Committee Minutes

Minutes/Finance-Development Standby Committee
Tuesday, July 12, 2005 - 4:00 p.m._______________

The Finance/Development Standby Committee met on Tuesday, July 12, 2005 at 4:00 p.m. in Room A101 in City Hall with Committee Chair Christensen presiding. Present at roll call were Christensen, Glassheim, Hamerlik.

Others present included: Greg Hoover, Keith Lund, Meredith Richards, Dennis Potter, and Jim Kobetsky from Schoen & Associates, Inc.

1. Update of Schoen's Elite Brownstones, Site #1 - Memorial Park.
Keith Lund, Urban Development, stated that Finance/Development recommended two projects for approval on May 31, city council approved them on June 20, and they are focusing on the Elite Brownstones and current proposal has 26-unit condo development that encompasses the entire block as it goes over the Herald site; action on Phase 2 is on hold pending wrapping up the details on Phase 1; the city assessor has reviewed the project assumption and feels the construction costs and sales price are in line and are appropriate, now have a project with construction costs of approx. $2.7 million and looks like the asking price will be $135,000 and requires developer equity of $670,000, private financing of $720,000 (bank loan at 6.5%) and approx. $1.7 million with no interest City loan funded through Fannie Mae. Christensen stated it is not a no interest, they will be paying the same interest we are paying. Mr. Lund stated that is not going to work - Christensen stated 3% of $1.7 million and that is $30,000/year. Mr. Lund stated 3.5 Performa and actually ran the numbers at 4% loan and deferred that and interest would be $117,000 for 3 years.

Mr. Lund stated they have had discussions with Fannie Mae about increasing our line of credit in order to do this and they are very willing to increase our line of credit and have given them financials and they are waiting for us to submit the details of the project - to approve this project will increase our line of credit. The City, Greg and someone from the Development team are meeting with the Grand Forks Herald Thursday trying to reach a favorable arrangement regarding the Herald parking lot, hoping for some type of trade arrangement. The ordinance has been approved that allows the transfer of property within the Renaissance Zone so will be able to deal with the transfer of the real estate pending city council approval

Christensen asked when they will have their document done so committee could review it. Lund stated he would anticipate having the structure of the proposal ready for council review in next cycle which would be two weeks from yesterday.

Christensen questioned that project going to take 3 years, might take a year to build if they have pre-sold a number of units, and when do they anticipate construction starting. Jim Kobetsky stated they want to start construction this year and construct it over the winter and have ready for occupancy the following summer. He stated they have a list of people who are interested in these units, 19 on the list now and would hope to sell them in a one year period after construction is done, but can't gamble and thinking a year to construct, a year to sell and year for bumper and is why they went for the 3 years. He stated he thinks it is going to be a 24 month deal and wrap up rather quickly, looks positive. Christensen stated they received some criticism because giving the land away, no commitments made that you were going to get a loan from the City, and what the City pays they have to pay, that we are getting our money from Fannie Mae at 3% and that either they are going to spend their cash, take our money and then take the bank's company, that we should get our money back, the only add to the City is putting those on the tax rolls and the people buying these will be getting tax break, they get $10,000 credit for 5 years, and in renaissance zone property tax, half is forgiven declining over 5 years.

Mr. Kobetsky stated the real issue is the cost of the units bumped up to $135,000 and thinks they are at the maximum on base price. Christensen stated shouldn't they try to sell them at $140,000 to see what kind of resistance they have; Mr. Kobetsky stated if go too high and at the top right now and have put together package that has brick veneer on the outside, that has windows and historic aesthetics and that is costing them money and not willing to give up the aesthetics of the historic field downtown to try to hold the price to $140,000 or $135,000 and that is where the money difference comes in. Christensen stated they should use their own money first, bank money second and City money last. Mr. Kobetsky stated he thought it was going to be on an equal basis, when sold, percentages would be on equal basis, that if sold 10 would split out on equal basis, the City, developer, etc. and City would get their cash back as well as their tax back on an equal basis and share equally, and proper way to do it in his mind.

Mr. Lund stated they actually ran the information through assessors and he has indicated that the construction numbers are in line and indicated that $135,000 is within the range of appropriate asking price in the market but isn't at the top. That with deferred interest at 3 years and put in place $174,000 profit line and the project actually shows a loss of $102,000 and the profit if it takes the Performa performs as projected the profit after 3 years is only $74,000 on a $2.6 million project.

Christensen stated only concerned about the City's involvement in interest free loan and how we get our money back, if any. Mr. Kobetsky stated that if sell in 12 months and if sell in 2 years whatever the interest is for that period of time would be on a shared basis, if sell off in 12 months would be 12 months of interest, and wanted 0% and that savings would be in both directions. Christensen stated that if they get it done in 12 months you would pay interest and if a bad deal you would want interest forgiven and not want to pay it. Mr. Kobetsky stated this project is tight and not huge amounts of profit here and what they have done is set it up so that there is 0% on the money at this point and would like to set it for 3 years if they could to be on the safe side and if it only takes one year, are asking then that they would use one year of 0% interest loans and if at the end of 3 years and not sold by then, then he would have to pick it up. Christensen stated what he would anticipate is and have told staff to give break on the interest and that we just want our money paid back so there is no additional cost to the citizens because no source to pay that interest back other than this project, and would like in the agreement that know how many pre-sold -- Mr. Kobetsky stated he can't pre-sell them. without having all the details, etc. Christensen stated before they advance any money will know how many have been pre-sold, and they sell them the City gets paid and would appreciate it if we would set it up that we get our money back and our interest just as doing with the bank, and if this doesn't work, that if 18 months from the day you start to sell then readjust what obligations you had, if any, to pay interest on the balance of the money that you are out or into us for, because have all that money in the deal when done and be into us for $1.7 million and if working we get our interest and if not working, then we are partners. Mr. Kobetsky stated to do that the price has to be raised and that he has a hard time with that. Christensen stated the City has given away the land, the interest and giving away real property taxes and they get a break under the State law for their income taxes, and if qualify for these loans - Mr. Lund stated a Renaissance Zone project would provide for the home buyer, provide a 50% tax abatement first year and would decline to 40%, 30%, 20%, 10% in next 5 years. Meredith Richards stated that each person has to apply individually to the City, each would go to city council and then to the State, could be denied if have basis. Christensen stated if selling this and whomever buys this is going to know that they have that potential property tax break.
Glassheim stated we started this project thinking there was a public interest in repopulating the downtown - that was the point of asking for bids and part of the public interest was that the downtown not remain vacant, thereby reducing property tax rates over a long period of time and that we not return to pre-flood deterioration of the downtown and that it seemed to him that city government was to do something to assist and encourage developers to build downtown where a simple market forces they might not and that is his understanding of what is going on - we are using federal HOME money which we got, the cost of the lot from the flood but really valued at nothing, it is a park has lovely flowers and some would rather have it stay that way, but have moved ahead to do this, and now why taking credit for that $100,000 as if somebody getting something for nothing as we got it for nothing and now want something for it - and if understands the developer who is looking out for himself but also has many years in this business and has good sense of what might happen, that we are trying to get this to move fast and want to live downtown and $100,000 to these units is going to sell in a day and $160,000 not sell at all and don't know what the price point is, but are moving beyond the original thought was, that was to create the excitement that would then lead to the second bunch of construction and even to a third and use of city lots - that we are giving something but doing it for the public purpose of re-populating the downtown, came out of that committee but the idea was that there would be some subsidy but only arguing over how much. He stated the payback to the City has always been in the big picture, long term population but also in the actual dollars of that construction rather than an interest charge, we are going to get 2.44% of $135,000 and 1.8% of 135,000 for the first 5 years on average, average out for 5 years to be a loss of 6/10th of a percent, about 1.8, not the city but all the taxing entities that they serve are going to get $2,000/year. He stated over the 5 years, 75%, first year 50%, then 40%, etc. and get $2500 average. Mr. Kobetsky stated this whole thing was trying to hold the price so don't get too high price here so he can honestly sell those things so it is a very successfully project and if go into the range that they are talking, thinks we are at the top already, and have raised it to - units are 1350 sq.ft. at $100.00/ft. is $135,000, and everybody knows you can't build anything for less than $1.20 ft., and is trying to suggest that if it is hot and it works, we get our cash back quicker and if it doesn't work and shared vision doesn't work, then don't pay the interest. Mr. Kobetsky stated he would rather see it on second phase, if it is hot then maybe the second phase, kick in the interest and boost the price up but the first phase should be zero interest, that they want to make this a successful and want all units to be sold and wants to do another project and raise price as fit, and now units maxed out. He stated Mel Carsen has looked at them and he knows they are at the tope of the list, and they know that they are at the max, and pushing the limit on the envelope and is at the limit and that is why asking for it.

Christensen asked that they e-mail and given them amortization of the taxes so they understand that and know what the break is, just take the tax estimate and let us know what we are going to get as a community. Hamerlik stated just over $3,000 would be tax break. Christensen stated it was $3240/year and first year only pay half of that, 40%, etc.

Christensen stated our interest rate is at 3% and will be going up because rates are going up, and can project what your rates are going to be as he draws down on our money and as they sell - but wants everybody to understand when they approve this, that they know what they are approving. and if there are some people who don't want it, then deal with it but he believes that $1.7 million and 3.5 or 4% that's good for a person who is picking up what they are getting in the form of state tax credits and property tax relief and believes that we should know that because we are spending your money, our money, so that everybody who looks at this in the future can analyze how this came down and what the benefits were - and when continue to do things down here, people have to know that, and would just as soon you get it done within the next 2 weeks so we have it as part of the presentation of whatever you are going to give us that we give to the council, and would also like to see the document before going to council so committee can look at its and be unified or not going to the council.

Mr. Lund stated it was his intention to have the council endorse the financing package and to work on the legal documents later and not sure when the city attorney's office would be done. Christensen stated the final legal documents have to be there before you can go to the bank, that if he wants to be selling by the end of next summer, someone has to make some room to get it done, they have to be digging in September and have to know they have a deal so they can go buy that from the Herald. He stated the legal documents are going to be a commitment that we are going to lend them some money and they are going to build to our specs. and that there is still some on-going discussion as to when and if they pay interest and how much and when, and we have to have two weeks to convey the land . Mr. Kobetsky stated they would like to start in September as the latest and have to draw the plans also, Glassheim stated if the council approved a non-legal document with all the points in it, they could go ahead with plans. Mr. Kobetsky stated they need to know whether they have a deal, Glassheim stated that the legal documents could come 2 weeks or 4 weeks after the council approves the terms and conditions that you understand and agree with. Christensen stated all they need from us is a commitment to advance x dollars at from 0 to x rated interest and paying back, and a commitment to convey the land, once they have the land in hand they can go to the bank, and asked if they are going to put a second mortgage on this land so have paybacks, and Mr. Kobetsky stated as they sell it there is a release price.

Glassheim asked if the document would include the disposition of the flagpole and the boat. Mr. Kobetsky stated not keep the corner monument where it is, the boat and plaques will be incorporated, will build a base and put the plaques and pictures in the base and boat on top; to be a centerpiece of the whole - the flagpole not sure what to do with those. Christensen asked if they could have that picture available to the council so they can see it when they vote on this.

Hamerlik stated he has heard concerns about the park, losing green and flagpoles, etc. Lund stated this is a trade-off. Hoover stated that he has been told is that those parks were put in place as placeholders, they weren't intended to be parks forever. Hamerlik stated he wouldn't disagree with that but when common person down the street, they see it and like it and now it is going to be gone; and the change to the land will change dramatically.

Glassheim stated the developer is going to take care of the Herald lot and that the City is not involved in that. Lund stated there will be some discussion. Christensen stated the RFP did not include the Herald land, that they have expanded the project to buy the land and it has been represented to us that they are going to be buying it; Mr. Kobetsky stated it was expanded at the City's behalf - that the Review Committee asked that they take a look at the Herald lot as part of the project and they are going to meet with the Herald, have looked at the design and can incorporate the parking on the backside, don't know how much money they want and when find that out will go from there. Christensen stated knowing this was bid and that the Herald parking lot wasn't included, and never told the public that we were going to be spending money to buy the Herald's lot, and at some point in time these things could become a deal breaker for the City, so make sure that everybody understands that when go talk to the Herald, good corporate citizen and maybe think about a corporate contribution - Christensen stated 4% on $1.7 million for 2 years and maybe spend some money with the Herald, and then maybe should rethink it and let the rest of the developers have a bite at - and try to get it done without bunch of add ons; keep throwing more at it to get it done. Glassheim stated it wasn't the developer's intent and it was the Review Committee that said if you are going to do that, it would look better to take the whole thing, and at the time were also in discussion about the other lot across from the Red Cross and there had been some conversation about that going to the Herald as part of that deal.
Kobetsky and Potter left the meeting.

2. Update of Dakota Crary MetroPlains 52-Unit - Site #2 - EZ Lot.
Lund stated following the opinion of the city attorney the development team moved forward with the proposed change on project for LMI tax credit project on that site, and now proposed that the 52-unit project changes to require provisions by the development team and financing - the city assessor has reviewed the project to determine estimated taxable value of the project and put that into their Performa ($3.222 million taxable value) and have also provided an estimate for base construction cost of $4.6 million, Mel Carsen has reviewed those costs and analyzed the basic on Marshal & Swift method and has estimated that the cost of construction will be just a little over $4 million to include all A & E and contractor overhead so have an issue of about $1 million off in terms of what they are saying the construction cost is and what our city assessor's says the construction costs should be. He noted that $4.6 is their construction cost with contractor 10% contractor overhead cost; but also A & E on top of that as well as contingencies - and Mel Carsen stated that the project should cost $4 million with all the contractor overhead and profit and contingency; and that we just got the information today and have a lot more work to do on terms of wrestling with the actual construction cost. Christensen asked for clarification as to how they get $5 million. Lund stated that $4.6 million construction cost, $197,000 A &E fee and $200,000+ contingency; the assessor indicates that the construction cost is probable to the $4.028 including A & E and contingency, that this information became available this morning and haven't had discussion with the developer and the developer has also asked for 15% developer fee and have had some discussion and asked them to consider a lesser developer fee. The developer fee is in addition to the $5 million. Lund stated he didn't know they would be getting into this level of detail and should get the information out before you start discussing. Christensen stated $750,000 developer fee; and asked where would they get the money to pay them the $750,000. Lund stated that is financed, that right now the sources and uses and they asked the developers to give them a projected performance assuming no City assistance and they told us they have a little over $1 million gap if this were to be concluded, financed without City participation; then they asked them to put in their request for what they would want from the City based on loan to value ratio, they estimate they could get $1.1 million private financing loan and they estimate they can get $4.1 million partnership investment which is the tax credits. They put into their sources at $462,000 tax abatement, they had requested a 13-year tax abatement and did some interesting discounting to get the $462,000 on quick blush with those numbers, and he estimated they could get $700,000 up front for that loan for the deferral of real estate taxes that they are indicating they can get $462,000. Hamerlik stated not interested in that as there are some major changes; Lund stated neither are they.

Lund stated that $462,000 is a loan they will take out with a lending institution payable from proceeds that they would pay for real estate taxes and that is the 13 year abatement - they had requested a $450,000 HOME or CDBG loan which would be minimally paid back for the first 18 years with a balloon of any remaining principal at that time and they indicated that even at that there was a gap of $110,000. He stated that now they have information available today from the assessor's office that project is going to cost $4 million to construct rather than the $5 million and that is not a one for one, you can only get about 65% of the project finance for tax credits and there are loan for value issues. He stated their next step is to contact the developer and let them know that we're not buying $5 million and are only buying $4 and let them know whether we are in fact interested in allowing a 15% or 10% developer fees. Christensen stated we are only interested in the 13-year tax abatement and the HOME loan, rest of it is money they are going to take out of the deal because they are going to sell the tax credits. Lund stated that if we reduced the developer fee from 15 to 10%, we have a lot less to finance - that the $450,000 HOME or CDBG loan is a form of financing, and tax abatement is a form of financing so the smaller project the less contributions the City has - not really ready for this.

Glassheim stated the 13-year full abatement seems excessive and not getting something back - Christensen stated we are getting 52-units of LMI's - Lund stated they are tax credits so are mixed units and majority are low or moderately low income. Christensen stated that the City gets zero out of this deal for 15 years. Lund stated that all the taxing entities contribute to a tax abatement -so we're only giving up 25% of that.

Glassheim stated he would be more interested in a 10-year declining balance, not sure how much that amounts to. Hoover stated that was input they wanted to get was reasonable parameters might be and was interested in Christensen's comment about the drop dead dates and doesn't want us to spend a long negotiating this and end up with it in the trash can. Hamerlik stated that even if we don't have to put out an RFP for this, there might be others interested in it if we're not and the sooner we get back to the negotiations because his opinion is this group is more negotiating - maybe put out RFP's and not drag this on but need to have U.D. time to talk and know whether they are deal breaker or not. Christensen stated that if this doesn't work there are others that probably could do it - like Housing Authority, and asked how much time are we going to spend on this.

Glassheim asked what are the parking arrangements, was out walking and some people outside the Ryan Hotel and asking - that they have 20 people who spark across the street, and asked if going to take it away. Lund stated this project has a 1.2 per unit which isn't very much and does not replace any of the parking - it will eliminate approx. 50 surface lots - Lund stated to move slowly on this project because of parking issues and because of flood protection issues and the plan that they submitted, the engineering department did raise a few issues and have provided that and asked them to work on those and are on a final track in reviewing the site plan - not close to putting a factor seal on this one, very complex.

Hamerlik excused..

Christensen stated as soon as they let this project go, the Dacotah is going to come over wanting to put their garages up, as soon as you release this project from future development, there are going to be people looking to use this for housing, the Dacotah for parking, and that is a competing interest so don't be so quick to give this one up, the issue you have is replacing the surface lot and what are our thoughts - underground at this one, or what. Lund stated they thought this project would be proposed with underground parking for the project and cost astronomical - even without that they requested a $2.5 million city grant to replace the parking.

Glassheim stated while in NYC a couple weeks ago came across electronic double deck parking - mechanical thing that sits on the ground, drive onto it and it goes up and you park underneath it - not a new technology and lot of money involved because space is so expensive and wondered as a solution to those people, Sampson, not attractive but if Dacotah is out back, could have two rather than one - doesn't know how much they cost, and wondered if somebody could follow up and get dollar cost for doing this - Hoover stated they wanted to keep it alive but don't want to expend a lot of energy with the developer - doesn't seem like we're halfway there - 50 parking spaces is a lot of disruption down there. Lund stated to build levels of parking is to build a parking ramp which can be absorbed in the project without city assistance - was $10,000 per car.

Lund stated he was interested in knowing about 50 parking spaces because if this committee and council would be willing to lose parking spaces on that lot by the public, this project can't do anything about that and might as well stop the discussion right now - Christensen stated that before you do that is that have 450 spaces across the street from him and those spaces could be used - could dedicate some of those spaces but that is something they have available - people would have to walk a block. Meredith Richards stated they were trying to get some preliminary figures on what it would cost to give that place a face lift and some security to make it pliable for resident parking - Glassheim asked if they would get renaissance zone credits as well as all of this extra money - Christensen stated they wouldn't need it as getting 100% rather than 50% for 5 years - Lund stated that would show no income on their bottom line to abate income taxes and would also receive a credit for any income on the property except they'll never show on a rental project.

Christensen stated that the issue for us as a community is that the tax abatements seem to have been aggressive, not so sure about the $450,000 loan, and he would say can have that for 7 years but pay it back, refinance it and wants the money back - as that was always the idea that CDBG be used and get it back. Lund stated that both Richard Helgerson and MetroPlains have selected 13 years for tax abatement and its odd that they would select 13 years -

The meeting adjourned at 5:20 p.m.

Alice Fontaine
City Clerk

Dated: 7/21/05