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Consideration of Amendment to the Burleigh Triangle Phase 2 Term Sheet and TID #7 Budget Amendment
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Submitted by:
John Ruggini
Department:
Finance
A. Issue
Due to rising interest rates and flat rents, the developer of the Burleigh Phase 2 project (Whole Foods complex) in Tax Increment District 7 is out of agreement with their bank for the loan outstanding for this phase and is requesting advance payment for an obligation the City has.
B. Background/Options
In 2015 the City and HSA agreed to terms for the development of the Whole Foods retail building which currently also includes Home Goods, Bob’s Discount Furniture and Verlo Mattress. This phase was successfully constructed and is currently 100% occupied. The Developer has outstanding debt with a private bank from this development that financed infrastructure improvements expected to be reimbursed sometime in the future, as outlined below. However, rising interest rates and flat rents have caused the Developer’s debt coverage ratio (annual lease payments divided by annual debt service) to fall below the bank’s required 1.25 coverage ratio. Technically, the HSA partnership, Burleigh 45, LLC is in default although the Bank has not taken any action at this point.
The phase three term sheet for the construction of the Synergy residential project agreed to in 2016 included terms to reimburse HSA for $2,320,000 in infrastructure costs incurred in Phase 2. However, as there was not sufficient cash flow in Tax Increment 7 at the time, this amount was agreed to be reimbursed in the future at an amount of $3,100 per housing unit for a maximum of $2,320,000. An additional $500 per unit was added to this incentive for a maximum of $369,400. The chart below depicts the agreement.
Over the past month, City staff have worked with an external financial consultant to review the loan documents and Burleigh 45, LLC financial statements and have verified the facts as presented by HSA. We also have negotiated a proposed solution.
I recommend we convert this development incentive into a straight reimbursement of $2,320,000 to be provided to the bank in March. As a reimbursement of previously incurred costs, the “Additional Incentive” of $369,400 would then be eliminated and not owed to HSA since it is not linked to a prior expense. Furthermore, HSA has offered that any interest cost the City may incur as a result of borrowing for all or a portion of the $2,320,000 can be credited against any accrued interest of the outstanding loan the City has with HSA for the purchase of the Shoeneck warehouse that was demolished to make way for the Wingspan, MSP and other future developments.
I think it is important to answer directly the question that the public will have about why the City should assist a private developer with their private loan. These were my considerations:
1. Term sheets are both legal obligations and declarations of partnership. If a Development partner will suffer financial hardships that are results of economic forces they cannot control and could threaten their ability to execute current or projects within the City, it is in the City’s interest to get involved. This was the case when the City provided a forgivable loan during COVID to the Renaissance Hotel developer.
2. The $2,320,000 was in effect a zero-interest loan provided by the Developer to the Tax Increment District for infrastructure necessary for future phases. They are not receiving any funds not owed to them.
3. The Developer has a track-record of following the Master Plan for the site and executing high-quality projects. Private market forces and demonstrated good faith to execute the master plan provide sufficient incentive for the developer so I believe that eliminating the incentive structure has no impact on future development occurring.
4. The Developer also provided the City favorable loan terms for the purchase of the Schoeneck warehouse (3.0% interest that is payable along with a single principal payment in 2032) that allowed Wingspan and MSP projects to move forward.
5. The Tax Increment District will be in a stronger financial position by executing this agreement as it will reduce future obligations by $369,400 even when considering forgone interest earnings.
6. The Developer has navigated some of the most difficult economic challenges to the retail sector including the COVID pandemic and competition from online retailers without needing any City financial support or term sheet adjustments.
7. This is a unique situation that does not create a precedent or obligation for the City to assist other Developers that experience financial challenges.
Based on these considerations, I’m confident providing this payment is both the prudent and right thing to do.
C. Strategic Plan (Area of Focus)
Economic Development & Financial Resilience
D. Fiscal Impact
Issuing a payment of $2,320,000 to the Burleigh 45, LLC Developer will reduce cash in the Tax Increment District fund resulting in lost investment earnings. Assuming that this amount would have been paid to the Developer upon the completion of the Wingspan project in 2028, this is estimated to be $243,600. This is offset by eliminating a $369,400 payment and by any interest credit in the event funds are borrowed.
E. Recommendation
I recommend amending the TIF 7 Phase 3 Term Sheet as attached and increasing the TIF 7 budget by $2,320,000.