|
TO: |
Honorable mayor and
city council |
FROM: |
Kay Winer Scott P. Johnson Paul Krutko |
Council
District: City-Wide
SNI:
N/A
SUBJECT: Amendment
to Line of Credit agreement and Third amended and restated agreement to lease
with hayes renaissance, l.p.
Recommendation
Adoption of a resolution by the City Council authorizing the City Manager to negotiate and execute amendments to the Line of Credit Agreement and the Third Amended and Restated Lease Agreement with Hayes Renaissance, L.P. (HRLP), extending availability and repayment of advances under the Line of Credit Agreement, and deferral of rent and repayment of deferred rent and outstanding line of credit loans to a date not later than December 31, 2003. The proposed amendment to the Lease is subject to the approval of Comerica Bank.
Background
On September 24, 2002, the City Council and City of San Jose Financing Authority (the “Authority”) authorized various actions to facilitate short term economic relief of $4.85 million for HRLP. These actions included authorization to the City Manager to negotiate and execute:
· the Second Amended and Restated Agreement to Lease by and between City of San Jose and HRLP (the “Lease”), in order to defer $1.85 million for the payment of rent due under the Lease, including payment of the debt service payments for the bond funded improvements,
· a line of credit of $3.0 million to HRLP for necessary operating expenses.
The City and HRLP subsequently entered into the Third Amended and Restated Agreement to Lease (the “Lease Agreement”) and the Line of Credit Agreement.
The short term economic relief was conditioned on HRLP diligently marketing the assignment of the Lease Agreement to effect an assignment no later than June 30, 2003. Additionally, the terms of the Lease Agreement and the Line of Credit Agreement specify that HRLP must repay in full, the deferred rent and revolving loans, along with accrued interest, no later than June 30, 2003. To date, despite aggressive efforts, HRLP has been unsuccessful in marketing the Lease Agreement, and it appears that they will be unable to repay the rent deferred under the Lease Agreement and the balance due the City under the Line of Credit Agreement by June 30, 2003.
Comerica Bank’s Interest
In order to obtain working capital for the Phase III improvements[1], HRLP obtained a loan in the amount of $2 million from Imperial Bank (now Comerica Bank) (the “Bank”) in 2001. To facilitate this loan, the City Council approved on April 10, 2001 an agreement by and among the City, the Bank and HRLP (the “Bank Agreement”). As a condition of the Bank Agreement, the City agreed to the following provisions:
(i) Bank consent before amending the Lease Agreement - The City will obtain their consent prior to execution of the proposed amendments;
(ii) Bank's security interest in personal property acquired by HRLP after the date of the Bank Agreement is senior to the City's security interest;
(iii) Bank receives written notice in the event HRLP defaults under the Lease Agreement and they have certain defined “cure periods”, which extend up to 150 days after a HRLP default under the Lease Agreement. The cure periods provide the Bank with the opportunity to exercise its rights under its loan agreement with HRLP including foreclosure of the leasehold.
Analysis
To protect the City’s interest in the Hayes Mansion Conference Center (the “Conference Center”) in the event that HRLP is unable to assign its leasehold interest, on May 27, 2003, Council authorized the City Manager to negotiate and execute an amendment to the consultant agreement with HVS International to provide the City with assistance in developing a request for qualifications for operation of the Hayes Mansion Conference Center (the “RFQ”).
Since the RFQ will not be released until after June 30, 2003 when the agreement with HRLP to market the Lease terminates, staff recommends that the City Manager be authorized to negotiate and execute a six-month extension of the economic relief provided to HRLP by amending the Lease Agreement and the Line of Credit Agreement. The extension will provide for continuity of services at the Conference Center during the time that the RFQ process is underway. The recommended six-month extension includes an initial three-month period, followed by additional extensions on a month-to-month basis as needed through December 31, 2003. As indicated previously, the proposed amendment to the Lease is subject to the approval of the Bank.
The recommendations are made to ensure that the City has viable options in the event that HRLP is unable to succeed in its efforts to sell its leasehold interest or recapitalize by June 30, 2003. These measures are necessary to protect the City’s investment in the Conference Center, to maintain the City’s bond rating and to mitigate any potential drain on the City’s General Fund.
Current Status of the “Hayes Funds”
Finance staff has analyzed the status of the City’s Community Facilities Revenue Fund 422 and the Authority’s Hayes Mansion Trust Fund 880 (also known as the Market Rate Volatility Fund). These are the two funds that have been established by Hayes lease payments and subsequently identified to fund the temporary relief to HRLP as approved by the Council in September 2002.
The Hayes Phase I Base Rent payments, Grounds Rent and Percentage Rent received from HRLP are deposited in Fund 422 and are used to fund the debt service associated with Phase I[2] of the Conference Center. The Phase I Base Rent and related debt service are essentially equal (Phase I debt consists of fixed rate bonds). It should be noted that consistent with Council’s direction in September 2002, the excess funds in Fund 422 as of September 2002 ($1,200,000) have been fully utilized to fund a portion of the $3 million Line of Credit provided to HRLP.
Prior to the actions of the Council and the Authority in September, Fund 880 was used to deposit Hayes Phase III Base Rent payments from HRLP and to make the subsequent debt service and bond expense payments for Hayes Phase III debt. Fund 880 is now the source for the City’s payment of Phase I and Phase III debt service payments and bond expenses. The City has benefited from the market’s low interest rate environment since the issuance of the Phase III debt (these bonds are variable rate bonds). Accordingly, there have been sufficient funds in Fund 880 to pay for both Phase I and Phase III debt service.
Based on HRLP’s most recent cash flow projections and the Finance Department’s analysis, Fund 880 should have sufficient funds available to pay debt service and bond expenses on Hayes Phase I and Phase III bonds, and no additional funds are projected to be needed from other sources through December 31, 2003.
Lease and Line of Credit Amendments
The proposed amendment to the Lease Agreement allows for the extension of economic relief through the continued deferral of Phase I Base Rent and Phase III Base Rent for three additional months with up to three one-month extensions not to extend past December 31, 2003. During the deferral period, HRLP’s obligation to pay grounds rent which is payable to City on an annual basis in the minimum amount of $300,000 will also continue to be deferred. The proposed amendment to the Lease is subject to the approval of the Bank. At the expiration or earlier termination of the rent deferral period and the line of credit agreement, HRLP will be required to repay the City, in full, the amount of the deferred rent and line of credit loans, including accrued interest.
Staff recommends that the amendment to the Lease Agreement and the Line of Credit Agreement include a provision specifying that any remaining working capital available to HRLP upon expiration or sooner termination of the Line of Credit and/or the Lease, be applied to repayment of any outstanding amounts owed on the Line of Credit or deferred rent, at the City’s option. Additionally, staff recommends that in the event the working capital of Hayes exceeds $250,000 (per month) in a given month, such excess be applied towards repayment of the Line of Credit.
The proposed amendment to the Line of Credit Agreement
extends the period of time in which HRLP can make draws from June 30, 2003, for
an additional three months, with up to three one-month extensions, but not to
extend past December 31, 2003. The
maximum amount available under the Line of Credit for advances remains
unchanged at $3.0 million.
The line of credit balance due the City as of June 4, 2003
is $2,471,211 (not including accrued interest of $41,207). The balance in the line of credit authorized
by the City Council at a not-to-exceed amount of $3 million available to HRLP
through the extension period is $528,789 (less accrued interest to-date). Additionally, staff estimates that
$2,168,776 of Base Rent will be deferred as of June 30, 2003. Based on the latest projections of funds
available as of June 30, 2003, staff estimates that a total of $1,080,000 will
be available for rent deferral or line of credit advances. Therefore, based on HRLP’s latest cash flow
projections, the projected amount remaining in Fund 880 as of June 30, 2003 is
projected to be sufficient to fund Hayes debt service and bond expenses through
December 2003.
Coordination
This report has been prepared by the Finance Department in coordination with the City Manager’s Office, the Office of Economic Development, and the City Attorney’s Office.
Cost Implications
The costs associated with deferred rent and draws under the
Line of Credit Agreement will be funded from the Hayes Mansion Trust Fund (Fund
880).
CEQA
Negative Declaration.
|
KAY WINER |
SCOTT P. JOHNSON |
PAUL KRUTKO |
|
Deputy City Manager |
Director, Finance Department |
Director, Office of Economic Development |