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Date
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August 7, 2006
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Agenda
Item No. 53 Roll
Call No. 06- Communication No. 06-484 Submitted by: Richard A. Clark, City Manager |
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AGENDA HEADING:
Approving Section 108 Loan Guarantee Application and Amended Brownfield Economic Development Initiative (BEDI) Grant Application for Redevelopment of Riverpoint West.
SYNOPSIS:
Recommend
approval of the City’s application for a $17.5 million U.S. Department of
Housing and Urban Development (HUD) Section 108 loan. This action also authorizes
staff to re-program an existing $2 million Brownfield Economic Development
Initiative (BEDI) grant to assist in the commercial redevelopment of Riverpoint
West. Commercial development is planned
along SW 9th Street and Martin Luther King, Jr. Parkway south of the
Central Business District. Section 108
loan funds will be used primarily for land acquisition (including relocation
and demolition), environmental remediation, geo-technical work and
infrastructure installation. The BEDI
grant will fund a debt service reserve to repay a portion of the interest-only
payments on the Section 108 loan during the first five years of the loan term
following a two-year draw down period.
FISCAL IMPACT:
Amount: $19.5 million
Funding
Source: There are two sources. At this time, accounts have not yet been
established but will be created when the contracts are executed.
1. The $17.5 million Section 108 loan will be drawn down over a two-year period and will have a 20-year term. It is anticipated that the City will repay the loan with 75% of the TIF revenue generated by the housing and the commercial aspects of the Riverpoint West redevelopment project over 22 years, provided that certain assumptions (listed below) are met. Interest-only payments will be made during the first five years following a two-year draw down period. Principal payments will begin in the sixth year to more closely match the anticipated TIF from the project, following the two-year draw down period. Non-project related TIF from the Metro Center District is expected to be used to address part of the loan repayment from Year 4 to Year 14 until there is sufficient tax increment from the project to cover the entire repayment.
It is important to note that the TIF anticipated to be generated by the Riverpoint West redevelopment project is predicated on several assumptions:
· The total assessed value related to construction of 642 townhomes/condominiums and 384,000 square feet of commercial space.
· Completion of the Riverpoint West development in accordance with the projected six-year build-out schedule.
· The residential components of the project being limited to the 5-year, 100% tax abatement schedule and the commercial aspects being limited to the 3-year 100% tax abatement schedule.
If the conservatively-projected assessed value is less than expected, if the project is delayed, or if Council allows a more beneficial tax abatement schedule, more than 75% of the project-related TIF revenue, more than 22 years of the project-related TIF revenue, or the use of non-project related TIF revenue may be needed to support the Section 108 loan.
2. The
$2 million BEDI grant will be used to fund a debt service reserve to pay a
portion of the interest-only payments on the Section 108 loan during the first
five years following a two-year draw down period.
ADDITIONAL INFORMATION:
On October 24, 2005, Council approved Preliminary Terms of Agreement with
River Point West, LLC for redevelopment of the Riverpoint West area. River Point West, LLC is an affiliate of
Sherman Associates, Inc. (George Sherman, President, 233 Park Avenue South,
Suite 201, Minneapolis, MN). River
Point West, LLC intends to develop 642 townhomes/condominiums, 384,000 s.f. of
commercial space and other improvements.
About one-half of the commercial space (192,000 s.f.) is anticipated to
be comprised of retail and the balance (192,000 s.f.) for office uses. Approximately 445 jobs will be created. The initial market value of the project is
estimated at $165 million with a six-year build-out. Any reduction in market value or delay in build-out will
adversely impact the City's ability to repay the Section 108 loan with
project-related TIF.
In accordance with the Preliminary Terms of Agreement, the developer
generated pro-formas that the City reviewed.
In addition, the City worked with a consultant from the National
Development Council to assist in analyzing and structuring the deal,
identifying other financing options, and submitting a Section 108 loan and
amended BEDI grant applications.
Section 108 loan and BEDI funds are proposed to be used only for the
commercial component of the project in order to meet the national objective of
benefiting low- and moderate-income persons through job creation. Listed below are the proposed sources and
uses of funds for this component.
|
Uses of Funds |
Amount |
Sources of
Funds |
Amount |
|
Land (incl. Relocation/Demolition) |
$14,950,000 |
Developer Lot Purchases |
$ 4,950,000 |
|
Environmental |
1,000,000 |
Section 108 Loan |
17,500,000 |
|
Geo-technical |
500,000 |
BEDI Grant |
2,000,000 |
|
Infrastructure |
10,355,000 |
RISE Grant |
500,000 |
|
Developer Administration |
2,300,000 |
Hubbell—SW 11th Street/Murphy Street Improvements |
325,000 |
|
Construction Interest |
600,000 |
Federal Earmarks |
1,155,000 |
|
Debt Service Reserve |
3,350,000 |
New Markets Tax Credits Equity |
6,625,000 |
|
Total |
$33,055,000 |
Total |
$33,055,000 |
Prior to entering
into the Final Development Agreement, which is projected to occur in
fall/winter 2006, the developer and the City will create a financing
contingency plan should all of the funding not be obtained. To date, the developer has pledged
$4,950,000 for the purchase of the pad-ready commercial lots, and the Hubbell
Realty Company has committed $325,000 toward construction of SW 11th
Street between Tuttle Street and MTA Lane as well as Murphy Street, which will
serve its proposed 143,000 s.f. flex space development. The Iowa Department of Transportation has
committed a $500,000 grant for construction of SW 11th and Murphy
Streets. U.S. Bancorp has submitted a
Letter of Interest for providing $6,625,000 in equity, net of load and fees,
through the New Markets Tax Credit Program.
Of the $1,155,000 anticipated to be received from federal earmarks, the
City has secured $300,000 in Federal appropriations for FY2006 and has requested
additional funds for Riverpoint West in FY2007. The U.S. House of Representatives has preliminary earmarked
$700,000 for sewer infrastructure and $300,000 for land acquisition and related
expenditures for FY2007. The U.S.
Senate will vote on appropriations in the next several months. The City will know the level of federal
investment in the project for FY2007 in fall 2006.
The Section 108
loan will be drawn down over two years: $8,125,000 in Year 1 and $9,375,000 in
Year 2. The developer will be required
to have optioned at least 75%
of the land and demonstrated commitments for the balance of the funding before funds
will be released in Year 1, and will have to meet performance benchmarks in the
first year before funds will be released in Year 2.
The primary source
of repayment for the Section 108 loan is 75% of the anticipated TIF generated
over 22 years from the residential and commercial aspects of the redevelopment
project. This is contingent on several
factors, which include (1) meeting the total projected assessed value, (2)
completing the project in accordance with the anticipated schedule, and (3)
developers being limited to 5-year, 100% tax abatement for the residential
development and 3-year, 100% tax abatement for the commercial re-use. The secondary source of repayment is TIF
generated from the Metro Center District as a whole. (NOTE: The Preliminary
Terms of Agreement anticipated that it would take 20 years, not 22 years, to
repay the Section 108 loan from 75% of the anticipated TIF generated by the
project.)
The City will agree
to repay the Section 108 loan from annual appropriations of TIF revenues. The annual pledge of funds will be subject
to non-appropriation and, consequently, will not count in determining the City’s
constitutional debt.
Section 108 loan and
other funds are projected to leverage over $6.6 million in New Markets Tax
Credits (NMTC) equity, which is an essential part of the project
financing. Due to the infusion of NMTC,
there are two impacts related to risk and security: First, the Section 108 loan is to be drawn down in two
installments rather than three ($8,125,000 in Year One and $9,375,000 in Year
Two). Second, the security arrangement
will become more complicated.
Based on the
Preliminary Terms of Agreement, security for repayment of the Section 108 loan
was for the City to hold mortgages on the land acquired for the project;
however, the NMTC financing
structure does not allow for this.
Instead, the City will lend Section 108 funds to the investment entity
that will make a qualified New Markets Tax Credit investment in a New Markets
Community Development Entity (CDE) that will subsequently make a loan with the
Section 108 funds to the development entity (River Point West, LLC) to complete
the project. River Point West, LLC will
use Section 108 funds to acquire property for re-sale and redevelopment of
commercial space. The New Markets CDE
will hold the first mortgage on the property, which will be a single-purpose
entity to finance the commercial aspect of the Riverpoint West project. The City will have a security interest in
the investment entity’s 99.99% membership interest in the New Markets CDE. As such, the New Markets CDE will have no
authority to amend the extensive set of mortgage, security and other documents
without the City’s authorization.
Otherwise, the developer would be in breach of the Master Agreement, and
the City could foreclose on the investment entity’s membership interest and
consequently cause the New Markets CDE to foreclose on the property. The Master Agreement will include the loan
documents, promissory note and pledge of security agreement as well as will
govern the disbursement of funds to ensure that the developer performs and that
the City has appropriate remedies in case of default.
An additional
source of collateral is that the developer has committed $4,950,000 to purchase
the pad-ready commercial lots, and the principal will back this by corporate
and personal guarantees.
The Section 108
loan is ultimately secured by the City's future allocations of CDBG funds. If the Section 108 loan is not timely repaid
by the City, the remaining principal and interest due on the loan may be
withheld from future allocations of CDBG funds.
The final acceptance of the Section 108 loan and BEDI grant is subject
to a future finding by the City Council as part of the final Development
Agreement that adequate security will be provided for timely repayment of the
Section 108 loan. Although the security
arrangements proposed by the developer and outlined above are acceptable in
theory, the details are extremely complicated and still need to be resolved to
the City's satisfaction prior to execution of the final Development Agreement.
The Preliminary Terms of Agreement also stated that the City of Des
Moines would be responsible for facilitating infrastructure installation. It is critical that the infrastructure be
developed and installed in conjunction with the project as a whole. Due to provisions of Iowa Code Sec.
384.95, the City of Des Moines must construct public improvements as City
construction projects. To the extent
that any portion of the cost of construction of the planned public improvements
in Riverpoint West is paid for with money that comes from (or through) the
City, the contract for the construction will be between the City and the
contractor and the contract will be awarded to the “lowest responsible
bidder.” Again, the New Market Tax
Credits flow-of-funds structure complicates this process.
The Final Development Agreement will detail the mechanisms whereby the
City competitively bids the infrastructure improvements as well as the
requirements for reserving the funds for the infrastructure improvements. There
are several mechanisms that could work.
One option would be to have the City bid the public improvements, enter
into one or more contracts for the infrastructure work and then assign some or
all of the contracts to the developer.
Another option would be for the developer to remit a sufficient amount
of the Section 108 loan funds to the City, which would contract for the
infrastructure work.
Due to the
complicated financing requirements of the Riverpoint West Redevelopment
Project, the City will need to employ outside legal counsel and financial
consultants. The expense of outside
counsel and consultants will be significant and will be included in the overall
cost of the project to be paid with project funds.
It is
likely there will be further changes in the developer’s pro forma or build-out
schedule before the City enters into the Final Development Agreement, Section
108 Loan Guarantee Agreement and BEDI Agreement. The impact on the projected TIF must be recalculated at that
time.
The developer has
made progress to date regarding land acquisition in Riverpoint West. Most notable is that it has entered into a
purchase agreement for the Merchants property at 1350 Martin Luther King, Jr.
Parkway. Sherman Associates and Nelson
Development have signed a Letter of Intent to develop a 50,000 square foot
speculative office building on part of this 10-acre parcel. Construction is projected to commence in
late spring 2007. The developer
continues to discuss opportunities to locate in Riverpoint West with several
companies.
PREVIOUS COUNCIL ACTION(S):
Date: October 24, 2005
Roll Call Number: 05-2603
Action:
Preliminary Agreement with Riverpoint West, LLC for redevelopment of
Riverpoint West Area. (Council
Communication No. 05-611) Moved by Hensley to adopt.
Motion Carried 7-0.
Date: September 12, 2005
Roll Call Number: 05-2217
Action:
Revitalize Iowa’s Sound Economy (RISE) Grant Application to construct
and reconstruct roadways in Riverpoint West area, SW 11th Street
from Martin Luther King, Jr. Parkway to MTA Lane, Murphy Street from SW 9th
to SW 11th Streets and Tuttle Street from SW 11th Street
to 300’ east. (Council
Communication No. 05-501) Moved by Hensley to adopt.
Motion Carried 7-0.
Date: July 25, 2005
Roll Call Number: 05-1832
Action: Authorizing continued Negotiations with
Riverpoint West, LLC for redevelopment of Riverpoint West Development
Area. (Council
Communication No. 05-419) Moved by Hensley to adopt.
Motion Carried 6-1.
BOARD/COMMISSION ACTION(S):
Date: May 3, 2006
Roll Call Number: N/A
Action: The
Neighborhood Revitalization Board recommended approval of the Section 108 loan
application to redevelop Riverpoint West.
It also encouraged the
development of affordable housing in the area if the return on investment to
the tax base and to the developers will allow it.
ANTICIPATED ACTIONS AND FUTURE COMMITMENTS:
The U.S. Department
of Housing and Urban Development will review the Section 108 loan and BEDI
applications concurrently. It is
anticipated they will decide on the funding in November 2006 and issue
contracts in early 2007.