FINAL REPORT - San Bernardino Superior Court

Section 4: SCLA Hangar Development
Ground Lease Amended in February 2006
On February 14, 2006, SCLAA amended the ground lease agreement with CBS Aviation
Development two weeks after the entering into the second loan agreement and only three days
before funds were disbursed. The lease amendment primarily eliminated the developer’s
responsibilities relating to the cargo complex (which was to be completed by December 31, 2006
under the original lease). It does not appear that funding was reduced or reevaluated as a result of
this amendment.
Additional Ground Lease Approved with CBS Aviation in July 2006, but Withheld by City
At its regularly scheduled meeting on July 18, 2006, the SCLAA Board approved two additional
ground lease agreements and amendments with CBS Aviation Development, LLC. Although the
original lease with CBS Aviation and all amendments were requested as part of this audit, copies
of these additional agreements and amendments were not provided to us by City management.
SCLAA Severed Agreement with CBS Aviation & Brought in New Contractor
In June and July of 2006, approximately seven months after the hangar facilities were to be
completed under the lease agreement, about 25 subcontractors of CBS Aviation Development
alerted City officials that they had not been paid by the company for work done on the hangars.
On August 11, 2006, the City, SCLAA, CBS Aviation Development, and KND Affiliates, LLC
(an LLC established by Jeff Kinsell, the principal of Kinsell, Newcomb, & De Dios, the City’s
bond underwriter) entered into a settlement agreement to remove CBS Aviation Development
from the project as the developer and replace it with KND Affiliates, LLC.
Settlement Agreement Implies KND would Buyout CBS and Finance Remainder of Project
The August 2006 settlement agreement implies that KND Affiliates, LLC would commit $70
million to buy out the CBS leaseholder rights, repay the City’s previous loans to CBS, and
complete the project. According to the settlement agreement, KND Affiliates agreed to accept
the partially completed project and immediately place $19.2 million into an escrow account with
$12.7 million intended for unpaid CBS subcontractors and $6.5 million to buy out CBS’s
interests in the project. The settlement agreement also states that KND would place an additional
$31.9 million into an escrow account to repay previous project financing and $18.8 million to
complete the project. Essentially, according to the settlement agreement, KND would accept all
assets and liabilities of CBS Aviation, including obligations to subcontractors, unpaid loan
amounts, and the costs to complete the four hangar facilities. In return, KND would have the
right to lease the facilities to tenants or sell the leased facilities to one or more institutional
investors. The amounts of KND Affiliates’ implied financial commitments are summarized in
Table 4.1 below.
4-4
Harvey M. Rose Associates, LLC