396 HAYES STREET, SAN FRANCISCO, CA 94102
T: (415) 552-7272 F: (415) 552-5816
www.smwlaw.com
HEATHER M. MINNER
Attorney
[email protected]
M E M O R A N D U M
TO: The City Council of the City of Barstow
CC: Andrew Espinoza Jr., Acting City Manager
Matthew Summers, City Attorney
FROM: Heather M. Minner
DATE: February 29, 2024
RE: Reimbursement Agreement with Barstow Hospitality, LLC (Marriott Hotel)
On May 27, 2021, the City of Barstow approved a Reimbursement Agreement with Barstow Hospitality, LLC. The Agreement provides that if a proposed Marriott hotel project is constructed and continues operation, the City will reimburse up to $2.4 million of Transient Occupancy Taxes paid by the hotel operator to the City over a five year period. The hotels opened in October, 2023, and on March 4, 2024 the City will hold a hearing to consider whether the terms of the Agreement have been complied with prior to granting the first reimbursement payment to the hotel operator.
There have been concerns expressed by some members of the community and City Council that the Reimbursement Agreement was not validly approved and/or that representatives of Barstow Hospitality, LLC and Hotel Investment Group (collectively HIG) misrepresented that a City subsidy was necessary to secure financing for the project. I have been asked to analyze these issues and this memorandum reports my conclusions to the City. To inform my analysis, I reviewed the Reimbursement Agreement, relevant City Council meeting materials and video, City email correspondence with HIG representatives, a recorded deed of trust securing a construction loan for the project, newspaper articles, and applicable law. I also conducted an inspection of the primary loan document referenced in the recorded deed of trust.
In summary, I have found that the Reimbursement Agreement was validly approved and that HIG representatives did not make misrepresentations that would constitute a default under the Agreement. A brief analysis is included below.
Memo to the City Council of the City of Barstow
February 29, 2024
I. Mayor Calling a Special Meeting for Council to Reconsider the Agreement On May 17, 2021, the City Council rejected a proposed Reimbursement Agreement for the hotel project by a four to one vote. I was asked whether it was lawful for the Mayor to schedule a special meeting to reconsider the Agreement on May 27, 2021. As I understand, some have argued that once the Council voted against the proposed Agreement, the Agreement could only have been brought back under Rosenberg’s Rules by a motion to reconsider made by a Council Member who had voted in the majority; yet the special meeting was called by the Mayor, who was alone in voting in favor of the Agreement.
I have concluded that it was not unlawful for the Mayor to call a special meeting to reconsider the Agreement. This is because he relied on superior state law authority to do so. Under California Government Code section 54956(a), the Mayor has the authority to call a special meeting and specify the business to be discussed at the meeting.
State law aside, and even if calling a special meeting could be considered a motion to reconsider, on May 27, 2021 the Council considered and ultimately approved an alternate Agreement, that was not the same as the one it originally rejected. The agenda item discussed on May 27, 2021 included two issues: “Reconsideration of the Agreement Between the City and Hotel Investment Group and Consideration of an Alternative Agreement Between the City and Hotel Investment Group.”1 The alternative Agreement
was a materially different agreement than the reimbursement agreement previously rejected by the Council: staff estimated that the City would receive an additional $1,000,000 under its terms compared to the originally proposed agreement. The Council ultimately approved this alternative Agreement.
Accordingly, even if it was procedurally improper for the Mayor to call a special meeting to reconsider the original Reimbursement Agreement, which I do not believe it was, it would not have been improper under Rosenberg’s Rules for the Mayor to propose considering the alternate Reimbursement Agreement, which the City ultimately approved.2
1 City of Barstow, Agenda Item 4653 (May 27, 2021) (emphasis added). 2 See Rosenberg’s Rules, p. 6 (discussing motion to consider the “original matter” and the “original motion”).
Memo to the City Council of the City of Barstow
February 29, 2024
II. Government Code Section 53083(b) Requiring a Public Hearing Before Granting a Subsidy
I was asked whether in approving the Agreement the City complied with Government Code section 53083 (adopted by AB 562), which requires a public hearing before “granting” an economic development subsidy. As I understand, some have argued that the City failed to comply with the information and hearing requirements of this law.
The Legislature enacted AB 562 to enshrine the “right of the public to be informed of economic development subsidies approved by their local agencies.”3 As summarized
by the Legislative Counsel, the bill requires local agencies “to provide specified information to the public before approving an economic development subsidy, as defined, within its jurisdiction, and to review, hold hearings, and report on those subsidies at specified intervals.”4
The City complied with the information provisions of this statute by providing the required information in the May 27, 2021 City Council Agenda Packet materials for the Reimbursement Agreement item (primarily in the staff report and attached Agreement).
This information was posted on the City’s web page before the meeting.5 As for the statute’s hearing requirement, this requirement most likely applies after approval of the subsidy, prior to the agency making a payment. Even if the hearing requirement applies to the original approval, however, the City did provide “public notice and a hearing regarding” the Reimbursement Agreement as required by the statute. The agenda for the May 27, 2021 meeting gave the public notice that the City Council would consider the Agreement “utilizing the alternative incentive option proposed by the developer,” and that notice was published at least 72 hours in advance of the meeting, in compliance with the Brown Act. This item was listed as a “business/action item,” and members of the public could attend the meeting and be heard by giving comment on this item in-person, virtually, or in writing.
Accordingly, the City complied with the informational and potential hearing requirements of Government Code section 53083 when it approved the Reimbursement Agreement.
3 2013 Cal. Legis. Serv. Ch. 740 (A.B. 562), Section 2, available at https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB562. 4 Id., Legislative Counsel’s Digest. 5 May 27, 2021 City Council Meeting Agenda Packet, available at:
https://barstowcityca.iqm2.com/Citizens/FileOpen.aspx?Type=1&ID=2278&Inline=True Memo to the City Council of the City of Barstow
February 29, 2024
III. Potential False or Misleading Statements by HIG Representatives During negotiations with City staff, HIG representatives sent several emails suggesting that a City subsidy/TOT reimbursement was necessary to secure financing for the hotel project. An HIG representative made similar statements at the May 17, 2021 and May 27, 2021 City Council meetings. Shortly after the City’s approval of the Reimbursement Agreement, however, it was discovered that on May 7, 2021, prior to these City Council meetings, a Deed of Trust securing a $24,644,000 loan between Barstow Hospitality and Greenlake Real Estate Finance was recorded against the hotel property.
As I understand, some have argued that HIG’s statements that a City subsidy was necessary to secure financing were therefore misrepresentations, given that HIG had signed loan documents prior to the City’s approval of the Reimbursement Agreement, and that this would constitute a default under the Agreement.6 I have concluded that the
statements by HIG were not false or misleading because the loan was contingent on HIG receiving a subsidy from the City.
The loan includes a covenant regarding “City Incentive” providing that “The City of Barstow wishes to provide the Borrower an incentive due to the Property and project generating additional value to the City of Barstow from, among other things, increased visitation (the “City Incentive”). As of the Loan Date, Borrower is in the process negotiating with the City of Barstow to determine the Details related to the City Incentive. On or before June 30, 2021, Borrower shall Provide a status update and information related to the City Incentive satisfactory to Lender.” The loan further provides that “[a]ny representation or warranty under this Note or any other Loan Document was inaccurate or misleading when made or becomes inaccurate,” “shall be deemed to be an event of default.”7
Further, under the loan, funding would not be
released in the event of default.
Accordingly, under the terms of the loan, if the City denied approval of the Reimbursement Agreement, then the representation that the City wished to provide an incentive would have become inaccurate and the Hotel Operator would be in default on 6 Section 6 (Default) of the Reimbursement Agreement lists events that “shall constitute a default by the Hotel Operator if not cured” after receiving notice by the City. The default events include “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.”
7 Loan No. 2551Mercantile CA Greenlake/Barstow Hospitality, Promissory Note.
Memo to the City Council of the City of Barstow
February 29, 2024
the loan. In my opinion, because the loan was subject to default if a City subsidy was not approved, then the subsidy was necessary to secure financing for the project.
I understand that some have argued that a City subsidy and/or loan must not have been necessary to develop the project because HIG had already bought the land and paid building permit fees before the Reimbursement Agreement was approved. The GreenLake loan, however, was to fund construction costs; it was not intended or structured to provide funds for property acquisition or fees paid prior to June 30, 2021. A review of the title documents for the parcel shows that the property was purchased by Barstow Hospitality Group in November 2019, a year and a half before the loan was received. Further, the loan was for construction hard and soft costs and the amount of the loan, $24.4 million, was below what the City reported in its agenda materials as an estimated $32 million cost of construction. Accordingly, land acquisition and other project development costs must have been paid from other HIG funds.
In summary, HIG’s statements that a City subsidy was necessary to secure financing for the project were not misleading or misrepresentations such that HIG would be in default of the Agreement.
IV. Allegations of Bribery
As I understand, some have alleged that HIG offered bribes to some Council Members in exchange for their approval of the Agreement and have question whether the Agreement is valid as a result.
If a public official accepts a bribe to approve a contract, the contract would be void under Government Code 1090, which prohibits city officers from approving a contract in which they have a financial interest. There are indications that the District Attorney and/or the Federal Bureau of Investigation might have looked into, or are currently reviewing, allegations of bribery related to the Reimbursement Agreement. At this point, however, I am not aware of any evidence that a member of the City Council accepted a bribe to approve the Agreement. If such evidence comes to light in the future, Government Code 1090 could come into play.
V. Conclusion
In my opinion, the City did not commit any procedural errors in how it approved the Reimbursement Agreement and the Agreement was validly approved. Further, HIG did not make misstatements or misrepresentations that would constitute a default under the Agreement.
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