CITY OF BARSTOW
REIMBURSEMENT AGREEMENT
2021, by and between the City of Barstow, a California municipal corporation, (the "City") and Barstow Hospitality, LLC, a California Limited Liability Company (the "Hotel Operator"). City and Hotel Operator are sometimes individually referred to as "Party" and collectively as "Parties."
RECITALS
A. Hotel Operator controls certain real property (Assessor's Parcel Number:
0428-351-08) in the City, on which the Hotel Operator intends to operate an approximately 181 room hotel project ("Project"). The Hotel Operator anticipates that the Project, once available to be occupied, will generate transient occupancy taxes ("TOT") to the City during the Project's operation, in addition to increased real estate taxes and sales taxes generated by the anticipated increased visitation to the Project and the City.
B. To offset anticipated costs and expenses during the first years of operation of the Project, the City has agreed to provide an economic subsidy to Hotel Operator in the amount of $2,400,000.00, paid in monthly increments as set forth herein over a five (5) year period, contingent on Hotel Operator operating a Nationally Recognized Franchise Hotel Brand and such other conditions as set forth herein.
C. The City has determined that this reimbursement agreement with the Hotel Operator, in accordance with the terms and conditions set forth herein and as contemplated by this Agreement, is of public benefit and contributes to the general welfare of its citizens based on the terms and conditions herein because the Project:
(1) Will create both temporary and permanent operational jobs, (2) Increase capital investment, property values and overall tax revenues including real property and sales tax revenues, and (3) Serve as an economic catalyst to the City by expanding the lodging options and amenities which support tourism.
AGREEMENT
NOW, THEREFORE, based on the foregoing Recitals, which are a substantive part of this Agreement and incorporated herein by reference, the City and Hotel Operator agree as follows:
Section 1. Reimbursement Commitment & Term: Conditions on Payment.
A. In consideration for the Hotel Operator costs and expenses for operating the Project and the other conditions and covenants provided for herein, and only upon the satisfaction of the conditions in Section 2 of this Agreement (defined as the 1 258067.1
"Reimbursement Obligation Conditions"), the City shall reimburse to Hotel Operator the amount of $2,400,000.00 (the "Total Reimbursement Amount"), to be paid on a monthly basis in the amount of $40,000.00 per month (the "Monthly Reimbursement Amount") for a 60 month period as more fully described herein. Payments made to the Hotel Operator under this Agreement shall be from any sources of funds available to the City by law for payment of contractual obligations.
B. Upon The Hotel Operator commencing the commercial operation of the Project as a hotel it shall be subject to paying to City amounts equal to the City's then current transient occupancy tax, levied and collected pursuant to Revenue and Taxation Code section 7280 et seq. and applicable provisions of the Barstow Municipal Code and any City policies and procedures, based upon income generated by the Project ("TOT Receipts"). The Monthly Reimbursement Amount shall be reduced in any month during the Reimbursement Term in which the TOT Receipts are less than $40,000.00 by an amount equal to the difference between the Monthly Reimbursement and the TOT Receipts for such month (the "Monthly Actual Reimbursement Amount"). The Monthly Reimbursement Amount shall not be increased in the event TOT Receipts for a given month exceed the Monthly Reimbursement Amount. However, it is the expectation of the Parties that the total of the Monthly Actual Reimbursement Amount for each 12 month period during the Reimbursement Term (the "Annualized Reimbursement") will equal $480,000.00 and that the TOT Receipts for each such period (the "Annualized TOT Receipts") will exceed $480,000.00. Accordingly, at the end of each 12 month period during the Reimbursement Term (each an "Agreement Anniversary Date"), a true up shall occur (the "True Up") by which if by operation of this Agreement the Annualized Reimbursement is less than $480,000.00, but the Annualized TOT Receipts exceed $480,000.00, then an additional reimbursement payment shall be made by City to Hotel Operator in an amount that will cause the total Annualized Reimbursement for such period to equal $480,000.00 (the "True Up Payment.") The Parties acknowledge that if TOT Receipts do not meet their expectations during the Reimbursement Term, the Total Reimbursement Amount may be less than $2,400,000.00.
Subject to the terms and conditions of this Agreement, the City shall pay to the Hotel Operator, from any sources of funds available to the City by law for payment of contractual obligations, the Monthly Actual Reimbursement Amount each month until the City has paid to the Hotel Operator the Total Reimbursement Amount.
Payment of the Monthly Actual Reimbursement Amount shall commence on the first day of the month (the "Reimbursement Commencement Date") following the first full month after (i) the satisfaction of the Reimbursement Obligation Conditions (as defined in Section 2 of this Agreement) and (i) the City has collected and verified for that first full month (and pro-rated amount, if any, from the prior month to that first full month) the TOT Receipts from the Project, and from thereon shall continue for sixty (60) months following the Reimbursement Commencement Date of the Monthly Actual Reimbursement Amounts (the last date is referred to herein as the "Reimbursement Termination Date," and the entire reimbursement period from the Reimbursement Commencement Date until the Reimbursement Termination Date is referred to herein 2 258067.1
as the "Reimbursement Term"). Notwithstanding any provision hereof to the contrary, the Total Reimbursement Amount shall not exceed $2,400,000.00.
D. The Hotel Operator shall at all times remit to the City all TOT Receipts from the Project in accordance with applicable provisions of the Barstow Municipal Code and any City policies and procedures. Notwithstanding anything to the contrary in the Barstow Municipal Code or any of City's policies or procedures, during the Reimbursement Term Hotel Operator shall remit TOT Receipts, and the related tax return required by City's Municipal Code, to City on or before the last day of the month following the month in which such tax is collected. After collection and verification of the amounts remitted by the Hotel Operator of the TOT Receipts for the preceding month (and, for the first full month, the pro-rated amount, if any, from the prior month to that first full month), the City shall pay to the Hotel Operator the Monthly Actual Reimbursement Amount no later than the first (15t) day of the month after the full month immediately following the month for which the TOT Receipts have been remitted by the Hotel Operator and verified by the City. By way of explanation of the foregoing sentence, if the City receives the remittance of the TOT Receipts from the Hotel Operator for the month of March, the City shall pay to the Hotel Operator the Monthly Actual Reimbursement Amount for March no later than first (1S1) day of May immediately following that March. If the first (1st) day of a month falls on a Saturday, Sunday, federal or state official holiday, or a day when Barstow City Hall is closed for business, the Monthly Actual Reimbursement Amount shall be paid by the City to the Hotel Operator on the next business day. True Up Payments, if any, shall be paid by City to the Hotel Operator no later than a date which is both 12 months following the Reimbursement Commencement Date, or the anniversary thereof as applicable, and the first (1s1) day of the month after the full month immediately following the month for which the TOT Receipts have been remitted by the Hotel Operator for the applicable 12 month period, and verified by the City.
E. At the end of each year after the Reimbursement Commencement Date, either the City or Hotel Operator may request a review of year-to-date remittances and TOT Receipts from the Project to verify the prior-year's reimbursement amounts were correctly calculated and paid. Additionally, either the City or Hotel Operator may request an audit, performed by an independent licensed auditor selected by the requesting Party, to review and verify that any reimbursement amounts were correctly calculated and paid. In the event that any such review or audit discloses that an overpayment was made by the City for any Actual Monthly Reimbursement Amount, and such error is not addressed by the annual True-Up, the Hotel Operator shall return to the City within ninety (90) days of the disclosure date the amount of the overpayment; in the event that any such review or audit discloses that an underpayment was made by the City for any Actual Monthly Reimbursement Amount, and such error is not addressed by the annual True-Up, the City shall pay to the Hotel Operator within ninety (90) days of the disclosure date the amount of the underpayment. For any over-or underpayment disclosed pursuant to a review or audit, the Hotel Operator may return to 3 258067.1
the City the amount of the City's overpayment by offset, with the City reducing in the amount of the overpayment the amount of a subsequent(s) reimbursement payment.
F. The Hotel Operator shall retain for no less than four (4) years after the Reimbursement Termination Date a complete set of accounting records for the operations of the Project, including gross and net revenues received from payment of any room rate, service fee, or other consideration received for renting hotel rooms at the Project. The accounting records shall cover no less than the entire Reimbursement Term. The City shall have the right, upon no less than five (5) days' prior notice to the Hotel Operator, to inspect any and all accounting records to review and verify the gross and net revenues from the Project for purposes of confirming any reimbursement made under this Agreement were in the correct amounts as set forth herein. This Subsection (E) shall survive the expiration of the Reimbursement Term and the termination of this Agreement.
Section 2. Conditions to Reimbursement. The obligation of the City to commence and thereafter continue to make any payment of the Monthly Actual Reimbursement Amount is contingent upon the satisfaction by the Hotel Operator of the following conditions precedent (each, a "Reimbursement Obligation Condition" and collectively "Reimbursement Obligation Conditions"):
A Before granting the payment of any Monthly Actual Reimbursement Payment, the City shall have prepared an economic development subsidy report and hold a public hearing in accordance with Government Code section 53083; the report shall include updated information from the Hotel Operator regarding the estimated number of jobs created by the commencement and continuous operations of the Project, broken down by full-time, part-time, and temporary positions at the hotel once operations have commenced; and
B. The Hotel Operator commences the commercial operation of the Project as a hotel in accordance with this Agreement and any other permits and approvals issued by the City, which commencement of commercial operations shall occur within ninety (90) days of the issuance of a Certificate of Occupancy by the City; and Upon commencement of commercial operations, the Project is continuously operated as a Nationally Recognized Franchise Hotel Brand during the entire five-year Reimbursement Term, subject to delay in continuous operations only due to an Event of Force Majeure as defined in Section 8 of this Agreement; and D. The Hotel Operator is not in default or breach of this Agreement, nor is the Hotel Operator in violation of any federal, state, or local law; and The Hotel Operator is not in bankruptcy or in receivership, either voluntarily or by operation of law, under any federal or state law; this includes no filing by or against Hotel Operator of a petition for relief under the Bankruptcy Reform Act of 4 258067.1
1978 or any bankruptcy or debtor relief law, and no general assignment by Hotel Operator for the benefit of creditors or the appointment of any receiver or trustee of all or any portion of the assets of the Hotel Operator.
The Reimbursement Obligation Conditions set forth in Subsections (C), (D), and (E) above shall be continuing obligations of the Hotel Operator for the entire Reimbursement Term. In the event that the Hotel Operator fails to meet any one of these Reimbursement Obligation Conditions at any time during the Reimbursement Term, the City shall have no obligation to pay to the Hotel Operator a Monthly Actual Reimbursement Amount for any and all months that the Hotel Operator fails to meet one or more of these Reimbursement Obligation Conditions in Subsection (C), (D), or (E).
Section 3. Public Benefit/Public Purposes. The City Council has determined that encouraging economic development, including private investment that involves creation of new jobs and income in the City, or the retention of existing jobs and income that would otherwise be lost or be unavailable to the residents of the City, is a valid exercise of the City's powers and serves important public purposes. By authorizing the City to enter into this Agreement, the City Council has determined that the benefits accruing as a result of the transactions contemplated by this Agreement are for legitimate and important public purposes, including without limitation, the public purposes identified in Recital C of this Agreement.
Section 4. No Obligation to Develop or Operate. Both Parties acknowledge that the Project is currently in the planning stages, and the Hotel Operator shall have no liability to City, and City shall have no obligation to Hotel Operator for any reimbursement payment, under this Agreement, if the Project is not opened and operated a hotel as described in this Agreement and any permits and approvals issued by the City relating to the use and operation of the Project. Nothing in this Agreement is intended to or shall be construed to limit the discretion of the City to consider the merits of such an application according to applicable law. Nothing in this Agreement shall authorize any hotel development before compliance with the Planning and Zoning Law, the City's municipal code, the California Environmental Quality Act (Public Resources Code § 21000 et seq. ["CEQA*"]), the CEQA Guidelines (14 Cal. Code Reg. § 15000 et seq.), and other applicable laws, policies and procedures. The City intends to consider in good faith all requested future permits and approvals as may be needed for the Project. 5 258067.1
Section 5. Indemnification.
The City shall indemnify, defend, and hold harmless the Hotel Operator, and its officers and employees, from all demands, claims, actions and damages, of whatever type or nature, including all costs of defense and attorneys' fees, to any person or property arising out of or caused by the City's breach of this Agreement, except for any demands, claims, actions and damages caused by the Hotel Operator's active negligence or willful misconduct.
B. The Hotel Operator shall indemnify, defend, and hold harmless the City, and its officials, officers and employees, from all demands, claims, actions and damages, of whatever type or nature, including all costs of defense and attorneys' fees, to any person or property either (1) arising out of or caused by the Hotel Operator's breach of this Agreement, except for any demands, claims, actions and damages caused by the City's active negligence or willful misconduct, or (2) arising from or related to a challenge to the adoption and/or implementation of this Agreement.
Section 6. Default.
A. Defaults. Any one or all of the following events shall constitute a default by the Hotel Operator if not cured within thirty days (30) after notice by the City, or, if cure cannot be completed within 30 days, then the Hotel Operator commences cure within thirty (30) days and diligently performs any and all action necessary to cure the default within ninety (90) days:
1. Any misleading statement, misrepresentation or warranty of Hotel Operator herein or in any other writing at any time furnished by Hotel Operator to City that materially harms the City or materially diminishes the benefit of the Agreement to the City;
2. Nonperformance by the Hotel Operator when due of any of the obligations described herein, or failure to perform any obligation or covenant contained herein, including but not limited to the failure of the Hotel Operator to remit timely to the City any and all TOT Receipts from the Project;
3. The filing by or against Hotel Operator of a petition for relief under the Bankruptcy Reform Act of 1978 or any bankruptcy or debtor relief law; and 4 A general assignment by Hotel Operator for the benefit of creditors or the appointment of any receiver or trustee of all or any portion of the assets of Hotel Operator.
5. Failure to comply with any requirement imposed on Hotel Operator by any applicable land use or other permit or approval for the Project. 6 258067.1
B. Remedies. In addition to any other rights or remedies, any party may institute legal action to cure, correct or remedy any default, to enforce any provision herein, or to enjoin any threatened or attempted violation, including but not limited to actions for declaratory relief, specific performance, injunctive relief, and relief in the nature of mandamus. All the remedies described herein shall be cumulative and not exclusive of one another, and the exercise of any one or more of the remedies shall not constitute a waiver of election with respect to any other available remedy.
City and Hotel Operator agree that, notwithstanding any other language in this Agreement, damages would not be an adequate or appropriate remedy if City or Hotel Operator fails to carry out their obligations under this Agreement. Therefore, specific performance of this Agreement is the only remedy which would compensate Hotel Operator if City fails to carry out its obligations under this Agreement, and City hereby agrees that Hotel Operator shall be entitled to specific performance in the event of a default by City hereunder. Further, specific performance of this Agreement is the only remedy which would compensate City if Hotel Operator fails carry out its obligations under this Agreement.
Section Z. Compliance with Governmental Regulations. Hotel Operator shall, at its sole cost and expense, comply with all applicable municipal, county, state and federal laws, rules, regulations and ordinances now in force, or which may hereafter be in force, pertaining to its activities contemplated under this Agreement, including, but not limited to: issuance of building and use permits and compliance with all federal and state labor laws (collectively, "Laws").
Section 8. Miscellaneous Provisions.
A. Transfer or Assignment. The Hotel Operator may assign or transfer this Agreement, and the rights and obligations herein, only upon receiving the City's prior written consent to such assignment, which shall not be unreasonably withheld. No later than ninety (90) days prior to the proposed assignment or transfer, the Hotel Operator shall delivery written notice to the City. The City shall have the right to consider, among other factors related to any proposed assignee or transferee, the professional experience and financial ability to own and operate a hotel like the Project. If the City approves the assignment or transfer, the Hotel Operator shall deliver to the City the assignee's/transferee's official business name, address, e-mail, address for service of process, contact person, and any other information that the City may require to confirm the receipt of TOT Receipts as contemplated by this Agreement.
B. Interest of Members of City. No member of the City Council and no other officer, employee or agent of the City who exercises any functions or responsibilities in connection with the carrying out of the City's work shall have any personal interest, direct or indirect, in this Agreement.
7 258067.1
C. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to conflict of law principles. The Parties hereby consent to the jurisdiction and venue for resolution of any dispute to be in a federal or state court of competent jurisdiction in San Bernardino County, California.
D. Time of the Essence. Time is of the essence of each and every provision of this Agreement.
E Notices. Notices or other communications given under this Agreement shall be in writing and shall be served personally or transmitted by overnight courier (such as FedEx), or by first class mail, postage prepaid. Notices shall be deemed received either at the time of actual receipt or, if mailed by first class mail in accordance herewith, on the third (3rd) business day after mailing, whichever occurs first. Notices shall be directed to the Parties at the following addresses or at such other addresses as the parties may indicate by notice:
City: City of Barstow
220 East Mountain View St., Suite A
Barstow, CA 92311
Attn: City Manager
Hotel Operator: Barstow Hospitality, LLC
1650 Hotel Circle North, Suite 110
San Diego, CA 92108
F. Headings. The titles and headings of the various sections of this Agreement are intended solely for reference and are not intended to explain, modify or place any interpretation upon any provision of this Agreement.
Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such or the remaining provisions of this Agreement.
Waiver. No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executing in writing by the Party making the waiver.
I. Number and Gender. As used in this Agreement, the masculine, feminine or neuter gender, and the singular or plural number, shall each include the others whenever the context so indicates or requires.
8 258067.1
Further Assurances. The Parties shall execute, acknowledge, file or record such other instruments and statements and shall take such additional action as may be necessary to carry out the purpose and intent of this Agreement.
Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties' respective heirs, legal representatives, successors and assigns.
L. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes all prior or contemporaneous agreements, representations, warranties and understandings of the Parties concerning the subject matter contained herein, written or oral. No change, modification, addendum or amendment to any provision of this Agreement shall be valid unless executed in writing by each Party hereto.
M. Attorneys' Fees. In the event of any litigation arising out of this Agreement, the prevailing Party in such action shall be entitled to recover its reasonable costs and expenses, including, without limitation, reasonable attorneys' fees and costs paid or incurred in good faith. The "prevailing party" for purposes of this Agreement, shall be deemed to be that Party who obtains substantially the result sought, whether by settlement, dismissal or judgment.
N. Amendment. This Agreement may be amended only by a written instrument signed by both City and the Hotel Operator.
O. Force Majeure. The Hotel Operator's obligation pursuant to this Agreement to continuously operate the Project as a hotel may be extended because of any forced closures due to unforeseeable causes beyond the control and without the fault or negligence of the Hotel Operator, including acts of God or of the public enemy, fires, earthquakes, floods, pandemic or epidemic, quarantine restrictions, riots, strikes, or freight embargoes, if the Hotel Operator notifies the City within ten (10) days of the commencement of such delay. The City shall ascertain the facts and the extent of delay, and extend of the time of the forced delay. Upon the conclusion of any event of force majeure causing the delay, the Hotel Operator shall immediately re-commence continuous operation of the Project as a hotel. The City shall have no obligation to pay a Monthly Actual Reimbursement Amount for any month during which the Hotel Operator did not operate the Project in compliance with this agreement due to a force majeure delay. The City and Hotel Operator agree to extend the term as needed to account for any such force majeure delays.
P. City Manager Authority. The City Manager, or authorized designee, shall have the authority, on behalf of the City, to execute this Agreement, to negotiate and enter into any amendments to this Agreement, interpret any provisions of this Agreement, and execute any implementing documents or instruments in furtherance of this Agreement, provided such action is consistent with the terms and conditions of this Agreement and approvals by the City Council for the use and operation of the Project. 9 258067.1
4 Council or consideratio any documents Gre Manil, a from meeting to the instruments, or other items, relating to this Agreement.
Q. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and such counterparts shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Parties hereto have executed this instrument as of the day and year first above written.
CITY: HOTEL OPERATOR:
City of Barstow, Barstow Hospitality, LLC,
a California municipal corporation a California Limited Liability Company Silas
By: By:
Name: James Hart Name: Bhavesh Patel
Title: City Manager Title: Manager
ATTEST: Ploy COMFORAR
Title: City Clerk
APPROVED AS TO LEGAL FORM:
MatterY. Servek
Name:
Title: City Attorney
10 258067 1
City of Barstow Approved
THE CITY OF California May 27, 2021 5:30 PM
*O BARYW
Agenda Item
4653
Reconsideration of the Agreement Between the City and Hotel Investment Group and Consideration of an Alternate Agreement Between the City and Hotel Investment Group
Information
Department: Finance Sponsors:
Category: Contract
Attachments
Printout
Marriott Hotel New Tax Revenue Analysis2.1
Marriott Hotel New Tax Revenue Analysis2.2
Barstow Rendered Elevation- compressed for review
A2#1 Shaded
A2.2 Shaded Version
Marriott-Barstow_TOT Reimbursement Agreement
Marriott-Barstow_TOT Reimbursement Agreement; second option with flat monthly payment Update... Delete...
(Upload New Attachment)
Fiscal Impact
Based on the incentive option approved, new revenues to the City would vary as follows: Under the first option, the developer would pay transient occupancy taxes (TOT) to the City. Based on the amount of TOT remitted to the City, the City would then make a payment, from any source of funding available, to the developer in an amount equal to the amount of TOT remitted for years 1-3. Since the City would be remitting an amount equal to the TOT received, there would be no additional cost to the City. For years 4 and 5, the City would remit to the developer an amount equal to 85% of the TOT collections. Beginning year 6, there would be no further remittance to the developer. During years 1-5 of operation, the City would receive approximately $2,616,000 in new revenue, net of the TOT payments. Thereafter, new revenue to the City would be approximately $1,100,000 annually from the project. The total remittance to the developer from the City would be capped at $2,400,000. The developer also proposed an alternative incentive option. Under this option, the City would remit to the developer $40,000 per month for 60 months. The developer would commit to remitting the full TOT collections to the City. If the TOT collections dropped below $40,000 in any month during this 60 month period, the amount remitted to the developer would be reduced to equal the TOT collections for that month. Per this option, the estimated new revenue to the City in the first 5 years would be approximately 3,620,000. Thereafter, new revenue to the City would be approximately $1,100,000 increasing annually. The City participation in the development would be capped at $2,400,000. In addition to tax generated from the operation of the hotels, the City would also receive tax from the contractors during the construction phase of the $32,000,000 project. The contractors would pay sales tax on the construction material costs. This project is anticipated to generate 600 temporary construction jobs and 50 permanent jobs. Additional tax benefits will accrue from the addition of these jobs and ancillary spending in the Lenwood area Executive Summary
After the May 17h Council meeting based on questions raised in the public City Council meeting, the development group contacted staff to express their continued interest and desire to build the Marriott hotel properties in Barstow and presented an alternative incentive option they believe may be more amenable to City City staff has reviewed the two incentive options for the proposed development of the two hotel properties totaling 181 rooms. Both options provide the City with approximately $43 million in new revenue over the project life. However, the alternative option recommended by staff is expected to provide the City with an additional $1,000,000 more in new revenue over the first option. The total new revenue received by the City during the first five years is anticipated to be approximately $3.6 million under the recommended option.
Discussion
Since the first quarter of 2019, City staff have been discussing the possibility with Hotel Investment Group of their firm constructing two Marriott hotels in the city under an innovative shared footprint design. This would be the first Marriott hotel property in the City. One of the two connected hotels would be an extended-stay hotel.
Combined, the two hotels would have 181 hotel rooms. The construction cost of this project is anticipated to be $32,000,000 (renderings are attached).
After the May 17*h Council meeting based on questions raised in the public City Council meeting, the development group contacted staff to express their continued interest and desire to build the Marriott hotel properties in Barstow and presented an alternative incentive option they believe may be more amenable to City Council. They expressed their desire to more fully demonstrate the benefits of their project to the City.
Both incentive options are the results of long discussions and intensive negotiations between the City and the developer. Due to the specialized nature of the legal analysis and review needed for hotel developments associated with negotiating and preparing development agreements, the City employed an attorney from Rutan and Tucker to represent the City's interests in these discussions. Hiring specialized legal counsel for negotiating development agreements is common practice. It is also common practice to require the developer to pay the cost of the City's legal counsel to minimize financial risks to the City should the project not proceed. The level and types of incentives requested during these discussions were narrowed down through negotiations to those presented herein.
Initially, the developer proposed an incentive option to assist the developer with financing of the property that included a payment to the developer of an amount equal to the transient occupancy taxes collected and remitted to the City for years 1-3. Since the City would be remitting an amount equal to the TOT received, there would be no additional cost to the City. For years 4 and 5, the City would remit to the developer an amount equal to 85% of the TOT collections. Beginning year 6, there would be no further remittance to the developer.
During years 1-5 of operation, the City would receive approximately $2,616,000 in new revenue from this development, net of the remittance to the developer. Thereafter, new revenue to the City would be approximately $1,100,000 increasing annually. The City participation in the development incentive would be capped at $2,400,000
Subsequent to the May 17 City Council meeting, the developer proposed an alternative incentive option that they believe may be more amenable to City Council. Under this alternative, the City would remit to the developer $40,000 per month for 60 months. The developer would commit to remitting the full TOT collections annually to the City. If the TOT collections dropped below $40,000 in any month during this first 60 month o ofeins or a man Per is option tho period, the amount remitted would be reduced to equal the TOT collections for that month. Per this option, the estimated new revenue to the City in the first 5 years would be approximately 3,620,000. Thereafter, new revenue to the City would be approximately $1,100,000 increasing annually. The City participation in the development would be capped at $2,400,000.
Staff reviewed both incentive options in great detail. Some economic benefits are the same under both incentive options.
Under both options, the City's incentive payment is contingent on a variety of conditions that must be satisfied by the developer. Most notably, the developer takes the risks associated with constructing and then commencing operations of a national brand hotel - a Marriott. Presuming the developer meets the contingency requirements, under either option the City would receive a significant amount of new revenue. This new revenue is paid by transient travelers passing through the community which lowers the tax burden on City After the incentive period, both options generate approximately $1,100,000 in new revenue increasing annually. The City participation would be capped at $2,400,000 under each option. Also, contractors working on the $32,000,000 project would pay sales tax to the City for construction material costs.
The project also generates 600 temporary construction jobs (approx. 150 FTEs) over the eighteen month construction cycle and 50 permanent jobs when completed.
However, although the total incentive is intended to be the same under either option (capped at $2,400,000 per the development agreement), the structure of the two incentive options discussed varies significantly. This amount was arrived at in discussions with the developer when discussing the revenue stream necessary to secure financing of the project. The type of incentive requested is a common ask for hotel developers.
Under the first incentive option, the assumptions the developers based their proposal upon included assuming annual TOT collections of between $442,000 - $527,000. After researching this assumption, staff determined that for similar Lenwood properties, the City is currently collecting $4,000 per room annually on average (disclosure of specific information for each hotel is protected by confidentiality agreements with the businesses and by laws governing its disclosure). Using this metric, the City may expect to receive approximately $724,000 in transient occupancy taxes annually from this development. Under either option, the remittances to the developer are limited to $2,400,000 through the development agreement, but under the first option, staff developer to reach that level of remittance. Thereafter, the City would receive 100% of the TOT. Under the first years under the alternative. After year 5, new revenues would be equal under both options at about $1,100,000 increasing annually.
Under the alternative incentive option, the City would receive 100% of transient occupancy taxes from day one.
The City would remit to the developer $40,000 for 60 months. If the TOT fell below $40,000 in any month, the amount remitted would be reduced to equal the TOT monthly collections. This option is expected to provide the City with $1,000,000 more ($3,620,000 versus $2,616,000) in new revenue during the first five years of operation of the project. Due to the anticipated $1,000,000 in additional new revenue during the first five years, staff is recommending this alternative incentive option.
Staff also prepared a fiscal analysis for each option (attached). This fiscal analysis is prepared using standard metrics for project costing for development proposals. The fiscal analysis estimates the annual new revenues to the City for each project year and the total new revenues to the City over the project life Each new source of revenue has been estimated using conservative assumptions. Property tax revenue estimates were based upon the expected project appraisal of $36,000,000. This value would become the base year taxable value. through a supplemental assessment or as part of their initial property tax bill. Of that amount, the City would receive approximately $134,388 for City of Barstow and Barstow Fire Protection District taxes. Thereafter, the base year amount would increase at the rate of 2% per year (Prop. 13 limitation). Property tax collections are assumed to increase at the same 2% rate as the taxable valuation.
Again, TOT estimates were developed using actual averages of TOT collections for similar Lenwood hotels based upon the 2019 fiscal year (pre-COVID). Per this data, the City is collecting slightly more than $4,000 per room in TOT taxes annually for similar hotels The fiscal analysis assumes no increases in room rates over the project life. It is expected that room rates over the project life will increase resulting in significantly more new TOT revenues than projected within the financial analysis.
The City levies and collects sales tax at the rate of 1% for both the Local sales tax and Measure Q tax. These tax collections are estimated based upon averages for certain local eateries. Due to the proprietary nature of this information, disclosure of specific data for individual restaurants is prohibited by state law. The development project is anticipated to have a full service restaurant in the shared lobby area of both hotels. In addition, there will be large conference rooms and banquet facilities. The City will receive sales tax and Measure Q taxes from the restaurant, catering and banquet activities. The sales tax and Measure Q taxes collected from these activities are expected to increase dramatically over the project life. However, the financial analysis projects no increases from this new revenue source.
Over the project life, new revenues to the City are estimated to be in the range of $42-43 million. However, due to the conservative nature of these estimates, the actual revenue collections over the project life more likely will be around $50 million.
Recommended Action
Staff recommends that City Council approve the agreement between Hotel Investment Group and the City utilizing the alternative incentive option proposed by the developer.
Meeting History
City Special Meeting & Draft
May 27, 2021 5:30 PM Video Council
INTERIM CITY MANAGER JIM HART
- Stated that Hotel Investment Group has asked the City to consider an alternate agreement and that staff will be presenting additional information.
- Also noted that it is common for staff to meet with City Council members to give a first look at what will be provided which is the same information provided to the public.
INTERIM FINANCE DIRECTOR MARC PUCKETT
- Presented the staff report as filed with the City Clerk. - Stated that staff is presenting alternatives proposed by the developer. - Discussed the methodology for the fiscal analysis.
- Discussed Option 1 which includes remitting payments to the developer in years 1 - 3 equal to the Transient Occupancy Tax (TOT). Years 4 and 5, 85% of TOT would be remitted to the developer with no further remittance to the developer beginning year 6. Noted that total estimated revenues over the project life is $42.3 million. - Discussed Option 2 which includes a remittance of $40,000 per month for 60 months to the developer with no further remittance due in year 6. Noted that total estimated revenues over the project life is $43.4 million. - Stated that the incentive is capped at $2.4 million for both projects.
DARSHAN PATEL, CEO OF HOTEL INVESTMENT GROUP
- Thanked the City Council and citizens for their consideration. - Apologized to COUNCIL MEMBER ROSE and stated his intention was not to sway her vote, but to extend gratitude for the Council's consideration.
- Discussed impacts to the hospitality industry and the financing process from the COVID-19 pandemic.
COUNCIL MEMBER SILVA
- Asked what the deadline is for the true-up clause.
INTERIM CITY MANAGER JIM HART
- Stated that the true-up clause is satisfied once $2.4 million is remitted.
COUNCIL MEMBER SILVA
- Asked Mr. Patel why was the incentive requested prior to the COVID-19 pandemic if the current request is now due to economic impacts.
- Asked how the City would justify honoring the same request of other existing hotels.
DARSHAN PATEL, CEO OF HOTEL INVESTMENT GROUP
- Stated that assistance was needed pre-pandemic and explained the hesitation of lenders as a result of the COVID-19 pandemic. Also noted that high interest rates and lending fees are why assistance is needed with the development.
COUNCIL MEMBER DYER KRUSE
- Asked if incentives have been provided to other developers in the past.
INTERIM FINANCE DIRECTOR MARC PUCKETT
- Discussed previous developer incentives including Tanger Factory Outlets, Factory Merchants Outlet Plaza and Walmart.
Discussion ensued about sales tax rates and conservative revenue estimates.
Discussion ensued about occupancy rates being over 90% and contractors at Fort Irwin and the Marine Corps Logistics Base contracting with certain hotel brands.
SPEAKERS
CARMEN HERNANDEZ, BARSTOW, CALIFORNIA
- Expressed concerns with the City entering into a development agreement with no timeline and the gifting of public funds.
- Stated the Mayor is not concerned about the City, but the developers. - Cited exampies of failed development agreements.
JULIE HACKBARTH-MCINTYRE, BARSTOW, CALIFORNIA
- Asked when the hiring of an attorney for the development was approved by the City Council. - Discussed concerns with providing a developer incentive when City employees have not been made whole as a result of the COVID-19 pandemic.
- Expressed concerns about a trick-down effect from approving the agreement. - Expressed concerns about other hotels in town.
GENERAL MANAGER OF ENVIRONMENTAL SERVICES KODY TOMPKINS - Stated that as an employee under a wage freeze, approval of the agreement benefits the City and General Fund which will aid in eliminating the wage freezes.
- Mentioned with this hotel the city might be able to pull in current vendors and contractors that stay outside the city limits.
- Noted with this development they are hoping to create jobs, revenue, and new grow to the city.
MIKE HERNANDEZ, BARSTOW, CALIFORNIA
- Asked for an analysis of the financial liability to the City by approving the development agreement. - Stated that policy changes would be needed to provide the same incentive to other hotels.
LAWRENCE DALE, BARSTOW, CALIFORNIA
- Discussed the importance of the project kicking off economic development in the City and suggested the Council look to the future instead of the past.
MICHAEL LEWIS, BARSTOW, CALIFORNIA
- Stated that providing concessions is a common, fair practice and discussed the importance of providing concessions to encourage development.
- Also cited the impact on the City's sales tax revenue as a result of development in the Lenwood area.
COUNCIL MEMBER DYER KRUSE
- Asked CITY ATTORNEY MATTHEW SUMMERS what the City's liability would be for approving the development agreement.
CITY ATTORNEY MATTHEW SUMMERS
- Discussed possible litigants and the indemnification clause in the agreement.
BUILDING OFFICIAL CHRIS HELDRETH
- Discussed development impact fees and the precedent of waiving such fees as a result of the economic climate and/or incentives and benefit to the City.
- Noted the impact to the General Fund if the agreement is approved which would aid in making staff whole from the concessions taken due to the COVID-19 pandemic.
Motion by COUNCIL MEMBER DYER KRUSE, seconded by MAYOR PRO TEM NOBLE to approve incentive option 2 for a term of 60 months and with construction starting within seven days.
COUNCIL MEMBER SILVA
- Thanked staff for their efforts with bringing development, but asked why an incentive being provided to a hotel when the City should incentivize other types of development. - Expressed concern with the development agreement initially being put on the May 17, 2021 consent agenda.
INTERIM CITY MANAGER JIM HART
- Expressed concern with prior comments made by Council about staff being non-transparent. - Also noted that staff meets with Council Members individually in order to be prepared and anticipate any questions that may arise.
Discussion ensued about email correspondence regarding the project and concerns with the Brown Act.
RESULT: APPROVED [3 TO 2]
MOVER: Marilyn Dyer Kruse, Council Member
SECONDER: James M. Noble, Mayor Pro Tem
AYES: James M. Noble, Marilyn Dyer Kruse, Paul Anthony Courtney NAYS: Barbara Mae Rose, Timothy Silva