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2019 03 07 MDD MinutesMINUTES OF THE REGULAR MEETING OF THE BOARD OF DIRECTORS OF THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT March 7, 2019 The Board of Directors of the Baytown Municipal Development District (MDD) met in a Regular Meeting on Thursday, March 07, 2019, at 4:31 P.M., in the Council Chamber of the Baytown City Hall, 2401 Market Street, Baytown, Texas with the following in attendance: Brandon Capetillo President Chris Presley Vice President Laura Alvarado Secretary Suhey Rios -Alvarez Director Charles Johnson Director Heather Betancourth Director Robert C. Hoskins Director David Himsel Director David P. Jirrels Director Gary Englert Director Rick Davis General Manager Ignacio Ramirez, Sr. General Counsel Leticia Brysch Assistant Secretary President Brandon Capetillo convened the March 07, 2019, MDD Board Regular Meeting with a quorum present at 4:31 P.M., all members were present with the exception of Mary Hernandez who was absent and Director Suhey Rios -Alvarez who arrived at 4:33 P.M. and Director Charles Johnson who arrived at 4:35 P.M. 1. MINUTES a. Consider approving the minutes of the Baytown Municipal Development District Special Meeting held on December 13, 2018. A motion was made by Director Robert C. Hoskins and seconded by Director Heather Betancourth approving the December 13, 2018, MDD Special Meeting minutes. The vote was as follows: Ayes: President Brandon Capetillo, Vice -President Chris Presley, Secretary Laura Alvarado, Director Heather Betancourth, Director Robert C. Hoskins, Director David Himsel, Director David P. Jirrels, Director Gary Englert Nays: None MDD Regular Meeting Minutes March 7, 2019 Page 2 of 16 Other: Director Suhey Rios -Alvarez (Not Present for Vote), Director Mary Hernandez (Absent), Director Charles Johnson (Not Present for Vote) Approved b. Consider approving the minutes of the Baytown Municipal Development District Special Meeting held on January 10, 2019. A motion was made by Director Robert C. Hoskins and seconded by Director David Himsel approving the January 10, 2019, MDD Special Meeting minutes. The vote was as follows: Ayes: President Brandon Capetillo, Vice -President Chris Presley, Secretary Laura Alvarado, Director Heather Betancourth, Director Robert C. Hoskins, Director David Himsel, Director David P. Jirrels, Director Gary Englert Nays: None Other: Director Suhey Rios -Alvarez (Not Present for Vote), Director Mary Hernandez (Absent), Director Charles Johnson (Not Present for Vote) Approved C. Consider approving the minutes of the Municipal Development District Regular Meeting held on February 07, 2019. A motion was made by Director Robert C. Hoskins and seconded by Secretary Laura Alvarado approving the February 07, 2019, MDD Regular Meeting minutes. The vote was as follows: Ayes: President Brandon Capetillo, Vice -President Chris Presley, Secretary Laura Alvarado, Director Heather Betancourth, Director Robert C. Hoskins, Director David Himsel, Director David P. Jirrels, Director Gary Englert Nays: None Other: Director Suhey Rios -Alvarez (Not Present for Vote), Director Mary Hernandez (Absent), Director Charles Johnson (Not Present for Vote) Approved 2. PROPOSED RESOLUTIONS a. Consider a resolution authorizing the Economic Development Basic Services Contract with Baytown/West Chambers County Economic Development Foundation (EDF). MDD Regular Meeting Minutes March 7, 2019 Page 3 of 16 Mr. BJ Simon, a representative of the EDF, expressed appreciation for the opportunity to work with the City of Baytown and entertained questions from Council regarding the subject of this agenda item. A motion was made by Secretary Laura Alvarado and seconded by Director Robert C. Hoskins approving Resolution No. 370, regarding agenda item 2.a. The vote was as follows: Ayes: President Brandon Capetillo, Vice -President Chris Presley, Secretary Laura Alvarado, Director Suhey Rios -Alvarez, Director Heather Betancourth, Director Robert C. Hoskins, Director David Himsel, Director David P. Jirrels, Director Gary Englert Nays: None Other: Director Mary Hernandez (Absent), Director Charles Johnson (Not Present for Vote) Approved RESOLUTION NO. 370 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT AUTHORIZING THE GENERAL MANAGER TO EXECUTE AND THE ASSISTANT SECRETARY TO ATTEST TO AN ECONOMIC DEVELOPMENT CONTRACT BETWEEN THE BAYTOWN AREA/WEST CHAMBERS COUNTY ECONOMIC DEVELOPMENT FOUNDATION AND THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT FOR ECONOMIC DEVELOPMENT SERVICES; AND PROVIDING FOR THE EFFECTIVE DATE THEREOF. b. Consider a resolution authorizing the Economic Development Special Services Contract with Baytown/West Chambers County Economic Development Foundation. Mr. BJ Simon, a representative of the Economic Development Foundation ('EDF") presented the agenda item and stated that Resolution No. 371 authorizes the Economic Development Special Services Contract with Baytown/West Chambers County Economic Development Foundation for an amount not to exceed $100,000. He further stated that the funding was contingent upon the completion of following special projects: Description Amount Not to Exceed Trade Shows — Attend and booth space $ 10,000.00 Industrial Expansion Symposia $ 20,000.00 Marketing Program Implementation $ 20,000.00 Phase III Research $ 30,000.00 Hotel and Conference Center $ 10,000.00 Strategic Economic Vitality Program $ 10,000.00 MDD Regular Meeting Minutes March 7, 2019 Page 4 of 16 Total Amount Not to Exceed $100,000.00 A motion was made by Director Robert C. Hoskins and seconded by Director Suhey Rios - Alvarez approving Resolution No. 371, regarding agenda item 2.b. The vote was as follows: Ayes: President Brandon Capetillo, Vice -President Chris Presley, Secretary Laura Alvarado, Director Suhey Rios -Alvarez, Director Heather Betancourth, Director Robert C. Hoskins, Director David Himsel, Director David P. Jirrels, Director Gary Englert Nays: None Other: Director Mary Hernandez (Absent), Director Charles Johnson (Not Present for Vote) Approved RESOLUTION NO. 371 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT AUTHORIZING THE GENERAL MANAGER TO EXECUTE AND THE ASSISTANT SECRETARY TO ATTEST TO AN ECONOMIC DEVELOPMENT SPECIAL SERVICES CONTRACT BETWEEN THE BAYTOWN AREA/WEST CHAMBERS COUNTY ECONOMIC DEVELOPMENT FOUNDATION AND THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT FOR ECONOMIC DEVELOPMENT SERVICES; AND PROVIDING FOR THE EFFECTIVE DATE THEREOF. 3. DISCUSSION a. Receive a presentation and discuss the Baytown Hotel and Convention Center Project. Mr. Steve Galbreath, a representative of Garfield Public Private, along with six other speakers provided a presentation that discussed the Baytown Hotel and Convention Center Project, which included the design, budgets, and schedules. Mr. Galbreath stated that Steve Moffett would provide his perspective of the project, Raymond Garfield would discuss the project structure and pro forma, Tatianna Troutman along with Chris Janning would expound on the project financing, Jonathan Frels would talk about the project mechanics, and Ron Bottoms would provide any remaining details. Mr. Galbreath provided a recap of the design of the project and stated that it would be built on Bayland Island. He stated that after crossing over the Fred Hartman Bridge there would be a main drive entering into the hotel/convention center; whereas, guests would enter to the hotel drop-off or continue on following the signage to the drop-off for the ballrooms. He noted that MDD Regular Meeting Minutes March 7, 2019 Page 5 of 16 there would be various types of guest staying just at the hotel for either a conference and would check in at the hotel, but may later on come back to the convention center, or guests staying for maybe a day event only going to the conference center. He stated that there would be parking primarily for the hotel, parking for the meeting space, and some overflow parking in addition to the marina and the existing restaurant parking. Mr. Galbreath stated that there would be 208 keys of guestrooms, just fewer than 22,000 square feet of meeting space, and a building of seven levels of about 160,000 square feet in total. He stated that there would be administration offices, a fitness center, and three (3) elevators. He noted that they always design these types of projects with the idea of expanding; therefore, only two elevators would have to be utilized for guests initially. He stated that a third elevator could be added if the hotel was extended at a later date in addition to adding a hundred keys. He stated that the future expansion would also include putting more board rooms, an 8,000 square feet ballroom, and a junior ballroom to accommodate various group sizes. He stated that there would be lots of lobby lounge space, a three -meal restaurant and bar, a lounge, and views out to the water. Mr. Galbreath stated that there would be an air conditioned connection between the hotel and the conference space with glass on one side that included a large space of restrooms and pre -function space for cocktail receptions. He stated that there would be lots of balcony space and the main ballroom would be 12,000 square feet, which would seat approximately 900 people in banquet mode. He further stated that there would also be three (3) meeting rooms with air walls for flexibility and noted that Council would be provided updates as development occurred. President Capetillo inquired of the height of the ceiling in the ballroom. Mr. Mark Bullard, a representative of BOKA Powell, stated that the base in the ballroom was the tallest and Mr. Galbreath noted that the bulkhead area in the ballroom was approximately seventeen feet, but the highest base where the chandelier would hang was approximately 20 feet. Mr. Galbreath further noted that vendors would be able to hang their choice of lighting in the ballroom and it would also accommodate a vehicle if desired, but it would not include large machinery. Director Presley inquired if the current location in the front was the only available place for the generator and transformer. Mr. Galbreath stated the generator was not large and that the wall was about six feet tall with landscaping, which keeps it pretty hidden. He stated that there were other options, but the issue would be that if moved there would be long runs back to the mechanical room with wire, resulting in upsizing and increase in costs. He further stated that from an economical standpoint, the recommended area would be the best place, as it was well hidden and would not be disruptive to the guests with most of the foot traffic occurring on the south side. Further during the presentation Mr. Galbreath stated that levels 2-6 would be at the bottom and the king rooms on this level would only have one (1) bed. He stated that the double queens, which have two beds, were about two feet longer and gives a little bit more variety on the face of the building. He stated that there was a corner suite with glass along the side, but not along the whole room because of the bathroom. Mr. Galbreath stated that on the seventh level, which is the top of the hotel, there would be king rooms, double queen rooms stacking on the top, a presidential suite, and other suites. He noted that the suites would have floor to floor glass, so it's a curtain wall system. MDD Regular Meeting Minutes March 7, 2019 Page 6 of 16 President Capetillo inquired of the reason for having that many double queens on that top floor. In response to President Capetillo's inquiry, Mr. Galbreath stated that typically there would be a double queen bed adjacent to suites, in which a suite is always a king room. He stated that the presidential suite could be connected to the double queen and get even larger. Additionally, he stated that on double queens attached to a suite or in double queens attached to a king, they typically put a tub only in those units. Director Alvarado inquired as to what type of shading would be provided with all of the glass. Mr. Galbreath stated that the pre -function spaces, which have glass along the side, would get a lot of daylight, but would have a canopy that covered the glass that faced the south. He stated that if necessary, they would put sheers or something to make the space not too bright. Director Himsel inquired of Mr. Galbreath, if they were ever involved in a design that utilized a rooftop. Mr. Galbreath stated that rooftop bars were very big in dense urban areas with lots of traffic. He stated that the downside to a rooftop was the difficulty of getting people down, so the stairs would be much larger and the elevator access would have to be a dedicated elevator access, which could cost in the magnitude of maybe $100,000 per floor. Director Alvarado further inquired if the rooftop was on the hotel side could there be a special access key to get to that next floor, as opposed to building a new elevator. Mr. Galbreath stated that for security precautions they did not want bar access occurring in the same elevator with guests. Additionally, Mr. Galbreath stated that this design, the expense, and the budget did not contemplate a rooftop bar. With regards to the canopy, Director Presley inquired if the recommendation from the former mayor about trying to tie into the Fred Hartman Bridge and the yellowish cables was considered. Mr. Galbreath stated that consideration was made with such regard, but they felt there was a risk in emulating the design owned by another company with another cable system similar to it. He further stated that when reaching out to the company for approval, there was no satisfactory sign off that it was okay to do so; therefore, the decision was made to move forward in a different route on the canopies. During further discussion, Mr. Galbreath stated that there were some changes to the budget, notably to the bottom line of $2 million. He stated that the original total budget was $56,409,460, but changed to $58,409,460, with the City's contribution of $21.1 million still remaining the same number. He stated that Citi was able to work with the third tier bonds to enable the raise of the budget that was all in the costs of construction with the reason being for the extremely expensive labor costs, along with the increase of interior finishes. He further noted that all of the soft costs remained the same, but to enable the $2 million change, about $1 million was added in certain categories. He stated that about $150,000 in signage was in their budget, but was removed because the contractor had also put it in their budget. Mr. Galbreath stated that there was a much larger change order reserve number; whereas $600,000 was removed from that is primarily meant to buy out the initial guaranteed maximum price (IGMP). He stated that the contract escalation line item was also for the IGMP, as it was held in the owner's budget, but was MDD Regular Meeting Minutes March 7, 2019 Page 7 of 16 removed. Additionally, he noted that once the IGMP is executed the FGMP would be that number or less. General Manager Davis requested that Mr. Galbreath emphasize the amount of contingency that was in the beginning and what remained. Mr. Galbreath stated that there was approximately $3 million in contingency dollars on top of a construction budget of about $39 million. Director Alvarado inquired for clarity if all of the AV's would be done as a drop down screen and a ceiling projector. In response to Director Alvarado's inquiry for clarity statement, Mr. Galbreath stated yes and further noted that the projectors would not be mounted in the ballroom, but would be available on an as needed basis. During further discussion, Deputy General Manager Bottoms noted that also included in the additional costs was funds to elevate the property another three (3) feet up to twenty feet to provide for more protection. Mr. Galbreath further noted that 17 feet was the required height and being at 20 feet would likely yield savings in insurance costs. Director Betancourth inquired if people were moving towards television monitors instead of screens and projectors. Mr. Galbreath stated that the choice depended on the scale and could be s shared standard. With regards to scheduling, Mr. Galbreath stated that within the next couple of years, they expect to execute the franchise agreements and have DPR's and IGMP accepted by the end of the month, while in the meantime have the Hotel Bond pricing occur in late May followed by the City CO Bond. fie stated that the bond closing would be scheduled for June 07, 2019, followed by the notice to proceed for construction to the contractor on June 08, 2019. lie stated that by June 21, 2019, the contractor should be on site to mobilize with the Certificate of Occupancy scheduled for September 21, 2020. Additionally, Mr. Galbreath stated that thirty days after the issuance of the certificate of occupancy, testing and trainings would take place with December 14, 2020, as the opening day. Director Hoskins inquired if there were any grass curbing with this project. Mr. Galbreath stated that he would check the budget and verify exactly what would be included. Mr. Steve Moffett, the City's consultant, stated that around last July, a private bond exited the transaction for this project and the budget was impacted by such delays. He further stated that the current deal was far better than the previous deal and he was confident in saying that everything done was to make a better transaction for the City of Baytown. He stated that there was a constant upward pressure on construction cost for the last year and the design build team worked to keep the budget as close to the initial budget of $56 million. He stated that overall, thinking of a full service hotel with the quality, the brand standards, and meeting space, he would use the metric of about $290,0004300,000 per key for this project. He noted that the budget for this project was $281,000 per key, which was a very good budget, as it did not sacrifice any of the building program or customer service experience. MDD Regular Meeting Minutes March 7, 2019 Page 8 of 16 Mr. Moffett stated that part of the capital plan was the pin out, which is an estimated cash flow projection for the hotel. He stated that in order to price and sell the bonds, there must be an independent market study that looks at the market and projects usage of the hotel and demand. He stated that the latest study done, which is the basis for the bonds, was conservative in its occupancy percentage by three (3) points. He further stated that it was very difficult for these firms to come in and look at a public -private partnership, such as this project, and compare it to the competitive set which were not public -private partnerships; therefore, there would not be full credit in the P&L from the HCS who did the market study. He stated that in his opinion, the City was about 3% shy in occupancy percentage, which nets to about $130,000 a year in net cash flow. He further stated that the revenue preoccupied room trended up, in which that part of the P&L does not trend up as it's a number based upon the cost of what people pay for meals. He noted that the P&L was very conservative as it is needed to underwrite the bonds. Mr. Moffett stated that the capital plan bond structure was outstanding, in which they were fairly priced and minimized risks. He stated that in the first ten years, the City would be getting approximately $2 million of net cash flow after funding over $2 million of reserves which helped reduce the risks of the transaction. He noted that the City would start to receive cash flow after all of the reserves in about Year 6 on this transaction, as opposed, to Year 10 of the previous transaction. Mr. Moffett stated that there were some delays; first being the private bond buyer leaving the transaction, which costs almost one year of time. He stated that another delay was the complexity of the transaction. He stated that Marriott deals fit within a box; whereas, they check off the boxes to confirm a deal. He stated that when the public -private partnership came along about 30 years ago, it was outside of that box, in which this particular deal was even outside of that box. Additionally, he noted that although there were some delays, the City got a much better deal that would more than pay off. Mr. Galbreath noted that the three questions with regards to the sun shade, the meeting room AV, and the parking would be addressed and submitted to Deputy General Manager Bottoms. He further introduced Mr. Ray Garfield to provide a slide presentation of the financing. Mr. Garfield stated that this project had complex financing and although it was not the first, it was one of the few done in the country and it has its own nuances. He stated that with this particular structure, once the hotel opens, the rooms' revenue, the parking revenue, the food and beverage revenue would flow from the hotel and convention complex to the MDD. He stated that the taxes generated from the operations and hotel would flow to the City. Mr. Garfield stated that the City of Baytown's contribution would be $21.1 million with a portion of that being used to design the property to date. fie stated that the City would also be negotiating some agreements with the MDD, with regards to the ground lease. He stated that the ground would be leased for a period of years for about a dollar a year and there would be a City's facility lease. He stated that the City would have full ownership of the City facilities and Parking facilities, because of the $21.1 million contribution. He stated that the City would own that particular facility and lease it back by the way under the City's facilities lease to the MDD. Mr. Garfield noted that there were a number of other project agreements included and that the City of Baytown would execute a design build agreement with the DPR Construction, in which DPR Construction, as the design MDD Regular Meeting Minutes March 7, 2019 Page 9 of 16 firm, would have vocal power. Additionally, he noted that DPR engaged vocal power to design the hotel tower, which was unusual in a public -private partnership. Mr. Garfield stated that the MDD would also execute a hotel owner agreement with Marriott under the franchise agreement itself. He stated that Marriott would execute a franchise agreement with Interstate, which was a negotiation in its own, because Marriott requires at every lawsuit on any product that they approve, it happens in the state of Maryland, which is not appropriate for municipality in the state of Texas. He stated that Interstate agreed to take on such liability, so in the event of a lawsuit on this deal, Interstate would be involved as the franchisee in Maryland and Garfield Public Private would transact their suit in the state of Texas. He stated that Interstate would also execute with the MDD, the Qualified Management Agreement (QMA) to operate this hotel for the next 30 years. He stated that the agreement was called the QMA, because all of the bonds on this transaction were tax-exempt bonds; therefore, under federal law, it's required to negotiate an operating agreement controlled by that issue and have certain nuances to it that a normal operating agreement would not have. Further during the presentation, Mr. Garfield stated that Citi Group was the investment banker and would be raising the bonds in the private sector for the funding of the hotel tower. He stated that the bonds that they sell, close and raise would be contributed, as well the $21 million from the City, together to pay for the design and the construction that fit out in the opening of this particular facility. lie stated that once the facility opens, the net operating income of this hotel would amortize those bonds and pay off the principal and the interest. Mr. Garfield noted that CBRE Hotels was the first firm to do a market study for this project and HVS was the second firm to do such study. He stated that the study from HVS showed a lower occupancy, with the first year occupancy rate being 65% and then stabilizing at 73% the rest of the history for this hotel. fie stated that the average daily rate (ADR), from HVS began at about 148 and the net operating income for the first year was about $3.344 million. He stated that the occupancy and rates from CBRE was a little more conservative, which were about 76% for the occupancy and about 153 for the rates. He noted that the bonds were being modeled using the HVS study. Additionally, Mr. Garfield noted for clarity purposes, that the net operating income was the money available to amortize the debt. Ile stated that the debt was being sold in three (3) different tranches, in which all is handled by the net operating income of this hotel including additional reserves. Mr. William "Bill" Corrado, Director for Citi, noted that it was not unusual for these types of projects to take lots of time, but financing hotel transactions with hotel revenue bonds was something underwriters did routinely, as they have been done all over the country to include Austin, Dallas, Houston, and Irving Texas. He stated that this was an important community asset and having the municipality and MDD, in this case, be the owner of the project would have some risks and benefits of ownership. Mr. Corrado stated that Citi would sell the transaction with hotel revenue bonds, as well as, with the City's CO's to finance both the hotel project and city facilities. He stated that they would sell MDD Regular Meeting Minutes March 7, 2019 Page 10 of 16 three (3) types of bonds for the hotel: a first lien bond, a second lien bond and the third lien bond. He stated that they try to attract the broadest investor base, but there were bonds with different credit qualities; whereas, some people would want no risks and buy high -rated bonds with low interest costs and some would take more risks for a higher return. He stated that the first and second lien bonds would be secured solely by hotel revenues, in which there would be no risk at all to the City and the MDD, as the bond holder would take the risk that the hotel would perform based upon at least the projections. Mr. Corrado stated that with the third lien bond there was a pledge of the MDD sales taxes to help provide some form of credit enhancement. Additionally, he stated that the projection showed that all of the bonds would be self-supporting just by hotel revenues, but to make the financing more efficient there was the credit enhancement on the third lien bond. Ms. Tatianna Troutman stated that they planned to sell $18.5 million of the senior lien bonds, which were secured only by hotel revenue bonds and structured for three times coverage. She stated that there were three times as many hotel revenues as there were senior debt service, with reason being so that such structure would get investment grade ratings to anchor the deal and secure low cost of financing. She stated that the second lien was $12 million and those bonds were structured so that the first and second liens together would have 1.75 times coverage with the hotel revenues. She further stated that the third lien bonds with the MDD sales tax backstop were structured to meet 1.25 times coverage from hotel revenues. Additionally, she stated that although the sales tax backstop helped get the rating and made the project much more cost effective, the bonds were structured to be self-supporting with hotel revenues. Ms. Troutman stated that debt service would not be paid until 2021, but the bonds would be sold in 2019; therefore, the City would fund interest from 2019 to 2021. She noted that because the bonds should be paid with hotel revenues, they didn't want any debt service paid until the hotel was operational and actually funded capitalized interest six months after December 2020. She stated that the Debt Service Reserve Fund was funded at approximately the maximum annual debt service, in which the purpose was so that the debt service would be paid for one year instead of being a default or going immediately to the MDD for sales tax in the event that one year revenue's decreased for any reason. She further stated with regards to cash flow, that there was also a supplemental reserve from hotel revenues to provide another layer of protection. Ms. Troutman stated that although revenues increased, the debt service leveled after stabilization in 2025, which was because they didn't want to grow revenues and then have a bad year. She noted that they used this type of structure before and there would be lots of demand because of the three tranches. She further noted that the City's contribution would still be $21.1 million and stated that if there was better execution, the junior lien bonds would be the trigger, which is what the the MDD was providing their backstop on and allows the City's source to remain at $21.1 million. She stated that the key money was being used to fund an operating reserve, which is provided by Interstate, the operator. She noted that Interstate would be making an upfront contribution into the hotel, as well as, Citi so that it showed that they were vested, which would sell to investors and then be used to fund the operating reserve. Council Member Hoskins inquired of what would be the worst case scenario with regards to the information presented. In response to Council Member Hoskins inquiry, Ms. Troutman provided a comparison of the 14VS and CBRE reports and stated that the presented information was based MDD Regular Meeting Minutes March 7, 2019 Page 11 of 16 on the HVS report, which was the most conservative. She stated that they never go to a scenario where there was less than 1.25 times coverage between the bars and the line. She stated that they target the three times, 1.75 times, and 1.25 times coverage for ratings, as well as, protection of the project to make sure all of the subsequent reserves was funded and would never run a scenario below that. Additionally, she noted that the scenario that she discussed was regards to hotel revenues only, but further noted that Chris Janning would discuss how the sales tax and other MDD revenues joined with this model. During further presentation, Ms. Troutman stated that they used the HVS pro forma as baseline as it, although was the most conservative, set the City of Baytown up for success. She stated that the bottom line would have less reserve as the net operating to start the bond model. She stated that senior debt service would be paid first, then the first lien debt service, then the second lien debt service, then the third lien debt service and the excess cash would flow to the City of Baytown or MDD. She further stated that in their HVS based case scenario money would began to the MDD in Year 6; however, they funded about $2.3 million in that surplus account, which was a reserve designed to help maintain the hotel in the event of a downfall. She noted that the funds would be MDD money and would be funded on day one. Additionally, she stated that in Year 10, the cash flow would grow to about $1.7 million and in the final year 30 there would be $41 million of aggregate money flowed to the MDD. Mr. Corrado noted that even before funding the supplemental reserve, another cushion for short falls and debt service, they would also set aside monies in the second Furniture, Fixtures, and Equipment (FF&E) line item. He further noted that before paying debt service, all hotel operators require them to set aside 4% of gross revenues to be sure to keep the hotel fresh. He stated that given that this hotel would be owned by the MDD, they want to be sure to have another reserve of 4% set aside below the line, which would be another cushion of money to use for routine replacement or for larger capital expenditure needs. Ms. Troutman stated that the debt service numbers remained the same and compared to the debt service on the CBRE report, which was the higher net revenue numbers, after funding the 4% reserve and after funding the surplus fund, money flowed to the MDD in Year 2. She stated that by Year 10 there would be almost $4.7 million and by Year 30, there would be $51 million after reserve, after FF&E, and after all of the management fees. Director Englert noted that the occupancy levels increased quickly and further inquired of the bases for such numbers, as well as, if the reserves were incorporated in the improvements. With regards to the occupancy percentages, Mr. Corrado stated that the numbers were standard escalations over stabilized years, which were tested by independent hotel consultants and noted that the reserves were set aside for MDD's rainy day use. Mr. Corrado further noted that the two firms that provided the study were the two best hotel firm consultants and stated that they were trying to position the transaction to sell to credit rating entities and overall based upon the lower cash flows. General Manager Davis stated that both hotel firms took into account that the occupancy would increase because the hotel would be part of networking system that would facilitate driving traffic to the hotel. MDD Regular Meeting Minutes March 7, 2019 Page 12 of 16 Mr. Garfield stated that the 4% set aside for the reserve for replacement was standard, but the subject hotel would have 8% and such funds were typically used every six years or ten to twelve years for full service replacements. He stated that with the reserves in this transaction they were confident that the hotel would be safe, protected, and maintained upper scale throughout. Director Himsel inquired if the reserves took into account shorter lifetimes for rooftops and HVAC's. Mr. Garfield stated that this hotel would never resale; therefore, the quality of material associated with the building would be of high quality and should last longer than the typical. Additionally, Mr. Corrado stated that Marriott and Interstate understood the market and would determine what percent of reserve would be set aside for replacement. Mr. Galbreath further noted that they were aware of the necessary upgrades for such climate and considers them when pricing the items. Director Hoskins stated that the hotels on I-10 were being built to different standards from those being built on the Seawall in Galveston and further inquired if the standards for this hotel were being built according to the ones in Galveston. Mr. Galbreath stated that the hotel would be built according to the same standards as if it was on the water. Director Alvarado inquired when the model room would be ready to view. Mr. Galbreath stated that it would take some time to get the model room ready, as there was lots of detail work to be done, but noted that a schedule would be sent to Deputy General Manager Bottoms. Director Presley inquired as to how the losses would work in the event occupancy expectations were not exceeded in Year 1 & 2. Deputy General Manager Bottoms noted that Mr. Jonathan Frels would provide information with such regards. Chris Janning, Managing Director with HilltopSecurities, noted that they were the City's financial advisor and that the City initially authorized up to $19 million of CO financing for the project, but would sell $17 million in CO's and contribute $4.1 million of cash. He stated that the legal pledge of the $17 million would be payable from ad valorem taxes, if necessary, and a lien on the City's water and sewer revenue system. He stated that the purpose of the certificates was for the design, development, and construction of the convention center facilities, the related infrastructure, surface parking, water and sewer drainage facilities, and the professional costs associated with such issuance. He noted that all three bonds series would sell on the same day and the City would receive a contract of purchase for all three series. He stated that the once the MDD hotel revenue bonds sell and once the base contracts of purchase with the City were received, the next day they would sell the CO's and fund the City's debt portion of the CO then close. He further noted that all of the contracts of purchase of the three revenue bonds for the hotel and the one CO issued would all have provisions that they would all have to close on the same day. With regards to the repayment of the $17.1 million, Mr. Janning stated that the MDD would make a monthly contribution to the City equal to the $17.1 million, in which calculated to $1.2 million a year of debt service. He stated that when the MDD transfer the annual budget to the City, it would mostly come from sales taxes, but in this case there would be hotel occupancy taxes and additional sales taxes on the site available. MDD Regular Meeting Minutes March 7, 2019 Page 13 of 16 With regards to the Stress Case Scenario, Mr. Janning stated that included in the owner and franchise agreement there was $5.5 million that Marriott could draw from in the event they could not get revenues from operations, in which MDD would have to reimburse within three (3) years. He stated that in Year 2023, the $5.5 million LOC would be paid back in three equal payments followed by the backstop of $1.2 million on the C bonds and fund a reserve of $600,000 paid by MDD revenue for two years. He stated that at some point the operator would be replaced, in which they would probably lower rates for competition purposes; therefore, the HOT revenues were adjusted down in the stress case to reflect the room price of the limited amenity hotels. Mr. Janning stated that the MDD would pay all of the existing debt service on the City's existing CO's. He stated that the MDD would receive back the HOT funds from the project and the City would receive sales tax collections. He noted that even on a stressed year the MDD would have approximately $1.3 million of cushion. He stated that the base year revenue amount should be consistent with the MDD and the City's general budgeting practice, but noted that adjustment would be made if necessary. Additionally, Mr. Janning stated that as the advisor, they were confident that there were enough resources to move forward with the project. Jonathan Frels, a representative from Bracewell & Giuliani LLP Partner, provided details on the project mechanics and stated that the MDD would own the hotel and lease the space from the City. He stated that there would be an operating agreement with Interstate to operate the hotel, along with an asset management agreement with Garfield Public Private. He noted that the MDD would be engaging experts to assist with running the hotel. lie stated that the MDD revenue bonds would be issued under a trust indenture, which is a document where all of the revenue funds from the project are captured inside an indenture structure; whereas, a trustee would watch such funds and only disperse such funds for particular uses authorized in the trust indenture. He stated that there would also be a cash management agreement, in which when Interstate is operating the hotel, revenues would be brought in daily and those funds would flow first into the cash management agreement before going into the trust indenture. lie noted that the franchisee would not be MDD, but rather Interstate and that Marriott requested that MDD backstop all of Interstate's obligations to Marriott under the owner agreement. Mr. Frels stated that the cash management agreement was a contract between the MDD, Interstate, and the trustee. He stated that when Interstate received any money from this transaction, it would go into the cash management agreement in the lock box fund to pay for franchise fees, marketing funds contributions under the franchise agreement, and any other costs under the franchise agreement. He stated that the next payments would go towards the operating expenses, such as the basic management fee, accounting fees, centralized services fees, reimbursable expenses, employment fees, and costs associated with operating the hotel on a daily basis. He stated that afterwards, the gross revenues would drop into the revenue fund, the fund used to disperse revenues everywhere else. Mr. Frels stated that the first funds go into the working capital fund, which is a reserve fund initially funded with the $600,000 received from key money from the operator. He stated that the Senior FF&E fund would be funded, which is the 4% fund required under the franchise agreement. He stated that the debt service would be funded out of the first -lien bond debt service fund and there would be a first -lien bond reserve fund, which would be a replenishment of the 1 st lien bond reserve fund. He noted that the initial funding of the reserve fund would come from bond proceeds. He stated that there would be a MDD Regular Meeting Minutes March 7, 2019 Page 14 of 16 second -lien bond debt service fund, a second -lien bond debt service reserve fund, a third -lien bond debt service fund, and a third lien bond debt service reserve fund. He noted that the third - lien bond debt service fund linked back to the pledged sales taxes. He stated that outside of the main flow of funds, a sales tax revenue fund would be set up and over a two year period that fund would be funded up to $1.2 million. Mr. Frels stated that in the event the third -lien debt service revenue bond was not sufficient to pay debt service, the funds would draw from the sales tax revenue fund and further noted that the third -lien bond debt service reserve would also assist with such. He stated that the reason the debt service fund was pre -funded and set aside was to not have a big impact on the budget. He further noted that there would be a rebate fund and a sales tax repayment fund. Mr. Frels stated that the idea was that the MDD would make a commitment to backstop the bonds, but if the revenues flowed well in the transaction and had to fund debt service in a particular year, the MDD would get reimbursed. fie stated that there would be a subordinate management fee fund, which is the additional payment to the operator, in which the operator agreed to postpone a payment of a portion of their fees to make it subordinate to the debt fees. He stated that there was a subordinate management fee fund that would be paid after the debt service of the project. He noted that there would be a subordinate FF&E reserve fund, which is the 4% set aside for capital project replacements. He stated that the surplus revenue funds would be available for many uses to include debt service, emergency expenditures, etc., and that the structure was that the remaining funds go to the City as additional rent or optional use. Mr. Frels stated that the structure was set up to give quite a bit of comfort to the first lien bond holders, so before drawing from the debt service reserve fund, MDD would draw from the surplus revenue fund, the subordinate FF&E reserve fund, the subordinate asset management fee fund, the subordinate management fee fund, the second -lien debt service fund, and the third -lien debt service fund. He noted that the second -lien bonds have a similar approach, as previously mentioned before, with funds being available to draw before drawing from the reserve. Mr. Frels further noted that the trust indenture sets up the contract with the bond holder, which states that certain requirements must be met before issuing more bonds. He noted that because there was a sales tax backstop, there was an additional bonds test for the third -lien bonds as related to the sales tax, to the extent that if MDD would issue any other debt based on the secured by sales tax on the same level, the additional sales test must be met, which would include the debt service on the letter of credit. Director Hoskins inquired if the funds, while being dormant in the fund accounts, could be invested to draw interest. Mr. Frels stated that the funds could be invested to draw interest. He further noted that the trustee would invest the funds in anything authorized under the public funds investment act, in accordance to the instructions from the MDD. He further stated that the interest would rotate back into the revenue funds, while some of the funds would go in specific funds. Director Hoskins inquired that if after the bonds were issued to start the project, would the money from the bonds be reinvested to draw interest while waiting to be used. Mr. Frels stated MDD Regular Meeting Minutes March 7, 2019 Page 15 of 16 that those funds would be able to be invested and there was flexibility on how to invest such funds. Director Englert inquired for clarity if the reserve items were included in the line item presented. Mr. Frels stated that the reserve items were included in the pro forma that was presented. Mr. Frels stated that the hotel owner agreement was between the MDD and Interstate for a 30 year term, in which, Interstate would have exclusive rights to operate the hotel during such time period. He further stated that on an annual basis, the MDD and Interstate would have to meet and discuss budget programs to develop the fee schedule. He stated that Interstate would also provide the MDD with quarterly and monthly financial reports. With regards to the hotel owner agreement, Mr. Frels stated that Marriott did not want to enter into a franchise agreement with the MDD directly, because the MDD has a political subdivision with the state, which would make them subject to some of the requirements of such in connection with the contract; therefore, they entered into a contract with Interstate to be the franchisee. He stated that Marriott also wanted the MDD to backstop Interstates obligation under such contract, so the owner agreement requires the MDD to backstop such, which is backstopped by the sales tax and in order to do so, Marriott would do a direct draw letter of credit of $5.5 million issued by Citi. He noted that if the MDD was in default, Marriott would draw from the letter of credit. He further stated that there would be a reimbursement agreement with Citi, in which the MDD would have to pay back anything drawn from the letter of credit within a three (3) year period. Deputy General Manager Bottoms stated that the debt service for the $17 million would start at $194,000 in 2019, $660,000 in 2020, and remain steady at $1.2 million for a twenty year term. He stated that for Year 1 there were funds budgeted for debt service and funds for the next years amount would be in the next year's budget. He stated that for Year 2020, $350,000 would be budgeted from the MDD funds, $660,000 would be from debt service, and $310,000 would come from HOT funds from the existing hotels. He stated that in Year 2021 the hotel would come online and the HOT funds from the hotel could be used, along with the $350,000 from MDD, $354,000 from HOT funds from other hotels, and the $1.2 million in debt service, which would flow for the twenty year term. Deputy General Manager stated that the MDD would be impacted for the Year 2019 by $194,000, $600,000 from the backstop, and $30,000 for the annual payment for the $5.5 million letter of credit. He stated that the impact for Year 2020 would be $$350,000 for MDD debt service, $600,000 to complete the backstop fee, $30,000 for the letter of credit annual fee and for the years to follow there would be the MDD debt service that decreases each year because of the HOT taxes. He stated that due to a possible legislation approval, there could be a rebate of the states HOT and sales tax, which combined with the city's tax would take care of the $1.2 million of debt service for the convention center. Additionally, he noted that the impact for Year 2021 would be approximately $30,000. 4. MANAGER'S REPORT a. The next Baytown Municipal Development District meeting is scheduled for Thursday, April 04, 2019, at 4:30 P.M., in the Council Chamber located at City Hall, 2401 Market Street, Baytown, Texas, 77520. MDD Regular Meeting Minutes March 7, 2019 Page 16 of 16 This item was skipped. 5. ADJOURN With there being no further business to discuss, President Capetillo adjourned the March, 7, 2019, MDD Board Regular Meeting at 6:38 P.M. Letitia Brysch, Assistan retary City of Baytown