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09/06/2005 - City Council Finance CommitteeI. II. AGENDA FINANCE COMMITTEE MEETING TUESDAY SEPTEMBER 6, 2005 5:00 P.M. EAGAN CITY HALL CONFERENCE ROOMS 2A & 2B ROLL CALL AND AGENDA ADOPTION CEDAR GROVE MASTER DEVELOPMENT CONTRACT UPDATE OTHER BUSINESS IV. ADJOURNMENT ARM lir 01 City of Eagan Nemo TO: TOM KEDGES, CITY ADMINISTRATOR FROM: .TON HOHENSTEIN, COMMUNITY DEVELOPMENT DIRECTOR DATE: SEPTEMBER 2, 2005 SUBJECT: COUNCIL FINANCE COMMITTEE MEETING SEPTEMBER 6, 2005 UPDATE ON NEGOTIATIONS OF CEDAR GROVE REDEVELOPMENT DISTRICT DEVELOPMENT AGREEMENT At its meeting of July 19, 2005, the Council Finance Committee received the information enclosed on pages _ I A regarding the status of the Cedar Grove Redevelopment Core Area Development Agreement. The Committee's direction is summarized in the minutes enclosed on page q and the direction memo enclosed on pages . On the basis of that direction, the City Attorney, in consultation with City staff and staff ot Ehlers and Associates has communicated these points to the developer's attorney. Enclosed on page � I is a comparison between the project expectations outlined in the RFP at the be g of the process and the points in the most recent developer's proforma. Enclosed on pages. is a memo from the City Attorney's office summarizing the discussions with the developer since the last Finance Committee meeting. At Tuesday's meeting, staff and the consultant will be present to provide additional background and respond to committee questions relative to the status of the negotiations and to discuss options for moving forward. DIRECTION REQUEST OF THE COMIVIITTEE: To provide feedback relative to next steps regarding the Cedar Grove Redevelopment District Development Agreement. � X1 1► .!' ,�. Ali - cc: Gene VanOverbeke, Director of Administrative Services Sid Inman, Ehlers & Associates Rebecca Kurtz, Ehlers & Associates Bob Bauer, Severson, Sheldon Law Firm City of Eagan demo TO: MAYOR PAT GEAGAN CITY COUNCILMEMBER PEGGY CARLSON FROM: TOM HEDGES, CITY ADMINISTRATOR DATE: JULY 15, 2005 SUBJECT: COUNCIL FINANCE COMMITTEE MEETING JULY 19, 2005 A meeting of the City Council Finance Committee will be held at 4:30 p.m. on Tuesday, July 19, 2005 in Conference Rooms 2A and 2B. The following item is in order for consideration at that time. UPDATE ON NEGOTIATIONS OF CEDAR GROVE REDEVELOPMENT DISTRICT DEVELOPMENT AGREEMENT At the direction of the City Council, the Council Finance Committee has met with staff to provide feedback and direction with respect to specifics of the financial aspects of the Cedar Grove Redevelopment District Development Agreement. The City Council has preliminarily designated Schafer Richardson as the master developer and has given preliminary approval to a redevelopment concept plan for the mixed use redevelopment of the Cedar Grove area. The next step in implementing the redevelopment is to formalize a development agreement outlining the responsibilities of the developer and the City, as well as the financing assistance that would be provided to the developer to fill the demonstrated gap and leverage private sector investments to cause the redevelopment to occur. In particular, the Council identified several view points that the staff and the consultants have pursued in its negotiations with the developer. They included: A financial structure that would insure the completion of the multi -phase project by the developer. A commitment to the completion of City Council priorities including: A A substantial area of vertical mixed uses in a centralized area like Excelsior Grand. Integration of some amount of horizontal mixed use from east to west through the area. ➢ Implementation of a transit station in one of the first phases of the development. ➢ Development of a hotel for both hospitality purposes and to provide a vertical element on the west end of the site to enhance visibility of the area. ➢ Development of a range of housing types at a range of price points including a substantial commitment to mixed value and scattered site affordable housing. ➢ Housing should fit the redevelopment plan rather than driving the redevelopment plan. A Use of building finishes that meet or exceed the CGD architectural and finish material standards. In particular City Council members have identified housing types from Ryland's Maryland and Indiana divisions that would better suit the City's vision for the area than the products that Ryland has proposed that are comparable to the housing developments in Hopkins and Eden Prairie. ➢ A substantial commitment to commercial development early in the project and in every phase of the project. • Having the developer promptly repurchase property that the City acquires and making the City whole for those transactions. • Coverage of all or as many costs as possible within the financing package for the project. • Active cooperation by the developer in implementing a relocation plan and identifying receiver locations for existing businesses. • The items listed were identified from the Finance Commission and City Council minutes. Other issues may have been identified in other discussions as well. As our redevelopment consultant Ehlers has advised that the profit margins in proformas for redevelopment projects often range between 10-15% of the cost of the project. Because of the complexity of the Cedar Grove project, early discussions placed the proforma rate at 15%. Since that time, a number of changes have occurred which reduced the developer's risk, Specifically, when the Council agreed to shift responsibility from the developer for the acquisition of properties to the City being the primary party for acquisitions, the risk to the developer went down substantially. In addition, the developer is carrying the purchase price of the mall in the proforma at $5.75 million, which may or may not be an appropriate valuation in that the master developer is one of the primary partners in the mall ownership. If all aspects of the deal were to work and the upside benefit of the mall value were to accrue to the developer at the end of the project as part of the return for completing the work, that may be justifiable. If not, the value presents a larger question in attempting to finalize negotiations. At Tuesday's meeting, staff and the consultant will be present to provide additional background and respond to committee questions relative to the status of the negotiations and to discuss options for moving forward. DIRECTION REQUEST OF THE CONMWTEE: To provide feedback relative to next steps regarding the Cedar Grove Redevelopment District Development Agreement. City Administrator cc: Gene VanOverbeke, Director of Administrative Services Jon Hohenstein, Director of Community Development Sid Inman, Ehlers & Associates Rebecca Kurtz, Ehlers & Associates Bob Bauer, Severson, Sheldon Law Firm 0 Cedar Grove Redevelopment District Deal Points and Issues July 19, 2005 The developer has moved the following items off of their budget and on to grants, city pays or yet to be defined: 1. $900,000 for affordable housing. 2. $2,400,000 for environmental clean up. 3. $2,500,000 for public improvements Total of $5,800,000. The city has also spent around $2,000,000 for land for a total of what the city would spend directly for this project to $7,800,000. ISSUES: 1. The 15% return was based on large end of phase cash flow risks that are no longer present. 2. The developer is not willing to guarantee the hotel. 3. The developer is not willing to guarantee the affordable housing. 4. The developer is not willing to guarantee the housing type. 5. The developer wants all additional tax increment that is a result of inflation on market value to insure they get 15%. OPTIONS: 1. Continue to attempt to complete negotiations of the outstanding issues. 2. City uses the $5.8 the developer wants in the project to buy the mall and start over with a new developer team. 3. City takes the risk and puts in $5.8 in costs and reduces the developers return to 10% to 12%. City keeps additional tax increment that is a result of inflation to pay them selves back for the $5.8 and (if available) use for the hotel. 4. City works around the Cedarvale Mall with a different developer and requires Cedarvale property to match our concept plan. The developer has refused to sign a predevelopment agreement or pay any costs of the planning and financial planning,to date. There is no contractual obligation on the City's part to complete an agreement with the developer. FJ FINANCE COMMITTEE MEETING NOTES TUESDAY JULY 19, 2005 4:30 P.M. CONFERENCE ROOM 2A & 211 Committee members present: Mayor Geagan and City Councihnember Carlson. City staff present: City Administrator Hedges, Director of Community Development Hohenstein, and Administrative Intern Walz. Ehlers. Also present: Bob Bauer of Severson, Sheldon, Dougherty & Molenda, Sid Inman of Cedar Grove Redevelopment Director of Community Development Hohenstein introduced the meeting by providing an overview and memo of the status of negotiations with Schafer -Richardson and Ryland regarding the Cedar Grove Redevelopment. The Committee reviewed the items that the developer has proposed to funded outside of the project budget and discussed options for the City to ensure these elements are covered in the overall development budget. In addition to an overview, the memo provided options for approaching unresolved points in the final development agreement. The Committee discussed the options and the feasibility of finalizing the development agreement and reinforced the following elements continued to be priorities: 1) One developer completes all five phases of development; 2) A hotel is included; 3) Acceptable types and finishes of residentiathousing is constructed; and 4) An acceptable percentage of affordable housing is constructed, with the Dakota County CDA as a primary partner. The Committee set a deadline of August 31, 2005 for completion of a development agreement and gave additional direction to staff for details of the proforma. The committee meeting adjourned at 5:30 p.m. 4 City of Eap ma TO: BOB BAUER, CITY ATTORNEY FROM: JON HOHENSTEIN, COMMUNITY DEVELOPMENT DIRECTOR DATE: JULY 25, 2005 SUBJECT: COUNCIL FINANCE COMMITTEE DIRECTION In follow up to the Council Finance Committee meeting of July 19, 2005, my notes reflect the following direction from the Committee relative to the resolution of the Cedar Grove Core Area Redevelopment Agreement: • Deadline for Completion of Development Agreement — The Committee directed us to complete an agreement with the Developer no later than August 31, 2005 or explore other alternatives, such as buying the mall and pursuing another master developer. • Profit Margin — The Committee concurred that, with the changes to the responsibilities for acquisition of property, shifting of risk, reallocation of major costs off the project budget,(affordable housing, environmental clean up and public improvements), it is necessary for the developer to accept a lower profit margin for developing the property. For the sake of discussion, say 10%. This would then allow the project to cover the costs currently carried off budget. Councilmembers have heard concerns in the community about the dual role of Schafer Richardson as the developer and the owner of the mall. A perceived high price for the mall combined with a high profit margin for the project will make it difficult to justify the project to the public. • Affordable Housing -- The Developer needs to make a proposal to provide affordable housing at a level of 20% of the number of units in the project. The Dakota County CDA should be the developer of the workforce housing units and should be the coordinator for the development of the mixed income rental units. The CDA has a better track record with the Council and they can develop the workforce units more efficiently and cost effectively without Ryland as the middle person. • General Residential Issues — The Committee indicated that they like the Schafer Richardson urban residential products and proposed vertical mixed use approach. They are not committed to Ryland as the developer of the other residential products and are very concerned about Ryland's stated intention to build the mix of product types and finishes shown in Eden Prairie. The Committee is frustrated by the inability of a national production builder to alter their program to better fit the City's vision for the area. Basically, the Committee reiterated comments made after the bus tour that the residential development is the easy part and that SR and the City should be able to find anyone to do that part. In fact the Committee asked whether it is time to have a side conversation with SR about finding a different residential partner. When Ryland proposed to be the lead partner and the deep pockets, it was one thing. Now that they simply want to buy lots from SR, that is another. Lack of Formal Commitment — The unwillingness of the developers to enter into a predevelopment agreement or to deposit funds to cover City costs gives the City the latitude to change plans if necessary. cc: Sid human and Rebecca Kurtz, Ehlers and Associates Gene VanOverbeke, Director of Administrative Services Cedar Grove Redevelopment District Comparison of Agreement Progress Agreement at the Beginning of Process: On the basis of the RFP criteria and the initial discussions with the developer, the basic deal points were: Developer to use good faith effort to buy the land and eminent domain to be considered only after good faith efforts to do so were exhausted. Developer to include Hotel in Phase V. Developer to provide affordable housing. Developer to take total risk of expenses and phasing, in return for 15% development profit. Developer to provide housing types and finishes that meet CGD zoning standards. Project proforma to be scaled for TIF proceeds to cover extraordinary costs of redevelopment. Current Proposed Agreement: In the course of negotiations and sequential updates of the developer's proforma, the developer has asked that the deal be modified in the following ways: City to buy the land through eminent domain and resell it to the developer for a dollar. (The city has spent approximately $2,000,000 for land to date for right of way improvements and acquisition of property from willing sellers.) Developer to choose whether to do Hotel or not. (But developer's proforma relies on anticipated increment from Phase V at the level projected for a hotel.) Developer proposes that City to pay the differential between affordable housing and market rate housing from non -TIF sources (Estimated to be $900,000). Developer proposes that City to pay for some off site improvements from non -TIF sources (Estimated to be $2,500,000). Developer proposes that City get grants for environmental clean up (Estimated to be $2,400,000). Total of requested additional City costs from non -TIF revenues exceeds the cost of acquisition of the Cedarvale Mall included in the proforma. Developer continues to carry 15% development profit on proforma. Residential development partner has not yet committed to meet CGD zoning standards or CGD consistent housing types. SEVERSON, SHELDON, DOUGHERTY & MOLENDA, P.A. SUITE 600 7300 WEST 147TH STREET APPLE VALLEY, MINNESOTA 55124-7580 (952) 432-3136 TELEFAX NUMBER (952) 432-3780 E-MAIL bauerr@sevorsonsheldon.com TO: Jon Hohenstein, Community Development Director FROM: Robert B. Bauer, City Attorney DATE: August 31, 2005 RE: Status of Negotiations Following Direction of the Subcommittee Our File No. 206-23508 Jon, Several weeks ago we met with the subcommittee members (Mayor Geagan and Councilmember Carlson) to discuss the status of negotiations with Shafer Richardson. • The subcommittee expressed concerns with the following: ➢ Latest proposal was significantly different than what was proposed in the RFP. ➢ The City was absorbing additional costs for offsite improvements, affordable housing and environmental. A The developer would not commit to the construction of a hotel. ➢ The developer still requested a 15% return. ➢ The City property would be conveyed to the developer for $1.00. A The developer was seeking a significant return on their investment in the purchase price for the mall. There was considerable risk that the developer would not proceed beyond the initial two to three phases of development. Jon Hohenstein, Community Development Director August 31, 2005 Page 2 ➢ The developer has not agreed to meet a 20% affordable housing level or to have the CDA build the workforce rental housing component of the project. ➢ The subcommittee gave a deadline of August 31, 2005, to negotiate the terms of the development agreement. The subcommittee gave direction to continue negotiations with the developer, however, if the City was absorbing all of the risks then the developer should not expect a 15% return and suggested that 10% was more appropriate and to potentially compromise at a 12% return. The Committee also gave direction to have the developer comply with the affordable housing level identified, have the CDA construct the workforce rental housing, meet the CGD architectural and finish standards for all of the products to be built and agree to a deal structure that would insure that all of the phases would be completed or that the City retain the ability and funding necessary to complete the redevelopment if the developer did not. . • The development negotiating team was reduced to the City Attorney and the. attorney for Shafer Richardson. • In initial discussions, the developer rejected the proposal for reduced profit and offered to contribute up to $400,000.00 for the off-site improvements; but would not commit to the construction of the hotel. • A meeting was held with the developer and their attorney on August 26, 2005, in an attempt to reach a resolution. • At the meeting, the developer was advised that the City would absorb the cost of off sites, affordable housing and environmental remediation and eliminate the requirement for the hotel Mlyy if the developer would agree to a 12% return. • On August 30, 2005, the developer indicated that they remained interested in pursuing the development, however, a 15% return was necessary. 6