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 surface parking lot adjacent to the Miami Beach Regional Library and the Collins Park Garage (G12). Pursuant to a competitive solicitation process, the City resolved to redevelop the Property as a mixed-use residential workforce housing development that prioritizes housing for income-eligible artists, educators, City employees, veterans, 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 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.)

On June 6, 2021, the Historic Preservation Board (“HPB”) unanimously approved a Certificate of Appropriateness for the Project’s design and Servitas submitted to the City’s Building Department its building permit application in September 2021.

On February 23, 2022, the Mayor and City Commission adopted Resolution No. 2022-32053, modifying the required mix of income-eligible tenants of the workforce housing units for the Project, providing that all of the workforce housing units would be rented solely to households earning 120% or less of the area median income (AMI) for Miami-Dade County, consistent with all applicable requirements relating to workforce housing in Chapter 58 of the City Code. This modification was intended to increase projected rental revenues generated by the Project to address a financing gap attributed to economic conditions including inflation and rising construction costs and achieve the appropriate debt service coverage ratio.

On March 9, 2022, citing the discussion on February 23, 2022 to take further action to improve the economic feasibility of the Project, the City Commission referred discussion to the FERC about eliminating additional development-related fees for affordable and workforce housing projects. On March 15, 2022, the Affordable Housing Advisory Committee passed a motion in support of exempting affordable and workforce housing from the Sustainability Fee.

On April 6, 2022, the City Commission referred to the Land Use and Sustainability Committee (“LUSC”) a discussion about amending the Land Development Regulations to exempt workforce projects from payment of the City’s Mobility Fee.

On June 6, 2022, the City Commission accepted the May 27, 2022 recommendation of the FERC and the June 6, 2022 recommendation of the LUSC and referred legislation to the Planning Board to reduce development-related fees for with the goal of increasing the city’s affordable and workforce housing stock.

On July 22, 2022, at the FERC budget briefing, the Committee discussed how rising interest rates and escalating construction costs had led to an additional Project financing gap of approximately $2.85 million and the Committee recommended that the City Commission consider a one-time cash infusion to bridge this gap.

On July 26, 2022, the Planning Board discussed the Project and provided a favorable recommendation of an ordinance to reduce City of Miami Beach development-related fees for affordable and workforce housing (the “Fee Exemption Ordinance”) to the City Commission.

On September 28, 2022, the City Commission approved the following:

i. Resolution 2022-32337, adopting the FY 2023 Capital Budget, including $2.85 million in gap financing for the Project, as recommended on July 22, 2022 at the FERC Budget Briefing.

ii. Ordinance 2022-4513, authorizing the Fee Exemption Ordinance.

On September 28, 2022, City Commission agenda item R7 F to consider the Revised Lease for the Project was Opened and Continued to the October 26, 2022 meeting (R7 E) (where it was subsequently Opened and Continued to the November 16, 2022 meeting).

Predevelopment Status

At the time of the City Commission’s original approval of the Ground Lease and Development Agreement on January 13, 2021, the Developer’s predevelopment schedule and timeline estimated that, by September 2021, the building permit would be issued and the Project would break ground. Cost estimates construction and debt financing for the Project were based upon this timetable and then-existing interest rates in late 2020. In actuality, the building permit application was initially submitted for regulatory review in September 2021. Rising inflation and the increased costs associated with construction materials and interest rates have resulted in a development budget higher than anticipated at the time of the City Commission’s January 2021 approval.

The City’s regulatory review of the Project’s construction plans was completed in April 2022, with payment of County and City development fees remaining as the sole condition precedent before issuance of the building permit. Without the tax-exempt and taxable bond funding on hand to obtain a building permit and to enter into a binding Guaranteed Maximum Price (GMP) agreement with the general contractor, the Project has been unable to achieve financial closing—a critical juncture in development when the Parties execute the Ground Lease and First Floor Sublease and the Developer takes possession of the Property to commence construction.

Economic Climate and Construction Cost

During the nearly nine months following the City Commission’s February 2022 authorization to adjust the Project’s unit mix of income-eligible tenants,  economic conditions, including escalating interest rates, have impacted the Project’s financial viability. Citing inflation at a 40-year high, the Associated General Contractors of America (AGC)’s July 2022 Construction Inflation Alert states:

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 and difficulty finding enough workers—a combination that threatens the financial health of many contractors. No single solution will resolve the situation, but there are steps that government officials, owners, and contractors can take to lessen the pain.

Global economic conditions have yielded significant increases in overall construction costs, ranging from historic escalation in the price of materials, supply chain disruption, delayed delivery and logistical concerns, and an increase in labor costs due to a shortage of skilled workers. Servitas has explained how these have directly impacted the Collins Park Project:

• Increased material costs: including a major shortage of cement in South Florida, increases in copper and aluminum costs impacting electrical and HVAC equipment, and the surge in price for fossil fuels affecting delivery and transport of all materials.
•  Supply chain delays:  global computer processor shortages have created long lead times and increased costs for assembled equipment components, such as air handlers, elevators, fire alarm equipment, chillers, fire pumps, generators, and appliances. 
•  Skilled labor shortage: regional decline in truck drivers has increased labor costs for their services. Due to elevated construction activity, subcontractors cherry-pick the most lucrative projects, and subcontractors lock in their fixed-pricing guarantees for only 14 days, rather than the typical 90 days, contributing to price volatility and an inability to maintain accurate cost estimates.

Although construction pricing will continue to evolve until a GMP contract is executed and prices are locked in, October 2022 pricing estimates of materials and hard costs by the Project’s general contractor, Moss & Associates, are approximately 74% higher than when the Ground Lease was approved in January 2021 and $3.9 million higher than when the City Commission last discussed the Project on February 23, 2022. See Exhibit A (Revised Proforma dated November 1, 2022).

On February 23, 2022, City Commission Resolution 2022-32053 authorized (i) an amendment of the Ground Lease, (ii) the First Floor Sublease with City as subtenant, and (iii) a cash subsidy of up to $532,451 to the Project to cover a shortfall in permitting costs attributed to the then-applicable Sustainability Fee.[1] In exchange, Servitas agreed to cap its developer fee to $1 million, at a cost to the Developer of approximately $600,000. It should be noted that, to date, the Administration incurred approximately $31,000 in upfront pre-development expenses related to Project negotiation and approvals. Upon financial closing and release of funds associated with the issuance of bond financing for the Project, the Project will reimburse to the City approximately $31,000 in City upfront pre-development expenses incurred up to this point.

At the July 22, 2022 FERC budget briefing, the Committee discussed the Project’s $2.85M funding gap. Since that time, the gap has widened considerably, due in part to the rising cost of debt from the Federal Reserve’s rate hikes intended to counter inflation. The Administration has met regularly with Servitas to discuss the Developer’s exploration of several sources of supplementary project funding.

a.      Miami-Dade County Impact Fee Exemption Ordinance

On July 7, 2022, the Miami-Dade County Board of County Commissioners (BCC) adopted Ordinance No. 22-80, amending the Code of Miami-Dade County relating to impact fee exemptions for affordable and workforce housing development in incorporated and unincorporated areas. The County ordinance expanded the existing impact fee exemption, from benefitting housing for tenants up to 80% of the County’s AMI, to now include workforce housing developments for tenants up to 120% of AMI. In addition, the Project has benefited from a reduction in its assessment due to credits for existing development, as the Project is subject to a covenant in-lieu-of unity of title with the Miami Beach Regional Library. Following enactment of the ordinance, the Administration has confirmed with the County’s Department of Regulatory and Economic Resources (DERM) Impact Fee Section that the Project’s Miami-Dade County impact fee assessment has reduced by 78% from $420,557 to $91,158.

b.      City of Miami Beach Fee Exemption Ordinance

During its February 23, 2022 meeting, the City Commission expressed a desire to explore additional cost reductions for this Project and others, as a means to lower development costs and incentivize greater housing development. As a result of enactment of the Fee Exemption Ordinance, adopted on September 28, 2022 via Ordinance 2022-4513, development-related fees for the Project were reduced by $1.26 million as follows:

c.      City Contribution

While the City has already made significant contributions to the Project including but limited to use of City-owned land, waiver of parking requirement, availability of 58 parking spaces, and certain development fee waivers, the Project requires an additional subsidy. As recommended by the FERC and approved by the City Commission via Resolution 2022-32337, the FY 2023 Capital Budget includes a one-time enhancement of up to $2.85 million for a financial contribution to the Project. This financial contribution will be advanced to the Project and paid to the Lessee. The City Contribution is for use solely to cover capital and development costs and is an advance that will be reimbursed to the City over approximately fourteen (14) years from Project net revenues on an annual basis through 2037. The terms of this capital contribution are outlined further below in the Revised Lease section.

d.      Arts and Culture G.O. Bond Contribution – Miami City Ballet

On July 25, 2022, the City Commission adopted Resolution No. 2022-32261, authorizing the November 8, 2022 ballot question to approve the issuance of $159 million in general obligation bonds largely to improve facilities programmed and/or operated by arts and cultural institutions throughout the city. If approved by the voters, among the project list is $16 million for the Miami City Ballet to be used for multiple capital projects, including $4 million to be contributed toward the cost of the buildout of the Ballet’s second-floor dormitory at the Project. The terms of this capital contribution are outlined further below in the Revised Lease section.

e.      Miami-Dade County Documentary Stamp Surtax Loan

On August 26, 2022, Servitas, on behalf of Ground Lessee, CFC-MB I, LLC, applied for Miami-Dade County Documentary Stamp Surtax Funding, a program designed to provide gap funding and address unmet needs in workforce and affordable housing, whose funding source is the County’s documentary “doc” stamp fee imposed by the County when documents are recorded in the public record. The Surtax Loan could provide funding up to $2 million, which must be repaid to the County. The Surtax Loan program requires implementation of certain green development standards that could cost the Project approximately $513,000 in design and construction upgrades. The County’s Department of Public Housing and Community Development (PHCD) is currently reviewing the application and an administrative decision is anticipated in late November 2022/early December 2022. If approved administratively, the BCC must then approve any recommended award during one of its regular meetings.

Revised Lease

The proposed Revised Lease incorporates two capital contributions by the City: (1) Lessor Direct Capital Cost Contribution and (2) Lessor Arts and Culture G.O. Bond Cost Contribution as funding sources for Project development and financing.

The Lessor Direct Capital Cost Contribution will be advanced to the Project and paid to the Lessee in two installments, with the first installment of $850,000 paid at financial closing, and the second installment of up to $2 million no later than 45 days after the Project achieves 50% completion. Completion status will be evidenced by applications for payment received by the Developer from its general contractor. The first installment may be used for any Project expenses and the second installment may be used solely to pay for Construction Costs associated with the improvements made by the Developer for the benefit of Lessee. The Lessee (Developer) must pay to the Lessor (City) from Net Available Cash Flow (i.e. Project revenues after the payment of all operating expenses and satisfaction of all debt service and the payment of subordinated expenses including, maintenance and operating reserves), all  amounts from time to time available, as needed to fully reimburse the City for the Lessor Direct Capital Cost Contribution.

The Revised Lease also contemplates that if the Arts and Culture G.O. Bond is approved by voters, the City would contribute the Lessor Arts and Culture G.O. Bond Cost Contribution with a transfer of $4 million to the Lessee on the earlier of (i) 45 days after issuance of the G.O. Bond or (ii) 45 days after the Project achieves 50% completion. To the extent that the Lessor transfers any portion of the Lessor Arts and Culture G.O. Bond Cost Contribution to the Lessee prior to the issuance of the first tranche of the Arts and Culture G.O. Bond, the Lessor intends to reimburse itself for the Lessor Arts and Culture G.O. Bond Cost Contribution from the proceeds of the Arts and Culture G.O. Bond. The Lessor Arts and Culture G.O. Bond Cost Contribution will not be reimbursed to the City.

The Administration recommends moving forward with the Revised Lease to formalize the City’s financial contribution necessary to bridge the gap in development financing. The Revised Lease terms will allow the Developer to market the Project and reach financial closing as soon as possible, potentially by December 2022.

The Administration recognizes that inflationary pressures as well as measures taken by the Federal Reserve in an effort to combat inflation have increased Project construction and financing costs through no fault of the Developer. To help fill the large gap in Project financing and to ensure the realization of a significant City project that aims to address the pervasive rental housing crisis, Servitas and the Administration have negotiated a measured strategy that balances different layers of public funding to subsidize the first workforce housing project in the City’s history with support for the Miami City Ballet, one of the City’s premier cultural anchors.

The Administration therefore recommends that the Mayor and City Commission approve the resolution authorizing the Revised Lease for the Collins Park Artist Workforce Housing Project.