01/16/2009 - City Council Finance Committee
AGENDA
FINANCE COMMITTEE MEETING
FRIDAY, JANUARY 16, 2009
1-2 P.M.
CONFERENCE ROOMS 2A&B
1. AGENDA ADOPTION
II. REVIEW FINANCING OPTIONS ASSOCIATED WITH THE POSSIBLE
RELOCATION OF FIRE STATION #2
III. REVISED CEDAR GROVE CONCEPT PLAN FINANCING
IV. OTHER BUSINESS
V. ADJOURNMENT
Agenda Information Memo
January 16, 2009, Finance Committee Meeting
II. REVIEW FINANCING OPTIONS ASSOCIATED WITH THE POSSIBLE
RELOCATION OF FIRE STATION # 2
ACTION TO BE CONSIDERED:
To provide direction to staff regarding financing options associated with the possible
relocation of Fire Station # 2
FACTS:
• The City's Public Works Committee and City Council have been reviewing the
possible relocation of Fire Station # 2.
• The final scope of the project for a Fire Station/Fire Station campus has not been
determined.
• The Finance Committee has been directed by the City Council to review possible
financing options and to report to the City Council at the goals retreat.
• Available financing options include some combination of the following:
o Community Investment Fund (CIF)
o Sale of Property
1. Station # 2
2. Fire Administration Building
o General Obligation Bonds
1. Capital Improvement Bonds (CIB) (No election)
2. General Obligation Bonds (With election)
• The City can issue Capital Improvement Bonds sold without a referendum to buy
the land and/or to construct the fire station. There are numerous legal
requirements to use this option. Certain components of the larger scope project
cannot be financed by CIB and these bonds cannot be used to purchase
equipment.
The City's current policy regarding the use of the CIF requires inclusion of
projects in two consecutive formally approved CIPs. Although discussed
frequently and over a relatively long period of time, this project technically does
not meet that requirement and will require an exception to the policy or a policy
change. The policy is strictly that of the City and can be waived or amended by
the City Council as desired.
• Direction on purchasing the previous parcel of property for this project included
the use of $600,000 from the City's General Fund. Given the current state of
affairs regarding the State's budget deficit and previous and expected responses
regarding payment of MVHC, use of the General Fund for this project is not
recommended at this time.
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• The following is one possible Uses and Sources scenario for the project:
Uses: Station Only Everything
Fire Station 5,181, 804 5,181, 804
Fire Administration 972,752
Residence Dorms 702,655
Police Storage 803,399
EOC 300,779
DCC 67,399
Land 600,000 600,000
Total 5,781,804 8,628,788
Sources: Station Only Everything
Sale of Station 2 560,000 560,000
Sale of Fire Admin Building 2,200,000
Community Investment Fund (CIF) 600,000 600,000
Capital Improvement Bonds (CIB) 4,621,804 5,268,788
Totals 5,781,804 8,628,788
Notes:
The potential sources have not been reviewed by the City Council, no direction has been given,
the relationship between CIF and CIB needs significant review, and the ability to sell existing facilities
at the estimated values should be verified.
Building costs are as presented by SEH.
The land cost is at the high end of discussed values for 5 acres.
The property sales are at the low end of the estimates.
• Using very preliminary debt service information and based on 2009 payable truth
in taxation calculations for the average market value house of $275,528, the
annual tax impact is estimated to be approximately $11.00 for the station only
bonds (principal $4,625,000) and $13.50 for the everything bonds (principal
$5,275,000). Changes to the principal amount resulting from a change to the
project scope or through the addition of capitalized interest, interest rate
adjustments, and bond sale timing, may result in a significant margin of error on
these estimates.
ATTACHMENTS: (None)
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Agenda Information Memo
City Council Finance Committee
January 16, 2009
III. CEDAR GROVE - FINANCIAL UPDATE
DIRECTION REQUESTED:
To provide feedback and direction regarding the Master Real Estate Purchase Agreement for the
Cedar Grove Redevelopment Core Area.
BACKGROUND:
A review of the current status of the City's TIF districts has been referred to the Finance Committee
by the City Council. This is in keeping with previous Council referrals, when the Finance
Committee has reviewed and given recommendations to the full Council and EDA on
redevelopment financing in the past.
In 2008, the Committee received an update on all of the districts and provided direction regarding
each of them. In particular, the Committee reviewed a sources and uses spreadsheet for the Cedar
Grove Redevelopment District that defined a range of financing sources in relation to expenditures
to date and expected. One of the more substantial sources of funds will be the purchase prices for
development property by the developer as the redevelopment activity moves forward. Since that
time, staff and the Cedar Grove Master Developer, Doran Pratt, have negotiated a draft of a Master
Real Estate Purchase Agreement to cover the terms under which the phased sale of properties will
be undertaken by the City to the developer.
The intent of this background and discussion is to provide a brief overview of the general terms of
that agreement and the reason for certain aspects of the calculation of sale price, in consideration of
the current economy. The information is at a very high level, with the intended outcome to be to
respond to Committee questions and identify any remaining issues to be addressed as the agreement
is prepared for consideration by the EDA. Further information regarding the general financial
issues and additional discussion of the funding sources would be expected to be at a future
Committee meeting.
General Overview of the Agreement
The City and the developer currently operate under a Preliminary Development Agreement, which
was originally entered into in August, 2007. It commits the parties to work together to define a
phased development plan and the details of a first phase, terms of which would then be committed
to through a TIF Development Agreement. The preliminary agreement runs through August, 2009.
The current development and credit markets have limited the developer's ability to present the next
phase of plans that would be necessary to develop the phased plan and, as a consequence, the parties
are not in a position to move forward on the Development Agreement. In addition, having become
the assembler of the development parcels, the City is in a unique situation that it can assist with the
financing of the development pro forma gap to the greatest extent through the purchase price of the
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property, rather than through payments to the developer or other considerations that typify many
redevelopment agreements.
For these reasons, in order to be poised ready to do that when the markets permit, the City and the
developer have been negotiating a Master Real Estate Purchase Agreement that would define the
terms and methodology for establishing the purchase price of the property in both the short and long
term. The basic outline of the agreement is described below:
• Sale by Phase - As was proposed in the past, the agreement would provide for the sale and
transfer of property by the City to the developer only when the City has approved a
development phase for the affected properties. This increases the cost of carry for the City,
but it also gives the City ultimate control over the development. Prior to any sale a public
hearing is necessary to allow for comments concerning the purchase terms. Separate
approval by the EDA is needed for each purchase agreement.
• Initial Purchase Price - In a more typical economy, the purchase price for a redevelopment
parcel should be the market price for bare land, with the City using TIF and other funding
sources to offset the extraordinary costs of acquiring developed parcels - costs of structures,
business relocation, demolition, remediation and site preparation. Recognizing that the
current development and credit markets may require the City to deeply discount the
redevelopment property in order to permit development phases to proceed, the agreement
would establish the initial purchase price through an analysis of the phase pro forma by
Ehlers and Associates. The parties would agree to the appropriateness of the various
assumptions, including the discount rate and the developer's return on investment. From
there, Ehlers would work back to determine the land cost the development could afford to
pay and still create sufficient return to cause the developer to proceed. In the current case,
depending on the nature and current market support for the uses in a particular phase, the
price may or may not be close to an ordinary market price for bare land.
• Look Back Provision - While it is expected to be necessary to discount the land price to
some degree on some if not all of the phases, as the economy recovers, it is possible that
property values will appreciate directly or through increase lease rates, such that the
developer's return on investment will exceed that assumed in the initial purchase price pro
forma. To account for this and to insure that the City participates in the upside should it
occur, the agreement includes a "look back" provision that calls for an updated pro forma
analysis at the time that the project is sold to an arm's length third party or at a time of the
City's choice. If that analysis concludes that the original rate of return could have been
achieved at a higher land purchase price, the agreement calls for the City and the developer
to participate in the benefit of the higher return up to what the "market price" for bare land
would have been in an ordinary market. The payment of the differential would be subject to
a personal guarantee by the developers. Ehlers has advised other clients regarding similar
clauses in other agreements in other communities.
• Pricing and Look Backs for Different Property Types - The agreement lays out the pro
forma and valuation approaches for each property type, because there will be a different
approach to value for the owner occupied sale homes that will establish value upon their
purchase and the other types of properties that will be leased over time and/or sold at
different times.
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• Term-The agreement has an initial term of three years, with the ability of Doran Pratt to
extend for an additional three years if certain development targets are met.
We anticipate that a number of the terms and inputs can be built into the initial pro forma in advance
at the outset and that others will be defined as the market recovers and the first phase approaches
approval. Doran Pratt indicates that having the Master Purchase Agreement in place will permit
them to include it in their marketing of the site to various development partners or retail tenants. As
a consequence, the agreement will both put the City and developer to be in a position to move ahead
as the market recovers and permit the developer to approach third parties with an established
approach to valuation and look back that can be considered in the negotiations to locate them in the
development.
If this approach to the Master Real Estate Purchase Agreement and the subsequent process are
acceptable to the Committee, staff and the consultants will continue negotiations to finalize the
agreement and prepare it for presentation to the EDA at an upcoming meeting.
ATTACHMENTS:
• None
