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HomeMy WebLinkAbout2000-03-27 City Council (21)City of Palo Alto C ty Manager’s RePlr5 TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: CITY MANAGER CMR: 181:00 DATE:MARCH 27, 2000 SUBJECT:APPROVAL OF ASSIGNMENT OF DEVELOPMENT RIGHTS FOR STANFORD’S SAND HILL ROAD SENIOR HOUSING PROJECT FROM STANFORD UNIVERSITY TO CC-PALO ALTO, INC., A SUBSIDIARY OF CLASSIC RESIDENCE BY HYATT, INCLUDING RELEASE OF HYATT FROM STANFORD OBLIGATION REPORT IN BRIEF The 1997 Sand Hill Corridor Development Agreement signed by Stanford University and the City of Palo Alto allows Stanford to transfer the development rights for any of the Sand Hill Corridor projects with the consent of the City Council. Stanford University has requested City Council approval of the transfer of the development rights for the Senior Housing project from Stanford University to CC-Palo Alto, Inc., a subsidiary of Classic Residences by Hyatt. Stanford is also requesting that Hyatt be released from certain Sand Hill development agreement obligations. CMR:181:00 Page 1 of 4 RECOMMENDATION Staff recommends that the City Council adopt a motion consenting to the assignment of the development rights for the Sand Hill Road Senior Housing project from Stanford University to CC-Palo Alto, Inc., a subsidiary of Classic Residences by Hyatt. BACKGROUND On June 30, 1997 the City Council approved a Development Agreement with Stanford University for the Sand Hill Corridor projects (i.e., the Stanford West Apartments, Senior Housing project, expansion of the Stanford Shopping Center and various roadway modifications). The City’s voters approved the Development Agreement in November 1997. Section 18(0 of the Development Agreement provides that Stanford has the right to sell, transfer or assign the property, in whole or in part providing that the "purchaser, transferee or assignee expressly and unconditionally assume all the duties and obligations of Stanford" under the Agreement. While this provision applies to all of the Sand Hill Corridor projects, it was acknowledged in 1997 that the Senior Housing project was most likely to be transferred given the complexities involved in developing senior housing. DISCUSSION Stanford and Cc-Palo Alto, Inc. has entered into an Assignment and Assumption Agreement for the Sand Hill Senior Housing project (Attachment I). Section 1.3 of the Agreement has caused the most discussion between staff from the City, Stanford and Hyatt. Section 1.3 identifies four Stanford obligations for which CC-Palo Alto, Inc. would have no responsibility and thus will remain with Stanford after the assignment of the development rights. The four obligations are: 1.The below market rate (BMR) housing requirements, all of which are satisfied on the Stanford West Apartment site; 2.The subdivision maintenance agreement approved by the City Council on May 24, 1999; 3. Construction of any public roadway-related improvements including the widening of Sand Hill Road; and 4. The operation of the Marguerite shuttle bus. Excluding CC-Palo Alto, Inc. from the four obligations is inconsistent with Section 18(f) of the Development Agreement quoted above which states that the assignee shall assume "all the duties and obligations of Stanford .... " However, the four items are incorporated into other Sand Hill Corridor project approvals (BMR housing in the Stanford West Apartment project; the subdivision maintenance agreement covers all of the projects; roadways are a separate approval and a condition of the Stanford West Apartment and Shopping Center projects; and the shuttle bus is a condition of the Stanford West CMR:181:00 Page 2 of 4 Apartments, Roadways and Shopping Center projects). From Stanford’s perspective, the four obligations are inherently the University’s responsibility and should not be delegated to a separate developer of senior housing. ’ From HyatCs perspective, assumption of the four obligations, which are off site and beyond its control, would make the project impossible to finance. On January 26, 2000 City, Stanford and Hyatt representatives met and reviewed the proposed assignment. In response to City staff questions regarding the ¯ financing of the project with and without the four obligations, Hyatt submitted letters dated February 18, 2000 from John Kevin Poorman and Jerry Falcon of Classic Residences by Hyatt (Attachments II and III) and a letter from Bank Paribas dated February 8, 2000 (attached to Attachment III). Hyatt’s conclusion is that if the four obligations become the responsibility of Hyatt, the senior housing can not be financed. City staff’s conclusion is that the four obligations have always been regarded as Stanford’s responsibility. The four items span all of the Sand Hill Corridor approvals. Shifting the four items to Hyatt would be of no benefit to the City and could cause future confusion regarding implementation responsibilities, details and procedures. Therefore, staff recommends approval of the Assignment. ALTERNATIVES TO STAFF RECOMMENDATION Alternatives available to the City Council include rejection of the Assignment Agreement and approval with the condition that some or all of the four obligations proposed to be retained by Stanford be shifted to Classic.Residences by Hyatt. RESOURCE IMPACT Approval of the staff recommendation will have no impact on City resources. POLICY IMPLICATIONS The Senior Housing project, whether developed by Stanford or Hyatt, will conform with the City Council’s 1997 approvals. As such, approval or rejection of the Assignment Agreement is not a policy issue. To the extent that City policy encourages development of housing, having a specialized senior housing developer undertake the Senior Housing project may increase the likelihood of the housing being constructed and thus approving the Assignment Agreement would be consistent with City policy. Finally, retention of the four identified obligations by Stanford is consistent with previous Council assumptions that these items would be Stanford’s responsibility. ENVIRONMENTAL REVIEW Acting on the Assignment Agreement is not a project under the California Environmental Quality Act. The Sand Hill Corridor projects were approved with a Certified Environmental Impact Report. No further environmental action or findings are necessary. CMR:181:00 Page 3 of 4 ATTACHMENTS I.Assumption Agreement II.2/18/00 Letter from John Kevin Poorman III. 2/18/00 Letter from Jerry Falcon with 2/8/00 letter attached PREPARED BY: Kenneth R. Schreiber,/~oordinat~d Hill Corridor Projects _ CITY MANAGER APPROVAL: ~,~/ ~ JUI~’LEMIN~J / -)Cil~ Manager Q~ co:Stanford Management Company (Bob Reidy, Bill Phillips, Diane Healey, Jim Inglis) Stanford University (Andy Coe) Classic Residences by Hyatt (Jerry Falcon, John Kevin Poorman) CMR:181:00 Page 4 of 4 MAR. 9,2000u12:31P#M STANFORD MANAGEMENT 650 854 9268 NO, 111 Re~ording ~.equested by and When ~e~orded Ream to: Classic ~esiden~e by Hya~ ¯ 200 W. Madison Street, Suite 3700 Chioago, IL 60606-3416 Attn: John Kevin Poorman, ~sq. DRAFT ATTACHMENT~I 02/23/00 ................................ sPAc~ A~OV~ Tl-r[s LIN~ ]=OR r~CO~X’S US~ ................................. ~G~NT AND ASs~TION AG~E~T ~evdo~me~t ~reement - SeMor Hou~ project ’THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("A~reem~t"). is made and entered into by and b¢~¢en TH~ B0~ 0F ~USTEES 0F T~ LE~ STANF0~ ~OR ~WE~ITY, a body having co.orate powers und~ ~e laws of ~e State of Califo~ia ("S~nford"), and CC-PALO ALTO, ~C., a Delaware co~oration ("Assignee"). RECITALS A. Stanford operates The Leland Stanford Junior University (commonly known as Stanford University). Stanford owns approximately 22.4 acres of unimproved real property, being a portion of the lands of Stanford University, located in the City of Pale Alto (the "City"), County of Santa Clara, State of California, and more particularly described in Exhibit A attached (the "Senior Housing Site"). B. Stanford and Assignee desire to enter into a Ground Lea~e for the Senior Housing Site (the "Ground Lease"), pursuant to which Assignee would develop, market and operate on the Senior Housing Site a. li,ensed seni0r citizen continuing care retirement community comprise~t generally of ul~ to 388 residential units, approximately 38 a.~sisted living units, approximately 46 sMlled nursing rooms, and approximately 24 Alzheimer’s and dementia units (the "Senior Housing Project"). .. C. Stanford and the City entered into that certain Development Agreement dated ¯ June 30, 1997 and recorded in the Official Records of Santa Clara County on December 3, 1997 as Document No. 13962429 (the "Development Agreement"), References in this Agreement to the "Development Agreement" shall include, without limitation, all those certain Conditions of Approval and Mitigation Measures contained in or’referenced by the Development Ag’reement. D. Stanford now desires to a~sign to Assignee, as of the effective d~m of the Ground Lease and subject to the City’s cor~sent, all of Stanford’s rights under the Development Agreement with respect to the Senior Housing Project (a~ described and defined more particularly in Section 1.3 below, the "Senior Housing ProJee, Rights and Obligationa"), and Assignee now de~ires to accept 30119293,4/04678-0220 02/23100 02:31 PM MAR,9, 2000u12:31PMAM STANFORD MANAGEMENT 650 854 9268 NQ,._1.1,1.221 P,,.7 7/14 --- in Section 1.4 below) and subject to the ¢ity:s consent, NOW THEREFOIL~, in consideration of these premises, and of.the agreements, covenants and conditions contained in this Agreement and the Ground Lease, the parties agree as follows: ARTICLE 1 ~ENT AND ASSUMPTIOQ ,OF SE_.E.~__OR HOUS~G P]~LO~’~¢T RIGHTS AND__OBLIGAf=!ON_~ 1.1 ~, Stanford assigns to Assignee, as of the Eff~-ctiv~e Date (as defined in Section 1.4 below), all of Stanford’s rights, title and interest in and to the Senior Housing Project Pdghts and Obligations. 1.2 Assqmptio~n. As of the Effective Date, Assignee accepts Stanford’s assignment of the Senior Housing Project Rights and Obligations and assumes and agro¢s to perform all of Stanford’~ liabilities and obligations with r~peot to the Senior Housing Project Rights and Obligations. 1.3 Senior Housin~ Pro|eet_~_ghts and Obligations,. For purposes of this Agreement, the term "Senior Housing Project P,.ights. and Obligations" shall mean and include all of the rights and obIigations of Stanford acceding on. and after the Effective Date under the Devalol~mcnt Agreement that: (a) are set forth in those sections of the Developn~em Agre~’mem (including without limitation the Conditions of Approval and Mitigation Measures) tha’t apply specifically to the Senior Housing Project, to the ¢xtent allocable to th, Ssnior Housing Site or the Senior Housing Project; or (b) directly or primarily relate to or arise out of th, development, occupancy, use or opera~ion of the Senior Housing Project; or (o) are performable, in whole or in part, on the S~nior Housing Site; provided, howcv,r, that the Senior Housing Project Rights and Obligations shall not mean or include any of.the obligations of Stanford that relate to or arise in corm,orion with: (w) that certain Subdivision and Below Market Rate Housing Agreement Bstween Stanford University and the City of Pale Alto entered into on May 24, 1999 and recorded in th~ Official Records o~’ the County on May26, 1999 as Document No. 14831997 (the "Below Market Rate Housing Agreement"); (x) that certain Sand Hill cruder Ma|ntenanco Agreement b~two¢n Stanford and theC ’City entered into on May 24, 1999 and r¢oord¢d in the Official Records of the County on May 27, 1999 as Document No, 14833454 (the "Maintenance Agreement"); (y) th~ construction of any public roadway-rdat~d improv¢ments, including without limitation the widening of Sand Hill goad; and (z) the operation of the Marguerite Shuttle. 1.~ .Ffffeetive D_ate; Subs.equ~on of Ground L~as~. For purpos,s of thisAgreement, ~he "~ffectiv¢ Date" shall be th~ later of: (a) the date the City gran~ its consent to th~ assignment and assumption of the Senior Housing Project Rights and Obligations by exe,uting this Agr¢emem; or (b) the date set forth in the preamble of *he Ground Lease as the "Effective Date" thereof. Upon any subsequent termination of the Ground L~ase, the assignment and assumption of the S¢nior Housing ~Projeot RighL~ and Obligations sha]l imtoraatica]ly terminate and all of the Senior Housing Project Rights and Obligations shaI] automatically rever~ tb Stanford without any ~rther assfgnmem or other documematlon. 3011 B293,4/0~678-0220 02/;~3/00 02:31 PM MAR, 9,2000u12:32PM~v~ STANFORD MANAGEMENT 650 854 9268 NO, 11!~21’P,,.88/14 ARTICLE 2 2.1 ,S~snford’.s Con~Inuin L|abili~ or Senior Houslne P~ ~. Notwithstanding Assi~nee’s assumption of th~ S~nior Housing Project ~i~ts and Obligations, Stanford shall remain liable to the Ci~ for all of the obligations and liabilities of "SmnfoM" or "Subdivider" undor~¢ Development Agro~menr, Below Market Rate Housing A~sem~nr and Main~rnan¢o A~rmcnt. ~ zh~ even~ ors Stanfo~ Breach (as defined bvlo~), the Ci~ may exercis~ against Stanford any of the ~ghzs and r~edies that ~e ~hen available to zh~ Ci~ under the D~velopmsn~ A~enr, Below Marker ~te Housing A~eement or Maintenance Agrremen~ (subject zo such force maj~ure, no~c¢ and cure pro~ ~s~ons as may be set ~o~h therein), a~ law or in ~qui~. For pu~oses of ~js A~eemvnt, "Stanford Breach" shall~m~an and in~lud~ the br~ach of any of the obligations of Stanford under ~o Drvciopm~t A~em~m, Below Market ~t~ Hous~g A~esm~t or Maintenance A~cemcnt, inrluding without limitation a breach ~sing ou~ of Assi~ee’s br~ach of any of~e Senior ~ousing Project ~ghm ~nd Obligations. 2,2 No..~Q_Assi~nee LlabiliW ~’or Stanford Oblieations~ Assignee shall not be. liable for any obligations or liabilities of S~anford under the Development Agreement, exoept for thv Senior Housing Project ~ghts and Obligations, and Assi~ee’ shall not be liable for ~y obligations or liabilities of Stanford ~az r~la~e ~o or a~s~ in connection with: (a) ~h~ B~low Marko~ ~to ~ousing A~e~ont; (b)the Maintenance A~osmont; (o)~h~ oons~c~on of any publi~ roadway-zola~d improvements, ~ncludlng without limi~on ~ widening of Sand Hill Road; and (d) th~ the Mar~ts ShuRl~. In the event of a S~nford Broach ~ar dose nor a~ss out of br~aeh of any o£ th~ Son,or Housing Project ~gh~s and Obliga~ons, rhr Ci~ shall not sx~rcise any of th~ ~gh~s or r~modi~s available zo it in o~ecdon with the Stanford Br~ach in a man~er tha~ would adv~sly affect ~s~ or ~hc dev~lopm~, use, opora~on or o~vupancy of tho Hearing Project, 2.3 i.Cffi~e~’es: S~. If ASsignee fails to comply ~vith any Senior Housing Project Rights and Obligations, the Citymay exercise against Assignee ar~y of the righ~:s and remedies that are then available to the City under the Development Agreement (subject re such force majeure, notice and cure provisions as may be set forth therein), at law or in equity. In addition, Stanford shall have the right, but not the obligation, upon not less than five business days prior written notice to Assignee, to cure or remedy such failure by Assignee, if and to the extent such failure could materially and adversely affect Stanford’s fights or.benefits under the Development - Agreement, but only if Assignee fails to correct or cure the failure within the five-business day period (’or, if the faiiure is of a nature that would reasonably require more than ~ive business days to - correct or cure, if Assignee fails to commence flae corr.eetion or cure within the five-business day period and thereafter diligently prosecute the cure to completion), Assignee shall reimburse Stanford prompdy upon demand for all costs r~asonably incurred by Stanford in effecring any such cure or remedy. 2.d ~. Assignee shall indemnify, defend and hold Stanford and the City harmless from and against any and all claims, damages, losses, liabilities and ~osts, including without limitation reasonable auorneys’ fees, costs and disbursements, to the exten~ arising from or r~lating to any failure by Assignee or its employees, officers, agents, contractors, guests or invitees 30119293.4/04678,0220 02/23/00 02:31 PM MAR, 9,2000v12:32PM~’’ STANFORD MANAGEMENT 650 854 9268 NO, 1]!~2I V,,.9 9/14 to comply with any or all of the Senior Housing Project Rights and Obligations; provided, however, that in no event shall Assignee be liable for any ptmitiv¢, cons,quential or o~her speculative damages. ARTICLE 3 ¯ GENERAL PR~ 3.1 ~. All notices, invoices and other communications required or permitted under this Agreement shall be made in writing, and shall b, delivered to the following addresses, or t~) such other address,s as the parties may designate in writing from time to time: ~ If to Stanford: with a copy to: If to Assignee: with a copy to: Stanford Management Company 2770 Sand Hill Road Menlo Park, CA 94025 Attention: Managing Director of Real Estate Stanford University Once of the G©ncr~l Counsel Building 170 Stanford University Stanford, CA 94305 Attention: C/*octal Counsel CC-Pa!o Alto, Inc. 200 W. Madison Street, Suit, 3700 Chicago, EL 60606-3416 Attention: Presidem Classic Residence by Hyatt 200 W. Madison Street, Suite 3700 Chicago, TL 60606-3416 Attention: lohn Kevin Poorman 3.2 Est0ppel Certtficateto Within ten days after receipt of a written request from time to time, either parry shall execute and deliver to the other, or to an auditor or prospective lender or purchaser, a wrltt¢n statement certifying: (a) that the Development Ag~m~nt is unmodified and in -~11 force and sffe¢t (or, if three hays bema modifications, that the Developm,nt Agrecanent is in full force and effect, and stating the 0ate and nature of such modifications): (b) that ~here at, no current defaults under the Development Agreement by the City and eith¢r Stanford or Assign,e, as lhe case may be (or, if defaults are asserted, so describing with reasonable speoificity); (c)that this Agreement iS unmddified and in full force and effect (or, if there have been modifications, that this Agreement is in full foro, and or’foot, and stating the dat~ and nature of such modifications); and (d) such oth±r matters as may b, reasonably requested. 3.3 . ~. In the event of any legal or cqultable proceeding in ~omlecfion with this Agreement, the prevailing party in such proceeding, or the nondismissing parry where the dismissal occurs other than by reason era sertlemen.t, shal] b, ,ntitlsd to r~cover its rcasonablo costs 02/23/00 02:31 PM MAR,9,2000U12:32PMAM STANFORD MANAGEMENT 650 854 9268 and expenses, including without limitation reasonable attorneys’ tees, costs and disbursements paid or incurred in g6od faith at the arbitration, pre-trial, trial and appellate levels, and in mforcing any award orjudgrnem granted pursuant thereto. For purposes of this Agreement, the pre aihng part’yy shall be the party which obtains substantially the result sought, whether by dismissal, award or judgment, 3,4 ~, No delay or omission by either party’ in exercising any right, remedy, election or option accruing upon the noncompliance or failure of performance by the other party. under the provisions of this Agreement shall consti~te an mpa~rment or waiver of" any such, right,iremedy, election or option. No alleged waiver shall be valid or effective unless it is set forth in a writing executed by the parry against whom the waiver is claimed. A waiver by either party of any of the covenants, conditions or obligations to be performed by the other party shall not be construed as a waiver of any subsequent breach o£the same or any other covenants, conditions or obligations. 3.5 AmendmeR[. This Agreement may not be amended by oral agreement, It may be amended only by a written agreement signed by both Stanford and Assignee and consented to in .writingby the City. . 3.6 Successors and Assit~n~, TMs Agremnent shall be binding on and inure to the benefit of’the parties and their respecti~e-e successors and assigns’. 3.7 He Joint Venture_, Nothing contained herein shall be construed as creating a joint venture, agency, or any other relationship between the parties hereto other than that of assignor and 3.8 ~, If any term or provision of this Agreement or the application thereof to any person or circumstance is found by a court of competent jurisdiction to be invalid, or unenforceable, the remainder of’ this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each remaining term and provision of" this Agreement shall be valid and enforceable to the full extent permitted by law. 3.9 ~. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 3.10 No Third Party_ Beneficiaries. This Agreement shall not be deemed or construed to ~onfer any tights, title or interest, including ~ithout limitation any third patty beneficiary status or right to enforce any provision of this Agreement, upon any person or entity other than Stanford, Assignee and the City. 30119~93,4/0~67~-02~0 MAR, 9,2000v12:33PM~V’ STANFORD MANAGEMENT 650 854 9268 N0,11!~21P,..1111/14 3,11 Time of the E~. Time is of the essence in me perfon’nance by eaCh party ofit~ obligations under this Agreem~t. IN WITNESS WHEREOF, Stanford and Assignee have executed this Agreement by proper persons thereunto duly authorized, to be effective as of the Effective Date. ASSIGNEE CC-PALO ALTO, INC. STANFORD TI~ BOARD OF TRUSTEES OF THE LELAND STANFORD .IUNIOR UNIVERSITY CI__I_I_I_I_I_I_I_I~_OF P.~LO ALTO’$ The City hereby consents to the assignment and assumption of the Senior Housing Project Rights and Obligations set forth in this Agreement, agrees to the terms and condition~ set forth herein, and agrees .that th~ Assignee and its lenders shall have the rights and benefits set forth in Sections 18(0 (Certificate of Compliance) and 180) (Mortgagee Protection) of r~e Development Agreement. Nothing in this Agreement, or the City’s consent thereto, shalI b~ deemed to amend the Development Agreement or release Stanford from any of its obligations and liabilities under the Development Agreement and it shall continue to remain frilly bound and liable for the p~rforman~e of all the obligations of Stanford thereunder notwithstanding the assignmen! and assumption set forth in r.his Agre~mont, or ~he City’s consent thereto. APPROVED AS TO FORM:CITY OF PALO ALTO City Attorney City Manager APPROVED: ~re~tor ~fPlanning " Community Developmem Dated:~___.=,2000 30119253.4/0,~678.02.20 MAR,9, 2000!J12:33PMAM STANFORD MANAGEMENT 650 854 9268 NO.,.j,i,l~221 H,,,i212/14 That certain real proloorry located in the City of Pale A|ro, County of S~.nta Clam, ~;~ate of California, described as follows: Lots 5 and 6, as shown in that certain subdivision map entitled "Tract No, 9139 ,,. Stanford West" recorded in the Official Re, cords of th~ Coun~ ~n May 26, 1999 in Book 716 of Maps a~ Pages 10 through 18, inclusive. ’ ATTACHMENT II H YAT T February 18, 2000 John Kevin Poorman Vice-Chairman Classic Residence by Hyatt 200 W. Madison St., Ste. 3700 Chicago, IL USA 60606-3417 Telephone (312) 750-8415 Facsimile (312) 750-8597 kpoorman@hyattclassic.com VIA FEDERAL EXPRESS Mr. Ariel Calonne City Attomey City of Palo Alto 250 Hamilton Avenue Palo Alto, California 94303 RE: Proposed Classic Residence by Hyatt at Palo Alto Dear Mr. Calonne: It is my understanding that you have requested an explanation as to why we believe it is necessary for the City of Palo Alto to consent to the partial assignment and assumption of the development obligations of Stanford to CC~Palo Alto, Inc. We will be investing a substantial sum of money as equity in the proposed senior project. It is our current estimate that we will be investing more than $75 million in equity, and we hope to obtain a loan in excess of $150 million. For essentially the same reasons described in the Banq Paribas letter dated February 8, 2000, to Peter Muhlbach, a copy of which is being furnished to you concurrently, we are unwilling to make this investment if Stanford’s failure to comply with obligations under the Development Agreement as it relates to projects other than the senior housing project could lead to material and adverse consequences to our investment and the senior housing project. More importantly, the impact on elderly residents and potential senior residents would be disastrous. If Stanford is unable to comply with its other obligations related to the non-senior housing projects and the City elects to exercise remedies against the senior housing project, elderly residents and prospective residents may suffer severe financial and emotional consequences. For example, if a prospective resident has sold her home, she may not have a place to move into if the City exercises its remedies under the Development Agreement. Additionally, some of the possible remedies which may be available to the City could lead to a closure of the senior project and the unsavory prospect of requiring elderly residents to move. We hope that you will conclude that the ability to enforce remedies against the senior site for defaults under the Development Agreement related to other projects may not be something the City would really desire to do. Mr. Ariel Calonne February 18, 2000 Page 2 I am available to discuss this matter at your convenience. Yours very truly, cc:Ms. June Fleming, City Manager ~;Mr.~Ken~Schreiber, Consultant ~. Mr. Jerry Falcon Mr. Scott Ogilvie Mr. Carl Seneker Ms. Diane Healey Mr. Michael Greene ATTACHMENT III H ¥AT T February 18, 2000 ]em/Falcon Senior Vice President of Development Classic Residence by Hyatt 200 W. Madison St., Ste. 3700 Chicago, IL USA 60606-3417 Telephone (312) 750-8297 Facsimile (312) 920-6101 jfalcon@hyattclassic.com Via Federal Express - Priority Overnight Mr. Ariel Calonne City Attorney City of Palo Alto 250 Hamilton Avenue Palo Alto, California 94303 Re:Request for the City of Palo Alto’s Consent to the Proposed Assignment and Assumption Agreement (Development Agreement . . . Senior Housing Proiect) By and Between the Board of Trustees of the LeLand Stanford Junior University, Stanford and CC-Palo Alto, Inc. ("Assignee"), (the "Agreement") Dear Mr. Calonne: In support of the request for the City of Palo Alto Act to consent to the above-captioned Agreement, I have enclosed herewith a copy of a letter from Mr. Russell A. Pomerantz, Director of Banque Paribas, a major lending institution specific to continuing care retirement communities. Paribas has financed a number of our communities and has financed many other continuing care retirement communities. As stated in the Paribas letter, absent a consent to the Agreement, the Senior Site is not financeable. Please contact me regarding any questions or clarifications you may need on this matter. Very truly yours, Vi~ President of Development Classic R’esideuce by Hyatt Ellclosure Ms.June Fleming, City Manager (w/enclosure) Mr.Ken Schreiber, Consultant (w/enclosure) Mr.Kevin Poorman (w/enclosure) Mr.Scott Ogilvie (w/enclosure) Mr.Carl Seneker, Esq. (w/enclosure) Ms.Diane Healey (w/enclosure) Mr.Michael Greene, Esq. (w/enclosure) PARIBAS Russell A. Pomerantz Director 212-1341-2561 February 8, 2000 Peter Muhlbach Senior Vice President of Finance Classic Residence by Hyatt 200 West Madison St., Suite 3700 Cliicago, IL 60606 Fax: (312) 920-6115 RE: Classic Residence by Hyatt at Palo Alto Dear Mr. Mulalbach: We have discussed the possible interest of Paribas in providing the construction financing for a senior citizen continuing care retirement complex in California that would be located adjacent to Stanford University and known as Classic Residence by Hyatt at Palo Alto ("CC-Palo Alto"). We understand that Classic Residence by Hyatt ("CRbH") or an affiliated company is proposing to ground lease an approximately 22 acre undeveloped site from Stanford University and construct an upscale senior citizen continuing care retirement community consisting of approximately 350 independent living residential units and smaller numbers of assisted living, skilled nursing, and Alzheimer’s and dementia units. The facility would be licensed by the appropriate governmental authorities and would be operated by a CRbH affiliate. While we have not yet received any loan application from CRbH or commenced any tmderwriting review of the proposed project, you have requested that we advise you whether certain features of the contemplated arrangements with Stanford University would be consistent with our underwriting criteria and requirements for construction financing. At this time, we have not been provided with a copy of the proposed Ground Lease or related documents, and therefore we are not in a position to confirrn whether the provisions of those documents are adequate to provide the types of protections to third party institutional lenders that we would typically require to be included in such documentation as conditions to the funding of construction financing secured by a leasehold mortgage. However, you have provided us with a copy of a Development Agreement between Stanford University and the City of Palo Alto that will govern the construction and operation of the CRbH senior citizen project as well as several other projects on or adjacent to Sand Hill Road in Palo Alto that are to be developed or constructed by Stanford University. You have also provided us with a draft of an Assignment and Assumption Agreement relating to the Development Agreement pursuant to which CC-Palo Alto, Inc., an affiliate of CRbH would take an assignment of, and Peter Muhlbach February 8, 2000 assume certain rights and obligations of Stanford University under the Development Agreement. As we understand the scope of the proposed assignment the obligations assumed by CC-Palo Alto would be those that relate to the senior citizen project, while Stanford University would retain all other Development Agreement obligations. Most importantly from the standpoint of the lender that would provide the construction financing, the proposed assignment would make clear that a default by Stanford University in performing its retained obligations under the Development Agreement would not trigger any right in the City of Palo Alto to exercise any remedy or impose any restriction against the senior citizen project so long as such default was not attributable to some breach or failure by CC-Palo Alto. We understand that the City of Palo Alto has raised an objection to this proposed assignment because it seeks to insulate CC-Palo Alto and the senior citizen project from remedies that the City might choose to employ in the event of a default by Stanford University with respect to its obligations under the Development Agreement that are not related to the senior citizens complex. We understand that these remedies would include the right to refuse to issue building permits or certificates of occupancy to any element of the various Sand Hill Road projects (including the senior citizen project), the right to terminate the Development Agreement, and the right to collect damages arising from such a default. This resistance by the City, while perhaps understandable from its viewpoint, will make your ground lease.~.not financeable, since as an underwriting matter we (and other lenders for whom we agent or participate our loans) would not be prepared to provide financing where our borrower is at risk of default, and our security at risk of impairment, due to the failure of a third party which is not affiliated with our, borrower to perform its obligations on property that is not subject to the lien of our mortgage financing. Under such circumstances, neither we, nor our borrower would have effective control over the exigencies that could seriously impact the project which we would be financing. Nor would we consider it to be sufficient that Stanford University might be willing to give an indemnity against its default. The exercise of any remedy by the City of Palo Alto against the senior citizen project because of a Stanford University default could seriously impair our security for the loan, and could tremendously complicate the full recovery of our loan. In addition, giving a lender the right under such circumstances to step in to cure a default would not be an acceptable solution since the default would extend beyond the property on which the lender would have its lien, and the costs incurred to cure the default could significantly exceed the underlying value of the security for the loan. Further, the existence of a possible remedy against Stanford University would not in our view be sufficient to provide adequate protection to a lender providing the construction financing for your project, and would not be the type of risk that a lender would agree to take in the context of such construction financing. In short we would not be prepared to fund a loan to CRbH or its affiliate subject to such contingencies and risks. You have asked whether the pricing of a construction loan could be adjusted to cover this additional risk, either by the payment of additional points, an increase in the interest rate,, a 2 Peter Muhlbach February 8, 2000 lowering of the loan to value ratio, or similar adjustment. Unfortunately, for Paribas this is an underwriting decision and not a pricing decision. We have no pricing mechanism that would support an assumption of this risk by our bank. We trust that this letter will provide an adequate response to your inquiry. Of course, while we value highly our relationship with Classic Residence by Hyatt, this letter should not be considered to constitute a commitment of any sort by Paribas to provide financing for the subject project or to consider favorably any financing proposal. Assuming that the issue noted above with respect to the Development Agreement is resolved in a satisfactory manner, we will be pleased to entertain a loan application on our standard conditions at an appropriate point in the future should CRbH or an affiliate decide to proceed with the project subject of course to our review and underwriting of the completed loan application and all required supporting information, including the executed Ground Lease and all project-related construction, marketing, licensing and operational materials. In that connection, please be advised that we have not undertaken a full review of the Development Agreement, and we would reserve the right to make further comments regarding the Development Agreement, including its provisions relating to mortgagee protection. Please feel. free to contact me if you have any additional questions_at this time, or ifI can be of any further assistance. Sincerely, Russell Pomerantz