DISCUSSION REGARDING THE ECONOMIC IMPACT STUDY OF THE PARKING GARAGE/RETAIL DEVELOPMENT PROPOSAL, INVOLVING CITY-OWNED PARKING LOTS IN NORTH BEACH, SUBMITTED BY NORTH BEACH TOWN CENTER DEVELOPMENT, LLC (DEVELOPER), AN AFFILIATE OF PACIFIC STAR CAPITAL, LLC; AND FURTHER, A REFERRAL TO THE FINANCE AND CITYWIDE PROJECTS COMMITTEE TO DISCUSS DEVELOPER'S LATEST TERM SHEET DATED JANUARY 3, 2019.

The Administration seeks direction regarding the Developer’s request for the Commission to reconsider, in light of the final and best offer Term Sheet, if the additional Economic Impact Analysis is still necessary and whether the Developer's January 3, 2019 Term Sheet should be referred to the next Finance and Citywide Projects Committee.  

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 5 Developer lots between Abbot and Byron Avenue structure, which would be constructed as part of the Developer’s proposed mixed use project between Abbott Avenue and Byron Avenue.  The project is proposed to be part of a larger development that, includes a mixed use development project between Abbot Avenue and Harding Avenue consisting of  office, retail and residential units as well as parking to support the mixed use development. 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 initially proposed to 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)   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;

(5)   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.  

On July 19, 2018, following months of discussion of the various issues raised by Developer’s new proposal (which would not include the existing Prima Pasta site), NBTC provided a revised Concept Plan and a Summary of Land Swap and Retail Condo Values as well as  a revised term sheet on July 20, 2018.  The terms of the proposed transaction were discussed at the July 27, 2018 FCWPC meeting.  The FCWPC was unsatisfied with the proposed transaction and advised the Developer to reconsider the proposed terms and conditions and to provide its best and final offer.

On November 7, 2018, the Administration met with the Developer to discuss its best and final offer.  At its November 30, 2018 meeting, the FCWPC discussed the terms of the offer, attached hereto as Exhibit “B”, and advised the Developer to substantially improve the economic terms if it wished to continue negotiations with the City.  The FCWPC also recommended in favor of directing staff to engage a consultant to perform an economic impact study of the Developer’s proposal.  At its December 12, 2018 meeting, the Mayor and City Commission accepted the recommendation of the FCWPC and directed staff to engage a consultant to perform an economic impact study and to include the value of the City’s land in the financial analysis.  The scope of work for the economic impact study is attached hereto as Exhibit “C”.   

Subsequently, the City has met multiple times with the Developer to discuss revised terms and conditions.  On January 3, 2018, the Administration met with the Developer to discuss its latest submittal and accommodations for Prima Pasta.  The Developer has provided its best and final offer attached hereto as Exhibit “D”.  Also, the Summaries of Land Swap and Retail Condo Values and Revised Concept Plans are attached hereto as Exhibits “E” and “F”.

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 separately owned building structures) with condominiums containing 80,378 s.f. of retail owned by the developer.  The City has the option of paying for the development rights (for spaces on Developer’s site) and for the cost to design and construct either (1) a 358 parking space garage; or (2) a 479 parking space garage, with all of the parking spaces to be owned and operated by the City (except all 111 spaces on the third level as set forth more fully below).  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.

Noteworthy, the retail portion of the project was 50 percent larger in earlier versions than in the current term sheet, which likely would have resulted in significantly greater economic impact in North Beach.

(2)  The Developer will provide 111 parking spaces on the third floor of the garage, which would be controlled by a separate access system.  The Developer has proposed to build approximately 41,000 SF of retail space on the entire 2^nd floor, with parking to now be located on Floors 3, 4 and the roof (358 space option), or on Floors 3, 4, 5 and the roof (479 space option).

·         The Cost of the 358 Space Parking Garage Option

Due to the configuration of the parking, under the 358 space option, the City would now pay the Developer $2,120,640 for the real estate value of the parking condo unit located on Developer’s parcel.  The City would receive from the Developer $3,486,385 for the real estate value of the retail condo unit located on City’s parcel, and $800,000 for the higher value of the City’s parcels for the land swap.  This results in a Developer net payment to the City in the amount of $2,165,745, which will offset the City’s $8,398,000 construction cost of the 247 spaces (358-111=247 at $34,000 per space). 

Accordingly, the net out-of-pocket construction cost to the City for the 247 spaces is $6,232,255 ($25,232 per space) versus $10,459,680 ($29,136 per space) for 359 spaces under the prior proposal.

·         The Cost of the 479 space Parking Garage Option

Due to the configuration of the parking, under the 479 space option, the City would now pay the Developer $3,180,960 for the real estate value of the parking condo unit located on Developer’s parcel.  The City would receive from the Developer $3,486,385 for the real estate value of the retail condo unit located on City’s parcel, and $800,000 for the higher value of the City’s parcels for the land swap.  This results in a Developer net payment to the City in the amount of $1,105,425, which will offset the City’s $12,512,000 construction cost of the 368 spaces (479-111=368 at $34,000 per space). 

Accordingly, the net out-of-pocket construction cost to the City for the 368 spaces is $11,406,575 ($30,996 per space) versus $10,459,680 ($29,136 per space)  for 359 spaces under the prior proposal.

(3)   In earlier FCWPC meetings, the Developer proposed the City provide up to ten (10) years of two-hour free parking.  As presented at the July 27, 2018 FCWPC meeting, the Developer proposed the City provide 2-hour free parking for up to 20 years through a ticket validation system, with the Developer paying for any operating losses in the Town Center garage in addition to an annual  contribution of $66,000 for replacement of the revenue associated with the City owned lots.  Commencing in the 5^th year, instead of Developer making validation payments for the full amount of tickets validated if retail occupancy exceeds 70%, Developer proposed to make validation payments if retail occupancy exceeded 90%, a significantly higher threshold.  The Developer’s current proposal includes one hour free parking for a period up to twenty (20) years.  The Developer will pay for the costs associated with implementing a validation system.  The Developer will pay the City the amount of the operating losses, if any, plus a contribution of $66,000 annually to replace the net revenue associated with the existing City-owned surface parking lots.  Commencing on the fifth anniversary of the opening date, if the Developer’s retail tenants occupy more than 79% of the floor area (“Occupancy Threshold”), the Developer will reimburse the City for the validated tickets, plus an annual contribution off $66,000.

(4)    In earlier term sheets, the Developer provided for flexibility for the City to convert the garage to other purposes after ten (10) years if parking utilization falls below specified thresholds (limiting City), but the City had the ability to convert the garage after 20 years in its sole discretion.  At the July 27, 2018 FCWPC meeting, the Developer proposed convertibility of the garage only after a minimum of 20 years, and the Developer proposed that, if the City decided 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.  The Developer currently proposes convertibility of the garage only after a minimum of 10 years, and only in the event total transient (hourly) transactions are less than certain specified thresholds “Convertibility Thresholds” as follows:

1. A decrease of 50% or more in Garage Occupancy in any one year period, as compared to Garage Occupancy for any other one (1) year period since the Opening Date, based on hours of operation between 10AM and 6PM; or
2. A decrease of 10% or more in Garage Occupancy, in each of three consecutive years, as compared to any one (1) year of Garage Occupancy since the Opening Date, based on hours of operation between 10AM and 6PM; or
3. Any year in which Garage Occupancy during the year consists of a total number of transient (hourly) transactions of less than 40,000 transactions.

The Developer shall have a right of first refusal to purchase the to-be-converted area at Fair Market Value, after Year 10.  After Year 20, Developer shall have a right of first refusal to the purchase of the to-be-converted area at Fair Market Value, only if the City decides to sell the property.     

(5)   The Developer’s current term sheet now includes accommodations in an effort to allow the Prima Pasta restaurant to continue to operate.  These accommodations are pending ongoing refinement by NBTC, and are subject to review by the Fire Department and Building Department.  The Administration has confirmed that Prima Pasta is satisfied, subject to further refinement, that these provisions sufficiently protect Prima Pasta’s interests.  The Developer has agreed to include the accommodations in the development agreement.

(7)   The Developer’s current proposal is for the joint development 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 between the City and Developer 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.  

Given the Developer’s proposed structure, 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 (i.e., sell the City parcels to the Developer and be paid the full appraised value at closing ($10 million), with the City to purchase 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), the Developer has attempted to address the City’s issues to the extent possible.

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

·         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 generate $1.115 million in 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. 

The report has not been updated for the more recent changes.

Concerns

While the Administration and the Developer have made significant progress since the November 30, 2018 FCWPC meeting, there are still noteworthy concerns associated with the project, including, but not limited to, the items below:

(1)   The Developer’s project currently consists of 80,378 SF of retail space, including a 30,151 SF grocery tenant.  The Administration is concerned that it would be spending $6.232 million (358 space option) or $11.407 million (479 space option) 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 (358 space option).

·         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, under the 358 space option, most of the 247 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 26 spaces in the area due to the development.  Under the 479 space option, inclusive of the 83 spaces lost from existing City lots that serve Prima Pasta and the Byron Carlyle, there is only a net gain of 95 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.

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.

Updated pro formas for the proposed NBTC garage based on revenues and expenditures similar to Sunset Harbour, , as well as with and without 1-hour free parking and with varying assumptions for utilization after 6pm, as the rest of public parking in north beach is free after 6pm, are shown in Exhibit “G”.  This results in a net profit prior to depreciation of $33,935-$66,935 and $51,935-$87,935 for the 358 option (with 247 owned by the City), with and without the 1 hour free parking, respectively.  Comparatives to Sunset Harbour, Collins Park and Alton and 5th are shown in Exhibit “H”. Depreciation is estimated at $168,000 per year for City’s 247 spaces 

(2)   Developer proposes no convertibility of the garage for a minimum of 10 years, and only in the event total transient (hourly) transactions are less than certain specified “Convertibility Thresholds”.  As noted above, prior term versions provided for convertibility without limitation after 20 years.

(3)   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 RMA also quotes Walker Parking Consultants that designers and operators should also consider flexibility in parking facility design, allowing for the adaptive reuse of spaces into non-parking land uses.

(4)   The Administration previously recommended that the term sheet include the terms for accommodating the Prima Pasta access, life safety, loading, grease trap/utilities, waste removal and related issues.  The Developer has included considerations for these items in the term sheet and concept plan.  Terms should be confirmed with Prima Pasta to ensure there are no material objections.  Life Safety and related issues must be confirmed by Fire and Building.

(5)   While the proposed term sheet has addressed the potential bankruptcy issues, the structure is complex and may involve the 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. 

Budget Advisory Committee

This matter was discussed at the January 8, 2019 Budget Advisory Committee (BAC) meeting.  The BAC passed a motion requesting the Administration to provide the results of the economic impact study, including a cash flow analysis of the City's lots based on their current use and a cash flow analysis of the proposed project.

Given that the City would be utilizing $10 million in land value and incurring $6.232 million in construction costs for 358 spaces that could potentially primarily serve this retail development, along with the loss of surface lot spaces, the Administration would not recommend proceeding with this project on its merits solely as a parking garage project. The Developer argues that the City’s investment is critical for this project to move forward, and therefore serve as a catalyst for economic activity in North Beach.  Since we have not yet conducted the economic impact study, we are unable to quantify what such an impact would be.  There is no question that North Beach has lacked economic development for many years. The City has, however, attempted to provide incentives through the increase in FAR in Town Center and the North Beach Town Center overlay.  These incentives could also serve as an important economic catalyst.  Accordingly, if the City Commission finds that the project provides a significant economic development benefit to the City sufficient to offset the costs and risks outlined above, the Developer has proposed the terms as outlined in the attached Term Sheet.

On December 20, 2018, the City Manager issued a Letter to Commission (LTC), attached hereto as Exhibit “I”, updating the Mayor and City Commission regarding the status of negotiations with the Developer.  The City Manager also advised the Mayor and City Commission regarding the Developer’s request for the Commission to reconsider, in light of the final and best offer Term Sheet, if the additional Economic Impact Analysis was still necessary. 

The Administration seeks direction from the Mayor and City Commission.