ANALYSIS:
Following is a summary of proposed project and January 3, 2019 Term Sheet:
(1) The City currently owns the five parcels outlined in red on the last page of the Term Sheet, which contain 83 surface parking spaces, and the Developer owns all the parcels outlined in yellow. The Developer would convey its five parcels outlined in blue to the City for use in a retail and garage structure to be constructed as part of the Developer’s proposed mixed use project.
(2) The appraisal submitted by the City’s appraiser estimated the value of the City’s parcels at $10 million, and the value of the Developer parcels at $9.2 million, resulting in a difference of $800,000.
(3) Upon exchange of Developer and City parcels, the Developer will pay the City $800,000 at closing for the difference in the appraised values.
(4) The Developer is 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. 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.
(5) The Developer will provide 111 parking spaces on the third floor of the garage. The 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 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).
Accordingly, the net out-of-pocket construction cost to the City for the 247 spaces is $6,232,255 ($25,232 per space).
· 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).
Accordingly, the net out-of-pocket construction cost to the City for the 368 spaces is $11,406,575 ($30,996 per space).
(6) 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
(7) 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, after the tenth year following opening of the garage; and
(8) 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.
(9) 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.
(10)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:
a. 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
b. 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
c. 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.
(11) 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 the Developer, 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 accomodations in the development agreement.
(12) 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.
(13)The Developer’s current 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.
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.
Lambert Advisory Economic Impact Assessment
The following are findings from the Economic Impact Assessment performed by Lambert Advisory:
The proposed NBTC development provides for significant economic benefits to the City, including, but not limited to: a $100+ million construction investment for the NBTC mixed-use/parking redevelopment, generating more than 410 short-term construction jobs annually during the estimated two-year development timeline; approximately 426 direct net new jobs from operations annually upon stabilized operations of NBTC that will be long-term recurring benefits to the City; and, a net present value (NPV) of an estimated $14+ million (358 space garage) to $18.5+ million (479 space garage) from incremental ad valorem tax revenue and associated ownership rights in the Town Center Garage. Accordingly, there are likely to be other broader direct and indirect community and economic benefits from NBTC in the form of new development overtime as a result of the proposed investment; and, the magnitude of which has not been seen in this area in more than 40 years. It is also worth recognizing the Developer’s effort and associated risk with assembling the adequate amount of land needed to support this type of project.
Specific to long-term/recurring impacts, there are direct potential fiscal benefits in the form of revenue associated with the City’s investment (and for either program). In the effort to monetize these benefits, the analysis considers the net present value (NPV) of the potential incremental revenue to the City over a 30-year timeframe and utilizing a 7.0 percent discount factor. Accordingly, it also considers one additional factor: at the end of the 30-year evaluation timeline, the City still retains its condominium ownership of 247/368 parking spaces in the Town Center Garage (depending upon the 358 space or 479 space scenario). Assuming these two floors remain as parking over the long-term, then the value of the City’s condominium spaces would be based upon the underlying value created through the net revenue generated. For the 358 space garage, the $54,165 in stabilized net revenue is estimated to represent $900,000 in capitalized value (using a 5.0 percent capitalization rate); and, $3.0 million for the 479 space garage based upon $177,000 in stabilized net revenue.
It is very important to note, though, that we do recognize the long-term possibility that the parking spaces could be converted to a more valuable residential and/or commercial use; and/or, that at some point in the future the City may elect to further increase density allowances and, therefore, enhance the property’s overall value. Given the variability of these alternative conditions, the capitalization approach outlined above has been utilized herein.
Based upon the evaluation factors outlined above, the following table provides a highlight of the NPV from the various potential revenue streams outlined above:
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358 Space TC Garage ($16.2M City Investment)
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479 Space TC Garage
($21.5 City Investment)
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NPV of Incremental Ad Valorem Tax from NBTC Property
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$10,100,000
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$10,500,000
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NPV of Incremental Ad Valorem Tax from Surrounding Properties[1]
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$3,350,000
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$3,350,000
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NPV of Incremental Parking Revenue to City
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($425,000)
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$1,500,000
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City’s Air Rights (Town Center Garage)
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$900,000
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$3,000,000
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NPV of Total Incremental Revenue to City
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$13,925,000
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$18,350,000
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Importantly, and in addition to the benefits outline above, there are likely to be other broader direct and indirect community and economic benefits from NBTC in the form of new development overtime as a result of this level of investment that has not been seen in this area in more than 40 years. This in addition to recognizing the Developer’s effort and associated risk with assembling the adequate amount of land needed to support this level of development.
[1] Based upon the mid-point of the lower and upper valuation scenarios
Administration’s 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 the City would incur out of pocket costs of $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; however, 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 4.3 spaces/1,000 SF, (or 130 parking spaces) leaving 309 spaces for general municipal use.
Updated pro formas for the proposed NBTC garage based on revenues and expenditures similar to Sunset Harbour, and at 100% daytime occupancy as proposed by the Developer, with transactions reduced by 50% after 6PM, as well as with and without 1-hour free parking are shown in Exhibit “D”, resulting in a net profit prior to depreciation of $50,500 and $78,500 for the 358 space garage and $194,500 and 230,500 for the 479 space garage, respectively. Comparatives to Sunset Harbour, Collins Park and Alton and 5th are shown in Exhibit “E”.
(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”.
Prior versions provided for convertibility without limitation after 20 years. The Administration prefers to have the option of convertibility after 20 years without limitation and for this to be made clear in the Term Sheet.
(3) 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 which have been confirmed with Prima Pasta to ensure there are no material objections, as contained in the attached Exhibit “F”,; however, Life Safety and related issues must be confirmed by Fire and Building.
(4) 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.
Specific Concerns Identified by Lambert Advisory
Lambert Advisory has identified the following items associated with the City/Developer’s development structure that warrants further discussion based upon the information provided to date:
(1) Developer’s Qualifications/Capacity: Based upon the documentation received, the City should consider requesting additional background information on Developer’s experience with similar projects, proposed development organizational structure (ie. partners, architect/engineer, general contractor), and support for funding capacity;
[Given the above, The Administration recommends that a thorough third party background check be conducted prior to proceeding with a Development Agreement.]
(2) Modification to Proposed Parking Density in East Lot: The East Lot currently proposed 256 total parking spaces, which is intended to support: 33,000+ square feet of retail; 62,000+ square feet of office; and 150 residential units. Understanding that there may be efficiencies in terms of shared parking and/or enhanced pedestrian access/mobility, this appears to be well below the practical parking needs for the proposed uses;
[Given these concerns, the Administration recommends that a) the Development Agreement be clear that no monthly parking will be provided in the Town Center Garage to residents or employees associated with the Developer’s mixed use project in the East Lot and b) as the level of parking may create challenges for Developer to secure financing for the mixed use project in the East Lot, that the Development Agreement contain conditions precedent in this regard.]
(3) Consideration for 479 parking spaces at Town Center Garage: As indicated within the Economic Benefit Assessment, the NBTC has the potential to encourage broader long-term benefits to the area by catalyzing new mid- to higher- density development. However, at least in the foreseeable timeframe, these redevelopment opportunities will be supported by access to public parking, which in the case of the 358 space garage would actually be diminishing by 26 spaces as a result of the NBTC development.
(4) Developer Return on Investment (ROI): In the effort to support key assumptions and inputs for the Economic Benefit Assessment, the Developer provided a brief proforma analysis for a 358 space garage, including but not limited to: estimated construction costs, and general stabilized operating performance measures (ie. lease rates, expenses, and/or net revenue). Accordingly, and based upon the information provided, Developer indicates an ROI of less than 5.0 percent. This appears to be low in terms of benchmark proforma industry standards, which generally range from at least 8+ percent to 12+ percent (unleveraged). From the City’s perspective, further discussion should be considered.
[Given the low ROI, the Developer may be motivated to sell the project before or upon completion, in which case the Development Agreement should include consideration for the City to share in the net sales proceeds.]
(5) Ensuring Tenant Standards: The Developer has indicated that Town Center Garage retail will include two major anchors, including a grocer and Target store; however, firm commitments have not been provided to date. The Economic Impact Assessment assumes these tenants will be procured, and the City should encourage timely delivery of commitments.