04/24/2013 - City Council Finance CommitteeFINANCE COMMITTEE MEETING
WEDNESDAY, APRIL 24, 2013
2:00 P.M.
EAGAN ROOM
Gr0*0171
I. AGENDA ADOPTION
II. CEDAR GROVE FINANCING
A. TIF BONDS
B. JENSEN'S PURCHASE OFFER
III. OTHER BUSINESS
IV. ADJOURNMENT
Agenda Memo
April 24, 2013 Finance Committee Meeting
II. A TIF bonds
ACTION TO BE CONSIDERED:
• Provide direction on proposed revised amount of the Cedar Grove parking ramp
bonds and recommend for approval at the May 7 regular City Council meeting.
• Provide direction on issuing taxable vs. tax - exempt bonds and recommend for
approval at the May 7 regular City Council meeting.
BACKGROUND — Amount of bonds:
• At the February 6 Finance Committee meeting, direction was given to issue bonds in the
estimated amount of $13.2 million, which was the estimated ramp cost ($19.0 million) less
Paragon's cash purchase of the land ($5.8 million).
• Since that time, some of the estimates have changed:
• Total ramp cost is still estimated at $19.0 million, but design and feasibility costs
of $1.0 million and a 5% contingency of $1.0 million are added to bring total
project cost to $21.0 million.
The City will receive only $5.0 million at closing for the land sale as $.6 million
will go to the broker's commission, and $.2 million will be escrowed for
potential environmental remediation.
Paragon's contribution toward the ramp of $4.2 million was originally expected
to be financed as an assessment. Paragon recently advised they will pay this
amount in cash at closing on the property, so $3.7 million of this is proposed to
reduce the bond issue amount and $ .5 million will be used to pay capitalized
interest.
• The revised principal amount is therefore reduced from $13.2 million to $12.6 million:
Sources:
(millions)
Par amount of bonds
$ 12.6
Net land sale proceeds
5.0
Paragon ramp contribution
3_7
Total sources
$ 21.3
Uses:
Primary purpose fund (incl. contingency)
$ 20.0
Design and feasibility
1.0
Underwriter's discount /bond issue costs
.3
Total uses
$ 21.3
Agenda Memo
April 24, 2013 Finance Committee Meeting
BACKGROUND — Taxable vs. Tax - exempt:
• The bonds are proposed to be sold as taxable, not tax- exempt. Given that the City hopes to
negotiate additional contributions toward the parking ramp from developers of the adjacent
outlots, it is the opinion of our bond counsel that it would be difficult to represent these
bonds as exempt.
• Bonds that are taxable obviously command higher rates of return for investors. In this case,
the City's bond advisor, Springsted, estimates an additional interest cost to the City of
$275,000 (present value). This is a relatively small amount due to the narrow spread
between taxable and tax - exempt in the current interest rate environment.
• Staff and the City attorney believe the potential is there to negotiate contributions from
developers that would significantly exceed the additional interest cost of taxable bonds.
• The bonds will be General Obligation bonds, secured by the full faith and credit of the City,
although no levy will be required under the set of assumptions Ehlers has used for their tax
increment revenue computations.
• Dave McGillivray from Springsted will be available at the May 7 Council meeting to
answer questions about the issue. Sale recommendations will be included in the May 7
packet material.
ATTACHMENTS:
• Memorandum from bond counsel Steve Rosholt re: Eagan Parking Ramp Bonds.
FAEGRE BWER
C&NIELS
MEMORANDUM
TO: Tom Pepper
Jon Hohenstein
Bob Bauer
Dave MacGillivray
FROM: Stephen C. Rosholt
DATE: April 2, 2013
RE: Eagan Parking Ramp Bonds
Introduction and Conclusion
Dave asked whether these bonds could be treated as tax exempt. For the reasons described below we
think the interest on the bonds will be taxable unless both (a) Paragon does not elect under the
Development Agreement to defer its $4,225,000 payment for the parking ramp easement by having it
treated as a special assessment and (b) (i) we develop a sound basis for allocating future land sale
proceeds between the value of the land and the value of future parking ramp easements and (ii) the
present value of the amounts allocated to the parking ramp are less than 10% of the parking ramp bond
proceeds. We are presently unable to specify a proper allocation formula. Let me know if you have
thoughts about that. If we expect Paragon to pay in a lump sum, we can discuss whether an allocation
formula can be developed that will withstand scrutiny.
Analysis
As some of you know, the bonds will be taxable if both the proceeds are used for a private use and there
are direct or indirect private payments to the issuer related to that use.
Treas. Reg. § 1.141- 3(b)(7)(i) provides that an arrangement that conveys special legal entitlements for
beneficial use of bond financed property results in private business use. For example, this includes
parking facilities where an adjacent landowner has the right to control the parking rates on a parking lot
open to the general public. Treas. Reg. § 1.141 -3(f). Example 5.
For purposes of the private payment test the payments taken into account include both direct and indirect
payments by persons treated as using the financed facilities. Payments are not so treated if they are
directly allocable to other property used by the person making the payment and the payments represent
fair market value compensation for that other use. Accordingly, payments by Paragon and other
purchasers need not be counted if they can be allocated to the land being purchased.
Whether or not private payments must be allocated to the bonds depends largely on the timing of the
payments. A payment under an arrangement entered into in connection with the issuance of bonds that
finances the property is allocated to that issue. Under Treas. Reg. § 1.141- 4(c)(3)(iv) an arrangement is
ordinarily treated as entered into in connection with a bond issue if both (a) the arrangement is entered
into during the 3 -year period beginning 18 months prior to the date of issue, and (b) the amount of
payments reflects all or a portion of debt service on the bonds. However, payments received within 18
months after completion of the project can be allocated to equity (and not to the bonds as private
payments). Therefore, if Paragon is making its $4,225,000 payment as a lump sum within 18 months, it
need not be counted as a private payment. But if it is to be paid as an assessment over time it would be
treated as a private payment and the bonds would be taxable for that reason.
Even if Paragon makes a lump sum payment, sufficient private payments from purchasers of adjacent
parcels may arise in the future to cause the bonds to be taxable. Those payments would arise if, as
permitted by the Paragon Development Agreement, the EDA charged future developers with a share of
the capital costs of the parking ramp. Such payments would be inferred even if embedded in the sale
price of parcels which included an appurtenant nonexclusive easement in the ramp. Allocation between
the amount treated as paid for the ramp easement and the amount treated as paid for the land must be
based on fair market value, as indicated above. See, e.g., PLR 200441025 in which the IRS permitted
exclusion of certain payments because the present value of the payments approximated the cost of the
improvements other than a financed parking ramp.
I frankly am not sure how to allocate the payments from future developers between the land and the
parking easement. If the EDA could reasonably recover the $12,000 construction cost per parking stall,
that amount would cause the bonds to be taxable. If only the $3,800 per stall being paid by Paragon
were assigned to stalls subject to future easements, the private payments might be under the 10%
threshold for taxability (but over the 5% loan threshold applicable to taxable private loan bonds if the
developer payments are deferred). Perhaps another way to look at it is to assume that, as in the case of
Paragon, approximately 40% of the proceeds of future land sales should be allocated to the parking
ramp. Given these uncertainties, we should perhaps wait to see how the Paragon payment will be made
before suffering the brain damage of arriving at an allocation formula.
SCR/djf
dms.us.51846833.01
-2-
Cheryl Stevenson
To: Doron R. Jensen
Cc: Bob Bauer (bauerr @dmshb.com); Coyle, Peter [pcoyle @larkinhoffman.com]; Tom Pepper
Subject: RE: RE: Jensen's Supper Club - trail info
Attachments: Graphic 2013 -04 -19 Jensens Site Concept Plan with Trail (JDH).pdf; Spreadsheet 2013 -04 -19
Summary of Jensens Sale- Easement Deal.xlsx
Do ro n,
Please give consideration to this counterproposal that approaches the math a bit differently, but ends up in a ballpark
close to your original offer of $217,000, but slices the deal in a way that I think would be more saleable for the EDA. The
purchase price of $10 /sf is what the City paid Cedarvale Lanes for the additional ROW for the Rahn Road relocation, so it
is a direct comparable for our presentation of a tentative deal to the EDA.
• Total net cost to Jensens of $235,000 ® See attached spreadsheet.
• EDA Sale of Residual CLI Lot at 31,000 sf to Jensens at $10 /sf - $310,000
• Jensens Resale of 4,500 sf trail easement on south end of CLI lot to EDA at $10 /sf - $45,000
• Jensens Sale of 3,000 sf trail easement on south end of restaurant's existing property to EDA at $10 /sf - $30,000
• Notes:
o By shifting the proposed new angle parking slightly to the south, the restaurant can restripe /preserve 9
angle stalls along the south side of the building.
o In combination with new stalls, the overall approach nets 141 total stalls available as compared to the
current 87 on site and your original max plan of 149.
• Net cost to Jensens is $235,000 as compared to the initial offer of $217,000 and the EDA's minimum price of
$8.66/sf which would have come to $268,460 for 31,000 sf.
• Jensens would replat the properties into a single lot. The EDA would pay for the description /definition of the
trail easement and Jensens would incorporate it into the plat application.
• The EDA would be responsible for the installation of the trail and any landscaping within the easement area. We
would work with you on the relocation /reconfiguration of the site lighting on the south side of the site such that
it could serve both the parking lot and the trail from Rahn to the east end of the restaurant property /trail
easement.
Take a look at this math, layout and logic and let me know our thoughts. If this is generally acceptable, we can get it
before the Council Finance Committee as soon as they can put together a meeting and then approach the EDA for
concept approval.
Thanks.
Jon
Ashh-
Jon Hohenstein - ICIVIA -CIVI I Director of Community Development City of Eagan
City Hall 13830 Pilot Knob Road I Eagan, MN 55122 1651- 675 -5653 1651-675-5694 ( Fax) City of Ea f
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Jensens /CU Site Sale and Easement Purchase
19- Apr -13
Area
CU Land Sale (EDA to Jensens) 31,000
Trail. Easement ( Jensens to EDA) 7,500
$ /sf Price
$ 10 $ 310,000
$ 10 $ 75,000
Net to EDA $ 235,000
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