MEMORANDUM. Review of California Space Center Notice of Default Submittals

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1 MEMORANDUM ADVISORS IN: Real Estate Redevelopment Affordable Housing Economic Development SAN FRANCISCO A. Jerry Keyser Timothy C. Kelly Kate Earle Funk Debbie M. Kern Reed T. Kawahara David Doezema LOS ANGELES Kathleen H. Head James A. Rabe Gregory D. Soo-Hoo Kevin E. Engstrom Julie L. Romey SAN DIEGO Paul C. Marra To: From: Teresa Gallavan, Economic Development Director/Assistant City Administrator City of Lompoc Kathleen Head Tim Bretz Date: November 12, 2015 Subject: Review of California Space Center Notice of Default Submittals California Space Center (CSC) was selected by the City of Lompoc (City) in the Request for Qualifications (RFQ) process for the development of 82 acres of City-owned land. CSC and the City subsequently entered into an Exclusive Negotiation Agreement (ENA). As part of that ENA, the City required CSC to submit additional information within 30- and 60-days of executing the ENA. In August 2015, KMA reviewed the CSC submittals and found that they did not fulfill the 30-day and 60-day requirements imposed by the ENA. Subsequent to the KMA report, the City issued a Notice of Default (NOD) to CSC pursuant to Section 6 of the ENA. The NOD required CSC to cure the identified defaults outlined in the NOD on or before November 2, CSC submitted responses to the 14 items detailed in the NOD within the time frame established by the City. The KMA summary of the CSC responses to the 14 NOD items is presented in an Appendix that follows this memorandum. KMA reviewed these responses, and our key findings and conclusions are summarized in the following sections of this memorandum. BACKGROUND CSC is proposing to construct a multiuse project that includes uses such as a rocket launch-viewing pavilion and amphitheater; educational facilities; a hotel and convention center; a spa, health club and recreational center; restaurants and retail; a Cinematic Hologram Experience and IMAX theater; and a virtual reality component (Proposed Project). CSC estimates the development costs at approximately $460 million. 500 SOUTH GRAND AVENUE, SUITE 1480 LOS ANGELES, CALIFORNIA PHONE

2 Teresa Gallavan, City of Lompoc November 12, 2015 Review of California Space Center Notice of Default Submittals Page 2 CSC is a recently formed organization that does not have any demonstrated development experience. To that end, the City is requiring that CSC assemble a development team with proven experience in developing large-scale projects. The primary focus of the 14 submittal requirements imposed in the NOD can be summarized as follows: 1. An identification of the key development team members and their relevant experience; 2. The capacity of CSC to secure the necessary funding to successfully complete the Proposed Project; and 3. Information relating to the experience of the development team members in preparing an overall vision for the Proposed Project. ANALYSIS Key Development Team Members Eva Blaisdell has no demonstrated experience as a real estate developer. To date a real estate developer has not been added to the team, nor is any mention made in the submittals of an intention to bring on a developer. It is therefore KMA s assumption that Ms. Blaisdell is planning to act as the Proposed Project s developer. Three well-qualified construction managers/general contractors are identified as potential team members. An architect is identified for the IMAX component of the Proposed Project; no other architects are identified in the submission. An economic consulting firm with specific experience in the assessment of space tourism development submitted a proposal to prepare an economic feasibility analysis of the Proposed Project. Funding Sources The CSC submittals include proposed funding from the following sources: 1. A letter from Rafal Trusiewicz of Katharsis Development states that he will work with his funding sources to secure planned financing of $150 million. Katharsis Development is focused on the development of convenience segment shopping centers in Poland under the name of HopStop. 2. A letter from Pavel Nykiel states that he is in the position to secure $14 million as part of a venture called the Prestige Space Center. KMA was unable to find any

3 Teresa Gallavan, City of Lompoc November 12, 2015 Review of California Space Center Notice of Default Submittals Page 3 background information on the Prestige Space Center; it is our assumption that this is a newly formed venture. 3. A letter from Adi Chan, of the recently formed Experiential Cinema Theater (ECT), stating that he will be able to raise $5 to $10 million from Japanese and United States venture capital sources. 4. Stewart Sando is the Principal of Technology Venture Consulting, a high technology consulting practice. He has agreed to join the CSC Board of Directors and to begin launching investor sessions. 5. Michael DaCosta Babb is identified as an Investment Ambassador at Large. He submitted a letter indicating that he is creating a short list of early stage sponsors and investors. Experience in Preparing a Vision for the Project The vast majority of the information provided in the submittals focuses on the CSC vision for the Project. In addition, CSC has included letters of interest from several companies that have the potential to bring uses to the Project that will enhance that vision. CONCLUSIONS/RECOMMENDATIONS The Project is proposed to be a $460 million venture with a diverse mix of pioneering uses. KMA has no doubt that CSC has a creative vision for the development of the Project. However, KMA has serious concerns that an inexperienced developer can successfully implement a project of the proposed magnitude. At a minimum, the development team needs to include an experienced developer, architect, construction manager/general contractor and financial partner at the early stages of the process. Each of the entities identified in the CSC submittals are proposing to secure funding from outside sources. However, none of the entities provided any details regarding how the identified funds are proposed to be raised. Given that no identified party to the transaction is proposing to directly invest funds in the Project, it is not currently possible to properly assess the potential for success in raising the anticipated funding. The CSC submittal in response to the NOD includes estimated stabilized year net operating income of $115 million. However, the source of this estimate is not identified. If the City Council chooses to move to the next stage in the ENA process, it is the KMA recommendation that CSC be required to obtain a market opportunities analysis prior to undertaking the required three public outreach charrette-type meetings and the creation of a Conceptual Master Plan

4 APPENDIX CSC RESPONSE TO NOD ITEMS

5 1. Submit letters of reference from two additional professional colleagues you have personally and specifically worked with in the past. Eva Blaisdell submitted two letters of reference that fulfill the requirements imposed by the NOD. The first letter is from Shannon Calvin, Vice President of AlwaysOn. The letter states that Eva Blaisdell has been an active member of the Silicon Valley organizations of AlwaysOn and Cuckoo s Nest communities of entrepreneurs and investors. The second letter is from Larry Reynolds, Vice President Economic Development of Scottish Development International. According to the letter, Eva Blaisdell and Larry Reynolds have been professional colleagues for almost seven years. The CSC submittal fulfills the NOD requirement for additional references. 2. Provide tangible evidence CSC has sufficient capital to successfully move the Proposed Project through the ENA and ultimate Disposition and Development Agreement ( DDA ) process. Recognizing that CSC has only recently been formed, it will be necessary for individual Development Team members to submit evidence that demonstrates the financial wherewithal to undertake the Proposed Project. The following documentation was provided by CSC: CSC states that $5 million has been budgeted to move the Proposed Project through the ENA/DDA process. According to CSC, the principal investors have been using personal financial resources to cover this short term predevelopment capital requirement. However, it is unclear which specific individuals or entities represent the principal investors. CSC also provided a table which outlines that co-founding partners and contributors, investors, and planned individual contributors have a joint net worth of $120 million in liquid and non-liquid assets. Specific individuals or entities were not identified. CSC provided a Letter of Interest from Katharsis Development to enter into a relationship with CSC to provide strategic advice to drive the most significant European partners and investors in different stages of the venture. The letter states that Katharsis Development is prepared to work to secure up to $150 million in funding. The letter was provided by Rafal Trusiewicz. Appendix: CSC Response to NOD Items Page 1

6 CSC provided a Letter of Interest from Prestige Space Center (Prestige) confirming plans to invest in a day spa, health club and recreational center as part of the Proposed Project. The letter states that Prestige has allocated funds and will participate in conceptual and master planning activities for the Proposed Project. According to the letter, Prestige is in a position to secure $14 million for the expansion of Prestige locations, including the Proposed Project. CSC identified entities that have committed to solicit investment funds for the Proposed Project. No direct investors were identified, and no financial capacity information was submitted. 3. Provide the qualifications and legal names, officers, directors or partners that have formally committed to join the Development Team. At a minimum, the Development Team members must include a developer, architect, construction manager, general contractor and financial partner(s) expressly committed to the Proposed Project. The information submitted to date does not provide evidence any of the identified individuals have formally committed to join the Development Team. Moreover, the information submitted for these individuals does not show sufficient qualifications to fill all the required professions. CSC states that it is premature to specifically identify key Development Team members. However, the following information was provided: Developer CSC LLC Architect TK Architects will design the IMAX Theatre component of the Proposed Project. No other architects were referenced for the other aspects of the Proposed Project. Construction Manager / General Contractor Bechtel, Turner Construction Company and The Korte Company are identified as firms that could potentially act as the construction manager and/or general contractor. Financing Partner No specific financial partner(s) were identified. CSC states that upon clarification of the ENA status prospective investors, sponsors and naming rights players will continue to be interviewed and qualified. CSC s goal is to use corporate funding and vendor funding to protect equity and control of the Proposed Project. CSC estimates that revenue will be generated in Appendix: CSC Response to NOD Items Page 2

7 Creative Director Steve Ryan of ShoConcepts is proposed to be the Creative Director of the Proposed Project. ShoConcepts submitted a Letter of Interest to work with CSC on the Proposed Project. It does not appear that a formal services agreement has been entered into with CSC. Financial Consultant Pro Forma Advisors, LLC provided a proposal for the economic analysis of the Proposed Project. The following additional potential team members were identified: Katharsis Development proposes to work with CSC on developing the Proposed Project. It appears that this work would consist of securing up to $150 million in funding for the Proposed Project. Michael DaCosta Babb is Vice President of ATTIC a consultant to technology companies. He has agreed to act as an Investment Ambassador at Large to provide a shortlist of potential early stage sponsors and investors. Technology Venture Consulting Stewart Sando is the Principal of Technology Venture Consulting, a high technology consulting practice. He has agreed to join the CSC Board of Directors and to begin launching investor sessions. Prestige Space Center intends to invest in a day spa, health club and recreational center as part of the Proposed Project. Through the Lens Entertainment submitted a Letter of Intent to work with CSC to develop a Cinematic Hologram Experience. In addition, CSC and Through the Lens Entertainment have founded a new company ECT (Experiential Cinematic Theater), an innovative 360-degree theatre that utilizes groundbreaking technology to balance artistic endeavor with commercial appeal. ECT estimates their current value at $40 million, although no basis for this estimate is provided. Adi Cahn intends to sign contracts for initial investment of $5-$10 million from designated Japanese and United States venture capital sources. Ubereal Pte Ltd submitted a Letter of Intent to work with CSC to design and produce virtual reality content for the Proposed Project. It does not appear that a formal services agreement has been entered into with CSC. According to the letter, Ubereal has over 20 years of experience in three key areas: video games, digital imaging and virtual reality. Appendix: CSC Response to NOD Items Page 3

8 Dennis Marini will work as a Strategic Advisor for the sustainability portion of the Proposed Project. He has agreed to become a member of the CSC Advisory Committee at the next project stage. It appears that Ms. Blaisdell is planning to act as the Project s developer. However, she did not submit information pertaining to any previous real estate development experience. Information was submitted for the IMAX architect, potential construction managers/contractors, and for entities that have committed to soliciting investment funds for the Project. 4. Provide detailed descriptions, including financial details, of three projects comparable to the proposed conceptual scope of development completed among the Development Team members within the last five years. The submittals provided by Bechtel do not appear to have been completed within the last five years. For the potential Development Team members who submitted qualifications with examples of past projects, identify which of those firms have been formally added to the Development Team. Experience information was submitted for Bechtel, The Korte Company and Turner Construction Company. Each of these firms has demonstrated experience with large-scale projects. No other entities identified in the submission have demonstrated experience in the development or operation of an approximately $500 million project. The CSC submittal fulfills the NOD requirement related to demonstrating the experience of the potential construction manager and general contractor. 5. Provide specific information regarding the type of entities that will develop and operate the Proposed Project, as well as a list of other owners of interest that may provide equity and the estimated percentage of ownership of each and how the management structure of the Proposed Project will be organized. The management structure is proposed to include a Board of Advisors for CSC. Eva Blaisdell is proposed to act as CEO with a variety of positions under her direction. Per the Cover Letter, Eva Blaisdell will control over 90% of the CSC, LLC. It is unclear who will control the remaining 10% of CSC, LLC., or how the ownership interest and equity shares for the Proposed Project will be structured. CSC states that two operating models will be considered. Under the first model, CSC proposes to hire a CEO with technology and entertainment experience. Appendix: CSC Response to NOD Items Page 4

9 The second model assumes that CSC will develop executives that may be recruited from companies such as Google or YouTube. At this point in the process, the CSC submittal fulfills the NOD requirement related to the transaction structuring issue. 6. Provide the specific method for Disadvantaged Business Enterprises (DBE) participation. CSC provided a more detailed description of the proposed method for DBE participation. KMA defers to the City as to whether it meets the City s requirements. 7. Provide specific information relating to the experience of the Development Team members in preparing an overall vision for the Proposed Project. The CSC submittals to date have focused on the vision for the Proposed Project. The current submission identifies Stewart Sando of Technology Venture Consulting and Steve Ryan of ShoConcepts as potential Board Members. A number of other entities are identified that have experience creating uses proposed to be included in the Project. Each of these individuals and entities have experience relevant to specific aspects of the Proposed Project. At this point in the process, the CSC submittal fulfills the NOD requirement related to the overall vision issue at this point on the process. 8. Identify which committed member(s) of the Development Team were involved in each of the fundraising transactions that were provided to demonstrate experience in fundraising and solicitation of investment capital. Describe the role that the identified Development Team member(s) played in obtaining funds. No new information was submitted by CSC for this question. 9. Provide a list of specific prior partners who specifically worked with the proposed Development Team members. CSC indicates that every company that is referenced in the response to the NOD has worked directly with Eva Blaisdell and some of her partners. The CSC submittal fulfills the NOD requirement related to the prior working relationship issue. Appendix: CSC Response to NOD Items Page 5

10 10. Provide each of the proposed Development Team member s specific past experience with the proposed funding sources envisioned to be utilized for the Proposed Project. CSC states that several fundraising entities are under evaluation now and as soon as the NOD is removed CSC will proceed with the decision-making effort to select which entities will be utilized. No new information was submitted by CSC for this question. 11. Provide specific information regarding past projects each of the proposed Development Team members worked on and the experience in formulating a plan and sustaining momentum until such time as funding sources become available for those past projects. CSC states that the Letters of Commitment provided in this submittal substantiate that the proposed Development Team members have the experience in formulating a plan and sustaining momentum until adequate funding is in place. However, specific information regarding the planning and sustaining of momentum of past projects of each of these potential Development Team members was not provided. At this point in the process, the CSC submittal fulfills the NOD requirement related to the plan formulation and sustaining momentum issue. 12. Provide contact information for the employees of the City of Los Angeles and the City of Malibu you worked with in different areas of economic and sustainability developments. CSC provided the following contacts for the City of Los Angeles and the City of Malibu: City of Los Angeles: JoAnne Stewart, Director LAEDC. It should be noted that the Los Angeles County Economic Development Corporation (LAEDC) is not a public sector entity. City of Malibu: Diane Miller, Real Estate Agent. Don Schmitz, Planning Executive. It does not appear that either of these individuals work directly for the City of Malibu. The CSC submittal fulfills the NOD issue related to the provision of contact information. Appendix: CSC Response to NOD Items Page 6

11 13. Provide specific examples of each of the member s of the proposed Development Team experience on similar projects as it pertains to the Proposed Project, as well as how those members have been formally added to the Development Team. CSC believes that this question is premature and based on the limited expectations for a standard project and corporate materials. CSC proposes to provide information on new players and added capabilities as they commit to the Proposed Project. No new information was submitted by CSC for this question. 14. Clarify the involvement of the Space Valley Land Company, who will control the company, how it will be managed as part of the overall Proposed Project and more details relating to the viability/experience of the members of that company to carry out real estate transactions. Also, provide evidence where that company is registered and is authorized to do business in California. CSC states that the Space Valley Land Company will be a standalone company formed by me (Eva Blaisdell) and my son for the purpose of making investments and acquisitions in auxiliary and synergistic real estate for the purpose of development of the Space Valley. CSC did not provide specific details regarding the management of the Space Valley Land Company or the viability/experience of the members of the company to carry out real estate transactions. No information identifying where the company is registered, and whether it is authorized to do business in California, was provided. Appendix: CSC Response to NOD Items Page 7