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11.01 DCSG Development Participation Agreement pF 0. .. .........� ,S`ta�oaP°aarFo�'!�! ti�'' , *j: . `•;e� 9��� �= AGENDA ITEM 9��F;�26.,��;�°Q �u�r�P March 12, 2019 _ TO; Honorable Mayor and Members of the City Council FROM:. Rick Otto,.City:Manager - _ . . REVIEW: y g inance - Cit Mana e 1. SU.BJECT Participatian Agreement with DCSG.Development, LLC. 2. SUMMARY - _ A public hear:ing to consider appr.oval of a Participation Agreement by and between pCSG . eve opment, an: .t e ity o range. .. . 3. REC.OMMENDED:.ACTION � Appr.ove the Participation Agreement by and between DCSG Development,.LLG and the - City of Orange, and authorize the Mayor and the City.Clerk to execute the:agreement on behalf of the City. - ;. . 4. FISCAL IM:PACT T.he proposed agreement will be performance based and budgeted through the City's: annual budgef process. 5. STRATEGIC PLAN GOALS _ . Goal 2: Be a fiscally healthy community e: Create:an environment to.attract, retain, and expand economic opportunities:: ; 6. DISCUSSION AND BACKGROUND DCSG Development, LLC (DCSG) is developing a 306 room, dual-branded Residence Inn and Courtyard by Marriott hotel at 3000 Wesf Chapman Avenue: The new hotef will : be bui_It on the site ;of;the former Motel 6 and Denny's Diner. To ensure:the operational viability of the project, DCSG r.equested an economic development subsidy from.the City in the form of:a rebate of a pereentage of the.transient occupaney tax generated by the new hotel. The Cify recognizes that this:new hotel will provide a range of benefits to residents and visitors including redeveloping a blighted property, providing additional hotel facilities in the city, and generating significant .transient occupancy tax revenues that.can support vital services such as police, fire, library; and parks. ITEM � � . � 1 03/12/2019 The terms of the proposed Participation Agreement are: • 25-year term • Transient Occupancy Tax Base of$310,000 per year will not be rebated to DCSG (this represents the transient occupancy tax that was generated by the Motel 6) • 33% of transient occupancy tax above the base to be rebated to DCSG • Transient Occupancy Tax Base increases by 3% per year The proposed Participation Agreement is made pursuant to the recently enacted Ordinance No. 16-18 that establishes a uniform transient occupancy tax sharing program. The proposed Marriott project meets the criteria of an "Eligible New Hotel" under the ordinance and a subsequent Feasibility and Public Revenue Analysis prepared by Keyser Marston Associates, Inc. shows that a public subsidy is warranted to make the project viable. It is expected that the new hotel will generate approximately $1,440,000 in transient occupancy tax per year. Therefore, the anticipated assistance for the first full year would be approximately $372,900. 7. ATTACHMENTS . 1. Participation Agreement by and befinreen DCSG Development, LLC and the City of Orange. 2. Feasibility and Public Revenue Analysis — Marriott Dual Branded Hotels (Exhibit "A" to the Participation Agreement). ITEM 2 03/12/2019 PARTICIPATION AGREEMENT by and between DCSG Development, LLC, a California limited liability company and City of Orange, a Municipal Corporation of the State of California TABLE OF CONTENTS RECI'TALS ............................................................................................................................ 1 TERMS AND CONDITIONS.................................................................................................... 2 Section 1: Incorporation of Recitals; Definitions..........................................................2 Section2: Findings........................................................................................................4 Section 3: Performance Requirements for Receipt by Owner of Tax Sharing .............4 Section 4: Terms Related to Calculation of Tax Sharing.............................................. 5 Section 5: Operating Covenants.................................................................................... 6 Section 6: Indemnification; Release.............................................................................. 6 Section 7: Termination of Agreement by City..............................................................7 Section 8: Miscellaneous Provisions.............................................................................7 SIGNATUREPAGE................................................................................................................ 12 Exhibit «A„Tax Sharing Report.............................................................................................. 13 Exhibit "B" Legal Description of Approved Hotel Business Site............................................ 14 i PARTICIPATION AGREEMENT This Participation Agreement ("Agreement") is entered into by and between the CITY OF ORANGE, a municipal corporation of the State of California (the "City"), and DCSG DEVELOPMENT, LLC, a California limited liability company (the "Owner"), and the effective date for reference purposes as of , 2019. Each of the foregoing parties may be referred fo hereafter as a"Party," and jointly as the "Parties." RECITALS WHEREAS, the general welfare and material well-being of the residents of the City depend in large measure upon the facilities, goods, and services that businesses make available to the public and the City's residents, which, in turn, generate tax revenues to the City to help pay for necessary services to the City's residents and such services; and WHEREAS, the operation of new and existing hotels within the City (i) will attract both local and regional shoppers, (ii) will likely generate increased transient occupancy tax, sales and use taxes and other revenues to the City, (iii) will promote job creation opportunities in the City, iv) will encourage property upgrades and enhancements in the City's commercial areas, and (v) will enhance the quality of facilities, goods and services available to the public and the City's residents; and WHEREAS,the City wishes to induce and encourage the operation of new and existing hotels,thereby assisting the City in achieving its goals related to the operation of said businesses and creating and preserving sources of tax revenue for the City's general fund which supports the public services that the City provides to its residents and to said businesses; and WHEREAS, the City desires to incentivize hotel operation in the City by sharing a portion of the increased transient occupancy tax revenues generated by hotels which are operated in a manner which satisfies the City's goals and objectives; and WHEREAS, the City is authorized under California law to provide economic incentives to businesses for economic development purposes; and WHEREAS,the Owner plans to construct and operate a hotel with assistance from this Agreement at 3000 West Chapman Ave., Orange, California(the"Approved Hotel Business"); and WHEREAS, a T� Sharing Report, attached hereto as Exhibit "A," has been prepared in accordance with Government Code Section 53083, and upon consideration of such other matters as may have been presented during said public meeting, the City Council found the Approved Hotel Business to be a business with which the City would enter into a Participation Agreement. 1 TERMS AND CONDITIONS NOW, THEREFORE, in consideration of the mutual promises and covenants of the Parties set forth herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged by the Parties, the Parties agree as set forth hereinafter. Section 1. Incorporation of Recitals; Definitions. The Parties agree that each of the foregoing Recitals is true and correct and incorporate each of the Recitals in this Agreement by reference thereto. "Approved Hotel Business" means Owner doing business as a hotel and related facilities, (excluding any potential future adjacent retail and restaurants) on a portion of the property commonly known as 3000 West Chapman Ave. in Orange, California, as legally described in Exhibit"B". "Business Tax Quarter" means a three month calendar quarter. "City" shall mean the City of Orange, a municipal corporation, organized under the laws of the State of California and having its offices at 300 East Chapman Avenue, Orange, California 92866. "Compliance Period" shall mean a Business Tax Quarter, commencing with the Quarter in which the Effective Date occurs, and each Quarter thereafter, for the Term. "Compliance ReporY' shall mean a report prepared by the Owner in accordance with paragraph f of Section 4 of this Agreement setting forth the information as may be required to determine whether the Conditions have been satisfied and calculating the amount of the Economic Development Assistance Payment due for the period in question. "Economic Development Assistance Payment" means the disbursement amount from the City to the Owner of the Approved Hotel Business of a portion of the Transient Occupancy Tax , as determined each year for which the Agreement is in effect. "Effective Date" shall March 12, 2019, to be the effective date of this Agreement. "Labor Challenge" shall mean any claim, challenge or requirement as to the level of wages to be paid (e.g. prevailing wages) or other benefits relating to the construction, development and/or the operations of the facilities(e.g.the hotel)against the City or the Owner; provided, however, a general requirement of a level of wages (e.g. minimum wage requirements) applicable to all workers in California shall not be considered part of a Labor Challenge. Labor Challenge shall include a voluntary wage payment to a class of workers (e.g. construction, operations or otherwise; or certain trade professional (e.g. plumbers or electricians) shall also be considered a Labor Challenge for the Property. 2 "Owner" means the person or entity (including their successors and assigns), which owns and operates the Approved Hotel Business, and has legal authority to enter into a Participation Agreement on behalf of the Approved Hotel Business with the City. "Participation Agreement" or "Agreement" means this agreement between the City and the Owner of the Approved Hotel Business which provides for the payment from the City to the Owner of a portion of the Transient Occupancy Tax, at a rate and for a time period as determined in this Agreement. "Transient Occupancy Tax" shall mean the transient occupancy t�es actually collected by the Owner or the City in accordance with Chapter 5.17 of the Orange Municipal Code generated by the Approved Hotel Business. "Transient Occupancy Tax Base from the Approved Business"shall mean,from and after the first day of the first full "Business Tax Quarter", the total Transient Occupancy TaJces paid by the Approved Business, the initial Transient Occupancy Taxes generated from the Approved Business in the amount of Three Hundred Ten Thousand dollars ($310,000) shall be excluded from the Economic Development Assistance Payment calculation. The Transient Occupancy Tax Base will increase by 3 percent (3°Io) annually as detailed in the table below. This initial amount of Transient Occupancy Tax received by the City shall be retained in its entirety by the City. Year TOT Base 1 $310,000 2 $319,300 3 $328,879 4 $338,745 5 $348,908 6 $359,375 7 $370,156 8 $381,261 9 $392,699 10 $404,480 11 $416,614 12 $429,112 13 $441,986 14 $455,245 15 $468,903 16 $482,970 17 $497,459 18 $512,383 19 $527,754 20 $543,587 21 $559,894 3 22 $576,691 23 $593,992 24 $611,812 25 $630,166 "Tax Sharing Report" means the report to be prepared by the City and provided to Owner which shall provide details of the calculation of the Economic Development Assistance Payments. "Term" shall mean twenty five (25) years, commencing on the date of the opening of the hotel component of he Approved Hotel Business. "Year" shall mean each twelve (12) month calendar period. Section 2. Findin�s. a. The City finds that the Owner's creation of new employment opportunities, and the construction and operation of a franchised hotel and other facilities, including but not limited to hotel and related facilities located at 3000 West Chapman Ave. in Orange (the "Property"), and the purposes for assistance to the Owner for development are substantially likely to generate new transient occupancy tax and other revenues, and that entering into this Agreement for this sharing of the Transient Occupancy Tax is in the best interests of the City and its residents. b. The City finds the benefit to the City of Economic Development Assistance Payment of the Transient Occupancy Tax, calculated pursuant to this Agreement, for the Approved Hotel Business. Section 3. Performance Conditions to Economic Develo�ment Assistance Payment . The following Performance Conditions must be satisfied by the Approved Hotel Business during a Business T� Quarter as conditions to the City's obligation to pay the Transient Occupancy Tax amount to the Owner for that Business Tax Quarter. a. The Approved Hotel Business shall provide no fewer than Two Hundred Seventy Five (275) Approved Hotel Business rooms for occupancy. b. The Approved Hotel Business shall be designated by AAA as Inspected and Approved, and shall receive and maintain a rating of not less than three (3) diamonds from AAA if AAA continues the current requirements and standards for a hotel. c. The Approved Hotel Business shall provide not less than Three Thousand (3,000) square feet of conference, meeting and banquet facilities for rental use by the public. d. The Approved Hotel Business shall employ not less than 50 full-time or full- time equivalent employees at all times. 4 e. The Approved Hotel Business shall be maintained in accordance with all material City Municipal Code requirements, and in accordance with the material requirement of any other governmental agency having jurisdiction over any aspect of the operation of the Approved Hotel Business, all only after notice to Owner and a reasonable opportunity to cure in the time period specified by Owner. f. The Approved Hotel Business shall generate a minimum of 1 million dollars in Transient Occupancy Tax per year. g. With respect to point of sale and/or use. The Owner,for itself(and will require that its general contractor and subcontractors), to agree to endeavor to the extent reasonably possible without increased cost or expense to seek a State Board of Equalization sub-permit for the jobsite and allocate all eligible use tax payments to the City and provide the City with either a copy of the sub-permit or a statement that the use tax does not apply to this portion of the job, to insure that the City is the point of sale and/or use under the Bradley Burns Uniform Local Sales and Use Tax Law (commencing with Section 7200 of the Revenue and Taxation Code,as amended from time to time). Section 4. Terms Related to Calculation of Tax Sharin�. a. The Term of the Economic Development Assistance Payment period shall commence on the Effective Date and end twenty-five (25) years thereafter. b. The Parties agree that the amount of the Economic Development Assistance Payment shall be thirty three and one third percent (33 and 1/3 %) of the Transient Occupancy Tax generated by the Approved Hotel Business during each Business Tax Quarter less the Transient Occupancy Tax Base from the Approved Business. c. The City's Finance Department may adopt such procedures, audits or required reports as are reasonable or necessary to enable the Finance Department to accurately calculate the Transient Occupancy Tax amount. The quarterly payment of the Transient Occupancy Tax Payment amount shall be based on information which is as accurate as can be obtained by the Parties. d. Not later than forty-five (45) days after the end of each Business Tax Quarter, the Owner shall prepare and submit to the City Manager a Compliance Report containing the following for the Business Tax Quarter in question,and calculating the amount of the Economic Development Assistance Payment amount, if any, that is due and payment to the Owner for the Business TaY Quarter: 1. A record for the Business Tax Quarter in question, which shall include a record of Transient Occupancy Tax; 2. The City shall make a Payment of Transient Occupancy Ta�c Payment amount to the Owner or Owner's designee within thirty (30) days after receipt of Owner's Compliance Report; and, 5 3. The Parties agree that Transient Occupancy Tax Payments shall be subject to adjustments at any time within two (2) years after the receipt by the City of evidence of incorrect information which was used in the calculation of the Economic Development Assistance Payment. Section 5. Operating Covenants. a. During the Term of this Agreement, the Owner covenants and agrees for itself, its successors,assigns or designees,to continually maintain and repair or cause to be maintained and repaired, the Approved Hotel Business property, including but not limited to buildings, structures, parking areas, lighting, signs, and landscaping, to be in good condition conforming to all applicable laws, including all applicable provisions of the City's Municipal Code, and shall keep the Approved Hotel Business property free from any accumulation of debris or waste materials. b. During the Term of this Agreement, the Owner covenants and agrees for itself, its successors, assigns or designees,that the Approved Hotel Business and any of its employees shall not discriminate against any person on the basis of sex,marital status,race, color,religion, ancestry, national origin, physical handicap, sexual orientation, or domestic partnership status. c. The qualifications and identity of Owner are of particular concern to City. It is because of those qualifications and identity that the City has entered into this Agreement with Owner, and Owner acknowledges and agrees that its rights, benefits, duties and obligations under this Agreement are personal to Owner. Accordingly, during the Term of this Agreement, Owner, except as permitted in this Section, shall not transfer or assign (hereinafter, "transfer") all or any part of its right to receive the Economic Development Assistance Payments (or any portion thereo� without either (i) City's prior written approval, which approval City shall not unreasonably withhold, or(ii)if done for financing purposes for the Approved Hotel Business, (iii)if done to an entity in which Owner or any of its members has a direct or indirect ownership interest, or(iv)when the hotel portion of the Approved Hotel Business has opened for business, at which time Owner and its successors and assigns are free to assign or transfer to any third party and shall be released from any obligations hereunder as of the date of such assignment or other transfer. Section 6. Indemnification; Defend; and Release. a. The indemnification and defend provisions provided in this section shall survive during the Term or any termination of this Agreement. b. The Owner agrees to indemnify, defend, and hold the City, and its elected officials, officers, employees, agents, and attorneys harmless from and against all damages, judgments, orders, rulings, costs, expenses and fees (collectively, the "Claims") arising from or related to any act or omission of the Owner in performing its obligations hereunder. c. Prevailing Wages. Owner acknowledges that City has made no decisions, 6 findings, or representations, express or implied,to Owner or any person associated with Owner regarding whether or not laborers employed relative to the construction of the Approved Hotel Business to be constructed pursuant to this Agreement must be paid the prevailing per diem wage rate for their labor classification, as determined by the State of California, pursuant to Labor Code Section 1720, et seq. ("Prevailing Wage Laws"). Owner agrees with City that Owner shall assume any and all responsibility and be solely responsible for determining whether or not laborers employed relative to the construction of the Approved Hotel Business undertaken pursuant to this Agreement must be paid the prevailing per diem wage rate pursuant to the Prevailing Wage Laws or other applicable law. Owner, on behalf of itself, its successors, and assigns, waives and releases City from any right of action that may be available to any of them pursuant to Labor Code Section 1781 or any similar law. Relative to the waiver and release set forth in this Section, Owner acknowledges the protections of Civil Code Section 1542, which reads as follows: A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party. By initialing below, Owner knowingly and voluntarily waives the provisions of Section 1542 or any similar law solely in connection with the waivers and releases contained in this Section. Initials of Initials of Authorized Mayor Owner Representative Owner shall indemnify, defend and hold harmless the City against any claim for damages, compensation, fines, penalties or other amounts arising out of the failure or alleged failure of any person or entity (including Owner, its contractor(s) and subcontractors) to pay prevailing wages as required by law or to comply with the other applicable provisions of Labor Code Sections 1720 et seq. and implementing regulations of the Department of Industrial Relations in connection with construction and installation of the Approved Hotel Business required pursuant to this Agreement. Owner's defense of the City shall be provided by counsel reasonably acceptable to the City. d. The Owner releases the City from any Claims arising from any inability of the City to legally collect and share the Transient Occupancy Ta}ces. Section 7. Termination of Agreement by City. a. The City shall have the right to terminate its obligations under this Agreement if the Owner breaches any material promise,obligation,covenant or duty under this Agreement. In order to terminate this Agreement, the City shall first provide sixty (60) days' notice to the Owner, given in accordance with the notice requirements set forth in 5ection 8 hereof. Said notice shall indicate the reason that City has declared a termination of the Agreement, and shall 7 indicate what steps must be taken to cure the referenced breach of the Agreement or of any attachment hereto. If, at the end of the sixty (60) day notice period, Owner has not taken the necessary steps to correct the alleged breaches (or commence such correction and thereafter diligently pursue if additional time is needed to cure), the City shall have the right, at its sole option, to declare the Agreement terminated through written notice thereof to the Owner. b. The Owner shall have the right to terminate this Agreement and its obligations hereunder ab initio or as of a particular date by written notice to the City. In the event of any termination, Owner shall return and not be entitled to any Economic Development Assistance Payment relating to any Transient Occupancy Taxes from and after the date of termination. Section 8. Miscellaneous Provisions. a. All findings and decisions of the City Council taken in connection with the application of the Owner to enter into this Agreement shall be deemed to be reasonable and supported by an adequate and appropriate record. No such findings or decisions shall be subject to challenge or be the subject of any Claim by the Owner. Any action taken by the City, including, but not limited to, the termination of this Agreement under the provisions hereof, shall be at the sole option of the City and in its reasonable discretion,unless a different standard is otherwise specifically indicated. The Owner acknowledges that City would not have entered into this Agreement in the absence of this covenant by the Owner. b. All exhibits attached to this Agreement are deemed to be incorporated into this Agreement by reference. c. The Owner agrees to execute any additional documents, forms, notices, applications or other documents which City reasonably determines to be necessary to carry out the intent of this Agreement and/or the intent and provisions of applicable portions of the Code. d. The Parties agree that, should any provision, section, paragraph, sentence or word of this Agreement be rendered or declared invalid by any final court action in a court of competent jurisdiction or by reason of legislation, the remaining provisions, sections, paragraphs, sentences and words of this Agreement shall remain in full force and effect and the Parties agree in good faith to immediately amend this Agreement in such a way as to carry out the intent of this Agreement and/or the Code. e. With respect to any default by a Party occurring after the Effective Date, the non-breaching Party may institute legal action to cure,correct or remedy any remedy or default, providing that such action is not otherwise prohibited or restricted by the provisions of this Agreement, to recover any damages arising from such breach or to obtain any other remedy consistent with the purposes of this Agreement, and further provided that notice is given in accordance with this Agreement. Such legal actions must be instituted in the Superior Court of the County of Orange, State of California, in any other appropriate court in that County, or in the Federal District Court in the Central District of California. 8 �f. The laws of the State of California shall govern the interpretation and enforcement of this Agreement. g. Except with respect to any rights and remedies expressly declared to be exclusive in this Agreement, the rights and remedies of the Parties are cumulative and the exercise by either Party of one or more of such rights or remedies shall not preclude the exercise by it, at the same or different times, of any other rights or remedies for the same default or any other default by the other Party. A waiver of a requirement shall not constitute an ongoing waiver of that requirement in the future. h. Any and all notices, demands or communications submitted by any Party to the other Party pursuant to or as required by this Agreement shall be proper if in writing and dispatched by messenger for immediate personal delivery, or by registered or certified United States mail, postage prepaid, return receipt requested, to the principal office of the City and Owner, as applicable, or by overnight delivery service such as FedEx, or by email if also such notice is sent by regular United States mail. Any such notice, demand or communication shall be deemed to be received by the addressee, regardless of whether or when any return receipt is received by the sender (if required) or the date set forth on such return receipt, on the day that it is dispatched by messenger for immediate personal delivery, or the next day of by overnight delivery service,or two(2)calendar days after it is placed in the United States mail as heretofore provided, or upon the email being sent. i. Any notices to any Party required to be given under this Agreement, or given by a Party for other reasons, shall be sent to: Owner: � DCSG Development, LLC 680 East Colorado Blvd. Suite 180 Pasadena, California 91101 Attn: Dennis Constanzo dennis @ dcsgdevelopments.com with a copy to: DCSG Development, LLC 732 S Walnut Ave San Dimas CA 91773 - Attn: Scott Gunderson scottgunderson9 @ gmail.com and Law Offices of Jonathan Curtis 600 Wilshire Blvd., Suite 600 Los Angeles, CA 90017 9 Attn: Jonathan Curtis j oncurtis @ sbcglobal.net City: City of Orange 300 E. Chapman Avenue Orange, CA 92866 Attn: City Manager With a copy to: City Attorney's Office 300 E. Chapman Avenue Orange, CA 92866 Attn: City Attorney j. No elected official, officer, employee or agent of the City having any conflict of interest, direct or indirect, related to this Agreement and/or the development of the Approved Hotel Business shall participate in any decision relating to this Agreement. k. The Owner warrants that it has not paid or given, and will not pay or give, any third party any money or other consideration for obtaining this Agreement. Third parties, for the purposes of this Section, shall not include persons to whom fees are paid for professional services if rendered by attorneys, �nancial or other consultants, accountants, engineers, architects and the like when such fees are considered necessary by the Owner. For the purposes of this paragraph,third parties is limited to selected officials,officers, or employees of the City. 1. No elected official, official or officer, employee, agent or attorney of the City shall be personally liable to the Owner, its shareholders or principals, or any successor in interest, or any other party or person whatsoever, in the event of any default or breach by the City or for any amount which may become due to the Owner or to its successors, or on any obligations under the terms of this Agreement, except for willful acts of such member, officer, employee or attorney. m. In addition to specific provisions of this Agreement,performance by either Party hereunder shall not be deemed to be in default where delays or defaults are due to war; insurrection;acts of terrorism; strikes;lockouts;riots;floods;earthquakes;fires;casualties; acts of God; acts of public enemy; epidemics; quarantine restrictions; freight embargoes or lack of transportation; weather-caused delays; inability to secure necessary labor, materials or tools; acts of the other Party other than as permitted or required by the terms of this Agreement; acts or failure to act of any public or governmental agency or entity other than as permitted or required by the terms of this Agreement (except that action or failure to act by the City shall not extend the time for the City to act unless such extension is otherwise expressly authorized herewith) unless such action or failure to act is the result of a lawsuit or injunction, or any other causes beyond the control or without the fault of the Party claiming an extension of time to 10 perform. Any extension of time for any such cause hereunder shall be for the period of the enforced delay and shall commence to run from the time of the commencement of the cause if notice by the Party claiming such extension is sent to the other Party. Times of performance under this Agreement may also be extended by mutual agreement in writing by and between the City and the�Owner. n. The City shall have the right at all reasonable times and, at no cost or expense, to inspect the books and records of the Owner pertaining to a breach or suspected breach of this Agreement. Matters learned by the City in the course of such inspections shall not be disclosed to third parties unless required by law or unless otherwise resulting from or related to the pursuit of any remedies or the assertion of any rights by the City hereunder. o. Whenever a reference is made in this Agreement to an action or approval to be undertaken by City, the City Manager of the City (or his or her authorized designee) is authorized to act on behalf of the City unless specifically provided otherwise or the law otherwise requires. The City Manager of the City is authorized to sign on his own authority amendments to this Agreement which are of routine or technical nature. p. Each Party represents and warrants the following: they have carefully read this Agreement, and in signing this Agreement and agreeing to be bound by the same, they have received independent legal advice from legal counsel as to the matters set forth in this Agreement, or have knowingly chosen not to consult legal counsel as to the matters set forth in this Agreement, and they have freely signed this Agreement and agreed to be bound by it without any reliance upon any agreement, promise statement or representation by or on behalf of the other Party, or its respective agents, employees, or attorneys, except as specifically set forth in this Agreement, and without duress or coercion, whether economic or otherwise. This Agreement shall be interpreted as though prepared jointly by both the Owner and the City. q. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective heirs, executors, administrators, legal representatives, successor and assigns. r. Unless otherwise indicated with respect to a requirement, all time frames for performance of an act required or permitted by this Agreement shall be calendar days. Time frames measured in months shall be calculated with reference to the actual number of days in the relevant months. Annual time frames shall mean a period of 365 days. s. This Agreement shall be executed in four (4) duplicate originals each of which is deemed to be an original.This Agreement constitutes the entire understanding and agreement of the Parties. The Parties may sign this Agreement in counterparts. t. This Agreement integrates all of the terms and conditions mentioned herein or incidental hereto, and supersedes all negotiations or previous agreements between the Parties with respect to all or any part of the subject matter hereof. 11 u. All waivers of the provisions of this Agreement and all amendments hereto must be in writing and signed by the appropriate representatives of the City and/or the Owner. Other than minor or technical amendments which the City Manager may approve on his own authority, any amendment to this Agreement must be approved in writing, as approved by the City Council of the City. [Signatures appear on following page] 12 WHEREFORE, the Parties, intending to be bound hereby, have affixed their authorized signatures to this Participation Agreement. CITY: OWNER: CITY OF ORANGE, DCSG DEVELOPMENT, LLC, a A municipal corporation California limited liability company By: By: Name: Mayor Title: B y: Name: Title: Attest: Pamela Coleman City Clerk Approved as to form: Gary A. Sheatz, City Attorney 13 _ .. '�> _ >,�l. . . .. ... ..e �.. _.. :: .: K�SER 1Vi�R�T'ON AS50CIATESn , ADVISORS 1N PUBL(C/PRIVAI'E REAL ESTATE DEVELOPMENT ":: : MEMORANDUM _ ADVISORSINc .. .. .. Real Estate: TO: Aaron Schulze; Senior Administrative.Analyst Affordable Housing. - Cit of Oran e : : Economic.Development . . Y. . . .. g BE�LEr .. .From: . . Kevin Engstrom. _ . . . .. ... A.Jerry Keyser Timothy C,Kelly,: _. _ De6bie M.Kern : � Date: : January 25,2019 avid Doezema " " ' Kevin Feeney,. " "' " _. LOS ANGELES Kathleen H.Head : SUbJeCt: Feasibi.lity& Public Revenue.Analysis=Marriott.Dual B�anded Hotels James A.Rabe : : � . Gregory D.Soo-Hoo. .. . ... .. ... .. .: Pursuant to our re uest, Ke ser Marston Associates, lnc. KMA reviewed the Kevin E.Engstfom y p y '�re�..R°"'ey� development costs and.operating projections.of the proposed dual branded Courtyard Tim R.Bretz ' � . .- .. and Residence Inn.Hotel:(Froject)to be located near the confluence of Interstate 5 and , Saiu DIEco Pa�i c.nnarra: . Chapman Avenue in the City of Orange (City). The Project includes a.194;room. , . ... .. Courtyard and 112-roorn Residence lnn and:will be developed on a 4.54 acre parcel (Site)that.includes the to�be.demolished Motel 6 and Denny's Restaurant....For this assignment,.KMA undertook:the.following tasks: � Reviewed the Project's deyelopment plans _. _. • Reviewed the Project's development costs _... � ' Reviewed tlie Project's operating projections . _ . :... • ...Compared development costs and operafing projections to.industry standard.. ranges • Estimated the Pro ect's feasibilit assumin t ical develo er returns. 1 Y g YP P .: •;:,,Projected the potential City revenues:generated bythe Project. .. Based on this analysis, KIVIA identified whether the Project generated a feasibility gap: 500 SOU7H:GRAND AVENUE,SUITE 1480➢LOS ANGELES,CAUFORNIA 90071➢PHONE 213.622.8095 17079.0 07.001.O RA,ke e W W W.KEYSERMARSTO N.COM 1812005 Aaron Schulze, City of Orange January 25, 2019 Feasibility& Public Revenue Analysis Page 2 ANALYSIS The analysis summarized below evaluates the Project's feasibility based on the anticipated Project costs and operating projections. The KMA analysis assumes the Project will include two,three-diamond,select-service hotels including a 194-room Courtyard and 112-room Residence Inn Hotel. Both hotel flags are members of the Marriott Corporation. Any changes to the proposed brand could have a material impact on the findings discussed herein. For the purposes of this analysis, KMA prepared two scenarios. Scenario 1 is shown in Attachment 1 and is based on KMA's review of the Developer's submittal, and our experience with hotel development projects in Southern California. Scenario 2 is shown in Attachment 2 and is based on the Developer's submittal. In addition Table 1 shows a comparison of the two scenarios. Development Costs The estimated development costs for both scenarios are shown in Attachment 1 and 2- Table 1 and are summarized below. • As KMA understands the situation,the project will be on a ground lease of$1.0 million (2022) annually. However, a land cost of$1.9 million was included in the cost estimates,which likely_assumes the accrued ground rent during construction. The full ground rent parameters were not provided; however,the rent term is 99 years with annual increases between 2%and 3%. • Site costs for the project are estimated at$4.0 million,which equates to$13,000 per key. The City will need to determine the reasonableness of any off-site costs that are included in this estimate. Assuming surface parking,these costs would be consistent with similar projects in the region. • The Hotel shell costs are estimated to be$150,000 per key($45.8 million). The costs are based on a bid provided to the Developer by R.D. Olson, which has significant hotel construction and development experience in Southern California. The Developer indicates these costs do not include prevailing wage provisions. Typically, hotel subsidy deals in California will require the payment of prevailing wages for the direct construction costs. 17079.007.001.0 RA.ke e � 1812005 Aaron Schulze, City of Orange January 25, 2019 Feasibility& Public Revenue Analysis Page 3 • The FF&E allowance is estimated at$21,400 per key,which is consistent with other three-diamond, select-service Notels evaluated by KMA in the region. • Given the preliminary nature of the cost estimates a 10%construction overhead/contingency factor is assumed for the Project. Typically, construction overhead and contingency allowances range from 5%to 10%of direct costs, but can decrease as design and construction bids progress during the process. • The total direct costs are estimated to be $62.0 million based on the R.D. Olson budget. This estimate is approximately$3.7 million less than the Developer's original submittal. • The architecture &engineering costs are estimated at 3.7%of direct costs. Typically,these costs range from 5%to 8%of direct costs, and KMA's estimate assumes entitlement, design, engineering and other consulting fees;therefore the Developer's estimates are relatively low. • The City needs to review the estimated permits and fees of$8,600 per key($2.6 million)to ensure they are reasonable. • KMA estimated taxes, legal and accounting costs for the Project at 2.0% of direct costs ($1.2 million). The Developer estimated these costs at .5%of direct costs ($283,000). • KMA estimated the pre-opening and working capital budget at$2,500 per key, which is comparable to other three diamond hotels. • The development management fee covers salary and other expenses borne by the Developer during Project development. Typically,this fee ranges between 2%and 5%of direct costs depending on the complexity of the Project. KMA assumed the development fee would be 3.0%of direct costs ($1.9 million). • KMA estimated a 3%contingency allowance ($263,000)for the Project's indirect costs. 17079.007.001.0 RA.ke e 1812005 Aaron Schulze, City of Orange January 25, 2019 Feasibility& Public Revenue Analysis Page 4 • The Developer's pro forma did not disaggregate all of the soft costs, but did include an additional soft cost line item of$3.5 million,which equates to 5.6%of direct costs. These costs could include expenses typically found in the development management, soft cost contingency and taxes, legal and accounting line items. • Overall, KMA's indirect cost estimate is$400,000 higher than the Developer. • KMA estimated the financing costs at$3.3 million, based on industry standards. The Developer's capitalized financing costs are estimated at$4.3 million. The development costs for both scenarios are shown in the table below: Scenario 1— Scenario 2- KMA Developer Development Costs $76,114,000 $76,310,000 As shown in the table above,the KMA and Developer estimates are very similar, even , though there are differences between many of the line item assumptions. Net Operating Income � The estimated net operating income (N01)for both scenarios is shown in Attachment 1 and 2-Table 2. • Based on a market study prepared by Kallenberger Jones &Co.,the Developer estimates the average daily rate (ADR) of the Project at$161 ($2018), which reflects an ADR of$155 for the Courtyard and $170 for the Residence Inn. After opening,the Project would have a blended ADR of$177 at stabilization in Year 3 (202Z). .For context, KMA reviewed the 2018 Southern California Lodging Forecast prepared by CBRE Hotels. According to CBRE, hotels in the Greater Anaheim market (Garden Grove and Orange) are forecast to achieve a $167 ADR in 2018. Based on the market area performance, quality and location of the Project, KMA estimated a 5% premium over the Developer's ADR for a rate of $168 ($2018). 17079.007.001.0 RA.ke e 1812005 Aaron Schulze, City of Orange January 25, 2019 Feasibility& Public Revenue Analysis Page 5 • Both the KMA and Developer scenarios assume a 79%stabilized occupancy level, which is consistent with both the Kallenberger Jones & Company market study and the CBRE forecast. • The other revenue sources are based on the Developer's submittal and KMA's experience with similar hotels in the region. • The Distributed expenses ratios estimated by KMA are based on similar Courtyard and Residence Inn projects we have reviewed in Southern California. The room expenses were estimated at 21%of room revenues, compared to the Developer's estimate of 24%. In addition,food & beverage expenses are estimated at 70% in the KMA scenario compared to 75% in the Developer scenario. • The undistributed expenses are consistent in both scenarios. • KMA and the Developer estimated the management fee at 3.0%of gross revenues,which is consistent with other hotels in the region. • . The property taxes in the KMA scenario are based on the Hotel's construction costs. The KMA estimate of$708,000 is higher than the Developer's estimate of $676,000. • KMA and the Developer estimated the FF&E reserves at 4%of gross revenues, which is consistent with other hotels in the region. Scenario 1—KMA Scenario 2- Developer Gross Revenues $16,726,000 $15,930,000 . (Less): Operating Expenses ($10,442,000) ($10,517,000) Hotel NOI $6,284,000 $5,413,000 NOI as a Share of Gross Revenue 37.6% 34.0% • The Project will be on a ground rent between the Developer and the Alice Wagner Irrevocable Trust. Consistent with other hotel ground rents,the rent will be prorated during construction and through Project stabilization. In 2022, 17079.007.001.0 RA.ke e 1812005 Aaron Schulze, City of Orange January 25, 2019 Feasibility& Public Revenue Analysis Page 6 the rent is set at$1.0 million, with annual increases for inflation thereafter. The rent payment equates to over 5%of gross revenues,which is relatively high. The Hotel operating pro forma for both scenarios is summarized in the table below: Scenario 1—KMA Scenario 2-Developer NOI After Ground Rent $5,396,000 $4,525,000 KMA estimated the N01 for the Hotel before ground rent at$6.3 million, which is 37.6% of gross revenues, compared to the Developer's estimate of$5.4 million, which is 34.0% of gross revenues. Similar select-service hotels that KMA recently evaluated in Southern California have NOI's ranging from 35%to 40%of gross revenues, so the KMA projections fall within this range. Further,the ADR projected by the Developer appears low relative to the market. Overall,the Developer projections are conservative,which � results in a lower net operating income. Estimated Project Surplus/(Feasibility Gap) As shown in Attachments 1 and 2-Table 3, KMA estimated the Project return based on the anticipated development costs and operating parameters. This analysis compares the NOI generated by the Project and the amount of investment it could support to its total development costs. Typical hotel returns for projects in Southern California range from 8.0%to 10.0%on costs. Given the location,flag and proposed quality of the Project, KMA assumed an 8.0% return on costs. The table below summarizes the Project's feasibility under the two scenarios. Scenario 1— Scenario 2- KMA Developer , Project Supported Investment $67,450,000 $56,563,000 (Less) Development Costs ($76,114,000) ($76,310,000) Project Surplus/(Feasibility Gap) ($8,664,000) ($19,747,000) In the KMA scenario,the Project generates a feasibility gap of$8.7 million, compared to a feasibility gap of$19.7 million in the Developer scenario. 17079.0 07.001.0 RA.ke e 1812005 Aaron Schulze, City of Orange January 25, 2019 Feasibility& Public Revenue Analysis Page 7 KEY SITE-SPECIFIC CITY REVENUES The key on-site public revenues generated by the Project are shown in Table 2. The revenue assumptions are based on the KMA scenario of the pro forma analysis,with the following key assumptions: • The revenue projections assume a 2.5%annual CPI increase after Year 5. • The City's Transient Occupancy Tax(TOT) rate is 10.0%. Transient Occupancy Tax 10 Years 20 Years 30 Years Total $17,286,000 $39,735,000 $68,470,000 Present Valuel $11,359,000 $18,229,000 $22,302,000 • The City's share of the sales tax is 1.0% of the taxable sales. The revenues are based on the projected food and beverage operations in the Hotel. Sales Tax 10 Years 20 Years 30 Years Total $152,600 $350,800 $604,600 Present Value1 $100,000 $161,000 $197,000 • The initial assessed value is based on the Project construction costs with 2% annual increases thereafter. The analysis assumes the City receives approximately 14.0%of the 1.0%annual property tax assessment. For the purposes of this analysis, KMA assumed the entire Project costs are taxable; however, alternative financing sources and/or other mitigating factors may reduce the assessed value of the Project. 1 Assumes an 8%discount rate. 17079.007.001.0 RA.kee 1812005 Aaron Schulze, City of Orange January 25, 2019 Feasibility& Public Revenue Analysis Page 8 Property Tax 10 Years 20 Years 30 Years Total $1,034,100 $2,294,500 $3,381,100 Present Valuel $685,000 $1,072,000 $1,291,000 • The gross revenues generated by the Project are summarized below. Gross City Revenues 10 Years 20 Years 30 Years Total $18,473,000� $42,380,000 $72,906,000 Present Valuel $12,145,000 $19,462,000 $23,789,000 • The proposed Project will replace an existing Motel 6 and Denny's Restaurant. This development currently generates revenue to the City in the form of TOT, sales tax and property tax.The City estimates these existing revenues at $329,600 annually. The table below summarizes the incremental revenues generated by the Project. Incremental City Revenues 10 Years 20 Years 30 Years Total $14,780,000 $33,962,000 $58,442,000 Present Valuel $9,705,000 $15,576,000 $19,047,000 SUMMARY The KMA scenario indicates the Project generates a significant feasibility gap of$8.7 million, even with a relatively low return on cost. However,the Developer's cost and operating assumptions would generate a feasibility gap of nearly$20 million. Some key issues requiring consideration from the City include: • Developer Experience- In addition to the feasibility review,the Developer provided some background information on their experience. Based on the 17079.007.0O1.ORA.kee 1812005 Aaron Schulze, City of Orange January 25, 2019 Feasibility& Public Revenue Analysis Page 9 - information provided,the Developer has limited ground up hotel development experience, particularly in California. Further,the City should confirm that the Developer has the financial wherewithal to undertake the Project. However, R.D. Olson,which provided the construction bid for the Project, has significant development experience in the region. • Land Transaction Costs—The proposed ground rent of approximately$1.0 million has a significant impact on Project feasibility and the gap. The City's assistance for this Project should reflect the appraised/market value of the land, as any value exceeding that amount is directly benefitting the current land owner. Typically,ground rents reflect 8.0%to 10%of land value. Assuming this is the case,the land value would be$10.0-$12.5 million, which equates to $50- $63 per square foot. • Prevailin�Wa�es—The Developer indicates prevailing wages are not including in their cost estimate, as they are not required. Typically, hotel developments in California receiving a TOT subsidy require the payment of prevailing wages. The City needs to ensure it is indemnified against any claims that might arise from the Developer's assumption. • Market Assumptions-The ADR estimate in the market study and Developer pro forma appears to be conservative. To that end, the KMA analysis assumes a 5.0% premium over the Developer's assumptions, which places the ADR in line with the market area average. However,this estimate would reflect a relatively conservative ADR, as the Project will have strong brand awareness, excellent visibility and Disneyland proximity. Given these concerns,the City should consider including language in the agreement with the Developer that reduces the feasibility gap payments if revenue per available room (ADR * Occupancy) is well above these projections. • Operatin� Performance-The Project's operating performance in the market study and Developer pro forma appear to be conservative. To that end, KMA assumed more efficient operations for the Project,which are consistent with other Courtyard and Residence Inn Hotels we have reviewed in the region. In particular,the dual branding and relatively large scale of the Project should allow 17079.007.001.0 RA.ke e 1812005 Aaron Schulze, City of Orange January 25, 2019 Feasibility& Public Revenue Analysis Page 10 for very efficient operations. The higher operating expenses and lower ADR estimated by the Developer reduce the Project NOI, which then limits the level of investment supported by the Project, resulting in a larger feasibility gap. • Proiect Return—KMA assumed a relatively low return on cost for the Prbject; however,the development benefits from proximity to Disneyland, freeway visibility, a strong local, regional and national hotel market and great brand recognition. • Permits & Fees-The City needs to ensure that the Developer's permit and fees estimates are reasonable. • Qualitv Assurance-Any agreement with the Developer will need to ensure the proposed quality level of the Project is maintained through development. In particular, KMA would suggest including a minimum diamond rating and/or cost threshold in any agreement with the Developer. Further, an agreement should include provisions for the City's review and acceptance of any changes to the hotel brand, operator and/or owner. • Public Revenues—The Project will generate significant public revenues to the City. Over 20 years,the Project will generate $42.4 million of revenues to the City, which has a present value of$19.5 million when discounted at 8.0%. While the public revenues are significant, any subsidy for the Project should reflect the net/incremental revenues it generates. After accounting for the existing revenue generated on the Site,the incremental revenue to the City is $34.0 million over 20 years,with a present value of$15.6 million. The analysis indicates the Project has a $8.7 million feasibility gap in the KMA Scenario. Typically, hotel subsidy programs assume some form of TOT sharing over time. The programs are structured in this manner to protect the City's interests and ensure the Developer is incentivized to maximize revenues through maintaining a high quality project. This is particularly important when a City has concerns about a Developer's experience and the potential feasibility of the Project. Attachment � 17079.007.001.0 RA.kee 1812005 TABLE 1 PRO FORMA SUMMARY COMPARISON 306 ROOM DUAL BRANDED COURTYARD 8�RESIDENCE INN HOTEL ORANGE,CALIFORNIA Pro Forma Comparison KMA Developer I. Project Development Costs Land Acquisition $1,858,000 $1,858,000 $0 Direct Costs 61,923,000 61,509,000 414,000 Indirect Costs 9,045,000 8,645,000 400,000 Financing Costs 3,288,000 4.298.000 (1.010.0001 Total Development Costs $76,114,000 $76,310,000 ($196,000) II. Hotel Rooms 306 306 0 ADR $168.87 $160.83 $8.04 Occupancy Rate 79.0% 79.0% 0.0% Hotel Revenue $16,726,000 $15,930,000 $796,000 Hotel Expenses (10.442.000) (10.517.000) 75.000 Hotel NOI $6,284,000 $5,413,000 $871,000 NOI as a Share of Revenue 37.6% 34.0°/a Ground Lease 888 000 888 000 � Project NOI $5,396,000 $4,525,000 $871,000 III. Supported Investment Project @ 8.0%Return on Cost $67,450.000 $56,563.000 $10.887.000 IV. Project Surplus/(Warranted Assistance) $8,664,000 $19,747,000 $11,083,000 ,� Prepared by:Keyser Marston Associates,Inc. Filename:Orange Hotel PF;PFSumm;12/10/2018;kee TABLE 2 ESTIMATED CITY REVENUES 306 ROOM DUAL BRANDED COURTYARD 8�RESIDENCE INN HOTEL ORANGE,CALIFORNIA TOT Revenue Gross Sales Tax Property Tax Revenue Incremental Revenue to City Room Developer Net City F$B Assesed Base City Revenue Existing Incremental Year Revenue TOT Subsidy TOT Sales Sales Tax Value Tax General to City Revenue� Revenue 1 $14,014,000 $1,401,000 $0 $1,401,000 $1,237,000 12,400 $67,450,000 $675,000 $94,500 $1,507,900 ($329,600) $1,178,300 2 15,203,000 1,520,000 0 1,520,000 1,342,000 13,400 68,799,000 688,000 96,300 1,629,700 (337,900) 1,291,800 3 16,424,000 1,642,000 0 1,642,000 1,450,000 14,500 70,175,000 702,000 98,300 1,754,800 (346,300) 1,408,500 4 16,858,000 1,686,000 0 1,686,000 1,489,000 14,900 71,579,000 716,000 100,200 1,801,100 (354,900) 1,446,200 5 17,275,000 1,728,000 0 1,728,000 1,525,000 15,300 73,011,000 730,000 102,200 1,845,500 (363,700) 1,481,800 6 17,709,000 1,771,000 0 1,771,000 1,564,000 15,600 74,471,000 745,000 104,300 1,890,900 (372,800) 1,518,100 7 18,152,000 1,815,000 0 1,815,000 1,603,000 16,000 75,960,000 760,000 106,400 1,937,400 (382,200) 1,555,200 S 18,606,000 1,861,000 0 1,861,000 1,643,000 16,400 77,479,000 775,000 108,500 1,985,900 (391,800) 1,594,100 9 19,071,000 1,907,000 0 1,907,000 1,684,000 16,800 79,029,000 790,000 110,600 2,034,400 (401,600) 1,632,800 10 19,548,000 1,955,000 0 1,955,000 1,726,000 17,300 80,610,000 806,000 112,800 2,085,100 (411,600) 1,673,500 11 20,037,000 2,004,000 0 2,004,000 1,769,000 17,700 82,222,000 822,000 115,100 2,136,800 (421,900) 1,714,900 12 20,538,000 2,054,000 0 2,054,000 1,813,000 18,100 83,866,000 839,000 117,500 2,189,600 (432,400) 1,757,200 13 21,051,000 2,105,000 0 2,105,000 1,859,000 18,600 85,543,000 855,000 119,700 2,243,300 (443,200) 1,800,100 14 21,577,000 2,158,000 0 2,158,000 1,905,000 19,700 87,254,000 873,000 122,200 2,299,300 (454,200) 1,845,100 15 22,116,000 2,212,000 0 2,212,000 1,953,000 19,500 88,999,000 890,000 124,600 2,356,100 (465,600) 1,890,500 16 22,669,000 2,267,000 0 2,267,000 2,002,000 20,000 90,779,000 908,000 127,100 2,414,100 (477,300) 1,936,800 17 23,236,000 2,324,000 0 2,324,000 2,052,000 20,500 92,595,000 926,000 129,600 2,474,100 (489,200) 1,984,900 18 23,817,000 2,382,000 0 2,382,000 2,103,000 21,000 94,447,000 944,000 132,200 2,535,200 (501,400) 2,033,800 19 24,412,000 2,441,000 0 2,441,000 2,156,000 21,600 96,336,000 963,000 134,800 2,597,400 (513,900) 2,083,500 20 25,022,000 2,502,000 0 2,502,000 2,209,000 22,100 98,263,000 983,000 137,600 2,661,700 (526,700) 2,135,000 21 25,648,000 2,565,000 0 2,565,000 2,265,000 22,700 100,228,000 1,002,000 140,300 2,728,000 (539,800) 2,188,200 22 26,289,000 2,629,000 0 2,629,000 2,321,000 23,200 102,233,000 1,022,000 143,100 2,795,300 (553,300) 2,242,000 23 26,946,000 2,695,000 0 2,695,000 2,379,000 23,800 104,278,000 1,043,000 146,000 2,864,800 (567,100) 2,297,700 24 27,620,000 2,762,000 0 2,762,000 2,439,000 24,400 106,364,000 1,064,000 149,000 2,935,400 (581,200) 2,354,200 25 28,311,000 2,831,000 0 2,831,000 2,500,000 25,000 108,491,000 1,085,000 151,900 3,007,900 (595,700) 2,412,200 26 29,019,000 2,902,000 0 2,902,000 2,562,000 25,600 110,661,000 1,107,000 155,000 3,082,600 (610,500) 2,472,100 27 29,744,000 2,974,000 0 2,974,000 2,626,000 26,300 112,874,000 1,129,000 158,100 3,158,400 (625,700) 2,532,700 28 30,488,000 3,049,000 0 3,049,000 2,692,000 26,900 115,131,000 1,151,000 161,100 3,237,000 (641,300) 2,595,700 29 31,250,000 3,125,000 0 3,125,000 2,759,000 27,600 117,434,000 1,174,000 164,400 3,317,000 (657,300) 2,659,700 30 $32,031,000 $3,203,000 $0 $3,203,000 $2,828,000 $28,300 $119,783,000 $1,198,000 $167,700 $3,399,000 ($673,700) $2,725,300 10 Years Total $17,286,000 $0 $17,286,000 $152,600 $1,034,000 $18,473,000 ($3,692,000) $14,780,000 NPV @ 8.0% $11,359,000 $0 $11,359,000 $100,000 $685,000 $12,145,000 ($2,439,000) $9,705,000 20 Years Total $39,735,000 $0 $39,735,000 $350,800 $2,295,000 $42,380,000 ($8,418,000) $33,962,000 NPV @ 8.0% $18,229,000 $0 $18,229,000 $161,000 $1,072,000 $19,462,000 ($3,885,000) $15,576,000 30 Years Total $68,470,000 $0 $68,470,000 $604,600 $3,831,000 $72,906,000 ($14,464,000) $58,442,000 NPV @ 8.0% $22,302,000 $0 $22,302,000 $197,000 $1,291,000 $23,789,000 ($4,742,000) $19,047,000 Asssumes initial year TOT of$310,000,city share of sales tax is$16,000 and property tax is$3,640. ATTACHMENT 1 SCENARIO 1 - KMA Prepared By:Keyser Marston Associates;Inc. Filename:Orange Hotei PF;KMA;12/10l2018;KEE ATTACHMENT 1-TABLE 1 ESTIMATED CONSTRUCTION COSTS 306 ROOM DUAL BRANDED COURTYARD&RESIDENCE INN HOTEL KMA SCENARIO ORANGE,CALIFORMIA I. Land Acauisition 306 Rooms $6,072 /Room $1,858,000 II. Direct Costs Off-Site Costs $0 Allowance $0 On-Site Costs 306 Rooms $13,000 /Room 3,981,000 Parking 276 Spaces $0 /Space 0 Hotel Shell 306 Rooms $149,600 /Room 45,763,000 Hotel FF&E 306 Rooms $21,400 /Room 6,550,000 Direct Construction Costs $56,294,000 Prevailing Wages 0.0% Direct Costs� $0 Construction Overhead/Contingency 10.0% Direct Cost(Exc.Off-Sites) 5,629,000 Total Direct Costs $61,923,000 III. Indirect Costs - Architecture, Eng.&Consulting 3.7% Direct Cost $2,291,000 Permits&Fees/Impact Fees $2,630,000 Allowance 2,630,000 Franchise Application � $0 Allowance 0 Taxes, Ins,Legal&Acctg 2.0% Direct Cost 1,238,000 . Pre Opening/Working Capital 306 Rooms $2,500 /Room 765,000 Development Management 3.0% Direct Costs 1,858,000 Contingency(Indirect Costs) 3.0% Indirect Costs 263,000 Total Indirect Costs $9,045,000 IV. Financin4 Costs Loan InterestZ $74,256,000 Financed 5.50% Interest $2,450,000 Loan Points3 1.50 Points 838,000 Total Financing Costs $3,288,000 V. Total Construction Costs $76,114,000 Per Room $248,700 City and Developer need to confirm that prevailing wages are not applicable. Z Based on Develaper submittal. 3 Assumes 24 month construction period and 50°/a average outstanding balance. Prepared By:Keyser Marston Associates;Inc. Filename:Orange Hotel PF;KMA;12/10/201 S;KEE AlTACHMENT 1-TABLE 2 ESTIMATED STABILIZED NET INCOME� 306 ROOM DUAL BRANDED COURTYARD&RESIDENCE INN HOTEL KMA SCENARIO ORANGE,CALIFORNIA I. Income Rooms 306 Rooms $169 P.O.R. $14,900,000 Food&Beverage 7.9% Gross Sales $15 P.O.R. 1,316,000 Market 1.7% Gross Sales $3 P.O.R. 278,000 Other 1.4% Gross Sales $3 P.O.R. 232,000 Gross Hotel Revenues $16,726,000 II. Distributed Expenses Rooms 21.0% of Dept.Sales $35 P.O.R. 3,129,000 Food&Beverage 70.0% of Dept.Sales $10 P.O.R. 921,000 Market 50.0% of Dept.Sales $2 P.O.R. 139,000 Other 0.0% of Dept.Sales $0 P.O.R. 0 (Less)Total Distributed Expenses ($4,189,000) III. Undistributed Exaenses General&Administration 6.5% Gross Revenues $12 P.O.R. $1,087,000 Information&Telecommunications 1.5% Gross Revenues $3 P.O.R. 251,000 Marketing 4.0% Gross Revenues $8 P.O.R. 669,000 Franchise 7.0% Gross Revenues $13 P.O.R. 1,171,000 Property Operation&Maintenance 3.0% Gross Revenues $6 P.O.R. 502,000 Utility Costs 3.0% Gross Revenues $6 P.O.R. 502,000 (Less)Total Undistributed Expenses ($4,182,000) IV. Manaaement Fees 3.0% Gross Revenues $6 P.O.R. ($502,000) V. Fixed Expenses Taxes 1.1% Hotel AV $8 P.O.R. $708,000 Insurance 1.1% Gross Revenues $2 P.O.R. 192,000 FF&E Reserves 4.0% Gross Revenues $8 P.O.R. 669,000 (Less)Total Fixed Expenses ($1,569,000) VI. Hotel Net Operating Income(NOq 37.6% Gross Revenues $6,284,000 VI. Ground Rent 5.3% Gross Revenues $10.00 P.O.R. ($888,000) VII. Project NOI 32.3% Gross Revenues $5,396,000 ' Assumes stabization reached in Year 4 at a 79.0%occupancy rate. Prepared By:Keyser Marston Associates;Inc. Filename:Orange Hotel PF;KMA;12/10/201 S;KEE ATTACHMENT 1-TABLE 3 ESTIMATED PROJECT SURPLUS/FEASIBILITY GAP 306 ROOM DUAL BRANDED COURTYARD 8�RESIDENCE INN HOTEL KMA SCENARIO ORANGE,CALIFORNIA _._____________________project Surplus/(Feasibility Gap)------------___e�e____ I. Proiect Net Operatinq Income $5,396,000 II. Warranted Investment 8.00% Return on Costs. Hotel Supported Investment $67,450,000 III. Develoament Costs ($76,114,000) IV. Pro'ect Sur lus/Feasibili Ga $8,664,000 Prepared By:Keyser Marston Associates;Inc. Filename:Orange Hotel PF;KMA;12/10/2018;KEE ATTACHMENT 2 SCENARIO 2 - DEVELOPER Prepared By:Keyser Marston Associates;Inc. Filename:Orange Hotel PF;Dev;12/10/2018;KEE ATTACHMENT 2-TABLE 1 ESTIMATED CONSTRUCTION COSTS 306 ROOM DUAL BRANDED COURTYARD 8�RESIDENCE INN HOTEL SCENARIO 2-DEVELOPER ORANGE,CALIFORNIA I. Land Acauisition 306 Rooms $6,072 /Room $1,858,000 II. Direct Costs Off-Site Costs $0 Allowance $0 On-Site Costs 198,427 Sq. Feet $20 /SF 3,981,000 Parking 276 Spaces $0 /Space 0 Hotel Shell 306 Rooms $149,552 /Room 45,763,000 Hotel FF8�E 306 Rooms $21,405 /Room 6,550,000 • Direct Construction Costs $56,294,000 Prevailing Wages 0.0% Direct Costs $0 Construction Overhead/Contingency 9.3% Direct Costs 5,215,000 Total Direct Costs $61,509,000 111. Indirect Costs Architecture, Eng.&Consulting 3.7% Direct Cost $2,263,000 Permits&Fees/Impact Fees 306 Rooms $8,595 /Room 2,630,000 Franchise Application $0 Allowance 0 Taxes, Ins, Legal&Acctg 0.5% Direct Cost 283,000 Pre Opening/Working Capital 306 Rooms $0 /Room 0 Development Management 5.6% Direct Costs 3,469,000 Contingency Allowance 0.0% Direct Costs 0 Total Indirect Costs $8,645,000 IV. Financinq Costs Construction Interest $4,297,500 Allowance 4,298,000 Loan Fees $0 Allowance 0 Total Financing Costs $4,298,000 V. Total Construction Costs � $76,310,000 Cost per Room $249,400 Prepared By:Keyser Marston Associates;Inc. Filename:Orange Hotel PF;Dev;12/10/2018;KEE ATTACHMENT,2-TABLE 2 ESTIMATED STABILIZED NET INCOME� 306 ROOM DUAL BRANDED COURTYARD&RESIDENCE INN HOTEL SCENARIO 2-DEVELOPER ORANGE,CALIFORNIA I. Income Rooms 306 Rooms $161 P.O.R. $14,191,000 Food&Beverage 7.9% Gross Sales $14.00 P.O.R. 1,253,000 Market 1.7% Gross Sales $3.00 P.O.R. 265,000 Other 1.4% Gross Sales $3.00 P.O.R. 221,000 Gross Hotel Revenues $15,930,000 II. Distributed Exuenses Rooms 24.0% of Dept.Sales $39.00 P.O.R. 3,403,000 Food&Beverage 75.0% of Dept.Sales $11.00 P.O.R. 940,000 Market 50.0% of Dept.Sales $2.00 P.O.R. 133,000 Other 0.0% of Dept.Sales $0.00 P.O.R. 0 (Less)Total Distributed Expenses ($4,476,000) III. Undistributed Exaenses General&Administration 6.5°/a Gross Revenues $12.00 P.O.R. $1,035,000 Information&Telecommunications 1.5% Gross Revenues $3.00 P.O.R. 239,000 Marketing 4.5% Gross Revenues $8.00 P.O.R. 716,000 Franchise 7.3% Gross Revenues $13.00 P.O.R. 1,164,000 Property Operation&Maintenance 2.7% Gross Revenues $5.00 P.O.R. 426,000 Utility Costs 3.1% Gross Revenues $6.00 P.O.R. 487,000 (Less)Total Undistributed Expenses � ($4,067,000) IV. Manaqement Fees 3.0% Gross Revenues $5.00 P.O.R. ($478,000) V. Fixed Expenses Taxes 4.2% Gross Revenues $8.00 P.O.R. $676,000 Insurance 1.1% Gross Revenues $2.00 P.O.R. 183,000 FF&E Reserves 4.0% Gross Revenues $7.00 P.O.R. 637,000 (Less)Total Fixed Expenses ($1,496,000) VI. Hotel Net Operatinq Income(NOI) 34.0% Gross Revenues $5,413,000 VII. Hotel Ground Rent 5.6% Gross Revenues $10.00 P.O.R. ($888,000) VI. Hotel NOI After Ground Rent 28.4% Gross Revenues $4,525,000 ' Assumes stabilization in Year 4. Prepared By:Keyser Marston Associates;Inc. Filename:Orange Hotel PF;Dev; 12/10/2018;KEE ATTACHMENT 2-TABLE 3 ESTIMATED PROJECT SURPLUS/FEASIBILITY GAP 306 ROOM DUAL BRANDED COURTYARD&RESIDENCE INN HOTEL SCENARIO 2-DEVELOPER ORANGE,CALIFORNIA -------------------------Project Surplus/(Feasibility Gap)------------------------- I. Proiect Net Operatina Income $4,525,000 II. Warranted Investment 8.00% Return on Costs Hotel Supported Investment $56,563,000 III. Development Costs ($76,310,000) IV. Pro'ect Surpius/Feasibili Ga $19,747,000 Prepared By:Keyser Marston Associates;Inc. Filename:Orange Hotel PF;Dev;12/10/2018;KEE Exhibit"B" Legal Description of Approved Site [Subsequent to finalization of the agreement, a copy will be kept on file with the City Clerk's Office.] 15 CITY COUNCIL MINUTES MARCH 12, 2019 7. ADIVIINISTRATIVE REPORTS (Continued) MOTION —Alvarez SECOND —Nichols AYES —Alvazez, Murphy,Nichols NOES —Monaco Moved to approve the agreement with Break of Dawn, LLC; and authorize the Mayor and CiTy Clerk to execute on behalf of the City. Staff was directed to bring.back design standazds for the barrio historic dishict. 8. REPORTS FROM CITY MANAGER—None 9. LEGAL AFFAIRS—None 10. ITEMS RELATING TO THE SUCCESSOR AGENCY OF THE ORANGE REDEVELOPMENT AGENCY—None 11 PUBLIC HEARINGS 11.1 Participafion Agreement with DCSG Development, LLC. (A2100.0; AGR-6749) Time set for a public hearing to consider approval of a Participation Agreement with DCSG Development, LLC to provide an economic development subsidy for the development of a Marriott hotel. The Mayor opened the Public Heazing. Public Sneaker: Dennis Costanzo—spoke in support of approving the participation agreement. The Mayor closed the Public Hearing. MOTION —Nichols SECOND —Alvazez AYES —Alvazez, Murphy,Nichols, Monaco Moved to approve the Participation Agreement by and between DCSG Development,LLC and the City of Orange; and authorize the Mayor and City Clerk to execute on behalf of the City. RECESS TO CLOSED SESSION —The City Council recessed back to Closed Session at 8:10 p.m. with all Members present. PAGE7