Item Coversheet

REGULAR AGENDA: NEW BUSINESS  13.

COMMITTEE MEMORANDUM

TO: Finance and Citywide Projects Committee Members


FROM:
Jimmy L. Morales, City Manager


DATE: July 27, 2018


SUBJECT:

DISCUSSION REGARDING THE NORTH BEACH TOWN CENTER GARAGE


HISTORY:

North Beach Town Center Development, LLC (“Developer” or “NBTC”) initially proposed for the City to convey two of its Parking Lots (P80 and P84) in North Beach to the Developer, in exchange for the Developer’s conveyance to the City of a separate, stand-alone public parking garage unit or structure, which would be constructed as part of the Developer’s proposed mixed use project between Abbott Avenue and Byron Avenue.  The City currently owns the five parcels outlined in red on Exhibit "A" (Parcel Map), which contain 83 surface parking spaces, and the Developer owns the parcels outlined in yellow.  The Developer would convey its five parcels outlined in blue to the City for use for the Town Center Garage. 

 

The appraisal submitted by the City’s appraiser estimated the value of the two City parking lots at $10 million, and the value of the Developer parcels at $9.2 million, resulting in a variance of $800,000 between the City properties and Developer properties.

 

Until April 6, 2018, Developer’s concept plan for the Project assumed that Developer would have ownership of property the Developer currently does not own (the Prima Pasta site).    The prior versions of the term sheet reviewed by Finance and Citywide projects Committee (FCWPC) at its February 23, 2018, March 13, 2018, and March 26, 2018 meeting, involved, among other terms, the following:

 

(1)   an exchange of Developer and City parcels, with developer to pay the City at closing for the difference in the appraised values between the properties being exchanged;

 

(2)   the project would be developed as two separate building structures, to include 126,627 SF of retail use and 459 parking spaces, with 359 parking spaces to be owned and operated by the City as a municipal parking garage, and 100 parking spaces to be owned and operated by the Developer for the benefit of its retail tenants;

 

(3)   City to provide limited two hour free parking rights at the municipal parking garage for up to ten (10) years for the benefit of Developer’s retail tenants, through a parking validation system, with Developer to make operating payments to the City, to replace lost revenue and the estimated losses that the City anticipates would be experienced at the garage as a result of the two hour free parking; 

 

(4)   City to pay Developer for the City’s portion of the design and construction costs for the Project, pursuant to separate stand-alone contracts for design and construction of the City garage, to avoid a commingling of funds and a separation of responsibilities (including separate performance bond, etc.) for the City’s portion of the project; and

 

(5)   The garage would be designed in accordance with City’s design criteria for convertibility to other uses (to take into account anticipated continued declines in parking demand), with no convertibility in the first ten years following the opening of the garage, and thresholds (limits) on any potential conversion by the City, between the tenth and twentieth year following opening of the garage; and

 

(6)   At completion of construction, at which time the garage project would be condominiumized, with the City to own the City parking garage condominium unit, and Developer to own the remaining condo units within the garage for retail and loading.

 

At the April 11, 2018 City Commission meeting, consideration of the proposed transaction was deferred,  as the Developer submitted that he no longer anticipated having control of the Prima Pasta site.  

 

As part of a supplemental memorandum to Item R7E on the April 11, 2018 City Commission agenda, which was subsequently withdrawn, the Administration outlined the various issues implicated by the new proposal, all of which would need to be addressed and negotiated in revisions to the term sheet and concept plan, including, without limitation, ensuring that any new project that excluded the Prima Pasta site would address any life safety, loading and other potential operational issues. 

 

Subsequently, the City has met multiple times with the Developer, its legal counsel and architects.  On May 30, 2018, the Administration met with NBTC to discuss its latest submittal.    At the meeting, NBTC presented a revised concept plan which represented significant changes from the discussions to date.  Subsequent to the meeting, on June 20, 2018, NBTC provided a revised concept plan and term sheet.  On June 27, 2018, the City provided updated comments to NBTC, including comments from Legal and Planning. 

 

On July 19, 2018, NBTC provided a revised concept plan and a Summary of Land Swap and Retail Condo Values attached hereto as Exhibits “B” and “C”.  NBTC provided the most recent term sheet on July 20, 2018, attached hereto as Exhibit “D”.  Some of the noteworthy changes from prior versions of the term sheet reviewed by Finance Committee include, but are not limited to, the items below:

 

(1)   The Developer is now proposing for the project between Abbott Avenue and Byron Avenue to be constructed as a single building structure (as opposed to two building structures) with condominiums containing 80,378 s.f. of retail owned by the developer and 287 parking spaces, all owned by the City.  The single structure of retail and parking would no longer be considered a main use garage. After the proposed swap, the underlying land would remain separately owned by Developer and the City until the project is completed and condominiumized. 

 

(2)   Instead of Developer providing a minimum of 100 parking spaces, which would be located on the 2nd floor and dedicated to the grocer tenant, Developer has proposed that it be responsible for zero parking spaces for the entire project, with the City to pay for the entire cost of all parking to support Developer’s mixed use project.    .  Instead, Developer has proposed to build approximately 41,000 SF of retail space on the entire 2nd floor, with parking to now be located on Floors 3, 4 and 5, and containing 287 spaces.

 

(3)   Due to the configuration of the parking, City now pays $4,254,640 for the real estate value of the parking condo unit located on Developer’s parcel (which adds adding approximately $15,000 per space to City’s cost of the garage, for a total of $49,000 per parking space), resulting in an total cost to the City of $9,758,000 for 287 spaces versus $12,206,000 for 359 spaces.  The net out-of-pocket cost for for the 287 spaces is $9,731,480 vesus $10,459,680 for 359 spaces under the prior proposal, resulting in a significantly more expensive project for the City.

 

(4)   Instead of providing up to ten (10) years of two-hour free parking, as previously discussed with the FCWPC, the Developer now proposes for the City to provide 2-hour free parking for up to 20 years through a ticket validation sysytem, with the Developer paying for any operating losses in the Town Center garage in additon to an annual  contribution of $66,000 for replacement of the revenue associated with the City owned lots.  Commencing in the 5th year, instead of Developer making validation payments for the full amount of tickets validated if retail occupancy exceeds 70%, Developer now proposes to make validation payments if retail occuancy exceeds 90 percent, a significant ly higher threshold..

 

(5)   Instead of providing for flexibility for the City to convert the garage to other purposes after ten (10) years if parking utilization falls below specified thresholds (limits on City), Developer now proposes convertability of the garage only after a firm 20 years, and the Developer proposes that, if the City decides to convert the garage based on agreed upon occupancy thresholds, the Developer would have a right of first refusal to purchase the to-be-converted areas at fair market value, without regard to any other public uses that the City Commission may contemplate for such spaces. 

 

(6)   While NBTC has proposed accommodations in an effort to allow the Prima Pasta restaurant to continue to operate, these accommodations are not reflected in the term sheet, are pending ongoing refinement by NBTC, and are subject to review by the Fire Department and Building Department.

 

(7)   At the request of the City, NBTC has modified the concept plan to provide for a single delivery/service drive from Abbott Avenue to Byron Avenue, to address the loading concerns previously raised by the Planning Department on multiple occasions. 

 

(8)   The Developer’s new proposal is for the project to be built as a single building structure, on land that is both publicly owned and privately owned, with the project to be condominiumized at completion.  This legal structure is significantly different from the prior proposal, which contemplated the City garage being built as a separate structure, pursuant to a separate stand-alone construction contract, on separately owned land.  The new structure raises certain complexities in connection with lender financing (as the project will partially be built on public land and cannot be liened or mortgaged) and in the event the Developer defaults.  Developer has agreed that (1) the entire project between Abbott Avenue and Byron Avenue cannot be liened or encumbered; (2) Developer’s construction loan will identify collateral other than the Project, (3) Developer has further agreed that as a condition of closing, Developer will provide evidence of lender’s agreement to continue to fund the project (and thereby provide a “completion guarantee”) in the event the Developer defaults and the lender forecloses on that separate collateral; and (4) the Developer entity will be constituted as a “bankruptcy remote” entity with independent directors, to ensure that any decision to seek bankruptcy protection is made in good faith and is not arbitrary.  In this regard, although as discussed more fully below, the Administration’s preference is for a structure that involves less development risk to the City, the Developer has attempted to address the City’s issues to the extent possible.

 

 

On July 20, 2018, the Developer submitted an Economic Assesment prepared by the RMA Economic Development Department (RMA) on behalf of Pacific Star Capital (Exhibit “E”). In summary,  the highlights of the economic impacts of the Developer investments estimated by RMA are as follows:

 

·         The estimated Ad Valorem impact to the City of Miami Beach for the project is estimated at $312,333 in the first year, and $3.5 million over 10 years.

 

·         The proposed city investment is $9,758,480. This investment will result in both direct, and more importantly indirect and stimulated economic benefits for North Beach and the city. The total estimated cost of the project is $80 million, which will have a positive economic impact of over $92 million during construction. Following construction, the project will include retail, restaurant, office and residential uses which will generate over $59 million annually in the local economy.

 

·         This economic activity will include an estimated almost $50 million annually in retail sales. This is retail spending that without this project, would likely occur outside of Miami Beach.

 

·         The project is estimated to $1.115 million in from Building Permit Fees and $863,682 in Transportation Concurrency Fees, in addition to  $220,000 in Art in Public Places funding.  [Note: Building fees offset the cost of building permitting and inspection services and, therefore represent no net revenues to the City.  Transportation Concurrency fees similarly represent the development’s share of transportation improvements associated with the number of trips generated by the development.]

 

The report also puts forward the premise that other projects will follow this project and may easily represent an additional $81 million in new investment into the area, creating new residential units and business opportunities, and supporting the City’s tax base with an additional +$8 million in Ad Valorem Taxes over the next twenty years.


ANALYSIS:

While the Administration and the Developer have made progress in certain regards, there are still several concerns with the project and the revised single building structure.  Some of the noteworthy concerns, and deviations from prior versions of the term sheet reviewed by the Finance Committee include, but are not limited to, the items below:

 

(1)   The Developer is no longer providing any parking spaces to support the Developer’s project, which currently consists of over 80,378 SF of retail space, including a 30,151 SF grocery tenant.  The Administration is concerned that it would be spending $9.758 million for construction of all of the parking for this project,  with the possibility that there will be no excess parking to serve the surrounding community, beyond the parking that is, as a practical matter, required to serve big box tenants and a grocery tenant.

 

·         Based on practical requirements of 3 spaces/1,000 SF for typical retail tenants and 5 spaces/1,000 SF for the grocery tenant, the parking requirement is 301 spaces just to support the on site tenants.  Therefore, all of the 287 parking spaces paid for and owned by the City are just to support the Developer.

    

·         Inclusive of the 83 spaces lost from existing City lots that serve Prima Pasta and the Byron Carlyle, this results in a net deficit of 97 spaces in the area due to the development.

 

·         Developer compares this project to Sunset Harbour, but as noted below, the vast majority of Sunset Harbour garage was additional parking to support future development.  In addition, Sunset Harbour garage also does not service a large, big box retailer or grocery store. The two grocery stores nearby have their own, dedicated parking.

 

Sunset Harbour garage contains 439 total parking spaces and only 30,000 SF of retail space.  The Sunset Harbour transaction anticipated retail demand at 4.3spaces/1,000 SF (or 130 parking spaces) leaving 309 spaces for general municipal use. This contrasts with the Town Center Garage, where the entire 287 spaces results in 3.6 spaces/1000 SF of retail, and which will likely result in net deficit of spaces to the surrounding community. Even if the Developer provided the 100 spaces as originally proposed, this would result in 4.8 spaces/1000 SF of retail, and would likely not provide any excess parking for the area.

 

In addition, Developer proposes 2 hour free parking rights for up to 20 years. Sunset Harbour provides no free parking rights.

 

The RMA study contends that due to low car ownership in the area, use of trolleys, etc., the parking demand by the retail will be less, thus providing excess parking spaces that will be needed by the North Beach Master Plan.

 

The Administration  strongly recommends that NBTC provide a minimum of 100 parking spaces for its retail tenants, consistent with the FCWPC recommendation, which was for for the Developer to consider owning more than the 100 spaces originally proposed. 

 

(2)   Developer now proposes 20 year 2 hour free parking rights with the Developer paying for the validated parking at 90 percent retail occupancy starting in the 5th year.  This is in conflict with the prior recommendation of FCWPC which was as follows:

·         Free 2-hour parking for 10 years

·         Threshold for developer/tenant payment of 2 hour free customer parking after the 5th year at 70 percent retail occupancy.

 

The Administration does not recommend any free parking rights in excess of the terms discussed with the FCWPC, as those terms represented the outer limits of the Developer subsidy considered to be necessary for this project.

 

The RMA states report states that “free parking” is a standard requirement of many types of retail tenants, especially supermarket and grocery operators.  It goes on to state, “this is a requirement for many large retailers when considering locations in dense urban areas” and sites local examples such as “Fifth and Alton” and Midtown Miami. 

 

Please note two important distinctions regarding these two examples.  We certainly know that the Fifth and Alton development agreement has a provision for the first two (2) hours of parking are free; however, there is a developer revenue contribution that partially subsidizes the two hour free parking revenue loss.  No developer revenue contribution is proposed in the term sheet for the NBTC project.   With regard to Midtown Miami, while there was a “free parking” period when Midtown first opened for business in recent years it has assessed parking fees and increased them over time.  Currently, Midtown garage parking rates are as follows:  

 

Midtown Miami - Parking Garage Rates:

1 Hour:                                $2.00

2 Hours:                              $3.00

3 Hours:                              $4.00

4 Hours:                              $8.00

 

            Event Rates:

5 Hours:                              $10.00

6 Hours:                              $15.00

 

Additional per hour

after 6 hours:                      $  5.00 per hour.

24 Hours:                            $35.00

Monthly:                              $95.00

 

Updated pro formas for the proposed NBTC garage based on revenues and expenditures similar to Sunset Harbour, and at 100% occupancey as proposed by the developer, as well as with and without 2-hour free parking are shown in Exhibit “F”.  Comparatives to Sunset Harbor, Collins Park and Alton and 5th are shown in Exhibit “G”.

 

(3)   Developer proposes no convertibility of the garage for a firm 20 years verus the prior FCWPC recommendation and Developer agreement that the 20 years could be reduced to as little as 10 years if occupancy of the garage falls below 30 percent.

 

The  RMA quotes Walker Parking Consultants that parking demand will remain at 100 percent through 2049, despite impacts from ride share networks or autonomous vehicles, due to demand growth in the area, in which case, the Developer should consider convertability a low risk scenario.

 

The Developer submits that he is not able to execute leases with the larger retail tenants (grocery store and general retail) if the convertability has the potential to occur after 10 years. One option may be to have the the Developer/tenant pay the City for the “opportunity cost” of continuing to own and operate an underutlized garage, in the years that occupancy falls below 30 percent.

 

Futher, the Administration does not support the Developer’s proposed Right of First Refusal if the City decides to convert the garage to other uses.  The Administration would recommend a Right of First Refusal only if the City decides to sell the garage.  Having paid full value for the City condominium unit, if the City Commission determines there are better public uses for City property, such public benefit considerations should take precedence over Developer’s retail parking preferences.  As noted above, if Developer is concerned about the need to have parking to support its retail tenants, Developer should build and pay for Developer-owned parking spaces to support his project, rather than rely on the City to subsidize all of the parking for this project.

 

(4)   Developer has not agreed to Commissioner Samuelian’s request for additional payments in exchange for the free parking rights, in addition to covering operating losses and the $66,000 lost from the surface lots.  Developer has similarly declined to cover depreciation expense, as requested by Commissioner Samuelian.

 

The Administration recommends that the term sheet include the terms for accommodating the Prima Pasta access, life safety, loading, grease trap/utilities, waste removal and related issues.  Terms should be discussed with Prima Pasta to ensure there are no material objections.  Life Safety and related issues must be confirmed by Fire and Building. Although the Developer has attempted to address Prima Pasta issues in its concept plan, Developer has declined to make any commitments in the term sheet with respect to Prima Pasta.

 

(5)   While the proposed term sheet has adressed the the potential bankruptcy issues, the structure is complex and may involve City taking on more development risk that may be necessary for the City to participate in the project.  Although the developer has general real estate experience and appears to have the financial wherewithal to proceed with the project, the Developer does not appear to have any prior experience with the development of a public project. .  A simpler alternative structure could be for the City to sell the City parcels to the Developer and be paid the full appraised value at closing ($10 million),with the City to pay the full value of the City parking condominium unit upon completion of the Project, so that City’s funds are not expended until the City is assured that the parking units would be completed and delivered to the City.  Developer does not agree to the proposed alternative. 



CONCLUSION:

For the reasons set forth above, at this time, particularly given that the City would be utilizing $10 million in land value and incurring $9.758 million in construction costs for 287 spaces that could potentially primarily serve this retail development, along with the loss of surface lot spaces, the Administration does not recommend proceeding with the proposed land swap and garage project. 

 

The Administration seeks direction from the Finance and Citywide Projects Committee.


ATTACHMENTS:
DescriptionType
Exhibit A - Parcel MapMemo
Exhibit B - Revised Concept PlanMemo
Exhibit C - Summary of Land Swap and Retail Condo ValuesMemo
Exhibit D - July 20, 2018 Term SheetMemo
Exhibit E - Economic AssessmentMemo
Exhibit F - NBTC Garage Pro FormaMemo
Exhibit G - Comparative Pro FormaMemo
Exhibit H - Parking Garage AnalysisMemo