens, for the term of loan.
If the Hayes Mansion Conference Center is sold during the term of the loan, then the loan to be paid first with the proceeds of the sale.

The commitment letter from Comerica stipulates the above provisions assuming the line of credit will be executed by the City and Comerica by October 31, 2003.

Deferred Loan Agreement with Devcon Construction Incorporated

HRLP borrowed $1.2 million from Devcon Construction Incorporated to satisfy its obligation to provide a financial contribution to Phase III of the Hayes Mansion Renovation. The City required HRLP to contribute a combination of equity and/or debt as a condition for the City issuing additional debt for Phase III renovation costs. As a condition of the Transition Agreement noted above, the City will assume the Devcon loan of $1.2 million. The loan will be restructured at 0% (zero percent) interest and will be in a subordinated role. The subordination provisions will require that operating costs for Hayes Conference Center, the City’s debt service costs and expenses on Hayes, Comerica line of Credit payments, and all operating lease payments associated with Hayes will have priority to any principal payments being made on the Devcon Loan. No payments for the Devcon loan will be paid by the Comerica line of credit. All principal loan payments will be made from positive operating cash flows after costs noted above have been funded. There will be no final due date.

Temporary Operating Agreement with Hayes Renaissance, L.P

To facilitate an orderly transition to a new Manager for the Hayes Mansion, it is recommended that the City enter into a temporary operating agreement with Hayes Renaissance, L.P. for the operation and management of the Hayes Mansion Conference Center, at the same standard that HRLP currently operates the facility, until the new operator assumes management. Consistent with the RFP schedule, City staff anticipates that the new management will assume operation of the Conference Center on January 1, 2004. The temporary operating agreement will be at a cost not to exceed a monthly fee of $15,000.

PUBLIC OUTREACH

Not applicable.

Coordination

This report has been prepared by the Finance Department in coordination with the City Manager’s Office, and the City Attorney’s Office.

COST IMPLICATIONS

The recommended General Fund source for the $5.0 million Hayes Mansion Conference Center Line of Credit Security Earmarked Reserve is a temporary reduction in the Workers’ Compensation/General Liability Catastrophic Earmarked Reserve. This Earmarked Reserve has been in place for a number of years and is not projected to be utilized during the period of loan guarantee. After the temporary reduction of $5.0 million, it should be noted that a total of $10.0 million will remain in that reserve for catastrophic claim losses. All other costs are anticipated to be funded by either the net operating revenues of the Hayes Mansion and/or the Comerica Line of Credit.

CEOA

Not a project.

KAY WINER	SCOTT P. JOHNSON	PAUL KRUTKO
Deputy City Manager	Director, Finance Department	Director, Economic Development

LARRY D. LISENBEE
Budget Director