| | | | | | | | | Resolutions - R7 A
COMMISSION MEMORANDUM |
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| | | | | | | | TO: | Honorable Mayor and Members of the City Commission | | FROM: | Alina T. Hudak, City Manager | | DATE: | February 23, 2022 | | | 4:02 p.m. Public Hearing
| SUBJECT: | A RESOLUTION OF THE MAYOR AND CITY COMMISSION OF THE CITY OF MIAMI BEACH, FLORIDA, FOLLOWING A DULY ADVERTISED PUBLIC HEARING, APPROVING THE AMENDED AND RESTATED GROUND LEASE AGREEMENT (THE “GROUND LEASE”) BETWEEN THE CITY OF MIAMI BEACH AND CFC-MB I, LLC, AN ARIZONA LIMITED LIABILITY COMPANY, FOR THE COLLINS PARK ARTIST WORKFORCE HOUSING PROJECT (THE “PROJECT”), SAID GROUND LEASE MODIFYING, ON A LIMITED BASIS, THE REQUIRED MIX OF INCOME-ELIGIBLE TENANTS OF THE WORKFORCE HOUSING UNITS AT THE COLLINS PARK ARTIST WORKFORCE HOUSING PROJECT, PROVIDED THAT ALL OF THE WORKFORCE HOUSING UNITS FOR THE PROJECT SHALL BE RENTED SOLELY TO ELIGIBLE INDIVIDUALS WITH HOUSEHOLDS EARNING 120% OR LESS OF THE AREA MEDIAN INCOME FOR MIAMI-DADE COUNTY, CONSISTENT WITH ALL APPLICABLE REQUIREMENTS RELATING TO WORKFORCE HOUSING AS PROVIDED IN CHAPTER 58 OF THE CITY CODE; APPROVING THE LEASE AGREEMENT (THE “FIRST FLOOR SUBLEASE”) BETWEEN CFC-MB I, LLC (SUBLESSOR) AND THE CITY OF MIAMI BEACH (SUBLESSEE) FOR THE FIRST FLOOR RETAIL SPACE WITHIN THE PROJECT; AND FURTHER, AUTHORIZING THE MAYOR AND CITY CLERK TO EXECUTE THE FINAL NEGOTIATED AGREEMENTS. |
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| | | | | | | | RECOMMENDATION
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Approval of the resolution authorizing an Amended and Restated Ground Lease Agreement (the “Ground Lease”) for the Collins Park Artist Workforce Housing Project and the First Floor Sublease with the City as Sublessee. |
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| | | | | | | | BACKGROUND/HISTORY
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The City is the owner of the property located at 224 23rd Street, within the Collins Park Cultural District (the “Property”), the current site of a 21-space public parking lot. Pursuant to an awarded competitive solicitation process, the City intends to redevelop the Property as a mixed-use residential workforce housing development that prioritizes housing for income-eligible artists, educators, and other members of the Miami Beach workforce (the “Collins Park Artist Workforce Housing Project” or “Project”).
On September 14, 2016, the Mayor and City Commission adopted Resolution No. 2016-29547, selecting The Concourse Group to identify public-private partnership (“P3”) opportunities to alleviate the cost, and other burdens, on the City associated with the development of workforce housing projects on City-owned property.
On January 18, 2019, the City issued Invitation to Negotiate (ITN) 2019-099-KB, with a workforce housing development requirement, focused on attracting artists and area educators to the City and encouraging proposers to incorporate dormitory space for the Miami City Ballet, Inc. (the “Ballet”) in the Project. The Ballet, South Florida’s premier classical ballet company, is a not-for-profit charitable cultural organization, headquartered in close vicinity of the Property, at 2200 Liberty Avenue.
On July 17, 2019, the Mayor and City Commission adopted Resolution No. 2019-30908, authorizing simultaneous negotiations with both ITN proposers, Atlantic Pacific Communities, LLC and Servitas, LLC. Following the withdrawal from negotiations of Atlantic Pacific Communities, LLC, the City Commission directed negotiation with the sole remaining proposer, Servitas, LLC (“Servitas” or “Developer”).
On September 23, 2020, the Finance and Economic Resilience Committee (the “FERC”) reviewed the proposed terms negotiated between the Developer and the City Administration, and unanimously recommended that the City proceed with the Project.
On October 18, 2020, the Mayor and City Commission adopted Resolution No, 2020-31435, accepting the FERC’s recommendation, approving the Project term sheet, directing negotiation of a Development Agreement and Ground Lease, and referring the Project for review by the Planning Board.
On November 17, 2020, the Planning Board unanimously passed Resolution PB20-0407, transmitting the proposed Development Agreement and Ground Lease to the City Commission with a favorable recommendation, in accordance with the requirements of Section 1.03(b)(4) of the City Charter and the City’s Land Development Regulations.
On January 13, 2021, the Mayor and City Commission adopted Resolution No. 2021-31553, approving, following second reading/public hearing, the Development Agreement with the Developer; Resolution No. 2021-31554, approving the Ground Lease for the Project; and Resolution No. 2021-31555, approving a waiver of the minimum and average unit size requirements for up to ten (10) studio units in the Project and of the City Code’s parking requirements with respect to the Project. (Note: ultimately no units were designed below the minimum and average unit size requirement.)
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| | | | | | | | ANALYSIS
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Project Update
Following the City Commission’s final approval of the Development Agreement and Ground Lease in January 2021, the parties executed the Development Agreement. On June 6, 2021, the Historic Preservation Board (“HPB”) unanimously approved a Certificate of Appropriateness for the Project’s design. Following issuance of the HPB development order, in September 2021, Servitas submitted plans for a building permit application to the Building Department. The City and Developer are nearing completion of the permit review and comment process and anticipate that the building permit will be issued soon.
Assuming timely issuance of a Building Department permit, Servitas anticipates that financial closing for the Project will occur approximately four to five weeks after receiving approval by the City Commission of the proposed Amended and Restated Ground Lease, described further below. The Project’s financial closing is a critical juncture as it serves to confirm completion of several milestones including building permit issuance, delivery of all loan documents necessary for bond issuance to fund Project construction, execution of the Ground Lease, execution of First Floor Sublease and the Ballet’s lease for the dormitory space, execution of the guaranteed maximum price (GMP) agreement with the general contractor for the Project, and delivery of physical possession of the Property. The Developer anticipates breaking ground approximately 7-10 business days following financial closing.
Economic Climate and Construction Costs
Post-pandemic economic conditions have borne witness to vigorous development activity throughout the country and significant increases in overall construction costs. The construction industry is facing historic price escalation in materials, supply chain disruption, delayed delivery and logistical concerns, a shortage of available labor, and increase in labor costs. According to the most recent Construction Inflation Alert published in September 2021 by the Associated General Contractors of America (AGC), “The construction industry is in the midst of a period of exceptionally steep and fast-rising costs for a variety of materials, compounded by major supply-chain disruptions. Owners need to recognize that significant adjustments are probably appropriate regarding the price or delivery date of projects that were awarded or commenced early in the pandemic…when conditions at suppliers were far different.” Upon review of the AGC’s data on historical and recent changes in producer price indexes for construction materials, building types and subcontractor segments, it comes as no surprise that the Project’s economic viability has been adversely impacted by recent industry and economic trends.
Although final construction pricing is not yet complete, recent overall pricing estimates of materials and hard costs by the Project’s general contractor are 53% higher than anticipated when financial projections were presented to the City Commission at the time of Ground Lease approval in January 2021. See Exhibit A (Revised Proforma dated February 16, 2022).
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December 2020
Proforma
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February 2022
Proforma
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Percent Change
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Project Hard Costs
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$15,094,400
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$23,094,965
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+53%
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Estimated Bond Issuance
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$27,454,260
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$37,354,127
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+36%
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Value Engineering Measures and Subordinated Debt Proposal
To help address the increase in construction costs, Servitas has taken a two-pronged approach. First, Servitas has worked with the contractor to identify cost savings via appropriate value engineering measures and has successfully reduced the hard cost estimate by over $1,000,000. Second, Servitas has proposed to create a subordinated debt tranche, to be issued at the time of initial bond issuance and repaid after payment of the senior debt each period. This repayment structure will allow the Project to yield positive cash flow and maintain the requisite debt service coverage ratio (DSCR) of 1.2. The DSCR is the metric that lenders use to gauge the ability of a borrower to extinguish debt and essentially consists of the ratio of a borrower’s net revenue to total debt service.
Tenant Income Eligibility and Unit Mix Adjustment
Per the terms of the Development Agreement and Ground Lease, the Developer’s business decision to issue additional, subordinated debt does not require City Commission approval. However, supplemental debt financing and value engineering alone cannot compensate entirely for the adverse impact increased development costs has had on the economic viability of the Project. To help close the gap, Servitas and the Administration are proposing an adjustment to the required leasing rate and tenant income eligibility structure for the Property.
As approved in City Commission Resolution Nos. 2021-31553 and 2021-31554, the Development Agreement and the Ground Lease currently require the Project to maintain an even split among the 80 housing rental units, with 50% (40 units) to be provided at rates applicable to eligible tenants earning 120% or less of the area median income (AMI)[1] for Miami-Dade County, and 50% (40 units) provided for eligible tenants earning 80% or less AMI. Servitas now requests that the Ground Lease be amended and restated to provide for 100% (80 units) at 120% AMI, representing an increase of 40 units devoted to the higher AMI category.
The adjustment to the tenant income-eligibility and unit mix contemplated in the proposed Amended and Restated Ground Lease would maintain the workforce housing character of the Project as required in ITN 2019-099-KB and consistent with applicable requirements relating to workforce housing as provided in Chapter 58 of the City Code. The income eligibility rate adjustment would also provide annual cash flows sufficient to ensure the economic viability of the Project. Despite the proposed adjustment to the mix of income-eligible tenants, the monthly rent for all the workforce housing units would not exceed 30% of the applicable AMI, as provided in the approved Development Agreement and the Ground Lease.
The proposed Amended and Restated Ground Lease stipulates that as the annual budget for the Project is developed each year, the City and CFC-MB I, LLC (the “Lessee”) will, if possible, modify the unit mix by reallocating units from 120% or less AMI to 100% or less AMI and/or 80% or less AMI to approach the unit mix that was originally contemplated when the Ground Lease was approved in January 2021. The reallocation of units will take into account the Project’s economics when the Annual Budged is developed, including consideration of the Project’s ability to repay the senior and subordinated bonds, cover all operating expenses, and pay ground lease rent to the City while maintaining the DSCR of the bond documents.
According to Servitas, if approved, the adjusted rental rates would not affect occupancy levels and would remain attractive to potential renters, when compared with average rental rates in the immediate market area. Servitas also believes that the resulting cash flow will more quickly reduce the proposed subordinate debt tranche and sustain the anticipated cash flow inuring to the City (and the Ballet, as approved by the City Commission in January 2021). Because the City Commission approved the Ground Lease, whose terms stipulated the 50/50 rental mix, it is necessary for the City Commission to approve the proposed change and other minor revisions of the Ground Lease.
Contribution to the Project
Despite the prioritization of workforce housing by Miami-Dade County and the City and enactment of incentives in the City Code, for several reasons, market conditions do not encourage workforce housing development in Miami Beach. Some of the underlying reasons for this include the high costs associated with permitting, construction, and South Florida real estate, limited profit margins on account of restricted rental revenues tied to AMI, and the inability of legislative efforts to make projects financially attractive. Therefore, it is imperative to promote policies that lower development costs in order to achieve the public need for housing.
The unit mix adjustment and resulting increase to revenue coupled with the amount of subordinated debt that can be assumed by the Project without jeopardizing the Project’s ability to maintain the required DSCR, does not entirely cover the financing deficit faced by the Project. In recognition of the high development costs for non-market rate housing projects, the Development Agreement and Ground Lease explicitly state that the Developer shall not be obligated to pay any City fees for the Project that can currently be waived under the City Code and the City may, in its sole and absolute discretion, adopt amendments to the City Code that permit the waiver or refund of all or part of City fees for the Project.
As a result of increasing construction costs and fluctuating interest rates in the bond market, the Developer and the Administration have exercised flexibility in order to promote the financial viability of the Project. Both parties have been agile and diligent in identifying cost savings and exploring multiple avenues for relevant and applicable fee reductions or waivers as may require current or future administrative or legislative approval including, but not limited to, reductions or waivers of concurrency, mobility, sustainability and other fees applicable to construction projects in the City. The Project will already benefit from incentives for workforce housing currently existing in the City Code (e.g., related to parking requirements, mobility fee reductions, and waiver of employment training fees). As partners in this endeavor to promote workforce housing development and to ensure Project feasibility, the Developer has agreed to cap its developement fee which results in a significant reduction to what they would be entitled to under the existing agreement, and, in exchange, the City has agreed to fund a shortfall in permitting costs of up to $532,451 prior to Certificate of Occupancy of the building in a future fiscal year, if additional workforce housing fee waivers are not identified.
Principal Purpose of Amended and Restated Ground Lease
The principal purpose of the Amended and Restated Ground Lease is to allow for the change to the rental unit mix described above. The document also revises the approved Ground Lease by adding an exhibit reflecting the procedures to be followed each year to ensure compliance with workforce housing and unit mix requirements, as the same may be modified from time to time. Further, as detailed in the preceding section, the Amended and Restated Ground Lease provides for the addition of the City Contribution. Although it will increase the City’s financial responsibility above what was originally approved, the Project is in jeopardy without this commitment by the City. And if the Project does not move forward, the Development Agreement requires that the City reimburse the Developer for its pre-development costs in the amount of up to $800,000, which would be a higher cost to the City without yielding a single unit of workforce housing, dormitory housing or first floor space for cultural activation. See Exhibit B (Amended and Restated Ground Lease).
First Floor Sublease
As approved by the City Commission on January 13, 2021, the Ground Lease provides the City with the option to enter into a master sublease for the ground floor leasable space (the “First Floor Sublease”), subject to City payment of ground floor rent, for the City to curate an appropriate street-level activation compatible with the Collins Park Arts and Culture District. In recognition of the potential for neighborhood placemaking, the FERC recommended in favor of the Ground Lease and suggested that the City retain the ability, at its option, to program the ground floor space. Upon approving the Ground Lease, the City Commission accepted the FERC’s endorsement and incorporated another recommendation to utilize any surplus Project revenues generated by the housing component in order to subsidize the City’s costs in renting the first floor space.
Based on the identified next steps, and pursuant to the Development Agreement’s October 1, 2021 deadline for the City to provide notice of intent to invoke its option to lease back the ground floor retail space, the City provided Servitas with timely notice and the parties undertook negotiations for the First Floor Sublease. See Exhibit C (First Floor Sublease).
Key Terms – First Floor Sublease
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Sublessor / Landlord
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CFC-MB I, LLC, an Arizona limited liability company, a wholly owned affiliate of Community Finance Corporation, an Arizona not-for-profit corporation, the same entity as the Ground Lease Lessee.
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Sublessee / Tenant
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City of Miami Beach
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Premises
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2,248 sq. ft. of ground floor retail space fronting on 23rd Street, to be delivered by Landlord as a baseline shell with minimal building systems.
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Initial Term
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Five (5) years
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Renewal Terms
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Seven (7) renewal periods of five (5) years each, exercised at the City’s option.
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Rent
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$26 per square foot annually per the Ground Lease, or $62,634 annually / $5,219 monthly, with three (3) months free rent in Lease Year 1, and 2% annual escalations thereafter.
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City Termination
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In the event the City Commission does not appropriate sufficient funding for the rental payments, City may terminate on 90 days’ notice.
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Eligible Subtenants / Uses
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Uses specific to City business or subleased/managed by not-for-profit/tax-exempt entities existing and operating under 501(c)(3), preferably with a cultural or performing arts purpose and subject to Landlord’s consent, which shall not be unreasonably withheld.
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Utilities
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Landlord will provide and bear the cost of all utilities (e.g., water and sewer service and garbage collection) except for electricity, telephone, cable, and internet, which are the City’s responsibility.
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Janitorial and Services
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Landlord will provide and bear costs for maintenance and janitorial service for common areas and janitorial service to the Premises consistent with the same level of janitorial services provided for commercial office space. The Landlord also provides Services including trash removal, landscaping, pest control, and building security.
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Repairs and Maintenance
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Landlord shall bear costs and expenses for all repair, maintenance, and replacement of the Building (including the Premises) including, without limitation, all HVAC, plumbing, electrical, glass, security, and structural components and systems and all appliances, fixtures, and other appurtenances contained in or serving the Premises as may be damaged by an act or omission of gross negligence or willful misconduct by Tenant or any Eligible Subtenants.
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The Ground Lease specifies that, throughout the entire term of the Ground Lease, the City shall receive, as rent under the Ground Lease, 100% of the net revenues of the workforce housing project, after payment of all operating expenses, debt service, and reserve requirements (the “Net Available Cash Flow”). With original approval of the Ground Lease via Resolution No. 2021-31554, the City Commission directed that all Net Available Cash Flow, if any, shall be distributed each year as follows: first, to reimburse the City for all Project Costs; second, to the Ballet, as a grant from the City to offset the Ballet’s annual rental charges for its use of the dormitory housing; and third, if the Ballet’s annual rental obligation has been fully reimbursed, to cover any rental obligations of the City in connection with the First Floor Sublease.
In addition to an annual rental payment by the City as master sublessee, the buildout of the first floor leased Premises will entail additional costs for tenant improvements in order to sublease the space to a chosen cultural arts tenant. The Development Agreement requires Servitas to deliver the Premises as a baseline shell, with specified requirements for a minimum number of base systems and finishing. The City will encounter additional costs related to the buildout, preparation, and continued operation of the Premises for its intended use (such as a nonprofit cultural arts partner, to be determined by the City Commission) and it is conceivable that the future tenant may not contribute significant funding to the tenant improvements or to offset rental costs.
[1] The term “AMI” refers to the household income for the median, or middle, household in a region as determined by the U.S. Department of Housing and Urban Development (HUD) on an annual basis.
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| | | | | | | | SUPPORTING SURVEY DATA
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The Concourse Group study (2016), an exhibit to the Invitation to Negotiate for the Project, noted that 53% of Miami-Dade County residents are cost-burdened when it comes to housing and most spend greater than 30% of income on rent. The Mayor and City Commission have identified the need for workforce and affordable housing in the City as a key objective in the City’s 2019 Strategic Plan Through the Lens of Resilience with a management objective to “support affordable, compatible workforce housing through public and private partners for key industries, including the use of development incentives.” In addition, in the City’s 2019 Strategic Plan, the City has committed to support, develop, coordinate, and promote performance, visual, and other cultural arts within the City, including elevating the Collins Park Cultural District, where the proposed project is to be located. The City’s 2040 Comprehensive Plan prioritizes workforce housing, with the express goal “to encourage redevelopment that provides workforce and affordable housing” within the City. |
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| | | | | | | | FINANCIAL INFORMATION
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Notwithstanding all costs related to the Sublease and future programming of the first floor retail space, the City remains a limited financial contributor to the development of the Project, with certain Project costs advanced or funded by the City to be reimbursed to the City either at Financial Closing, or from the Project’s net revenues, prior to any distribution of net revenues to any other party. The strategy presented in the proposed Amended and Restated Ground Lease would preserve the viability of the Project and ensure that the rental housing revenues will generate surplus revenue (after payment of all operating expenses, maintenance reserves, and debt service reserves) for the benefit of the City. Contingent upon the scale and scope of the City Commission’s preferences and direction regarding cultural arts programming of the first floor, there will be costs associated with the buildout and preparation for occupancy of the leased premises. |
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| | | | | | | | CONCLUSION
| The Administration recognizes that the inflationary pressures, which have increased Project construction costs, have resulted through no fault of the Developer. To fill the large gap in construction financing and in order to ensure a stable financial model upon construction completion, Servitas and the Administration have negotiated a measured strategy that provides for adding a limited amount of subordinated debt and an adjustment to the Project’s tenant income eligibility and unit mix consistent with all applicable requirements for workforce housing within the City Code. Upon completion of development of the Project, the City’s option to lease the ground floor retail space will enable the City Commission to further shape the Collins Park Cultural District campus with a tenant and uses of their choosing.
The Administration therefore recommends that the Mayor and City Commission approve the resolution authorizing an Amended and Restated Ground Lease for the Collins Park Artist Workforce Housing Project, authorizing the Administration to execute a First Floor Sublease with the City as Sublessee. |
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| | | | | | | | Applicable Area
| South Beach |
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| | | | | | | | Is this a "Residents Right to Know" item, pursuant to City Code Section 2-14? | | Does this item utilize G.O. Bond Funds? | | Yes | | No | |
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| | | | | | | | Strategic Connection
| Mobility - Support affordable, compatible workforce housing. |
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| | | | | | | | Legislative Tracking Economic Development |
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