11/7/23 Term Sheet
& $200M in Bonds

The 11/07/23 Term Sheet:

Development Term Sheet
(Ann Arbor Hotel and Conference Center Project)

Date: November ___, 2023

This Development Term Sheet is provided for discussion purposes only and is subject to review, change, and approval by all parties. The proposed terms and conditions herein represent the primary business points under which the Developer and the City will enter into negotiations for the proposed ground lease of the Project Site, and the financing and construction of the proposed Project, and shall not be construed as binding upon any party until the mutual execution of all requisite definitive financing, ground lease, construction, and related lease agreements occur. Any obligations that may be deemed to arise under this Term Sheet are contingent on the Developer obtaining all necessary zoning, financing and other approvals. This Term Sheet is proprietary and confidential to the extent permitted by law.

This Development Term Sheet (this “Term Sheet”) outlines a proposal by the Developer to the City of Ann Arbor, a Michigan municipal corporation (the “City”), regarding a ground lease of certain real property owned by the City at the Project Site (as defined below) to the Developer or its assignee, and the financing, construction, equipping, and improvement by the Developer of a hotel and conference center facility on the Project Site, which will benefit of the City and its citizens. Unless expressly stated to the contrary herein, all references to the City herein shall be limited solely to the role of the City as the fee owner and ground lessor of the Project Site. Whenever a reference is made to the City in any capacity other than as the owner of the Project Site, the City is hereinafter referred to as the “Municipality”.

I. Summary of Certain Terms of the Project

The Project:  A 205 room hotel facility, approximately 375,000 square feet in size and an adjoining conference center facility, approximately [60,000] square feet in size (the “Project”), plus up to 105 condominium residences (“Residences”) on top of the structure and an approximate 300 space parking garage to be constructed on the Project Site, with at least 140 spaces open to the public for parking at the same hourly rates then charged to the public in the Municipality’s other parking facilities

Developer:  SI A2 Development LLC, a Delaware limited liability company (the “Developer”), owned by an affiliate of Cobblestone Development & Consulting LLC, a Texas limited liability company (“Cobblestone”), and Sports Hospitality Ventures LLC, a Delaware LLC and/or an affiliate, and a member of the Sports Illustrated Resorts group of companies (“SIR”) (Developer, Cobblestone and SIR, collectively, the “Parties”). Cobblestone will be the manager of the Developer, responsible for overseeing the development of the Project.

Project Site:  Approximately    total acres of real property located at 309, 337, and 339 S. Ashley Street and 104, 116, and 120 W. William Street, Ann Arbor, Michigan 48104 (the “Project Site”). See Exhibit A attached hereto for the legal description of the Project Site. The City currently owns the Project Site and will continue to own the Project Site on and after the Closing.

Project Purpose:  The Developer believes the development of the Project at the Project Site will bring substantial economic benefits to the City, create jobs and employment opportunities and help alleviate the burdens of government. The Project Site is currently used as a surface parking lot. The Project Site will be developed as a mixed-use development including a parking garage (the “Garage”), a hotel and conference center facility (the “Hotel”), which are both a benefit to the City and, depending on the market for same, a residential phase containing the Residences. The City will ground lease the Project Site to the Developer (the “Ground Lessee”), which in turn will offer to sublease Project Site constituting the Garage and the Hotel to the Project Owner (as defined below) (the “Ground Sub-Lease”). In the event the current Downfield Development Authority (“DDA”) elects not to undertake management of the Garage, same shall be operated by a party selected by Developer which is reasonably acceptable to the Municipality, subject to the limitations described above. The payments to be made to the City under the Ground Lease for the first five (5) years will be $930,000 per year, which exceeds the revenues the City is currently receiving from the Project Site. On the fifth anniversary of the term and every five (5) years thereafter, the annual rents during such ensuing five (5) year period will increase by the lesser of CPI or fifteen (15%) percent (computed based on a three (3%) percent annual increase for each year of the prior five (5) year period). After construction, the Project will provide ongoing employment to local residents. The Project will add important hotel and conference center amenities which are currently lacking in the area of the Project Site.

The fee owner of the Project Site is the City, and the entity formed to be the ground sub- lessee of the Developer and the title holder of the Hotel (the “Project Owner”) will be a charitable 501(c)(3) non-profit entity. Although the Project Owner will be a charitable 501(c)(3) non-profit entity, it is still expected that the Project will be subject to Michigan ad valorem property taxes. 

Assuming that the Project owned by the Project Owner will be determined to be subject to property taxes by the local tax assessor, the City agrees to cooperate with Developer and Project Owner in seeking approval by the Washtenaw County Brownfield Redevelopment Authority (WCBRA) of a brownfield plan that includes Tax Increment Finance (“TIF”) revenues to finance eligible brownfield activities (“Brownfield TIF”). The eligible brownfield activities would include eligible environmental activities and eligible non- environmental activities to fund the parking facility and related infrastructure improvements as permitted by Act 381 and in accordance with City of Ann Arbor Brownfield Policy.

Developer understands use tax may still apply, even if materials are exempt from sales tax.

Financing Revenue Bonds:

The Developer intends to seek the issuance of tax-exempt and taxable project revenue bonds in the estimated principal amount of up to $200,000,000 to finance the cost of construction of the entire Project and Garage, but not the Residences, to capitalize interest during the construction period, to provide reserves, and to pay costs of issuance and other costs (the “Revenue Bonds” or “Bonds”), through the Economic Development Corporation of the City of Ann Arbor (“EDC”), if it approves this transaction, or another entity that is a political subdivision or otherwise qualified to act as an issuer of tax-exempt and taxable revenue bonds (the “Issuer”). The proceeds of the Revenue Bonds will be made available by the Issuer to the Developer pursuant to a construction and/or other contract for the development of the Project. The Revenue Bonds will never be a general obligation of the City or of the City’s taxpayers. The final amount of the Revenue Bonds is subject to change. In connection with the issuance of the Bonds, the Municipality will be required to adopt a resolution confirming that the development of the Project by the Project Owner and, in particular, the Hotel is in furtherance of the Municipality’s interest in fostering and encouraging economic development in the Municipality and the surrounding area and one or more resolutions in connection with the issuance of the Revenue Bond by the EDC.

Project Costs:  The total Project costs excluding the Residences are currently estimated to be not more than approximately $150,000,000, including for construction costs, design fees, soft costs, and developer fees; but it is also currently an estimate. The estimated cost of the Residences is $136,500,000. The fee to be paid to the Developer for acting as developer of the Project (excluding the Residences) is required to be a fair market fee. References in this term sheet to the Residences are for informational purposes and to note that the Residences will occupy the “air rights” above the Project.

Expected Revenue Bond:

Closing Date: On or before August 1, 2024.

Construction:

Schedule: Construction of the Project is expected to be completed by the end of 2026.

Developer’s Commitment to Cover City Costs:

Prior to undertaking any further negotiation in relation to the Project, Developer agrees to execute and deliver to the City a separate written agreement whereby Developer agrees to pay for and/or reimburse the City within thirty (30) days of billing all third party costs and expenses incurred by the City in connection with the negotiation of the ground lease and related development documents (including attorney fees) and the evaluation of the proposed Project regardless of whether the parties reach agreement on the form of Ground Lease and/or the Project proceeds.

II. Terms of the Ground Lease

Summary: Subject to the approval of the City Council of the Municipality, the City, as ground lessor, shall enter into a ground lease for the Project Site with the Developer as Ground Lessee, on terms acceptable to the City and the Project Owner (the “Ground Lease”). The form of the Ground Lease must be acceptable to the City, the City Council, the Project Owner, and Developer. It is contemplated, subject to the approval of the City Council, the City will also execute and record an irrevocable and perpetual easement for structural support, utilities, and cost sharing covering the Premises (the “Easement”) to provide assurances to the several owners of the Project, including the owners of the Residences that such components shall have the right to use and access the structural components of the Project and utilities, which easement will survive perpetually following the termination of the Ground Lease. Any reversion of title of the Project to the City following the expiration of the Ground Lease will be subject to the ongoing easement obligations burdening the Premises inuring to owners of the Project and the owners of the Residences. It is further contemplated that Developer will create a site condominium for the Project Site, with one or more condominium units for the Hotel/Conference Center/Parking Facility components (the “Project Units”) and condominium units for the Residences (the “Residential Units”). Upon establishment of the site condominium, the City would become the owner of the Project Units and the Project Units would be subject to the terms of the Ground Lease. The City agrees that it will execute such agreements as may be reasonably requested of the City, in its capacity as the fee owner of the Project Site, to accomplish the formation of the site condominium and to ensure that the owners of the Residential Units would not be adversely affected by any termination of the Ground Lease.

Ground Lease:  The term of the Ground Lease shall be sixty (60) years; and the term of the sublease to the Project Owner shall end on any termination of the Ground Lease, or upon the earlier of (i) sixty (60) years and (ii) the date on which the financing for the Project (and any refunding indebtedness) has been satisfied in full. When the Ground Lease ends, the title to the property rights of the Developer in the Project and the Project Owner’s property rights in the Hotel Project under the ground sub-lease shall revert automatically to the City, subject only to the ownership rights of the owners of the Residences and the Easement. The Ground Lease will include typical terms with the Ground Lessee being responsible to pay Annual Rent, Additional Rent (each as described infra), and all expenses associated with the ongoing concession, management and operation of the Project, as exist from time to time. The Ground Lease or a separate Development Agreement between the EDC and Developer will include the obligation of the Developer to construct the Project, including any necessary or desirable additional improvements from time to time completed and delivered in accordance with the Ground Lease. It is contemplated the Ground Lease will provide “put” and “call” rights for the benefit of the City which would obligate the Developer and/or its permitted assigns to purchase the Premises from the City upon the expiration of the Ground Lease term and allow the Developer and/or Project Owner to require the City to sell the Premises to the Developer and/or its permitted assigns, in each case at a price and on terms to be negotiated.

Annual Rent:  The Ground Lessee shall pay annual rent to the City, without demand or setoff, of $930,000.00 per year for the first five (5) years of the ground lease term. On the fifth (5th) anniversary of the ground lease term and every five (5) years thereafter, the Annual Rent for each year of the next five (5) year period shall increase by the lesser of CPI or 15% (“Annual Rent”).

Additional Rent:  The Ground Lessee also shall pay additional rent as required, in such amounts as are needed to offset documented costs incurred by the City in connection with the Ground Lease. Additional Rent (“Additional Rent”) payable by the Ground Lessee includes, but is not limited to:

1. Taxes (if required), payments in lieu of tax (if exempt from property taxes), charges, and assessments;

2. insurance premiums to maintain casualty and liability insurance on the Project at all times;

3. all amounts due on or with respect to the Revenue Bonds or any loan or other financing obtained to finance the Project and any other loan secured in whole or in part by the interests of the Ground Lessee in the Project or the Project Site; and

4. all other costs, fees, charges, and expenses related to the construction, installation, use, possession, operation, maintenance, and repair of the Project and maintenance of the Project Site.

Ground Lessee Obligation:

Non-Recourse:  The obligation of the Ground Lessee to pay Annual Rent and Additional Rent will be non- recourse to the Developer and will be payable solely from Ground Sub-Lease payments from the Project Owner to it and from other revenue from the Project, it being understood the rental and/or the economic obligations owed to the City under the Ground Lease shall have priority in the payment waterfall mandated by the Bonds.

Purchase Option:  In addition to the “put” and “call” rights noted above which will mature upon the end of the Ground Lease term, the City may, subject to the terms and conditions of the Ground Lease, terminate the Ground Lease and purchase the interests of the Ground Lessee in the Project Site and the Project, at the end of the Ground Lease term or at any time after completion of construction of the Hotel contained in the Project plus [10 years],[to be discussed] if the City, as ground lessor, is not in default at such time and all accrued Rent and Additional Rent payments are made, for an amount equal to (i) $1.00, plus (ii) the outstanding unpaid principal balance of the Bonds and accrued and unpaid interest and premium, if any, thereon, plus (iii) all transfer and transaction costs including attorneys’ fees incurred by the Ground Lessee and the Project Owner in the preparation or review of applicable documentation for such purchase; plus (iv) all fees due at the time of purchase under the Asset Management Agreement to the Asset Manager and under the Operating Agreement to the Operator which will also include the scheduled future fees that are due and payable under those agreements. Also, the Developer will have the right to terminate the Ground Lease at any time and purchase the Project and the Project Site after [   ] years by paying the same amount described above in (i) through (iv) plus an increment equal to the difference between the calculated amount above and FMV (fair market value) of the Ground Lease interest. This Developer’s right to purchase that property for essentially FMV of the Ground Lease interest shall take priority over the City’s rights hereunder to acquire the Project and the Project Site.

Termination:  The City may not terminate the Ground Lease, except in connection with the exercise of its purchase option and/or a default under the Ground Lease which is not cured following notice and the expiration of any extended cure period provided to the Bond holders.

Ownership:  During the term of the Ground Lease, the Project Owner is intended to have the necessary benefits of ownership of the Project for federal tax purposes and to be treated as the owner for financial accounting purposes. Assets (and liabilities) associated with the Project will not be placed on the EDC’s or the Municipality’s balance sheet.

Subleasing and Assignment:

Subject to such use and other limitations and notice requirements as may be contained in the Ground Lease, the Project Owner may assign or sublease its sub-ground lease interest in the Project in furtherance of its normal charitable business operations at the Project Site without the need for consent or approval of the City. In addition, the City shall retain the right to sell and/or finance its reserved fee interest in the Premises, subject to the ongoing interests of the Developer under the Ground Lease, the ground sub-lease interest of the Project Owner and the REA. Further, the Ground Lessee and the Project Owner may each collaterally assign its lease-hold estate to its mortgagee and grant a leasehold mortgage with respect to the Ground Lease or Ground Sub-Lease, as security for the payment of the Revenue Bonds, and such mortgagee shall be permitted to assume the Ground Lease or Ground Sub-Lease as part of its exercise of remedies under the Ground Lease and the loan documents for the Project, in each case without the need for the consent or approval of the City, but subject to certain limitations as may be contained in the Ground Lease. The Project Owner shall not be permitted to transfer or assign its interest in the Project until the Hotel has been constructed and opened to the public.

Control of Project:  The Developer will be responsible for making and shall control the applications to the Municipality for the necessary approvals for design and operation of the Project. The Developer agrees to fully comply with all laws, rules, regulations, and/or ordinances of the Municipality in connection with seeking all entitlements required to construct and operate the Project. The EDC will have the right to review and provide input upon the plans for the Project. Nothing herein, nor in the Ground Lease, and/or the easement shall constitute an agreement by the Municipality to amend and/or modify any process and procedure mandated by the laws, rules, regulations, and/or ordinances of the Municipality applicable to obtaining all of the required permits and approvals for the design and construction and use of the Project. The City, as ground lessor, under the Ground Lease shall have no liability to EDC, the Developer, and/or the Project Owner if the Municipality fails to grant and/or issue any required approval for the design and/or use of the Project. The Developer will oversee the construction of the Project for the Project Owner and will execute the construction contracts in accordance with the Ground Lease and a development agreement among the Developer, the Project Owner and the EDC (the “Development Agreement”).

Operation of Project: Once the Project has been completed, the Project’s success and compliance with the financing documents will be managed, inter alia, by SI A2 Management LLC, a Delaware limited liability company (the “Asset Manager”), owned by Cobblestone and SIR, or one or more of their respective affiliates. SIR will be the manager of the Asset Manager, responsible for the asset management of the Project, and supervision of the Operator, after completion. The Asset Manager’s responsibilities with respect to the Project include, but are not limited to, the following: (i) overseeing the operation of the hotel and conference center; (ii) providing monthly and annual financial reports with respect to operation of hotel and conference center; and (iii) providing information about the operation of the Project to the Ground Sub-Lessee, the EDC and the City on a periodic and regular basis. In addition, the Project Owner, based on the advice of the Asset Manager, will retain a company with experience and a national reputation in management of hotels and conference centers (the “Hotel Operator”) to act as on-site operator for the Project and to manage the operation of the hotel and conference center on a day-to-day basis. The initial Hotel Operator is expected to be SIR or its affiliate operating under the Sports Illustrated Resorts brand.

Management of the Parking:

It is expected the DDA will manage, the new Parking Facilities at the Project Site on commercially reasonable terms to be negotiated for use as a public parking facility, with such portions thereof as may be agreed upon to be available for Hotel.

III. Terms of the Revenue Bonds

Revenue Bonds:

The EDC or another political subdivision will issue not to exceed $200,000,000 of Revenue Bonds to be purchased by an underwriter or lender for the Revenue Bonds (the “Lender”). It is anticipated that the Bonds issued will consist of taxable and tax exempt Bonds.

Interest Rate:

To be determined by Lender.

Term of the Revenue Bonds:

The term of the Revenue Bonds will ultimately be determined by the Lender, but will not exceed the terms of the Ground Lease and will be self-amortizing.

Construction / Capitalized Interest:

The amount of the Revenue Bonds will include capitalized interest to fund interest to be paid to bondholders and Annual Rent and Additional Rent through the construction period, in an amount as determined by the Lender.

Amortization:

To be determined by Lender.

Security for Revenue Bonds:

It is anticipated the Lender (or its Revenue Bond Trustee) will receive a first leasehold mortgage on the interest of the Developer and Project Owner in the Project Site, and a security interest in the Project Owner’s interest in the Project and in all Revenues of the Project. There will also be a 10% Debt Service Revenue Fund and appropriate Operating Revenues.

Construction Period: 

24 months (estimated)

IV. Additional Items

Job Creation and Retention: 

The Developer estimates that the Project will result in the creation of approximately   full-time equivalent construction jobs with an estimated total payroll of $                                      during the construction of the Project and   full-time equivalent permanent jobs with an estimated annual total payroll of $                            within 36 months following the completion of the Project.

City’s Use of the Conference Center:

The Developer will ensure that the Municipality and EDC are able to use the Conference Center for its own meetings and purposes for a minimum number of days [  ] total days per year, to be agreed upon between the Developer and the City and set forth in the Ground Lease.

Indemnification:

The Project Owner will defend and indemnify the City against any cost, expense, liability, claim, lawsuit or other loss asserted against, incurred by or imposed upon the City arising from, related to or in connection with all obligations of the Developer under the Ground Lease, the construction of the Project, the Project Owner’s use of the Project Site and its development and operation of the Project, or any action or failure to act on the part of the EDC, the Project Owner, or any sub-lessee of the Developer, and/or Project Owner, including without limitation, costs, expenses, liabilities, claims, lawsuits or other losses related to damage to or loss of property or injury to or death of any person, and any claim that sales or use taxes are payable with respect to the purchase of building and construction materials incorporated into the Project. The foregoing is intended as a description, is not intended to be either complete or definitive and is subject to final agreement in the definitive documents evidencing the proposed transaction.

City Cooperation:

Subject to the disclaimers and limitations described above, the City, as owner of the Project Site and as landlord under the Ground Lease, will reasonably cooperate to the extent permitted by law with the Developer and will, at the request of the Developer, the EDC and the Project Owner (at no cost to the City and subject to applicable law and appropriate indemnifications), sign authorizations reasonably necessary in connection with the procurement of permits, governmental approvals or similar items in connection with the construction, development, leasing, management and operation of the Project Site and the Project.

In addition to any requirements under any existing and/or future laws, rules, regulations, and/or ordinances as may be adopted by the Municipality, the Project Owner and the Developer will agree to seek and obtain, as required, the approval of the Municipality with respect to material changes in use of the Project Site or Project which, under applicable law, require approvals from the Municipality (e.g., any significant additions or renovations after completion of the Project) and on request, but at no cost to itself, the City, in its capacity as the landlord under the Ground Lease, will reasonably cooperate to the extent permitted by law with the Developer, the EDC and the Project Owner in facilitating or implementing such transactions it determines to be beneficial to the Project and not detrimental to the interests of the City.

Additional Requirements:

In addition to the items otherwise identified above, the following will be required prior to the Financing Closing Date, all at the sole cost and expense of Developer (which shall include reimbursement from Bond proceeds):

1. confirmation by the Developer of acceptable environmental condition of the Project Site;

2. confirmation by the Developer of appropriate zoning for the Project;

3. confirmation by the Developer of adequate access to roads, utilities, water and sewer and other amenities for the Project;

4. an acceptable survey and/or plat of the Project Site;

5. an acceptable title insurance policy establishing that City has fee title to the Project Site;

6. evidence of all required insurance, including required loss payee and additional insured certificates; and

7. an acceptable project cost budget relating to the Project.

8. confirmation by the Developer that the City has obtained all required approvals to enter into the Ground Lease and take other actions required of it in regard to the Project.

Additional Potential Credit Enhancements:

1. the Developer may discuss with Washtenaw County and Destination Ann Arbor the potential contribution of a certain portion of the bed tax generated by the Project toward the costs of the Project; and

2. the Developer may discuss with the University of Michigan its potential periodic use of the hotel facilities by University football and basketball teams and by visiting teams.

V. Terms Not Binding 

The provisions of this Term Sheet are not intended to be binding upon the City or Developer; but are an outline of their current discussions regarding the Project. If, before the execution of the Ground Lease or the issuance of the Revenue Bonds, there are any substantial changes to the Project or the proposed financing, the City and the Developer each reserve the right to cancel or amend the terms of this Term Sheet. Successful closing of this transaction is subject to, inter alia, obtaining an acceptable Lender commitment, the issuance of all required permits and approvals by the Municipality, approval of the City Council, the approval of the Project Owner and Developer, delivery of satisfactory legal opinions, completion of due diligence, and completion of final documentation. The City will not be responsible to the Developer, the Project Owner or any other entity for any fees or expenses if the transaction does not close.