ACTION REQUESTED:
Title
Communication from the City Manager with a Request to APPROVE a REFINANCING AGREEMENT with PERE MARQUETTE HOTEL, LLC, and Affiliates Subject to the Receipt of $2,000,000.00 of Refinancing Proceeds and the Establishment of a 4% Hotel Tax Special Service Area for the Hotel Pere Marquette and Courtyard.
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BACKGROUND: In 2012, the City Council adopted a Second Amended and Restated Redevelopment Agreement by and among the City of Peoria and EM Properties, Ltd., and several limited liability companies established to operate and maintain the Pere Marquette and Courtyard hotels. They include:
• Pere Marquette Hotel, LLC, an Illinois limited liability company;
• Pere Marquette TIF, INC., an Illinois corporation;
• Pere Marquette Courtyard, LLC, an Illinois limited liability company;
• Pere Marquette Garage MT, LLC, an Illinois limited liability company;
• Pere Marquette Garage, LLC, an Illinois limited liability company; and
• Pere Marquette Historic, LLC, a Delaware limited liability company.
Collectively, these entities are referred to as the “Borrowers”.
As part of this redevelopment agreement, the City agreed to make available to the Borrowers a term loan for the Project in the principal amount of $7,000,000.00 (the “Original Project Loan”), and a promissory note made by the Borrowers, except Pere Marquette Historic, LLC in favor of the City and were secured by a second mortgage on the property and personally guaranteed by Gary E. Matthews.
INDURE Build-to-Core Fund, a limited liability company, Morton Community Bank, South Bank and Caterpillar, Inc. formed the senior lending group (the “Senior Lender”), which held the First Mortgage on the project in the amount of $30,000,000 (later increased to $33,000,000). The City was required to sign a Subordination Agreement with the Senior Lender and the tax credit purchasers that stated, among other things, that the City could not take action against the Redeveloper Borrowers without the consent of the Senior Lender.
The approximate $90,000,000 project to complete the hotel was a substantially complete in early 2015. In July, 2014, Marriott was replaced as manager of the hotels, but remained the franchisor.
The Redeveloper Borrowers made their first payment to the City in April of 2015, and a partial payment to the City in April of 2016 for $200,000. Sometime in 2016, the Borrowers stopped paying Marriott its franchise fees. In the fall of 2016, the Redeveloper Borrowers stopped paying their first mortgage to the Senior Lender. The Borrowers have also not paid any of the 2016 real estate taxes payable in 2017.
Beginning in 2016, the Borrowers made attempts to refinance the Hotels. While always a challenge, those efforts ran into an almost insurmountable roadblock when Caterpillar announced in January 2017 that it was moving its headquarters to Deerfield, IL.
The Senior Lender filed for foreclosure of its First Mortgage in February, 2017. It has been having trouble getting a Receiver appointed because the Borrower is made up the 7 entities above, each of which is allowed under Illinois law to remove a judge without cause, and all of them have availed themselves of this right. The next hearing is scheduled before Judge Gorman on January 11, 2018.
Presently, the Borrower owes the following amounts that are senior to the City’s Second Mortgage:
(i) the Senior Lender claimed it was owed $38,997,376.59 under its First Mortgage, with interest accruing the rate of about $7,164 per day beginning in July, 2017. This amount includes about $32,500,000 of unpaid principal, accrued and unpaid interest, and a yield maintenance payment resulting from default/early pay-off. The yield maintenance has been objected to by the City in formal pleadings. On January 2, 2018, the Senior Lender agreed to waive its claim for the yield maintenance payment and certain related claims objected to by the City and lowered its total claim to $33,944,821.78, provided that the YAM refinancing proposal (see below) is consummated or judgement is entered in favor of the Senior Lender in court on January 11, 2018
(ii) All of the 2016 real estate taxes (payable in 2017) were recently sold for a total of $1,577,485. It will likely cost almost $1,700,000 to pay them off.
In addition, Marriott is owed about $2,700,000 to bring the relationship current and permit the continuation of the franchise relationship. (This amount owed is not a lien on the property so it is not ahead of the City, but needs to be paid in order to keep Marriott as the hotel franchise).
The City’s Second Mortgage, together with accrued and unpaid interest now total $8,199,175.
Main Street Land Trust currently holds a Third Mortgage and is owed which is owed about $2,700,000. There are various other unsecured creditors as well.
YAM Refinancing Proposal
YAM Capital III, LLC, has recently offered the Borrower a $38,500,000 first mortgage loan. The loan is short term (1 year) with YAM (lender) having four 6 month extension options. There are substantial points paid to YAM and its brokers up front (about $2,280,000); the annual interest rate is 10%; and there is a 2 percentage point exit fee whenever the loan is paid off.
As set forth in the proposed refinancing:
(i) Marriott would be paid about $1,000,000, with the Borrower having to commit to a payment plan to pay off the remaining $1,700,000 owed over an agreed upon period of time;
(ii) All of the sold real estate taxes would be paid off; and
(iii) The Senior Lender would be paid approximately $32,500,000 (principal amount only) in full satisfaction of what it is owed.
In connection with the YAM Refinancing, Aimbridge Hospitality, LLC, (“Aimbridge”), will replace the current manager of the Hotels. Aimbridge has a long and very extensive relationship with Marriott, nationally. We have been provided the Aimbridge Term Sheet for each Hotel and are prepared to move forward if the refinancing takes place.
As an incentive to encourage the participation of the City in the refinancing, the Senior Lender has agreed to give the City $2,000,000 of the loan proceeds at closing of the YAM refinancing. The Borrower has requested that its loan from the City (with an outstanding amount of approximately $8,199,175) be reduced by this $2,000,000 payment.
In addition to the financing being expensive, there are two features of the proposal that have been of particular concern to the City:
(i) YAM requires that the City exchange its approximate $8,199,175 Second Mortgage for an $8,199,175 unsecured loan against the Borrower (to be reduced by the $2,000,000 payment of refinancing proceeds). Main Street Land Trust will similarly be required to give up its lien in exchange for an unsecured loan in the same amount which the City has insisted must remain subordinate to the City unsecured loan. The City would also ideally receive subordination agreements from the Borrowers’ other unsecured creditors, and guarantees from Mathews and Brannan and their spouses; and
(ii) Messrs. Mathews and Brannan will remain the managers of the Borrowers.
In a further effort to secure the City’s approval, and mitigate the effect of the loss of the second lien, YAM and the Borrowers are agreeable to the City placing a 4% Hotel SSA Tax on both Hotels. Assuming hotel revenues of $10,000,000 per year, this Hotel SSA Tax would result in a payment to the City of approximately $400,000 annually. The City would not give up its unsecured loan (but would give the Borrowers a pay-off credit in the amount of the collected Hotel SSA Taxes as of the date that the City’s unsecured loan is paid in full). The Hotel SSA Tax will stay in place after the $8,199,175 unsecured loan is paid in full to assist with the repayment of the bonds that assisted in financing this project initially.
FINANCIAL IMPACT: $2,000,000 would be received by the City on the original $7,000,000 project loan. The 4% Hotel SSA Tax will aid in amortizing the City General Obligation Bonds issued in connection with this project.
NEIGHBORHOOD CONCERNS: N/A
IMPACT IF APPROVED: If approved and the YAM refinancing closes, the hotels would remain open and operational and remain Marriott hotels. The refinancing package is very expensive, and unless the hotels are sold in the next year, it is very possible that the YAM would foreclose, threatening the repayment of the City’s unsecured loan.
IMPACT IF DENIED: If denied, the City would risk losing the entire $8,199,175 owed through the foreclosure proceedings. As previously stated, the Senior Lender has filed for foreclosure, appointment of a receiver and sale of the Hotels. If the property is sold in foreclosure, it is likely that it will not sell for enough that will cover the amount owed to the Senior Lender plus accrued and unpaid real estate taxes with the result that the City would realize nothing from its Second Mortgage. Also, the hotels might close for a period of time.
ALTERNATIVES: The City has for some time now attempted to negotiate an arrangement with the Senior Lender that would alleviate some of the pain that will be visited on the City if the property is sold in foreclosure. In response to a specific proposal made by the City to the Senior Lender, the City was offered the $2,000,000 from the Senior Lender as an incentive to consent to the YAM refinancing. The Senior Lender maintains that it will assert its foreclosure rights as they exist under Illinois law with the result that the City and its Second Mortgage will likely get wiped out if the YAM Refinancing does not close.
EEO CERTIFICATION NUMBER: N/A
WHICH OF THE GOALS IDENTIFIED IN THE COUNCIL’S 2014 - 2029 STRATEGIC PLAN DOES THIS RECOMMENDATION ADVANCE?
1. Vibrant Downtown: Riverfront/ Central Business District/ Warehouse District
WHICH CRITICAL SUCCESS FACTOR(S) FROM THE COMPREHENSIVE PLAN DOES THIS RECOMMENDATION IMPLEMENT?
1. Not applicable.
DEPARTMENT: City Manager's Office