SHARKS ICE EXPANSION DATE: June 30, 2020 PROJECT UPDATE

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SHARKS ICE EXPANSION DATE: June 30, 2020 PROJECT UPDATE TO: HONORABLE MAYOR FROM: Julia H. Cooper AND CITY COUNCIL Kim Walesh Matt Cano SUBJECT: SHARKS ICE EXPANSION DATE: June 30, 2020 PROJECT UPDATE Approved Date 6/30/2020 INFORMATION BACKGROUND On December 10, 20191, the City Council accepted the Finance Feasibility Report (“Study”) on the feasibility of financing the proposed expansion of the Solar4America Ice Centre. As part of the Study, the lease payments from Sharks Ice, LLC were set to be sufficient to cover the debt service payments on the lease revenue bonds proposed to be issued by the City of San Jose Financing Authority (“Authority”) to finance the expansion and to refund the outstanding Authority’s 2008E Bonds. Additionally, the City Council directed staff to: • Develop a bond financing structure and prepare the necessary documents for consideration by the Authority Board and City Council; and • Negotiate an Amended and Restated Lease and Management Agreement with Sharks Inc, LLC for the Council’s consideration. On January 28, 20202 the City Council approved the necessary development and planning actions for the expansion project to proceed. These actions included: • Adoption of a resolution adopting the Solar4Amercia Ice Facility Expansion Project (“Project”) Mitigated Negative Declaration and associated Mitigation Monitoring and Reporting Program in accordance with CEQA; 1 December 10, 2019 City Council Meeting, “Financial Feasibility Study Ice Centre Expansion Project” https://sanjose.legistar.com/LegislationDetail.aspx?ID=4263943&GUID=3E5A3385-AB63-4A9B-A7D2- DC45ADEFB470&Options=&Search= 2 January 28, 2020 Council Meeting, “Conforming Rezoning and a Conditional Use Permit for the Property Located at 1500 South 10th Street” (Solar4America Ice Centre) https://sanjose.legistar.com/LegislationDetail.aspx?ID=4304033&GUID=7C831583-9008-4091-AEE2- 2E58CE6FCE4A&Options=&Search= HONORABLE MAYOR AND CITY COUNCIL June 30, 2020 Subject: Sharks Ice Expansion Project Update Page 2 • Approving an ordinance rezoning an approximately 21.23-gross acre site situated at the southeast corner of South 10th Street and East Alma Avenue (1500 South 10th Street) from the R-2 Residential Zoning District to the PQP Public/Quasi-Public Zoning District; and • Adopt a resolution approving, subject to conditions, a Conditional Use Permit to allow the demolition of the San José Municipal Firing Range, the removal of 33 ordinance-size trees and 65 non-ordinance-size trees and to allow the 204,193-square foot expansion of an existing ice rink facility with late night use and an off-site alternative parking arrangement on an approximately 21.23-gross acre site at 1500 South 10th Street. In December 2019, staff presented a financing schedule which contemplated Council approval of the bond financing in March; this date was delayed to early April given the work effort that was underway to prepare the necessary bond documents including the official statement for Council review and approval. At the onset of the shelter-in-place order related to COVID-19 pandemic, staff was anticipating Council approval of the bond financing in April with bond closing in May. This information memorandum provides an update on the status of the expansion of the Project and the proposed bond financing that has been delayed given the shelter-in-place order and the significant shift in the City’s financial situation. ANALYSIS The analysis section of this information memo is divided into three sections to provide the following updates to the City Council: • Current Operations at Solar4America Ice Centre and Impact of COVID-19 • Status of Public Works Project • Status of Bond Financing Current Operations at Solar4America Ice Centre and Impact of COVID-19 The Solar4America Ice Centre (“Ice Centre”) was closed for three months (March 13 to June 14) and Stage 2 reopening occurred on June 15 with youth camps approved by Santa Clara County. The Sharks have reported the following on current operations: • All the youth camps, with all required protocols in place are full; • All the summer youth hockey camps were fully registered and sold out prior to COVID- 19 shelter-in-place; during the shelter-in-place only 6% of registrants requested a refund; and • 4-week youth figure skating camp offered to its customer base sold out in 30 minutes. Attached is a white paper prepared by the Sharks titled, “Sharks Ice Expansion Project – Beyond the Pandemic”. The white paper provides the Sharks’ responses to questions regarding the impact to operations and revenue related to the shelter-in-place order, reopening plan, working HONORABLE MAYOR AND CITY COUNCIL June 30, 2020 Subject: Sharks Ice Expansion Project Update Page 3 premise for future of the business, assumptions of return to another shelter-in-place, COVID-19 effect on expected operations for 2020-21 hockey season, why the project now – why not delay, events planned in existing and expanded facility, financial protections and assurances offered to the City and economic advantages to the City for proceeding with the project. The information presented in the white paper has not been independently verified by the City. It is important to note that during the shelter-in-place order and the closure of the Ice Centre for three months, all payment obligations were made to the City. Status of Public Works Project The construction documents for Solar4America Ice Rink Expansion project are currently under Public Works review. Once reviews are complete, all the permits for construction are likely to be issued in August 2020. To expedite the process, the Department of Public Works will separate permits for the earlier project work. It is expected that permits will be issued to start the demolition, underground utilities, and grading work in the next month, with construction to start late July or early August at the Sharks risk that bonds are not issued. Full construction will last approximately two years from the start date. Status of Bond Financing The financing schedule has been delayed due to the significant shift in the City’s financial situation given the impacts of COVID-19 which has impacted the ability to complete the preparation of the Official Statement for the sale of the bonds. Although it is anticipated the Sharks will make lease payments to the City for the use of the Ice Centre that will be sufficient to pay debt service on the bonds, the obligation to repay the bonds rests with the City. Official statements disclose material information on the bond issue, such as the project to be financed, the repayment source which in this case is the City’s General Fund, a discussion of the City’s financial condition, and credit ratings. Investors use this information to evaluate the credit quality of the issue of the bonds. Staff does not believe we will be able to prepare an accurate and complete description of the City’s financial condition until after adoption of the budget and sales tax data for the final quarter of FY 2019-2020 is received in August. This information is necessary to represent that the Official Statement is accurate and complete in all material respects. As discussed earlier, in December 2019, staff presented the Financial Feasibility Report (“Study”) prepared by an independent feasibility consultant. The Study evaluated the sustainability of the Ice Centre operation after expansion and the Feasibility Consultant presented three operating projection scenarios: (1) conservative; (2); expected and (3) aggressive. Projections in the Study reflected smooth growth over time but considered that event demand and sports participation cycles are not always smooth. These scenarios recognized that business can be affected by unpredictable local and national economic factors; and, demand is often cyclical and based on market conditions. The Study did not contemplate a pandemic which HONORABLE MAYOR AND CITY COUNCIL June 30, 2020 Subject: Sharks Ice Expansion Project Update Page 4 forced a prolonged closure of the facility and a reopening under strict operating guidelines for social distancing and regular/frequent cleaning. In addition to providing three operating scenarios described above and in detail in the December 2019 memorandum to the Council, the Study also provided an economic sensitivity analysis for the Expected Scenario for the first year of stabilized operations in FY 2026 that presented a range of possible outcomes for Ice Centre operations under typical, cyclical market conditions and the impact of a significant economic downturn or recession. The top portion (Summary Sensitivity Analysis – Expected Scenario) of the table below from the December 2019 memorandum depicts sensitivity to a 10%, 20%, and 30% reduction of operating and non- operating revenues in the Expected Scenario. Summary Sensitivity Analysis - Expected Scenario (dollars in thousands) 10% 20% 30% Revenue Revenue Revenue FY2026 Decline Decline Decline Operating Revenue $26,888 $24,199 $21,510 $18,822 Operating Expenses (15,353) (14,098) (12,843) (11,588) Operating Income/(Loss) $11,535 $10,101 $8,668 $7,234 Non-Operating Revenue $3,535 $3,535 $3,535 $3,535 Indirect Expense (868) (868) (868) (868) Net Income/(Loss) $14,202 $12,768 $11,335 $9,901 Current Market Coverage Analysis (dollars in thousands) Bond Scenario – 2 Years of Capitalized Interest - Lease Payments1 $8,876 $8,876 $8,876 $8,876 - Coverage by Net Income 1.60x 1.44x 1.28x 1.12x - Bond Debt Service2 $8,122 $8,122 $8,122 $8,122 - Coverage by Net Income 1.75x 1.57x 1.40x 1.22x Bond Scenario – 3 Years of Capitalized Interest - Lease Payments1 $9,434 $9,434 $9,434 $9,434 - Coverage by Net Income 1.51x 1.35x 1.20x 1.05x - Bond Debt Service2 $8,631 $8,631 $8,631 $8,631 - Coverage by Net Income 1.65x 1.48x 1.31x 1.15x 1 Assumes lease payments based on estimated debt service using current market rates as of June 22, 2020 plus 50 basis points (0.50%); bonds fund $120 million of project costs, refinancing of 2008E Lease Revenue Bonds, capitalized interest, debt service reserves, and issuance costs.
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