Overview of the Proposal and Project Delivery Structure:
Servitas proposes a 7-story building designed by Shulman & Associates and PGAL Architects, featuring:
- ground floor space for either commercial retail or artist studios;
- 30-bed dormitory on the second floor for the Miami City Ballet (plus two private units for MCB staff); and
- 80 workforce housing units (mix of studios, 1BRs, and 2BRs) on the remaining five floors.
One of the key aspects of the Servitas proposal that distinguishes its proposal from other public-private proposals the City has received is that this Project would ultimately be not-for-profit in character, in that it would be leased by a non-profit entity and used for not-for-profit purposes at all times.
As proposed, the City would enter into a long-term ground lease for the entire property with a nonprofit 501(c)(3) organization, Community Finance Corporation (the “Ground Lessee”), which would finance the design and construction of the Project with tax exempt bond financing (which would be non-recourse to the City, with principal and interest payable solely from Project revenues).
Based on the information provided to the City by Servitas, Community Finance Corporation, the proposed Ground Lessee, is a not-for-profit Arizona corporation organized and operated exclusively for the purpose of assisting governments and nonprofits with the construction and financing of public buildings, and accordingly, is operated exclusively for charitable purposes. Community Finance Corp. has participated in over $1.3 billion in P3 projects throughout the United States, including a wide range of governmental and nonprofit uses, such as office facilities, parking structures, public safety/correctional facilities, university facilities, privatized student housing, and infrastructure.
In addition to the Ground Lease, the City would enter into a development agreement with Servitas to govern the development of the Project. Once the Project is constructed, the Ground Lessee would have overall responsibility for the operation of the Project.
Under the proposed structure, Servitas would earn a Development Fee for delivery of the completed Project to the Ground Lessee, with its fees to be covered by the tax-exempt bonds issued by the Ground Lessee to finance the Project. See Exhibit B. Following completion of the Project, Servitas would separately contract with the Ground Lessee to provide asset management services to the Ground Lessee.
Accordingly, if the Project proceeds to a Financial Closing, the Project would be constructed, and managed, with limited City financial participation, and the City would not be responsible for payment of any of Servitas’s fees or for Project development costs, with limited exceptions discussed more fully herein. Specifically, Servitas proposes for certain pre-development environmental expenses to be covered by the City, subject to reimbursement of the City from bond proceeds at Closing or from surplus revenues later once the Project is completed. See Section 3 below for further explanation.
Once the Project is constructed, the Ground Lessee would be solely responsible for the operation and maintenance of the Project, with the intent that the Project would be entirely self-supported by the rental revenues the Project will generate. To the fullest extent possible under applicable law, the Project would be structured to be exempt from ad valorem taxes, pursuant to exemptions that are available for workforce/affordable housing, and/or otherwise available for properties leased and used for exempt not-for-profit purposes.
To the extent the revenues of the Property generate surplus revenues (after payment of all operating expenses, maintenance reserves, and debt service reserves), such revenues would solely inure for the benefit of the City or any other not-for-profit entity designated by the City to receive surplus revenues. See Section 1 below for further explanation.
Servitas’s proposed Term Sheet is attached as Exhibit A. A summary of the key items requiring Finance Committee input and direction, along with the Administration’s recommendation, is set forth more fully below.
1. Designation of Not-for-Profit Entities to Receive Any Net Proceeds Generated by the Project, After Payment of all Project Expenses, Debt Service and Reserves.
As set forth above, one of the key features of the Servitas proposal is that the not-for-profit Ground Lessee proposes that any net proceeds, if any, generated from the Project (after the payment of all operating expenses, debt service, and maintenance reserves) shall be dedicated for use by the City Commission or any other not-for-profit entity designated by the City to receive the “surplus revenues.” A summary of the pro forma for the Project is attached as Exhibit B hereto and indicates that by Project Year 3 (2022-2023), the Project may generate approximately $329,432 in surplus revenues annually. The Administration requests direction from the FERC on this issue, as it implicates a pure policy question as to the proposed uses of funds.
Based on the proposal submissions received from Servitas, Miami City Ballet will pay rent for its use of the second-floor dormitory space, in the approximate annual amount of $363,841 in the first rental year (Project Year 3). This amount is consistent with the amounts Miami City Ballet has previously advised the City that it spends annually in connection with housing for dancers and MCB participants.
From a financing perspective, the guaranteed rental income from the lease of an entire floor to a single entity is beneficial to the Project, as stable rental flows reduce the financing risks associated with the Project. As part of the parties’ recent discussions, the Ballet indicated that it would consider providing a letter of credit or some other form of security to guarantee its rent obligations, or the additional costs to the Project in the event the Ballet no longer uses the dormitory and the entire floor must be converted to housing units. Subject to Finance Committee direction, the Administration will continue to address this issue with the MCB as part of the overall negotiation of the Project agreements.
Miami City Ballet has proposed that it be designated as a Project beneficiary to receive surplus revenues from the Project, so that if the Project is successful and generates net proceeds, the Project would serve to potentially subsidize and reduce Miami City Ballet’s rental obligations with respect to the dormitory floor, and thereby free up funds for the Miami City Ballet to enhance its cultural and charitable mission to provide dance education and cultural programming, in close proximity to its headquarters in Collins Park.[1]
If the City Commission were inclined to designate MCB as a beneficiary, the Administration would propose that, at a minimum, the City also be designated a beneficiary, to permit the City to either: (1) utilize revenues to activate cultural programming on the ground floor of the Project or elsewhere in the Collins Park neighborhood (see Section 2 below), (2) further reduce the required rent for the workforce housing tenants in the building, or (3) support other workforce/affordable housing projects in the City. It should be noted that Servitas’s pro forma assumes that in the second rental year (Project Year 4), the “surplus revenues” generated by the Project exceed the amount of annual rent paid by Miami City Ballet.
The Administration would also propose that, if the City Commission approves for the City to undertake any financial commitments with respect to the Project (i.e., to cover a portion of expenses for environmental remediation and other site preparation), any surplus revenues should first be paid to the City prior to being distributed to MCB or any other entity, to permit the City to recoup its costs.
2. Use of Ground Floor Space, Either for Revenue-Generating Retail to Support the Financing of the Project or for Cultural Activation Purposes.
Servitas has indicated a willingness to work with the City with respect to the programming for the ground floor of the Project, provided, however, that no matter how the ground floor space is used, the ground floor needs to generate rental income in order to support the financing for the Project. The most recent proposal included 5,400 sf of revenue-generating retail and/or artist studio space, with 2 separate lobby entrances, one for the Miami City Ballet dormitory and one for the remaining residential housing floors.
Subject to direction from the City Commission, one option with regard to the ground floor space is for the City to enter into a master sublease (or have a right of first refusal to do so), for the entire ground floor (subject to City payment of ground floor rent), in order to curate an appropriate street level activation compatible with the Collins Park Arts and Culture District. To this end, Servitas has proposed annual rent of $100,000 – $150,000 (per square foot rental of approximately $18 - $27).
3. Servitas Request for City to Pay for Environmental Remediation Costs for the Project, Subject to Reimbursement from Bond Proceeds or Project Revenues.
Servitas will be responsible for obtaining and paying for environmental reports necessary to determine the scope of work and associated costs of any required environmental remediation, subject to City prior approval. Servitas proposes that it will cover initial costs up to $20,000 (as a Project reimbursable cost), with the City responsible for amounts in excess of $20,000, up to a maximum City contribution for environmental expenses of $200,000. In the event that the parties anticipate that remediation costs would exceed $200,000, the City would have a right to terminate the development agreement.
Any amount expended by the City with respect to any of the foregoing would be reimbursed to the City at Closing (to the extent such costs are financeable), or from the net revenues of the Project, with the City to receive first priority for payment of such expenses from the net revenues of the Project.
4. Request for City Reimbursement of Servitas Development Expenses if the Development Agreement is Terminated.
Servitas anticipates that it will expend up to $280,036 through the regulatory Historic Preservation Board approval for the Project, and $1,306,250 through the Financial Closing. The developer’s Pre-development Budget is attached as Exhibit C.
Servitas has proposed that the City be responsible for reimbursement of such pre-development expenses if the development agreement is terminated because the Project is rendered financially unfeasible and cannot proceed. Specifically, Servitas proposes:
(i) Prior to the HPB approval for the Project, in the event the Project cannot proceed due to unforeseeable conditions, the City would be responsible for all Pre-Closing expenses incurred, approximately $280,036, and a portion of the Development Fee that would have been earned as of the date of termination, which fee could be up to $387,385 (40% of Servitas’s proposed Development Fee). Collectively, the costs that Servitas proposes the City would be responsible for could amount up to approximately $667,421.
(ii) After the issuance of the HPB approval for the Project but prior to Financial Closing, in the event the Project cannot proceed due to unforeseeable conditions, the City would be responsible for all Pre-Closing Expenses (in the amount of $1,306,250), but in such event, the City shall not be responsible for any portion of the Development Fee.
Historically, the City has not agreed to reimburse a developer for its development costs. In prior development agreements, the City has addressed this issue by agreeing to limit the City’s ability to terminate an agreement for convenience, in order to provide a developer with the certainty that the City would not, in its proprietary capacity, simply “change its mind” after the developer has incurred significant costs to advance a project. As all projects involve development risk, the City’s position in prior public-private projects has been that it is for the developer, and not the City, to undertake such risks.
Notwithstanding the above, none of the prior development agreements the City entered into were structured to provide the City with all of the net revenues of the Project, and accordingly, all of the potential upside, for the entire term of the lease. For this reason, the Administration requests direction as to the proposed approach.
At a minimum, the Administration would recommend that, as part of its continued discussions with Servitas, the parties should negotiate a cap on the City’s monetary exposure and/or limit any allocation of risk to the City to the early stages of the Project only (i.e., prior to HPB approval). In addition, to mitigate risks, as part of discussions, the parties should develop very clear limitations or parameters for the types of unforeseen circumstances which could give rise to any City payment obligation if the Project could not ultimately proceed.
5. Request for Waiver of Permit Fees, Impact/Concurrency Fees for the Project.
In February, following review of the fees applicable to workforce housing projects, the Finance Committee declined to recommend any further reduction in the permit fees on workforce/affordable housing projects, with the exception of the Technology and Training Fee (which is generally calculated as 6% of the total fee for building, electrical, mechanical, plumbing and demolition permits). On September 16, the Commission voted favorably upon First Reading of an ordinance codifying this Technology and Training Fee waiver.
The City would need to amend the City’s Land Development Regulations and City Code to accomplish further reductions to the fees applicable to affordable/workforce housing projects.
6. Request for “GU” Waivers to Address Minimum Unit Size for the Studio Units and Required Parking for the Project and Library.
Servitas seeks three LDR waivers: (1) “required minimum unit size” for the 22 studio units (as Servitas is proposing 387 sq. ft. per studio unit, rather than the required 400 sq. ft. per unit); (2) “required off-street parking” for the project (approximately 58 spaces); and (3) “required off-street parking” for the Miami Beach Regional Library (approximately 24 spaces), which spaces are currently satisfied on P51 and will be eliminated by development of the project.
Under the City Code, to be eligible for a GU waiver, a property must be either (1) governmental owned or leased, and wholly used by, open, and accessible to the general public, or (2) used by not-for-profit, educational, or cultural organizations. As proposed, the project would qualify for a GU waiver.
In addition to satisfying the Code’s requirements for GU waivers, the reduction in unit size and required parking are the primary incentives prescribed in the City’s workforce housing regulations. The City Commission previously granted this Project a GU height waiver, specifically “to allow for maximum capacity for artist housing” (Resolution No. 2016-29679), as well as a loading space waiver to the parking garage facility in recognition of physical constraints inherent in the Museum Historic District and Miami Beach Architectural District (Resolution No. 2018-30560).
The relatively small lot size of P51 does not lend itself to viable redevelopment under the applicable development standards. Considering that the Project evolved from the City’s initiative to redevelop parking assets into mixed-use housing and parking facilities, The Concourse Group originally intended that the housing component’s off-street parking requirement would be satisfied in the adjacent garage facility. Therefore, staff supports the waivers, including any waiver of parking for the library that was previously satisfied on P51.
7. “Waterfall” List of Eligible Residents for the Workforce Housing Units, in the Event of Insufficient Demand from Artists and Educators
The City Commission directed that the Project cater to employees of artistic institutions and area educators employed in the City of Miami Beach.
In order that the units not remain vacant, and to ensure that the Project is financeable and has the ability to generate stable rental income streams to meet debt service obligations, Servitas has requested that, following a specified (to be negotiated) period of marketing to artists and area educators, the Project be permitted to lease the individual rental units to other persons meeting the income criteria for workforce housing. The Administration proposes a “waterfall” list to prioritize eligible residents, as follows:
- Tier 1: artists and educators
- Tier 2: nurses, law enforcement, firefighters, any other emergency service providers employed in the City of Miami Beach
- Tier 3: any income-eligible worker employed in the City of Miami Beach in the hospitality, culture, or entertainment industry
- Tier 4: income-eligible workers, regardless of city of employment
[1] The foregoing benefits for the MCB presume that the MCB will ultimately participate in the Project, and confirm its long-term commitment via a master sublease or other agreed-upon arrangement for its use of the dormitory floor. In the event MCB determines that it cannot participate in the Project, the second floor would be designed to accommodate additional workforce housing units. City staff will work with Servitas and MCB with regard to the timing for confirming MCB’s participation as early as possible in the process, to avoid additional costs or delays associated with the necessary design changes that would be required to convert the dormitory floor to regular workforce housing units.