HomeMy WebLinkAbout21 - Balboa Bay Club Ground LeaseQ SEW PpQT
CITY OF
NEWPORT REACH,
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°q<,FOaN,P City Council Staff Report
TO:
FROM:
PREPARED BY
APPROVED:
TITLE:
ABSTRACT:
Agenda Item No. 21
September 13, 2011
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
City Manager's Office
Dave Kiff, City Manager
949- 644 -3002, dkiff @newportbeachca.gov
Dana Smith, Assistant City Manager
Assignment of Balboa Bay Club Ground Lease
The Balboa Bay Club is located upon City administered tidelands and is subject to a
50 -year ground lease. The City received a request to approve assignment of the
ground lease from Balboa Bay Club, Inc., to Seven -On Capital- Business, Inc., and Mr.
Winston Chung.
RECOMMENDATIONS:
(1) Approve the proposed assignment of the Balboa Bay Club ground lease from
Balboa Bay Club, Inc., to Seven -On Capital- Business, Inc., and Mr. Winston
Chung and find that Balboa Bay Club, Inc., is not currently in default under the
Ground Lease; and
(2) Authorize the Mayor and the City Clerk to sign the Estoppel Certificate and
Consent to Ground Lease Assignment on behalf of the City.
FUNDING REQUIREMENTS:
There is no fiscal impact related to this item.
DISCUSSION:
On October 25, 2000, the City of Newport Beach ( "City ") and the Balboa Bay Club, Inc.
( "BBC ") entered into a 50 -year Ground Lease ( "Lease ") for tidelands property on which
the BBC operates its multi -use hotel and club facility. On August 5, 2011, the BBC
notified the City of its intention to assign the Lease to Seven -On Capital- Business, Inc.
and Mr. Winston Chung ( "Assignees "). Under the Lease, the City is required to take two
actions in response to the BBC's notification: (1) respond within 15 days with an
Estoppel Certificate certifying to the best of the City's knowledge BBC is not, or is, in
default under the Lease; and (2) respond within 30 days with the City's consent, or
Assignment of Balboa Bay Club Ground Lease
September 13, 2011
Page 2
rejection, to the assignment. Both timelines are set up within the Lease so that any
delay by the City results in automatic approval. The City Manager secured a time
extension from BBC to allow the City Council to consider BBC's assignment request at
its regular meeting on September 13, 2011.
The Lease sets forth specific standards for assignment, as noted in Articles XII and XIII.
These standards are intended to protect the City's (and the public's) interest in the
property and also to assure a continuing successful business operation and related
cash flow. As required by Lease Section 12.1, the City's Finance Department
conducted an audit of BBC's compliance with its obligations under the Lease. A copy of
the audit is included with this staff report. The audit confirmed that BBC is current with
all of their obligations under the Lease and is not currently in default with any term.
Therefore, staff recommends the City Council approve the attached Estoppel Certificate
finding that BBC is not in default under the Lease.
To conduct due diligence of the Assignees, the City hired Economic & Planning
Systems, Inc. ( "EPS ") to perform an independent review. EPS submitted its findings in
a final report dated September 8, 2011. The EPS final report is attached to this staff
report. The main focus of EPS' review was in reference to Article XIII of the Lease
(Assignment and Subleasing); particularly, Section 13.1(a), which requires the
Assignees' net worth to be at least equal to the greater of (i) $4 million plus cost of
living, or (ii) at least 10% of the fair market value of the leasehold; Section 13.1(b),
which requires the Assignees to be qualified managers (defined within the Lease to be a
person experienced with the operation of a hotel and restaurant) or have a binding
contract with a qualified manager; and Section 13.1(c), which requires the Assignees to
have a reputation for honesty, integrity, and sound business practices. As detailed in
the attached report, EPS found the Assignees meet or exceed the criteria established in
Lease Sections 13.1(a), (b) and (c).Therefore, staff recommends the City Council
approve the Balboa Bay Club Consent to Ground Lease Assignment.
ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California
Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will
not result in a direct or reasonably foreseeable indirect physical change in the
environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378)
of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it
has no potential for resulting in physical change to the environment, directly or
indirectly.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of
the meeting at which the City Council considers the item).
Assignment of Balboa Bay Club Ground Lease
September 13, 2011
Page 3
Submitted by:
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Dave Riff
City Manager
Attachments: A. Estoppel Certificate
B. Consent to Ground Lease Assignment
C. City's Audit of BBC's Compliance with the Lease
D. EPS' Final Report
Balboa Bay Club Estoppel Certificate
The Ground Lease by and between the City of Newport Beach ( "Landlord ") and Balboa
Bay Club, Inc., ( "Tenant ") dated October 25, 2000 ( "Lease ") is in full force and effect. At
this time, to the best of the Landlord's knowledge there are no Events of Default (as
contemplated in Lease § 17.1) by either Tenant or Landlord. No events have occurred
which, with the giving of notice or the passage of time or both would constitute an Event
of Default with respect to Tenant or a default with respect to Landlord under the Lease.
To the best of Landlord's knowledge, there are no defenses or off -sets in favor of either
the Landlord or Tenant. The applicable base rent under the Lease is the greater of
annual rent of two million seventy -two thousand two hundred sixty -six dollars
($2,072,266) or the percentage rent set forth in Lease Section 5.2. The base rent is
paid quarterly in installments of five hundred and eighteen thousand sixty -seven dollars
($518,067). Base rent has been paid through June 30, 2011, with the next installment
due October 1. 2011.
Pursuant to Lease Section 12.1, the persons signing below have the necessary
authority to execute this Estoppel Certificate on the Landlord's behalf.
APPROVED AS TO FORM: CITY OF NEWPORT BEACH,
OFFICE OF THE CITY ATTORNEY A California municipal corporation
Date: 9 / 7 / 11 Date:
Aaron Harp Michael F. Henn
City Attorney Mayor
ATTEST:
Date:
By:
Leilani I. Brown
City Clerk
A*A-o,clnwte w� A
Balboa Bay Club Consent to Ground Lease Assignment
The City of Newport Beach ( "Landlord ") hereby grants its consent to the one -time
assignment of the Ground Lease by and between the Landlord and Balboa Bay Club,
Inc., ( "Tenant ") dated October 25, 2000 ( "Lease ") from the Tenant to Seven -On Capital -
Business, Inc., and Mr. Winston Chung (collectively, "Assignees'). The Landlord's
consent to this assignment of the Lease to Assignees is made pursuant to Lease
Section 13.2 and follows the completion of Landlord's due diligence under Lease
Sections 13.1(a), (b), and (c). The Landlord's consent to this one -time assignment is
conditioned upon the Assignees accepting and agreeing to be bound by all terms
contained within the Lease.
APPROVED AS TO FORM: CITY OF NEWPORT BEACH,
OFFICE OF THE CITY ATTORNEY A California municipal corporation
Date: 'I / 7 / I ( Date:
By: A, C. � ,
Aaron Harp
City Attorney
ATTEST:
Leilani I. Brown
City Clerk
By:
Michael F
Mayor
Henn
A- 4LxcAnvtneA* S
REVENUE DIVISION
DATE: SEPTEMBER 1, 2011
TO: INTERNATIONAL BAY CLUBS, INC.
CC: DAVE KIFF, CITY MANAGER
TRACY McCRANER, FINANCE DIRECTOR
MICHAEL TORRES, DEPUTY CITY ATTORNEY
FROM: HORTENSIA MATO, REVENUE AUDITOR
RE: BALBOA BAY CLUB GROUND LEASE
1) COMPLIANCE WITH THE GROUND LEASE; AND
2) SECTION 12.1, ESTOPPEL CERTIFICATE
The Balboa Bay Club ( "Tenant ") and the City of Newport Beach ( "Landlord ") entered
into a Ground Lease ( "Lease "), dated October 25, 2000, which granted Tenant
possession of a certain parcel of land located in the City of Newport Beach for use as a
multi -use hotel and club facility by the Balboa Bay Club.
The Revenue Division conducted a review of the Lease in conjunction with a request to
issue an estoppel certificate as set forth in Section 12.1 of the Lease.
The purpose and requirements of the estoppel certificate are as follows:
"Within fifteen (15) days after each request therefore by either party, the other party
agrees to deliver a certificate to any person designated by the requesting party
(including a proposed Mortgagee or purchaser), or to the requesting party, certifying (if
such be the case) that this Lease is in full force and effect, that to the best of such
party's knowledge at this time, there are no Events of Default by Tenant hereunder or
any defaults by Landlord hereunder and that no events have occurred which, with giving
of notice or the passage of time or both, would constitute an Event or Default with
respect to Tenant or a default with respect to Landlord hereunder, or stating those
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claimed by the responding party, and that, to the best of such party's knowledge, there
are no defenses or off -sets in favor of either party hereto, or stating those claimed by
the responding party, and /or certifying whether any consent or approval required under
this Lease has been denied or granted by the responding party and whether any
specified rights have been waived or deemed waived or expired. Any such certificate
shall also contain a warranty that the person signing has the authority to execute the
certificate on behalf of such party.. Each such estoppel certificate shall identify the Lease
and all amendments, shall specify to which the Rent has been paid, and shall specify the
then applicable Base Rent payable hereunder. If the responding party fails to execute
and deliver any such certificate within the aforementioned time period, insofar as the
requesting party and any person designated by the requesting party is concerned, the
other party shall be conclusively deemed to have acknowledged that the certificate as
submitted by the requesting party is correct. The requesting party or the person
designated by the requesting party as the recipient of said certificate (including, but not
limited to, a proposed Mortgagee or purchaser) may rely on the certifications made by
the responding party or the certifications deemed made thereby (if such certificate is
not delivered within such fifteen (15) day period). Nothing in this Section 12.1 shall be
construed as reducing the period of time that any party has under the terms of this
Lease to respond to a request by the other party for consent or an approval."
The limited test work procedures performed to generate this report do not constitute
an audit by professional accounting and auditing standards. The term "audit" has
certain industry expectations usually associated with an independent accounting firm
rendering a formal opinion or written report based on significantly greater scope than
the work described in this report. Section 5.10(e) of the Lease spells out the Landlord's
audit rights and obligations:
"Landlord shall have the right upon two (2) days prior notice to Tenant and during
normal business hours; but not more than one (1) time during each Fiscal Year of the
Term, to audit the Tenant's statements of Gross Revenues, and supporting records and
data. Within ten (10) days of receipt of such audit, Tenant shall pay Landlord the
additional Rent found to be due plus interest thereon at the Lease Interest Rate if the
audit discloses an understatement of annual Gross Revenues. However, if audit
discloses Rent has been overpaid by Tenant, the excess shall be applied to any amounts
then due from Tenant to Landlord, and the balance, if any, shall be credited against Base
Rent thereafter due from Tenant. Tenant shall pay for the reasonable cost of Landlord's
audit if Landlord's audit discloses a total underpayment of Rent for any Fiscal Year which
is in excess of five percent (5%). Landlord shall have the right to receive a copy of the
results of any audit conducted at the request of Tenant of Tenant's statements of Gross
Revenues during the Term. Promptly following the completion of any such audit, Tenant
shall deliver, or cause to de delivered, to Landlord a copy of the result of such audit
regardless of whether Landlord shall have made a demand therefore."
PKI
Scope
This compliance review covered the period from January 1, 2008 through June 30, 2011.
The purpose of the review was: (1) to determine if the Tenant was in compliance with all
the requirements of the Lease; and (2) to identify the date to which rent has been paid
for the estoppel certificate.
The following documents were reviewed for the above referenced period:
General Ledger and Revenue Detail Ledgers
Monthly Schedules of All Revenues
Fixed Assets and Capital Expenditure Worksheets
Property Tax Records and Payment Detail
Insurance Certificates by Types of Insurance
Diagram of Marina and Sample Rental Agreements for Boat Slips
FINDINGS AND RECOMMENDATIONS
1. Revenues By Category
Section 1.1, Definitions - Gross Revenue provides: "All gross revenues shall be
computed without deduction or allowance for costs, charges or expenses for the
purchase, sale, transportation or delivery of merchandise or services, or for labor
and materials in connection with the rendering of services or the sale of goods."
The 2008 room revenues was reported net of reservation fees, travel agency,
and group commissions. The Tenant reported an additional $10,683.00 of 2008
room revenue rent with the 1Q -2010 payment. The Tenant stopped deducting
the commissions from room revenue in 2009.
Findin
All revenues by category for the audit period were accurately calculated and
reported to the City. The Tenant is in compliance with the Percentage Rent
percentages spelled out in the Lease.
2. Base Rent and Percentage Rent Payments (Sections 5.1 through 5.30(c)
The first adjustment of the Base Rent was calculated in December 2009, during
the previous compliance review. The current annual Base Rent is the greater of
annual rent of Two Million Seventy -Two Thousand Two Hundred Sixty -Six Dollars
($2,072,266) or the Percentage Rent set forth in Section 5.2 of the Lease. Base
Rent is paid quarterly in installments of Five Hundred Eighteen Thousand Sixty-
Seven Dollars ($518,067). Percentage Rent is determined by the revenue
categories.
The Tenant is required to submit to the Landlord the Base Rent payment on the
first (15`) day of each calendar quarter. If Percentage Rent exceeds Base Rent,
the difference is paid in arrears, concurrent with the quarterly statement of
gross revenues.
Base Rent is due on January 1, April 1, July 1 and October 1. Percentage Rent is
due April 20`h, July 20`h, October 20th, and January 20`h (Section 5.10 (c) of the
Lease).
The Tenant has paid Base Rent through June 30, 2011. The next Base Rent
payment will be due on October 1, 2011. Percentage Rent has been paid
through June 30, 2011. The next Percentage Rent payment for 3Q -2011 will be
due on October 20, 2011.
The Tenant paid the Base and Percentage Rents on time during the compliance
review period. Quarterly and annual rent reconciliations were also timely
submitted.
The Tenant is charging fair market values based on comparisons for such goods
and services charged by other private clubs in Southern California. The Tenant
maintains full and complete books in accordance with generally accepted
accounting principles.
Finding
The Tenant is in compliance with the rent calculations and reporting
requirements of the Lease.
3. Marina Slips (Section 3.10 and 7.2)
The Tenant is required to maintain and operate a minimum of 140 slips for rental
to the general public who are members of the Balboa Bay Club.
Section 3.10 of the Lease provides that rentals of the slips shall not be for more
than one (1) year unless such agreements have provisions for yearly adjustments
of rent to full fair market value. The Auditor specifically reviewed the fair market
comparisons for marina slips completed by the Tenant. The comparisons were
timely and in keeping with the Lease.
Section 7.2 of the Lease requires Tenant to install and maintain a vessel holding
pump -out facility in the marina area. The City Harbor Resources Manager
reported that the Tenant is diligent in keeping the pump -out station in good
repair and operated in accordance with the Lease.
Finding
At some point in time, the Tenant reduced the number of slips in the marina
from 140 to 130 in order to accommodate larger vessels. The City Harbor
Resources and Revenue Departments were made aware of the changes during
the last compliance review.
We recommended that the Lease be revised, pending approval of Harbor
Resources and City Manager's office, to reflect the reduced number of marina
slips. The Lease has not yet been revised.
Recommendations
No further action is recommended.
4. Other Reporting Requirements
The fiscal year end date pursuant to the Lease is October 25, based on the
contract execution date. All the reporting due dates in the Lease are based on
the October 25 date.
Finding
At some point in time, the Tenant changed the fiscal year end date to December
31 without protest from the Landlord. All reporting due dates have also
followed the December 31 year end date rather than October 25.
As an example, the annual statement for the prior year is due January 28, one
hundred twenty (120) days from the end of the contractual fiscal year. However,
the Tenant actually submits its annual statement of gross revenue mid or late
May.
The reporting requirement of submitting a forecast on May 1 for the upcoming
fiscal year of gross revenues expected has not been complied with. The forecast
of 12 months of budgeted capital improvements, repairs, replacements and
maintenance due September 30 has also not been provided to the Landlord.
The previous compliance review recommended amending the Lease so the due
dates of annual statements of gross revenues and forecasts reflect the
December 31 year end followed by the Tenant. We recommended the forecasts
of projected gross revenue and projected capital improvements for the
upcoming year be submitted to the Landlord in a timely manner. No action has
been taken by the Landlord to amend the agreement or to request the forecast
budgeted capital improvements, repairs, replacements and maintenance.
Recommendation
No further action is recommended.
S. Insurance Requirements (Section 10)
The Tenant provided insurance certificates for the coverage specified in the
Lease. All certificates met the limit requirements of the Lease and listed the
Landlord as the certificate holder.
Findin¢
The Tenant is in compliance with the insurance requirements of the Lease.
The Auditor was unable to confirm if the Tenant has any reportable claims,
lawsuits orjudgments that could have an adverse economic effect on the
Tenant.
6. Capital Improvements. Repairs and Maintenance (Section 6.3)
During each rolling three (3) year period (2007 to 2010), the Lease requires a
minimum of four percent (4 %) of gross revenues be expended on repairs,
replacements and renewals of furnishings and capital improvements to the
premises.
The Auditor calculated four percent (4 %) of gross revenues from the
reconciliation revenues by category. The result was compared to the Tenant's
fixed asset accounts and schedule of improvements to verify whether or not
capital improvements and maintenance met the 4% of gross revenue threshold.
Findin
The Tenant is in compliance with maintenance requirements of the Lease.
7. Taxes and Assessments (Section 6.2)
Property tax assessments and the corresponding payments were reviewed for
compliance. The Tenant has paid property tax to the County Assessor through
the current tax year.
It was noted that the Orange County Assessor issued the Tenant a $103,493.00
secured property tax refund for Tax Year 09 -10.
Finding
The Tenant is in compliance with the tax section of the Lease.
8. Environmental Requirements (Section 7.3)
The Lease does not permit the use of any hazardous material in construction,
reconstruction, renovations, or additions in violation of any applicable law,
regulation, code or ordinance.
Finding
It is beyond the Auditor's professional capacity to determine if all environmental
requirements have been met.
Conclusion
The Lease requires submission of an annual audited reconciliation of rents
performed by a Certified Public Accountant. We have reviewed all applicable
financial reports and documentation required by the Lease including the annual
audited reconciliation of rents. Based on our review, the Tenant has complied
with the terms of the Lease and is current on Base and Percentage Rents.
September 8, 2011
Dana Smith
Assistant City Manager
City of Newport Beach
3300 Newport Boulevard
Newport Beach, California 92663
Subject: Request for Consent to Deemed Assignment of the Balboa Bay
Club, Inc.; EPS #21107
Dear Ms. Smith:
Economic & Planning Systems, Inc. (EPS) has been retained by the City of
Newport Beach to conduct due diligence associated with the proposed
Balboa Bay Club, Inc. (BBC) Ground Lease (Ground Lease) assignment.
Tfr,=l rveormra.,Jl.,nd ; .r Our effort has focused on Article XIII of the Ground Lease (Assignment
and Subleasing), As a part of this effort, we have reviewed the letter
originally submitted by International Bay Clubs, Inc. (IBC), dated
August 5, 2011, requesting Consent to Deemed Assignment of the BBC
and reviewed the terms of the Ground Lease as well. EPS has also
corresponded with representatives of IBC and representatives of the new
owner, Mr. Winston Chung, requesting additional information; we have
reviewed the information received in response to our requests, including
the Purchase Agreement. Representatives of IBC and Mr. Chung have
been highly professional and responsive in our interactions. We also
conducted research regarding the U.S. companies in which Mr. Chung
owns an interest and information available about Mr. Chung's China -based
companies and interests.
Section 13.1(a) (Net Worth Calculation)
Section 13.1(a) of the Ground Lease provides that the proposed purchaser
have a net worth of: (i) $4 million plus cost of living from the date of the
commencement of the Ground Lease (the year 2000); or (ii) at least "ten
percent (10 %) of the fair market value of the leasehold estate created by
this Lease."
Regarding Mr. Chung's net worth; documents submitted on behalf of IBC
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included an unaudited financial statement for the "Winston Group -
Winston Chung" citing a net worth of $553 million. This value is based
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upon ownership interests in a number of Chinese and U.S.-based
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companies, in addition to other assets, and is largely the results of Mr.
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However, detailed documentation of assets or liabilities has not been
provided, with Mr. Chung's representatives citing differences in business
Serkelry
practices between the U.S. and China and other difficulties, including the
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Dana Smith
September 8, 2011
Page 2
multi - layered structuring of ownership interests. As is the case with many foreign investors in
U.S. businesses, Mr. Chung's investments are channeled through a British Virgin Islands -based
corporation that owns Delaware -based corporations that actually own the interests in the U.S.
companies. As I understand the matter, this same structure will be used for the IBC acquisition.
Regarding the value of the leasehold, while there is no current appraisal, a leasehold value can
be imputed from lease revenue. In calendar year 2010, the BBC paid the City of Newport Beach
$2.7 million. Applying that number to a typical conservative commercial capitalization rate of
6.0 percent, the value would be in the range of $45 million.
Thus, under either measure, Mr. Chung easily satisfies the financial requirement of the Ground
Lease. To further assure the City of Newport Beach that Mr. Chung meets this threshold, IBC
representatives have made the following points:
(a) Section 2.3(e) of the Purchase Agreement requires a deposit from Mr. Chung of
$4 million, an amount which currently is held in the account of IBC;
(b) Mr. Chung has invested in three manufacturing companies in California (Balgon
Corporation, Krystal Koach, Inc., and Gaffoglio Family Metalcrafters), with unencumbered
investments totaling $45 million as documented in letters received from these
companies; and
(c) Mr. Chung has further agreed to: (i) transfer the sum of $5 million to his East West Bank
account in the U.S.; and (ii) provide evidence of that deposit prior to the City Council
meeting on September 13, 2011.
Thus, it appears that the Section 13.1(a) Ground Lease requirement is met as Mr. Chung's net
worth far exceeds the requirement. Moreover, the acquisition of IBC is an "all cash" deal; no
leverage (bank lending or other investment capital) is apparently involved. This being so, the
financial risks (e.g., lender foreclosure) are diminutive.
Section 13.1(b) (Qualified Manager)
This Ground Lease section requires that the assignee is, or associates with, a "qualified
manager." IBC representatives have stated that Mr. Chung's business model reflects the
commitment to and retention of existing management. Thus, the IBC transaction has always
been structured to assure the availability and retention of key employees, and the concurrent
execution of Key Employee Agreements is a condition to the Purchase Agreement. Mr. Chung, as
a part of this transaction, has entered into such employment contracts with existing IBC
management including Mr. David Wooten as CEO and Mr. Henry Schielein as President and COO
of the BBC, the same management that has run the BBC for more than 15 years. I have
reviewed the employment contracts and find them both typical and favorable to the continuing
managers.
Section 13.1(c) (Honesty, Integrity, and Sound Business Practices)
This section requires that the assignee be noted for honesty, integrity, and sound business
practices. This standard is difficult to measure for an offshore investor, especially for an
individual such as Mr. Chung, who has established a number business ventures in China and
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Dana Smith
September 8, 2011
Page 3
Hong Kong with complex relationships and histories. Mr. Chung, in his business relationships
here in the U.S., along with charitable giving, clearly appears to meet this standard. Mr. Chung's
U.S. business partners have attested in writing to Mr. Chung's honesty, integrity, and sound
business practices. However, among other evidence of such virtues are any past or pending
lawsuits, judgments, or bankruptcies involving Mr. Chung or any of the companies in which he
has held an ownership position. In this regard, representatives of Mr. Chung have disclosed the
following three matters:
(a) That a certain lawsuit has been filed against Mr. Chung, pending in the High Court of the
Hong Kong Special Administrative Region, Court of First Instance, Action No. 420 of 2011
relating to Thunder Sky Energy Technology Limited;
(b) That a certain lawsuit has been filed against Mr. Chung, pending in the High Court of the
Hong Kong Special Administrative Region, Court of First Instance, Action No. 1283 of 2011
involving Fadar International Limited, a British Virgin Islands company and its investment
in MVP RV, Inc., one of the U.S. companies in which Mr. Chung owns an interest; and
(c) That a certain lawsuit has been filed against Mr. Chung, pending in the Riverside County
Superior Court, Case No. 1112808 relating to MVP.
All three cases arise out of Mr. Chung's dealings with Mr. Jaime Che and Mr. Zhenguo Miao in
connection with two ventures, Thunder Sky and Fadar International Limited. Mr. Che and Mr.
Miao solicited Mr. Chung to participate in a public offering in Hong Kong that included license
rights to 15 of Mr. Chung's patents and a supply agreement for Mr. Chung's manufacturing
company located in mainland China to supply Thunder Sky such products. Fadar International
Limited was formed for the purposes of purchasing a controlling interest in MVP. All three cases
and the subsequent counterclaims involve allegations involving breach of contract and breach of
fiduciary duties against each of the parties.
The Thunder Sky Litigation is complex, involving recently filed (2011) lawsuits both in Hong Kong
and mainland China where Mr. Chung owns and operates his battery manufacturing facilities.
The case; which is not likely to be resolved before 2012, involves disputes over ownership of
patents that Mr. Chung originally bound to the company and other contractual matters. Mr.
Chung was originally a majority stockholder in Thunder Sky as well as its Deputy Chairman and
Chief Technical Officer. Following its initial capitalization and related increases in stock value,
Mr. Chung sold the majority of his shares (thereby raising several hundred million dollars).
Subsequently, Mr. Chung was fired from his executive positions and the legal actions were
initiated. There is no way of knowing precisely what financial exposure, if any, to Mr. Chung
may result from an unfavorable judgment in this case.
Meanwhile, Mr. Chung continues to develop and manufacture new products at the mainland
China companies he owns, using this new technology and obtaining additional patents for that
technology which has no relationship to the Thunder Sky Litigation.
With respect to the Fadar International Limited Litigation and MVP Litigation, Mr. Chung has
offered to purchase Fadar International Limited's interest in MVP and it appears that there will be
settlement of those matters by September 30, 2011. Notwithstanding the foregoing, the amount
in controversy in the Fadar International Limited Litigation and MVP Litigation, even if resolved
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Dana Smith
September 8, 2011
Page 4
adversely to Mr. Chung, would not have a material adverse consequence to Mr. Chung in light of
his large net worth. Mr. Chung has at all times maintained an excellent working relationship with
the management (and minority owners) of MVP, and he has supported the efforts of MVP
management through the making of unsecured loans in excess of $8 million to keep MVP in
business.
Summary
In summary, the City's Ground Lease sets forth specific standards for its assignment. These
standards are intended to protect the City's (and the public's) interest in the property and also to
assure a continuing successful business operation and related cash Flow (i.e., participation lease
payments) to the City. Based upon our review of the transaction documents, the disclosure
materials submitted by IBC and representatives of Mr. Chung, and our independent research, it
appears that this transaction will further these objectives. In addition to our other findings the
"all cash" nature of this transaction, the commitment by Mr. Chung to reduce BBC's existing debt
obligation, and finally, the physical improvements that are planned to the properties that may
improve revenue all contribute to this conclusion.
Sincerely,
ECONOMIC & PLANNING SYSTEMS, INC.
Walter F. Kieser
Managing Principal
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