Council Agrees (6-1, Price Dissenting) To New 66 Yr Lease For New Queen Mary Lessee Using Up To $23 Million In Public Money To Fund Ship's Immediate Repairs; Mgm't Admits $200+ Million Needed For Add'l Ship Repairs But No Councilmembers Ask Why Or Who's Responsible; Council Majority Declines Request By Price, Favored By City Auditor Doud, To Review Transaction Before Council Approval

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Also Revealed: New Lessee Will Build New Terminal For Carnival So Lessee Can Use Spruce Goose Dome For Special Events

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(Nov. 2, 2016, 9:05 a.m.) -- As seen LIVE on LBREPORT.com, the City Council voted 6-1 (motion by Pearce, Price dissenting, Richardson and Gonzalez in China) at its Nov. 1 meeting to approve a new 66 year lease for new QM lessee/operator/developer Urban Commons. The accompanying agendized city staff report indicates that the lease specifies City-spending of up $23 million in "up-front" funding for immediate ship repairs using $17.2 million (from a total $19 million) debt bond and pledging nearly $6 million in Tidelands funds to back up the debt-bond if anticipated revenue from its lessee (Urban Commons) and sub lessee (Carnival) doesn't materialize as planned. (The lease text itself wasn't attached to the agendized city staff report.)

The Council declined to agree to a request by 3rd dist. Councilwoman Suzie Price to give City Auditor Laura Doud 14 days (Price initially sought 30 days) to review the proposed transaction.

During the Council session, Interim Director of Economic and Property Development, Kathryn McDermoot, disclosed two matters that city management didn't reveal in its agendizing memo:

(1) The Queen Mary requires over $200 million in repairs, and this was known as a result of a survey on the ship' condition conducted by its previous lessee (Garrison) and its current lessee (Urban Commons); and

(2) Lessee Urban Commons plans to build a new cruise ship terminal for its sub lessee Carnival enabling Urban Commons to take possession of the "Spruce Goose" dome (now used by Carnival) for possible special events.

2nd dist. Councilwoman Jeannine Pearce swiftly made a motion to approve the proposed new lease (seconded by Councilman Dee Andrews.), Councilwoman Price then engaged in a colloquy with Assistant City Manager Modica related to the pledge of Tidelands revenues to back up the planned city debt-bond (in other words tying up those Tidelands funds that the public had been told would cover other projects.) City staff replied that the pledge of Tidelands revenue is intended only to obtain a lower bond interest rate (debt servicing) while the actual payments for the bond debt are anticipated to be paid from Urban Commons/Carnival revenue. Staff compared the arrangement to the Aquarium bond financing and called the risk to Tidelands pledged revenue very low ("minute.")

Councilwoman Price noted that the proposal was a large transaction, indicated she was uncomfortable with approving it at this point...and invited City Auditor Laura Doud to come to the podium [who perhaps not coincidentally was seated in the Council Chamber.]

City Auditor Doud said she has a duty to express her concerns, would like to examine the long term plans for the QM and voiced concern over the size of $200+ million in QM repairs that staff now contends are needed.

City management hadn't disclosed the $200+ million figure in its agendizing memo, first citing it (to our knowledge) at the Nov. 1 Council meeting. Management indicated that former lessee Garrison and new lessee Urban Commons had commissioned a survey indicating $200+ million in repairs are required. [After LBREPORT.com first reported the Queen Mary item as agendized on Oct. 25, the PressTelegram reported the $200+ mil repair figure and repair survey on Oct. 26, attributing its information to Ass't City Manager Tom Modica; LBREPORT.com plans to request a copy of the survey, which the PT has also requested.]

No Councilmembers or Mayor Garcia publicly asked management to explain how the $200 million in now-needed repairs had accumulated or who had been in charge of overseeing repairs throughout the years. City management's agendizing memo simply stated: "The total repair needs of the Queen Mary far exceed the amount that will be funded by the proposed upfront funding, but the upfront funding will allow the highest priority repairs to be made in a timely manner and prevents further deterioration of the Queen Mary, and allow the revitalization and development of the associated property to move forward."

As to Councilwoman Price's request for 30 days to let the City Auditor Doud to review the matter, city staff indicated there was some urgency to Council approval of the item, at one point suggesting that a delay might prompt new lessee Urban Commons [current lessee under old lease] to reconsider its position or possibly exit [leaving the City with $200 million in repair costs on its own.]

No Councilmembers supported Councilwoman Price's request for a 30 day (later 14 day) City Auditor review of the transaction...and Councilwoman Stacy Mungo actively opposed it. Councilwoman Mungo volunteered that she and her fiance had just taken a Carnival cruise -- using her own money she noted -- and indicated she believes much could happen within 30 days that might change a company's plans. Mungo added that the item had been agendized for eight days [implying Price had sufficient time to review it] to which Price responded that she had read the agendizing memo but only recently realized that it would pledge Tidelands revenue [effectively preventing that money from being spent elsewhere during the 10 year bond period] although the public has been told those Tidelands sums had been committed to other Tidelands projects.

City management also revealed during its Council presentation that lessee Urban Commons plans to build a new replacement passenger facility terminal for Carnival which would enable Urban Commons to retake use of the former "Spruce Goose" dome for special events. That also wasn't included in management's agendizing memo, which noted that what it called a "key point" in 2015 had been a requirement for Urban Commons to sublease the entire dome to Carnival for expanded terminal operations to accommodate larger cruise ships and "[s]ubsequent to the approval of the terms by the City Council on November 17, 2015, the negotiations between Urban Commons and Carnival to accomplish several of the deal points were more complicated, and more costly to implement than initially anticipated; therefore, the 2015 Amended and Restated Lease was not executed."

In public testimony, Diane Rush (Queen Mary scholar/long-time advocate of preserving the ship as a historical asset) made a verbal Public Records Act request seeking a document from the 1990s that she said relates to infrastructure repairs that were to have been made.

ELB resident Ann Cantrell asked rhetorically "how in the world" the City had allowed the ship to require $200 million in repairs, commenting that it appeared to her that someone hadn't been overseeing funds that were supposed to be spent on repairs. Ms. Cantrell added that the new lessee had indicated it would do wonderful things if the City leased it the developable land, and accordingly the lessee should be responsible for doing the repairs.

Mayor Garcia said nothing pro or con on the agenda item until after the Council vote, when he indicated that he expects great things as the relationship with new lessee continues.

City management's agendizing memo states in pertinent part:

DISCUSSION
On November 17, 2015, the City Council authorized the City Manager to execute an Amended and Restated Lease and Operations Agreement No. 22697 (2015 Amended and Restated Lease) with Urban Commons, LLC (Urban Commons), as Successor Lessee to Garrison Investment Group, LLC (attached). The previous action also authorized the assignment of the 2015 Amended and Restated Lease from Garrison Investment Group, LLC to Urban Commons, LLC. Significant deal points of the 2015 Amended and Restated Lease included making capital improvements to the Queen Mary using City revenue from Carnival Corporation (Carnival) passenger fees. Another key deal point was the requirement for Urban Commons to sublease the entire dome to Carnival for expanded terminal operations to accommodate larger cruise ships, the first of which is expected to arrive in January 2018. The other major deal point was to ensure that Urban Commons had the financial capability to develop the land surrounding the Queen Mary.
Subsequent to the approval of the terms by the City Council on November 17, 2015, the negotiations between Urban Commons and Carnival to accomplish several of the deal points were more complicated, and more costly to implement than initially anticipated; therefore, the 2015 Amended and Restated Lease was not executed.
The City and Urban Commons have now agreed to changes in lease terms associated with urgent Queen Mary repairs and the replacement passenger facility. The proposed changes to the lease terms (2016 Amended and Restated Lease) and the impacts to the City are outlined as follows:
Urgent Queen Mary Repairs
The 2015 Amended and Restated Lease provided that Urban Commons would continue to assume responsibility for maintenance and repair of the Queen Mary. However, due to the age and location of the ship, there are significant structural and utility deficiencies requiring urgent attention. In order to protect this City asset, the 2015 Amended and Restated Lease contemplated that the City would participate by annually pledging revenues to be used for capital projects and historic preservation. These revenues would be deposited into a reserve account, called the Historic Preservation Capital Improvement Plan (HPCIP) fund.
HPCIP funding would come from Passenger Fee Revenues paid annually by Carnival to Urban Commons and passed-through to the City (estimated at $2.15 million) and Base Rent paid annually by Urban Commons ($300,000). The level of urgently needed repairs requires an investment in excess of this annual revenue stream. Therefore, City staff and Urban Commons have negotiated a plan in which the City would provide significant upfront funds for capital repairs and renovations to the Queen Mary. The proposal uses existing cash reserves currently designated for the Queen Mary (up to $5.8 million) and a ten-year City bond issue of about $17.2 million to provide up to $23 million for repairs agreed upon by the City and Urban Commons. Payment of the debt service on the bond issue will come from future Passenger Fee Revenues and Base Rent during the first seven years of the 2016 Amended and Restated Lease. These revenues would have been deposited in the HPCIP fund for preservation, conservation, and restoration of historical assets associated the Queen Mary, but will instead, for the first seven years, be used to pay debt service on the bond issue to partially fund the needed immediate improvements. In addition, Urban Commons will divert a portion of its share of Passenger Fee Revenues in Years 6 to 10.
The total repair needs of the Queen Mary far exceed the amount that will be funded by the proposed upfront funding, but the upfront funding will allow the highest priority repairs to be made in a timely manner and prevents further deterioration of the Queen Mary, and allow the revitalization and development of the associated property to move forward.

The revised lease terms related to the capital repairs of the Queen Mary are as follows:
Amount of HPCIP available to Urban Commons is limited to annual Passenger Fee Revenues and Base Rent paid by Carnival.
2015 Amended and Restated Lease 2016 Amended and Restated Lease

Passenger Fee Revenues paid to the City will be deposited into an HPCIP fund annually to be used for preservation, conservation and restoration associated with historic aspects of the Queen Mary, and maintenance, repair and replacement of specific elements associated with the maritime nature of the ship. No change.

$816,668 per year (estimated) for 5 years Within six months from signing the 2016 Amended and Restated Lease, the City will provide upfront funds of up to $23 million for capital repairs to the Queen Mary.

xxx City's revenue from Passenger Fee Revenues and Base Rent in Years 1-7 will be used toward repayment of City upfront funding or financing; Urban Commons' revenue from Passenger Fee Revenues in Years 6-10 will be used toward repayment of City's upfront funding or financing.

Deposits of Passenger Fee Revenues from Carnival into the HPCIP that would have been made annually will be directed toward repayment of financing in the first ten years of the 2016 Amended and Restated Lease; therefore, HPCIP funds will not be available to Urban Commons in the event of capital repair needs. However, this does not relieve Urban Commons from its responsibility for preservation, conservation, restoration, maintenance and repair of the Queen Mary.

Replacement Passenger Facility
During negotiations with Urban Commons, it became apparent that the use of the dome is integral to Urban Commons' long-term redevelopment plans as an event venue. This necessitated additional negotiation between Urban Commons and Carnival related to the construction of a new replacement passenger facility, which when completed, would make the dome available to Urban Commons. Urban Commons and Carnival have signed a Second Amendment to the Sublease, which details Urban Commons' responsibility to provide a replacement passenger facility to Carnival. The City and Urban Commons have agreed to amend the Revenue Sharing provision of the 2016 Amended and Restated Lease to increase the Passenger Fee Revenues paid to Urban Commons. The additional revenue to Urban Commons will defray the additional cost of construction of the replacement passenger facility and preserve capital for the commercial development of the land.
2015 Amended and Restated Lease 2016 Amended and Restated Lease

Years 1-5, Urban Commons will pay to the City all Passenger Fee Revenue Fee from Carnival, up to a maximum of $2.15 million per year; thereafter, the parties will share excess Passenger Fee Revenues equally. Years 6-15, Passenger Fee Revenues will be split equally, subject to the City receiving a minimum of $1.5 million per year, subject to the City receiving a minimum of $2.15 million per year.
Beginning on Year 16, Passenger Fee Revenues will be split equally; subject to the City receiving a minimum of $2.15 million per year, adjusted from Year 1-16 based on the CPI, with an annual CPI thereafter of not more than 3 percent per year.

The reduction in revenue to the City is estimated at $5.375 million in the first ten years of the 2016 Amended and Restated Lease, which is the length of the bond issue. This will result in lower revenues than otherwise would have been deposited into the HPCIP fund.
City Bond Issuance
The City will provide up to $23 million for immediate repairs to the Queen Mary through a combination of Tidelands cash (up to $5.8 million previously designated for the Queen Mary) and a bond issue secured by a general pledge of Tidelands revenues, but intended to be repaid entirely by revenue received by the City and Urban Commons as previously described.
The bond issue is expected to be sized at approximately $19 million to provide about $17.2 million in construction proceeds. The bond issue would be backed by a pledge of all Tidelands revenue, including oil revenues and the transfer from the Harbor Revenue Fund. This is the same revenue backing used for the Aquarium Bond issue and the same as any future Tidelands debt. This bond issue thus weakens slightly the City's ability to borrow from Tidelands revenues in the future. The actual source of debt service payment is anticipated to be the Passenger Fee Revenues and Base Rent received from Urban Commons, as shown below.
Source of Revenue Expected Revenue

City Passenger/Base Rent Revenue Years 1-5 $2.45 million per year for 5 years

City Passenger/Base Rent Revenue Years 6-7 $1.933 million per year (estimated) for 2 years

Urban Commons Passenger Fee Revenues Years 6-10 (50 percent of its 50 percent share) $816,668 per year (estimated) for 5 years

The bond issue, to be repaid by the Passenger Fee Revenues and Base Rent revenue, has some risk to the City with regard to the sufficiency of the identified funding sources to pay debt service. The Economic and Property Development Department has reviewed the risk and concludes that the risk is low. Carnival is the largest vacation cruise line company in the world and owns other brands, including Princess, Holland America and Cunard. The City terminal is the only terminal owned by Carnival in the United States, which is very strategic to its operations (it is able to control vessel deployment, passenger handling, and terminal operations rather than paying a third party operator). The Southern California market for cruises is consistently strong. The Department believes that the strength of Carnival's business in the City outweighs the risk that Carnival will stop bringing vessels to Long Beach or that its business will deteriorate.
This matter was reviewed by Deputy City Attorney Richard F. Anthony on October 17, 2016 and by Budget Analysis Officer Julissa Jose-Murray on October 18, 2016.
TIMING CONSIDERATIONS
Upon the City Council's approval of the additional terms, the parties are prepared to sign the Amended and Restated Lease.
FISCAL IMPACT
To address urgent repair needs at the Queen Mary, the City will provide up to $23 million through the use of Queen Mary reserves of up to $5.8 million and a bond issue netting approximately $17.2 million in construction proceeds as outlined above. There is a minute risk that market changes may preclude the City from issuing the expected debt in a timely manner. The Financial Management Department believes this to be extremely unlikely. However, if the financing is delayed, the City will temporarily redirect money from existing resources and reserves and replenish that money as soon as debt can be issued.
Additionally, to facilitate private development of the replacement passenger facility for Carnival by Urban Commons, the per Passenger Fee Revenue distribution methodology in the lease agreement will be revised. The proposed methodology will redirect approximately $1 million annually of per Passenger Fee sharing revenues from the City to Urban Commons during Years 6-15. In the unlikely event that the replacement passenger facility is never constructed by Urban Commons, then Urban Commons, at its expense, will be required to construct an alternate facility (subject to City's reasonable approval) intended to provide a general benefit to the public.
The Passenger Fee Revenues being redirected from the HPCIP fund for debt service or the new passenger facility, will not be available for Queen Mary preservation, conservation, restoration, maintenance and repair during that time, although the monies being redirected to pay debt service will be used to fund immediate, instead of future, repairs. Beginning in Year 16 the HPCIP is anticipated to resume receipt of its projected annual funding at $2,450,000.
SUGGESTED ACTION
Approve recommendation.
Respectfully submitted,
KATHRYN MCDERMOTT
INTERIM DIRECTOR OF ECONOMIC AND PROPERTY DEVELOPMENT
APPROVED:
PATRICK H. WEST
CITY MANAGER