Convention Partnership

Convention Partnership DRAFT for Policy Discussion Only Finance Working Group February 15, 2011

Agenda • Cost Estimates • Financing Options • Next Steps

DRAFT for Policy Discussion Only Cost Estimates 3

Cost Estimates Introduction • Tishman and Budget Development Process • Tishman Experience • Relevant Project Experience • Hotel Development

Cost Estimates Introduction • Program Budget Development Process: • Starts with Design Documents • Program matrix • Architectural Narrative • Structural Narrative • Conceptual Plans

Cost Estimates Introduction • Budget Organization • Uniformat • Cost Center Diagrams

Cost Estimates Introduction • Budget Preparation Process • Trade Cost Take Off & Pricing • Soft Costs • Total Development Cost (Not Including Land & Finance Costs) • 2011 Dollars – No Escalation

Cost Estimates Headquarters Hotel • One Option Evaluated in Detail: USPS Site • Program Developed with Input from 5 Hotel Operators • Cost Center Diagrams • Budget Take Off & Pricing Process • Total Budget

Cost Estimates Headquarters Hotel • Site Premiums • Deck Construction • Building Over the Highway • Parking • Steel Trusses • Design Efficiency Compared to Other Hotels • Cost Comparison to Other Hotel Projects

Cost Estimates BCEC Expansion: Multipurpose Space/Exhibit Hall/Meeting Rooms • Three Options Evaluated • Southeast • South • East • Southeast Option Selected for Base Budget

Cost Estimates BCEC Expansion: Multipurpose Space/Exhibit Hall/Meeting Rooms • Cost Center Diagrams • Budget Take Off & Pricing Process • Total Budget • Budget Adjustments for Other Options • East Option • South Option • Site Premiums • Building Next to an Operating Facility

Cost Estimates Construction Costs in Boston • Cost Comparison to Other Cities • Labor • Weather – Winter Conditions • Site Premiums

Cost Estimates Initial Implementation Steps • Land Acquisition • Relocation of MassDOT Testing Lab • Relocation of MassDOT Maintenance Facility • Pre-Permitting for BCEC Expansion • Headquarters Hotel RFP Process • Mid-Priced Hotel Opportunities • Long Term Parking • Truck Marshaling • Reposition Hynes as “Congress Center”

Cost Estimates Initial Implementation Steps

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Financing Options Market Update • Economic recovery is underway • Strong equity market performance driven by strong earnings and improving economy • Treasury rates have risen since October, 2010 on inflationary fears and continuing signs of economic recovery • Recent interest rate increase by China

Financing Options Market Update • Tax-exempt rates have risen dramatically due to market concerns over state and local deficits • Yield curve has steepened over the last three months • Credit spreads continue to remain wide as investor preference is toward high-grade, essential service bonds

Financing Options Initial Implementation Program • The primary source to fund the initial implementation phase could be existing bonding capacity of the Convention Center Fund • Revenues pledged to the Convention Center Fund include: • 2.75% Room Occupancy Tax (Boston, Cambridge, Springfield, Worcester) • 5.7% Room Occupancy Excise Tax (Boston, Cambridge, Springfield) • Additional 4% Room Occupancy Excise Tax (Springfield) • $9/transaction Vehicular Rental Surcharge (Boston) • 5% Sightseeing Surcharge (Boston) • $2/day Parking Surcharge • 6.25% Retail Sales Tax (Boston, Cambridge, Springfield)* • *Increased from original 5%

Financing Options Convention Center Fund • Convention Center Fund • Revenue Assumptions • Future occupancy taxes projected by Pinnacle (October 2009) • Sales taxes, vehicular rental surcharges and sightseeing surcharges are forecast at 0% growth from 2010 levels • Historical collections as reported Statutory Basis Financial reports for the FY 2005 through 2010

Financing Options Initial Implementation Program • Sufficiency test is performed annually • Retained receipts requirement • Additional Bonds Test: • “In-ground” collections (12/18 mos.) ≥ 1.5x MADS; OR • Projected collections over the next 5 years ≥ 1.0x DS; andProjected collections in 5th year ≥ 1.5x MADS; • Bonding capacity is based on the assumption of a single issuance of bonds in FY 2011

Financing Options Initial Implementation Program • Bonding capacity based on the above assumptions is ranges from approximately $169 million to $380 million • Variables include certain assumptions including revenue growth, interest rates, operating costs and capital expenditures • There is sufficient capacity within the Convention Center Fund to finance the initial implementation program

Financing Options Headquarters Hotel (1,000 Rooms) • As part of the initial implementation program, an RFP for the headquarters hotel project will be released • The proposed project will attract private capital given the strength of the Boston lodging market and the attractiveness of Boston as a convention destination • Due to the relatively high level of construction and development costs in Boston, the hotel cannot be financed on a 100% project revenue basis • A financial subsidy will be required

Financing Options Headquarters Hotel (1,000 Rooms) • The following analysis estimates the level of private capital that could be raised for the hotel based on current underwriting standards • The analysis is based on a 1,000 room hotel and operating projections provided by HVS and cost estimates provided by Tishman

Financing Options Private Financing Model (1,000 Rooms) • Underwriting Criteria • Loan-to-value ratio 50-65% • Minimum debt coverage 1.50x • Hold period 7 years • Equity return required 18-20% • Assumptions • Interest rate 7% • Hotel Sale 7th operating year • Exit cap rate 8% • Equity IRR 18% • Capital Structure Tax Revenues Generated (Stabilized)* • NOI per HVS (Stabilized) $29,142,000 Occupancy Tax (8.45%) to CCF $5,673,000 • Debt coverage ratio 1.75x Occupancy Tax (6.00%) to City 4,029,000 • Supportable debt $235,000,000 Sales Tax (6.25%) 2,582,000 • Equity return 18% Property Tax (4% of Revenue) 4,338,000 • Equity investment supported $65,000,000 • Hotel operator key money $10,000,000 • Total private capital $310,000,000 Total $16,622,000 *Does not include income taxes or tax revenue from spending outside hotel.

Financing Options Financing Gap • A financing gap of approximately $200 million exists on the proposed, 1,000 room headquarters hotel project • Certain methods utilized by other municipalities to provide hotel gap funding have included: • Tax abatements; • Favorable ground lease terms; • Land contribution; • Contribution of hotel specific tax revenues; • TIF or other special financing; • Contribution of infrastructure; • Contribution of parking; • Provision of low-cost loans or grants; • Empowerment Zone financing; and, • Increase or impose tax levy and/or surcharges on visitor related activities.

Financing Options Financing Gap Continued… • Recent examples of public support for private convention center hotel development include: • Washington DC (Marriott Marquis) – Issued $249 million of TIF bonds (payable from hotel specific taxes) and backed by District wide occupancy, F&B and vehicle rental tax revenues. The District also provided land in the form of a favorable ground lease • San Diego (Hilton) – Port paid environmental remediation costs, contributed 890 parking stalls and provided ground rent discounts over the first ten years

Financing Options Financing Gap Continued… • Recent examples of public support for private convention center hotel development include: • Los Angeles (JW Marriott/Ritz-Carlton) – Rebate of hotel specific taxes up to 25 years up to a maximum of $270 million • San Antonio (Hyatt) - Issued $208 million of first mortgage tax-exempt Empowerment Zone and taxable bonds backed by hotel revenues, hotel specific City and State taxes and a City backstop with city-wide occupancy taxes

Financing Options BCEC Expansion • The cost estimates for the BCEC expansion project range from $968 million to $1.07 billion. • These estimates include a 25% contingency (actual estimate range in 2011 dollars is $774.8 million to $805.5 million). • A generous contingency has been included to reflect uncertainties, including: • The fact that the cost estimates are based on preliminary designs, not final construction documents; • Potential cost escalation between the time the estimates were completed and the dates construction actually commences. • There are a variety of options for financing the expansion of the BCEC, to be discussed at future Partnership meetings.

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Convention Partnership