MEETING DATE:
OCTOBER 28, 2014
SUBJECT:
Title
ADOPT RESOLUTION NO. 2014-XX, AUTHORIZING A BUDGET AMENDMENT APPROPRIATING $8,850,425 FROM GENERAL FUND EXCESS UNASSIGNED RESERVES TO CREEKSIDE MARKetPLACE FUND TO PURCHASE BUILDING A AND Fund TENANT IMPROVEMENTS FOR HOBBY LOBBY, LLC AND WINCO, INC
Body
Recommendation
Recommendation
ADOPT a resolution authorizing a budget amendment appropriating $8,850,425 from General Fund Excess Unassigned Reserves to Creekside Marketplace Fund to purchase former Lowe's Building A and fund tenant improvements for Hobby Lobby, LLC and WinCo, Inc.
Body
Board or Commission Action
Not applicable
Relevant Council Strategic Theme
Economic Development
Planning for the Future
Relevant Department Goal
Continuing to Maintain Fiscal and Financial Health to the City
Introduction
It was recommended at the October 14, 2014 City Council meeting, that Council consider and direct financing options for the purchase of the former Lowe's Building A and subsequent tenant improvement costs for Hobby Lobby, LLC and WinCo, Inc. Consideration of the use of General Fund excess unassigned reserves balances were discussed as a potential funding option and ultimately staff's recommendation. It was determined and directed by City Council that evening that the purchase of the former Lowe's Building A and subsequent tenant improvements would be funded using the General Fund excess unassigned reserves. Lease payments from both Hobby Lobby and WinCo, beginning with occupancy, will be used to replenish the reserve levels accordingly.
Discussion
The City will be required to purchase Building A on October 31, 2014 in the amount of $4,479,004. Under the terms of the lease agreements with WinCo and Hobby Lobby, the City will immediately be required to modify the existing building. The City expects to complete the construction of phase 1 by early spring, allowing the tenants enough time to complete their improvements. These documents have been reviewed by Planning and Building. Total financing for the purchase of Building A along with subsequent modifications, tenant improvements, and soft costs are estimated to be $8,850,425.
Staff is recommending City Council adopt Resolution 2014-XX authorizing a budget amendment appropriating $8,850,425 from General Fund Excess Unassigned Reserves to Creekside Marketplace Fund to purchase former Lowe's Building A ($4,479,004) and fund tenant improvements for Hobby Lobby, LLC and WinCo, Inc. ($4,371,421).
The City does have the option to not use reserves for this project and instead secure outside financing. Based on market conditions at present and utilizing a ten (10) year financing plan, we would expect an interest rate of from 4.5% to 5% on a loan of $8,850,425. A typical loan repayment for such an issuance at 4.5% would look as follows:
Year |
|
Interest Payment |
Principal Payment |
Total Payment |
Remaining Balance |
1 |
|
$ 398,269 |
$ 720,237 |
$ 1,118,506 |
$ 8,130,188 |
2 |
|
$ 365,858 |
$ 752,647 |
$ 1,118,505 |
$ 7,377,541 |
3 |
|
$ 331,989 |
$ 786,516 |
$ 1,118,505 |
$ 6,591,025 |
4 |
|
$ 296,596 |
$ 821,910 |
$ 1,118,506 |
$ 5,769,115 |
5 |
|
$ 259,610 |
$ 858,896 |
$ 1,118,506 |
$ 4,910,219 |
6 |
|
$ 220,959 |
$ 897,546 |
$ 1,118,505 |
$ 4,012,673 |
7 |
|
$ 180,570 |
$ 937,936 |
$ 1,118,506 |
$ 3,074,737 |
8 |
|
$ 138,363 |
$ 980,143 |
$ 1,118,506 |
$ 2,094,594 |
9 |
|
$ 94,256 |
$ 1,024,249 |
$ 1,118,505 |
$ 1,070,345 |
10 |
|
$ 48,165 |
$ 1,070,340 |
$ 1,118,505 |
$ 5 |
|
|
|
|
|
|
Total |
|
$ 2,334,635 |
$ 8,850,420 |
$ 11,185,055 |
|
As the table indicates, the interest charges in an outside financing would be $2,334,635. In addition to interest charges there would be loan origination fees and other assorted costs that would likely add about 1% of loan value costs, or $88,504 for a total of additional project costs $2,423,139.
If the City uses reserves instead of an outside financing, it would save those financing costs, however, it would lose interest earnings on those funds in the city's portfolio as well as the flexibility of having those funds on hand. Based on current investment earnings of 1%, that $8,850,425, would generate $930,400 of interest earnings over a ten year period. The net result in terms of real project costs would be that the use of outside financing would increase the costs of the project by $1,492,739.
In addition to the straight line revenues and costs analysis, the project also generates a significant long term return on investment. In September of 2013 when the decision to purchase the building was made, staff and our consultants shared with the City Council that we projected that the building would yield a ten year cash flow of approximately $35 million. At that time we were projecting approximately $8 million in acquisition and construction costs, so those costs have escalated somewhat. We did not assume financing costs at that time as it was unknown whether we would self finance or go to the private financing market. We projected a terminal value of the building of approximately $23 million after ten years and a profit of approximately $27 million.
We have updated those projections/assumptions based on current information. A sheet is attached that demonstrates where the project is now. In summary, the bullet points are below:
· Acquisition Price $4,479,000 (no change)
· Capital Costs $4,371,421 (up from $3,502,996)
· Ten Year Projected Terminal Value $28,358,333 (up from $23,736,217)
· Ten Year Cash Flow $40,996,191 (up from $34,996,866)
· Ten Year Profit $32,811,919 (up from $27,059,498)
The Council will recall that the projected ten year profit to not purchasing the building and allowing the lease to be assigned to WalMart as Lowe's proposed was $19 million with a projected terminal value of $12 million.
Fiscal Impact
The City Council previously adopted a policy that the City should have general fund liquid cash reserves of 50% of budgeted expenditures. At the close of Fiscal Year 2013/14, the City has $43,409,716 (un-audited) of liquid general fund cash reserves. The adopted general fund budget for Fiscal Year 2014/15 is $63,744,113. In order to be minimally compliant with the adopted policy, the City would need to have $31,872,056 in liquid cash reserves (50% of $63,744,113). The actual liquid cash reserve level of $43,409,716 represents 68% of budgeted expenditures and exceeds the 50% requirement by $11,537,660.
The purchase of the former Lowe's Building A in the amount of $4,479,004 and costs of tenant improvements estimated to be $4,371,421, will lower the General Fund reserve level to $34,199,291 or 53.6% of budgeted expenditures and in compliance with the adopted policy.
Upon full occupancy by both Winco Foods and Hobby Lobby, the City will realize annual lease revenues in the first full fiscal year of co-occupancy of $1,479,150. Since the use of reserves for this project does not bring the City below the adopted policy reserve level, the City Council will have the option of utilizing those new lease revenues for whatever purpose(s) it chooses which could include reserve level replenishment.
Attachment(s)
Resolution 2014-XX
Attachment - Creekside Marketplace - Financial Analysis Overview
Prepared by: Laura Rocha, Finance Director
Approved by: Jack Griffin, City Manager