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2020 06 25 MDD MinutesMINUTES OF THE REGULAR MEETING OF THE BOARD OF DIRECTORS OF THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT June 25, 2020 The Board of Directors of the Baytown Municipal Development District (MDD) met in a Special Meeting on Thursday, June 25, 2020, at 4:32 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 Robert C. Hoskins Director Heather Betancourth Director David P. Jirrels Director Rick Davis General Manager Karen Horner Interim General Counsel Leticia Brysch Assistant Secretary President Brandon Capetillo convened the June 25, 2020, MDD Board Special Meeting with a quorum present at 4:32 P.M., all members were present with the exception of Directors Rios - Alvarez, Hernandez and Johnson who were absent. 1. DISCUSSIONS a. Discuss and take appropriate action concerning the timing of the financing and construction of the Baytown Hotel and Convention Center Project given COVID-19 and the current financial market. General Manager Rick Davis presented the item and stated that some time ago, Standards and Poors required that the staff re -initiate or dusted -off the City's old HBS study in light of the current emergency to re -project revenues for the proposed project on Bayland Island. Mr. Davis noted that the basic conclusion of the report is that this remains a very viable project, although the report also notes, that there is a certain amount of time that is going to have to take place in order for the convention industry, the hotel industry, to recover from the current situation. Mr. Davis noted that unfortunately, the report provides us with a couple of years, as mentioned in previous communications, where revenues would be lower than previously anticipated. Meanwhile, the cost of debt issuance for the hotel revenue bonds would be higher and so the difference between those first couple of years, especially with diminished revenues based on the projections of the average daily rate and occupancy compared to the cost that the District would have to pay or return for the bonds, creates a delta or a gap that the only way to remedy that difference is for the MDD to step forward and provide additional support assurance as guide and contributions; i.e., in essence, taking on more risk, especially during that time. MDD Board Special Meeting Minutes June 25, 2020 Page 2 of 6 Mr. Davis further noted that the alternative to MDD doing that would be, obviously, Plan B, which was something put together in a meeting with staff, financial advisers, and others of whom you will hear from tonight, and it is to actually continue to work on some of the outstanding issues of the hotel/convention center projects; such as: the title work, other legal tasks that need to be performed, infrastructure work, permitting, et cetera, in order to be ready with a shelf -ready project in the spring when the staff commissions yet another HBS study, and hope that the bond market has made even more of a recovery by that time. This would mean that the facility would open in 2023 as opposed to 2022, which gives everyone a little bit better of a situation to go ahead with the project at that time. He noted that they are not suggesting that this project be put on ice or canceled or anything likened to it. He noted that the District has already invested quite a bit in this project and the intent is to move forward with this project. He noted that they would be more ready, obviously, in the spring, after having a couple of some of these other tasks completed to have a better market and probably a better projection in terms of revenue that would align with the cost of the debt and allow them to move forward with the project at that time. Mr. Davis noted that that would be his recommendation. Christian Durando with Hilltop Securities noted that Mr. Davis framed the current situation accurately and noted that they did get to do an HBS study. He noted that the biggest impact is really with the COVID crisis and the lower utilization in the industry, the ramp -up time to get to the same normalized occupancy; the impact that is going to slow down the revenue generations by the hotel per the new HBS study. He noted that in using those HBS numbers, they, as the MDD advisers, work with the CitiGroup, the bond underwriter like we have been doing and noted that the real impact was not to the first tier of the hotel revenue bonds or the second -tier hotel revenue bonds, which they could still structure, cover, and still can structure coverage to. He noted that the real impact came when they got to the third tier and if the directors will recall, the surplus of the last hotel revenue declined, and it was the one where they were guaranteeing by a virtue of a reserved fund and reserved fund replenishment pledge from the MDD. The balance to the project funding, certificates of obligation, and the City's cash contribution, as well as, the key money from the hotel partner, all remain the same. But as previously mentioned there was an issue with that third tier and per the new HBS projection, there would not be adequate revenue to pay full debts service on that third tier. He further noted that the District is at one, two and three, and really in the report, while there is a surplus that is available after the payment, and the operation at the hospital for that third tier, it only covers a part of that forty -year payment. Mr. Durando referred back to the current plan and noted that they did not just accept the challenges with COVID and say, "oh, this does not work," but instead looked at the project and saw that in the out years, this is a very viable hotel project. Mr. Durando noted that as the District's financial adviser, he knows the importance of this project for the city, and they reviewed what could be done to mitigate the impact on the third tier. He noted that after reviewing the information, and considering where the bond market and investors are right now, there is an alternative to the original plan and it is to continue to move forward on pace with the existing plan and issue the first and second series of the hotel revenue bonds this summer, but instead of doing a third series hotel revenue bond with a very limited pledge of the MDD sales tax, this issuance would be a full sales tax revenue bond obligation of the MDD. MDD Board Special Meeting Minutes June 25, 2020 Page 3 of 6 He further noted that the District would still have to have a pledge or surplus hotel revenues, because investors are really going to look that in those first four years, per the HBS forecast, there is enough of a cash flow, in order to pay the debts service. He noted that one of the positive effects of going to a sales tax bond is that they do not have to have the same level of reserved funds and of course, the interest during construction and capitalized interest they do not need anymore because the MDD is already collecting its sales taxes. Mr. Durando further noted that this will bring the third series of bonds down from the current plan of twenty-five million to about twenty- two point seven million. Again, all other sources for project funding would remain the same. Again, except when coming down to debt service reserve, funding is a little less de -capitalized, interest goes down and there is a little bit of benefit, there is a little lower cost. Mr. Durando noted that if the City and the MDD were to go with the alternative, to get the bonds done in this market under these conditions and convert those to sales tax bond, they would really be looking at a situation where the hotel is paying for about 40% of the capital and the City is paying for 60% of the capital. Again, the District will have to deliberate about the sales tax revenue bond issue that if they decide to go with the third series of bonds $1.186 million; call it a million two. Mr. Durando further stated that the new HBS study would have surplus cash flows, none in years one, two, and three; a partial about six hundred thousand dollars of surplus to help all set that payment in year four, with a projection that these hotel revenues would be enough to pay the full sales tax revenue bond issue beginning in year five. He noted that when he and Joe advise clients on what is a safe level of coverage, and if the District was going to treat the hotel surplus revenue, and say, it is just like sales tax, it is hotel revenues, but it is saying that it is going to cover, minimum investment grade coverage from any cash flow service source. He noted that for good sale financial planning, they see as one and a half times coverage, would actually hit surplus hotel revenues at a level of one and a half times that annual bond payment in year ten. So that kind of scopes all they are hoping for and if the District wants to move forward into this new COVID market and the new reality of this pandemic, and what it would take to make it happen. Director Englert stated that his only comment was, what composition do we, the District want to put itself in, considering that there are so many unknowns right now. He asked what was the construction time frame on this project? Mr. Davis responded that at least eighteen months from groundbreaking. Director Englert stated in response that in eighteen months from now, or twenty months from now whatever it is, twenty-four months even where does that put the District? He noted that he would be somewhat reluctant to say let us do something and then not know if the cash flow is going to be there to support it, and is the City prepared to do that, and is MDD ready to make-up that difference? Ray Garfield with Garfield and Associates noted that everyone is really relying on the new market study provided by HBS, which is an international firm and one of the real solid market study in the country and they believed that they have a really conservative response from HBS, and what they are saying is that in the long term, this is very viable hotel. He further noted that MDD Board Special Meeting Minutes June 25, 2020 Page 4 of 6 the report shows that if they open this hotel in 2022, that the estimated rates and occupancies, in particular, are bigger and that the recovery from the national or international travel market is forecast be slow as well, so even in the second year of operations 2023, that it would be below where they will be in forecast with COVID, and those are the stress years. He further noted that once they get beyond that, then they are getting the numbers that they originally felt would be there last December, before COVID. So, he believed that this consideration is really important and the idea of waiting until next year spring, to see how this COVID-19 crisis resolved itself, is a sensible thought process to go through. Steve Gallagher with Garfield and Associated, in response to a questions regarding whether or not the project costs will increase if they wait too long, noted that they had a number of conversations with the contractor for this project and they feel that there could be modest escalation of costs, looking six to nine months out; however, they do not think it would be in the order of magnitude or, you know, upwards of five percent. He stated that he believed it could be one percent maybe, likely not much higher than that, but again, they do not have a crystal ball, but they think there isn't much risk of escalation. President Capetillo noted that at the end of the day, the District needed to provide some kind of direction and to his understanding the board could wait until probably next year to see where the market would be; see if there is a better market for these bonds. He noted that the framework is under this current scenario plan or the District could go forward and proceed with a high -risk plan. He again noted that to his understanding a lot of the scenarios when looking at this other plan, was from a very, very conservative almost worst -case scenario on cash flow and other items and he believed that the District has already seen different scenarios over the past year and a half where there was not going to be positive cash flows until years seven, maybe nine and then it moved. President Capetillo noted that the interest rates were looking really favorable, and was moving as early as year three. He noted that this project was never something that was immediate cash, positive cash flow, so the board members have to keep that in mind. President Capetillo stated that the District is right back, kind of where they started, where kind of the year four would be, maybe the threshold where there would be a positive cash flow, so this is just something to consider. He thought that the market, interest -wise, the market over the next six to twelve months should still be favorable on interest, when there is a market for this type of bonds. He noted that this is pretty much where he would leave it at that point, but he wanted to hear from the other members for their input. However, it was his understanding that the direction that MDD needs to provide staff today is, do we want to pause or do we want to wait? There is a scenario here where we take on more risk, but we actually save about two and a half million dollars and the grand scheme of things. So those are some decisions that we have to look at. Director Alvarado noted that overall, she feels confident by what was said that the hotel would be here, whether done now or further down the line. She noted that she felt that there is still a lot of unknowns right now with the travel industry, and what is happening with the virus, but there is always risk one way or another, and when it comes to city funds and debts, because the virus is still such an unknown, she wanted to be a little bit protective of that as well, in what they may need to dip into. Director Alvarado further noted that they have so long for this project, even before her MDD Board Special Meeting Minutes June 25, 2020 Page 5 of 6 time on the Council, and for her perspective, she did not think that it would hurt to wait a little more because they know that it is a solid project based on HBS numbers, and the previous firm that had done the research as well. She again noted that she thought that the project was still going to be a strong project, whether done now or whether done later, but her preference would be to err on the side of caution. Director Presley stated that he agreed with Director Alvarado in that, he remembered when they did the sensitivity analysis and ran an optimistic or realistic and a pessimistic scenario, and he can say that even the pessimistic scenario did not account for the Coronavirus. Director Presley further noted that they are way below the pessimistic scenario now with Coronavirus out there, and Director Alvarado is opposed to taking on additional risk as a public body, and he is supportive of it because the hotel will essentially sustain itself. Director Presley noted that this was a positive, and he thinks that it was a positive for this body and a positive to sell it to the public as well, and that is where their support is, that it would be self- sustaining. Director Presley note that he would like to still go in that direction, if possible, and once, if there is a vaccine, it is going to be a done deal, if that happens before the spring, and that is what is really needed. He further noted that there are a lot of businesses that need that, and a lot of industries, especially hotel conference center projects, so there is a lot of unknowns, and in his opinion that the safest, most prudent thing to do is to wait until the spring, summer, fall of next year, whenever that may be. Mr. Davis noted that he is still in favor of the current plan even if it means waiting, and his reason in comparing the two plans was to give the District options. He noted that he did not really like the shift in hotel supported capital, and city supported capital from the two plans and then in looking at the second plan, the dependence on sales tax revenue just seems like not a good idea at this time. Director Himsel noted that he thought it would be foolish to move forward with any plan at this point, just because of the world is changing daily, and they cannot make a plan for next week, let alone, several months down the road. He noted that he agreed that they just needed to wait; however, her re -iterated that nobody wants to see this project go south, as everyone has been President Capetillo noted that he too felt that they should wait, but he wanted to at least visit on this item in order to kind of start looking at what does the market look like first quarter, maybe there is a vaccine that comes out in October. He noted that he would not be surprised if that happens October, or maybe the November timeframe. Regardless, he felt that by January, the District should take a look and re-engage all the stakeholders. Mr. Davis noted that he wanted to District to keep in mind that there is still quite a bit of infrastructure work related to this project that has already initiated designs. He further noted that there is some advantage obviously to continuing the development of the island in terms of electrical power, water; wastewater, the lift station; et cetera and he wanted to know if the board was open to continuing that infrastructural work on the island. MDD Board Special Meeting Minutes June 25, 2020 Page 6 of 6 Mr. Davis stated that there was still some work that needed to make this project shelf -ready that included the design and/or construction of some infrastructural improvements that are necessary for the full build -out of the island at some point in the future here, regardless of the Hotel Convention Center; such as a twelve inch water line loop, electrical, the design of a lift station, some park land issues that the attorneys are working on and some plans in terms of debt issuance. The district discussed this item briefly and noted that the staff could move forward with items that were necessary to move the project forward, but not on those items that had large financial impacts; such as the actual building of the lift station. A motion was made by Secretary Laura Alvarado, and seconded by Vice -President Chris Presley to delay the project until such time as the staff makes the recommendation and move forward. 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 Mary Hernandez (Absent), Director Charles Johnson, (Absent), Director Suhey Rios -Alvarez (Absent) Approved 2. ADJOURN With there being no further business to discuss, President Capetillo adjourned the June 25, 2020, MDD Board Special Meeting at 5:07 P.M. City of Baytown