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CC Staff Rpt - Talus-SRR PSDA AMEND 5 (2023-10-17)BUSINESS SESSION ITEM NO. 1 City of La Quinta CITY COUNCIL MEETING: October 17, 2023 STAFF REPORT AGENDA TITLE: APPROVE AMENDMENT NO. 5 AND RELATED DOCUMENTS TO PURCHASE, SALE, AND DEVELOPMENT AGREEMENT WITH SILVERROCK DEVELOPMENT COMPANY, LLC, SILVERROCK PHASE I, LLC, AND SILVERROCK LAND II, LLC, TALUS LA QUINTA (FORMERLY SILVERROCK RESORT) AND REQUIRE DEVELOPER TO PRESENT MONTHLY PROGRESS UPDATES AT COUNCIL MEETINGS ONCE FINANCING IS CLOSED AND UNTIL THE LUXURY HOTEL IS OPEN RECOMMENDATION Approve Amendment No. 5 and related documents to the Purchase, Sale, and Development Agreement with SilverRock Development Company, LLC, SilverRock Phase I, LLC, SilverRock Land II, LLC, and TALUS La Quinta (formerly SilverRock Resort); authorize the City Manager and City Attorney to make minor revisions and additions as necessary that do not substantively change the business terms, and execute and implement said agreements and other documents necessary; and require developer to present monthly progress updates at Council meetings once financing is closed and until the luxury hotel is open. EXECUTIVE SUMMARY • In November 2014, Council approved a Purchase, Sale, and Development Agreement (PSDA) with SilverRock Development Company (SDC). • In May 2017, SDC initiated the work to realign golf course holes to accommodate the luxury hotel and improve the golf experience; this work was completed in November 2017. • Amendment No. 3 was executed in November 2018 primarily to update schedule and project phasing to enable closing of the $212 million construction financing with Mosaic Real Estate (Mosaic). • In April 2019, SDC commenced mass grading of the site in preparation for vertical development; this work was completed in November 2019. • In March 2020, just after the COVID-19 pandemic started, SDC provided the first of several updates to Council including notification that they would be delaying the start of vertical construction as a result of the pandemic but that both SDC and 73 their financing partner, Mosaic, are committed to the successful completion of TALUS La Quinta. • On April 15, 2020, SDC provided the City with a Force Majeure notice related to impacts to the development schedule associated with the COVID-19 pandemic. • In April 2021, the City issued a notice of default to SDC, per the terms of the PSDA which identified completion of the two hotels, spa, conference facility, and permanent golf clubhouse by December 31, 2020. • In September 2021, SDC provided verification of revised capitalization. • Amendment No. 4 to the PSDA was executed on October 12, 2021, modifying the development schedule; decreasing the amount of a rebate available (which is calculated based on transient occupancy tax (TOT) receipts) by 5% for the 15 -year term when calculating any rebate for continuous operation of the hotels, once opened, under TOT Covenant Agreements; identifying additional project milestones; increasing the purchase price on "Future Resort Property" (Option Property) for missing milestones; and requiring hotel operator to manage all resort residential short-term vacation rentals. • Since January 17, 2023, when Robert Green gave his last update presentation to Council, construction at TALUS has continued but at a slow pace and with a focus on the Montage residential units while SDC has worked to secure additional funding necessary to recapitalize the project. • As proposed, Amendment No. 5: ✓ Resets financial penalties for missed milestones and reset the schedule of performance to coincide with the loan closings. ✓ Allows for the recapitalization of the project due to the rising interest rates and costs for labor and materials since the COVID-19 Pandemic and identifies new lenders to be brought into the project. ✓ Outlines further reductions in rebates based on Transient Occupancy Tax (TOT) receipts that SDC faces if completion dates for either of the two hotels are not met. For example, should the hotels be six months late, the rebate program as agreed to under the original PSDA and modified by Amendment No. 4 will be reduced from 15 years to 14 years and 6 months. ✓ Includes a provision giving the City additional oversight over how project funding is expended by SDC, ensuring that contractors and others are being paid on time. 74 FISCAL IMPACT The development of TALUS La Quinta will generate revenue for the City and the greater community. As the project is developed, the City will receive an estimated $7 million of Developer Impact Fees (DIF); annual property tax revenue that will continue to increase as the property is improved and sold (estimated to be over $640,000 annually within 10 years); sales tax generated through food, beverage and retail sales (estimated to exceed $580,000 annually within 10 years); and net TOT revenue from hotels and resort residences (estimated to exceed $2 million annually within 10 years). Furthermore, it is estimated that the project will generate 1,750 temporary construction jobs and 465 full- time permanent operational jobs at the resort. The average Montage/Pendry employee is among the highest paid in the hospitality industry and would introduce to the community more than $19 million in employment opportunities. Finally, the City will be relieved from funding operational deficits associated with the golf course, dust control and parkway maintenance costs averaging approximately $600,000 annually. BACKGROUND/ANALYSIS Since the approval of Amendment No. 4 and during the construction of the luxury and lifestyle hotels, golf clubhouse and conference and shared facility (Core Project Components), SDC informed the City that the capitalization for the construction of those components would no longer include Mosaic, due to rising interest rates and costs of labor and materials which had brought the cost for project development from an estimated $400 million to an estimated $600 million. Instead, the funding would consist of three integrated components: C -Pace financing in the approximate amount of $170 million, a real property secured construction loan to SDC in the approximate amount of $95 million funded by bonds, and EB -5 funding of up to $90 million with the ability to obtain an additional $18 million. It has been two years since Amendment No. 4 with SDC was executed, during which project construction on the two hotels, conference center and shared facility and new golf clubhouse continued on schedule until second half of 2022 when construction was paused. Major milestones have gone unmet while SDC works to close on new funding sources. Amendment No. 5 raises the purchase and sale price of Phase 2 land to the developer by $2 million as penalty for missing project milestones. In December 2022, Robert Green secured a construction loan for $48 million from Builders Capital allowing SDC to continue work on the first 13 of 29 Montage luxury residential units with purchase agreements for most of the units which is required to close on financing needed to continue construction on the Core Project Components. He also received a commitment for a $49 million construction loan from Builders Capital for the construction of 20 of 55 Pendry residential units and was approved for $108 million in EB - 5 financing which has begun funding capital for the project. There are two "Bridge Loans" associated with the project as well: 75 • An up -to $25 million loan secured through Keillor Capital — $12.5 million of which is available as an initial installment with at least $10 million available to pay off subcontractor mechanics liens. • A $79 million loan was secured and is awaiting closing through Silver Arch Capital, a placeholder loan to pay off the first bridge loan through Keillor Capital identified above, liens by general contractors Granite Construction and R.D. Olson Construction, and Poppy Bank, which holds the debt on the master site infrastructure. SDC is near closing on recapitalization loans from two lenders: Lieef loan for about $170 million through C -PACE, a government sponsored program that provides clean energy loans to developers for using energy-efficient systems, and approximately $95 million in bond sales through Ziegler. When escrow closes on the Ziegler funds (senior loan) it will trigger the closing of the Lieef loan. The Ziegler and Lieef funds will be dedicated to the construction of the Core Project Components which are the commercial components, including the two hotels, conference center and shared facility, and new golf clubhouse. Staff has concluded negotiations with SDC on the revised schedule that still includes project milestones, with financial consequences for failing to meet, updated start and completion dates of project components as well as new and revised terms and conditions as outlined below. Prior to the closing of escrow for the recapitalization loans, SDC will be subject to the requirement, consistent with the PSDA, to deliver copies of the draft final loan documents to the City Attorney and City Manager for confirmation of financial feasibility to complete the Core Project Components. Upon the closing of escrow with the recapitalization lenders and from the loan proceeds made available from the loans, SDC will pay all outstanding mechanic's liens and encumbrances affecting the Core Project Components. Updated Schedule of Performance The chart below details Amendment No. 4 and proposed Amendment No. 5 schedule of performance dates. The Amendment No. 5 changes provide time extensions to complete major milestones: Project Component Amendment No. 4 Amendment No. 5 Start Finish Start Finish Luxury Hotel Vertical construction 8/30/21 9/30/23 8/30/2021 3/13/2025 76 Lifestyle Hotel 9/30/22 7/31/24 520 days after the closing of 12/31/2026 Vertical construction Recapitalization Loans but not later than 12/5/25 Conference & Shared 8/30/21 9/30/23 8/30/2021 3/13/2025 Services Golf Clubhouse & 8/30/21 11/1/22 8/30/2021 11/25/2024 Practice Range Completion dates or timeframes listed in this table are the outside dates permissible under this Agreement. The developer must show good faith diligence in closing escrow on the recapitalization loans by no later than January 1, 2024. However, under Section 3 of Amendment No. 5, the developer has the right to extend outside date for the closing of the recapitalaztion loans to June 30, 2024. To the extent such outside date is extended, then the completion dates under items 8,9,11,13,15,16 and 22 are automatically extended to the same extent. This is permissible if the City Attorney and City Manager are satisfied that the developer has been acting in good faith in continuing to close on the recapitalization loans. Approving Amendment No. 5 will enable SDC to close on recapitalization loans, pay off liens and recall the contractors to resume construction of the commercial components of the project which are the hotels, shared facility and conference center and golf clubhouse. SDC will continue to provide project updates at Council meetings that will include recent milestones achieved, scheduled updates and project highlights. Additionally, the City Manager will have oversight over payment of funds to contractors and subcontractors, ensuring they are being paid on time. ALTERNATIVES Council could direct staff to further modify the terms of Amendment No. 5, which would delay development and impact development financing. Prepared by: Approved by: Sherry Barkas, Specialist Jon McMillen, City Manager Attachment: 1. Amendment No. 5 to Purchase, Sale and Development Agreement 77