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).
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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
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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
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March 7, 2019
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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.
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March 7, 2019
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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
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March 7, 2019
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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.
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March 7, 2019
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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
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March 7, 2019
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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
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March 7, 2019
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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
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March 7, 2019
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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.
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March 7, 2019
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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.
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March 7, 2019
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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
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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
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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