City Council and
Redevelopment Agency Report
City Council and Redevelopment Agency Meeting: March 8, 2011
Agenda Item: 8-D
To: Mayor and City Council
Chairperson and Redevelopment Agency
From: Andy Agle, Director of Housing and Economic Development
Carol Swindell, Director of Finance
Subject: Bank Loan Financing and Payment of Redevelopment Funds to Finance Redevelopment Priority Capital Projects, Modification of a Contract for Bond Counsel Services and Authorization for City Manager to Exercise Options in Agreement No. 9340
Staff recommends that the Redevelopment (Agency):
1) Adopt the attached Resolution identifying parameters for and authorizing the Executive Director to enter into an agreement with Wells Fargo Bank (Bank), and take all necessary actions, to obtain a bank term loan in the amount of $60,000,000 for purposes of financing redevelopment priority capital projects, and,
2) Authorize prepayment of payments due to the City pursuant to Implementing Agreement No. 9318 to Cooperation Agreement No. 9267, including the $60,000,000 from the Wells Fargo Bank term loan.
Staff recommends that the City Council (Council):
1) Direct the Director of Finance to segregate the prepayment by the Agency of funds due the City pursuant to Implementing Agreement No. 9318 to Cooperation Agreement No. 9267, including funds drawn from the Wells Fargo Bank Term Loan into a designated account earmarked solely for funding redevelopment priority capital projects;
2) Authorize the City Manager to negotiate and execute a modification to increase the not-to-exceed amount by $130,000 to $350,000 for the existing agreement with Stradling, Yocca, Carlson, and Rauth (SYCR) for legal services related to the issuance of debt financing by the City;
3) Authorize the City Manager to exercise the options to purchase Agency real property pursuant to Second Implementation Agreement No. 9340; and,
4) Approve the budget changes as outlined in the Financial Impact and Budget Actions section.
Several of the Agency’s priority capital projects including the Palisades Garden Walk, Pico Library, Parking Structure 6 and Civic Auditorium Renovation (the Projects) have achieved significant critical path milestones in design development, community input, environmental analysis and construction cost estimates. A next major step for the Projects is financing.
Following extensive study, staff recommends the use of a term loan from Wells Fargo to finance the Projects, as this option allows the Agency to leverage its tax increment revenue stream while fulfilling the Agency’s commitments to the City in accordance with Cooperation Agreement No. 9267(CCS/RAS) and Implementing Agreement No. 9318 (CCS/RAS). Additional actions associated with implementing the loan include modifying the existing contract with the City’s bond counsel to provide funds for legal services and authorizing the prepayment of funds due to the City pursuant to Implementing Agreement No. 9318, including funds drawn from the Wells Fargo Bank Loan, into a segregated account earmarked for the purpose of funding redevelopment priority capital projects.
Finally, the Agency and City previously authorized execution of the Second Implementing Agreement No. 9340 (CCS/RAS) to provide the City the ability to exercise an option to purchase Agency properties to secure performance of the Agency’s obligations under the Cooperation Agreement. The recommended action is to authorize the City Manager to exercise the options in accordance with the agreement terms.
On November 17, 2009, the Agency adopted its Five-Year Implementation Plan (the “Plan”) for the period of FY 2009-10 through FY 2013-14, with established goals to support affordable housing, disaster prevention and mitigation, community revitalization, commercial revitalization, and institutional revitalization. To implement the programs and activities associated with each goal, the Agency made redevelopment fund allocations totaling approximately $283 million, based on a variety of assumptions regarding growth in tax increment, borrowing costs, timing of borrowing, State grabs of local funds, leveraging opportunities and State law.
On August 10, 2010, to ensure timely implementation and completion of the Agency’s Five-Year Implementation Plan Projects, the Council and Agency authorized the execution of Cooperation Agreement No. 9267 (CCS/RAS) and adopted Resolutions 10519 (CCS) and 527 (RAS). On January 17, 2011 to set forth the schedule of payments from the Agency to the City for the City’s implementation of projects contained in the Agency/City Cooperation Agreement No. 9267, the Council and Agency authorized execution of Implementing Agreement No. 9318 (CCS/RAS) (the “First Implementing Agreement”) and, most recently, on February 22, 2011, authorized execution of the Second Implementing Agreement No. 9340 (CCS/RAS) (the “Second Implementing Agreement”) to provide the City the ability to exercise an option to purchase certain Agency properties to secure performance of the Agency’s obligations under the Cooperation Agreement.
Pursuant to the Second Implementing Agreement, the staff has finished preparing an inventory of the Agency’s properties and associated legal descriptions. The next step is to authorize the City Manager to exercise the options in accordance with the agreement terms. To fulfill the obligations under the Cooperation Agreement and First Implementing Agreement, staff evaluated a variety of financing options and determined that a bank loan was the best option for financing certain projects. Staff obtained competitive quotes and Wells Fargo provided the most advantageous terms via a seven year term loan. Given the relatively restrictive credit market for redevelopment agencies at this time and the limitations on the Agency’s ability to concurrently finance all the Projects with pay-as-you-go funding, the bank loan provides an immediate source of funding for the Projects. The terms of the loan allow the Agency to prepay it at any time with only LIBOR breakage costs, which are generally minimal.
The Agency received proposals from Bank of America, JP Morgan Chase Bank and Wells Fargo Bank in response to a request for a potential bank loan. Lenders were asked to provide terms for an initial credit line of $50-$60 million. The Agency’s annual revenue stream can support borrowing in this amount without impacting debt service and pass-through obligations. Wells Fargo provided the best proposed terms. Late in the afternoon on Wednesday, February 23rd, the State Department of Finance released language for a proposed budget trailer bill that addresses the Governor’s proposal to disestablish redevelopment agencies. In response to that proposed language, Wells Fargo modified its previous offer of a line of credit to a fully amortized term loan. Their proposal includes options for tax exempt and taxable debt, as well as both variable and fixed interest rate options. The term sheet is included with this staff report as Attachment B. The term loan is for seven years with a tax-exempt rate of 70 percent of LIBOR plus 150 basis points and a taxable rate of LIBOR plus 150 basis points.
Fixed rates are offered using an interest rate swap agreement pegged to LIBOR that would equate to a tax exempt rate of 3.2 percent and a taxable rate of 3.85 percent given today’s LIBOR rate. The expectation is the Agency would prepay the loan with longer term debt when the credit market has stabilized. The security is the pledge of tax increment revenues from the Agency’s Earthquake Recovery project area, subordinate to senior pass-throughs and bonded indebtedness. In authorizing the Agency Executive Director to negotiate and execute a Term Loan Agreement with Wells Fargo Bank, Section 1 of the attached Resolution sets limits on the exercise of the Executive Director’s discretion to do so and, among other things, provides that the Term Loan must be an obligation solely of the Agency payable from tax increment and not an obligation of the City’s General or other Funds.
Of the Agency’s priority capital projects, the Palisades Garden Walk, Pico Library, Parking Structure 6 and Civic Auditorium Renovation should proceed into construction within the specified period. A brief summary of the Projects’ progress is provided:
· Palisades Garden Walk and Town Square: This project is quickly approaching the construction documents phase, as an addendum to the Civic Center Specific Plan EIR has been prepared and hearings before the Planning Commission and Council are scheduled for the near future. The current schematic designs incorporate extensive input from the community and various boards and commissions as well as Council’s input from its October 12, 2010 meeting. Refinements have been made to the initial design concepts to address connectivity, access, play, water elements, lighting, landscaping and historic preservation. The cost estimate based on the 100 percent schematic designs is $35.9 million. It is anticipated that construction will commence in Fall 2011.
· Pico Library: Council recently provided design direction on February 22, 2011, helping staff move toward further development of the concept plans. The current cost estimate for this project is $11.4 million. Staff will return to Council for design development review in Fall 2011.
· Parking Structure 6: On January 11, 2011, staff presented concept designs to Council and received approval to move forward with schematic design. An addendum to the Downtown Parking Program EIR, text amendment and a conditional use permit necessary for the demolition of the existing parking structure and new construction is scheduled to go to Council on March 8, 2011. The total cost of construction is approximately $40 million.
· Civic Auditorium Renovation: Also on the March 8, 2011 agenda is a recommendation that Council approve negotiated business terms for the use and programming of the Civic Auditorium by the Nederlander Organization. Major improvements are necessary in order for the Civic Auditorium to function effectively as a destination venue. Staff is currently refining early cost estimates for the required renovation and planning to issue a design/build RFB in Spring 2011 to keep the project timeline intact. The current schedule anticipates that the renovation of the building would begin in the Fall or Winter of 2012 and last 18 to 24 months. At this time, Council has allocated $25 million to partially fund the venue’s seismic and ADA renovation.
Combined, the cash flow needs of these four projects exceed the Agency’s ability to finance construction simultaneously within the next two years on a pay-as-you-go basis. The bank loan offers the Agency the ability to immediately address the funding needs of the Projects.
Bond Counsel Services
The City is currently working with Stradling, Yocca, Carlson, and Rauth (SYCR) to prepare opinions and documents related to the financing. The City’s current contract with SYCR limits total compensation to an amount not to exceed $220,000. Staff recommends that the amount of the contract be increased by $130,000, making the total compensation under the contract $350,000. The increase also provides for future anticipated borrowings, including the potential use of longer-term debt to pay off the Wells Fargo loan. SYCR has served as the City’s Bond Counsel since entering into a contractual agreement in September 2007, following a competitive selection process. The current contract with SYCR contemplated debt financing but did not provide adequate total funding to meet the City’s needs since September 2007. The remaining terms of the contract and scope of services will remain unchanged.
First Implementing Agreement No. 9318
This agreement sets forth the schedule of payments from the Agency to the City for the City’s implementation of the projects contained in the Cooperation Agreement. Given the immediate funding needs of the Projects, staff recommends the Agency authorize prepayment of payments due to the City pursuant to the First Implementing Agreement, including any funds drawn from the Wells Fargo Bank Loan. In addition, to ensure proper tracking of expenditures, it is recommended Council direct the Director of Finance to segregate the prepayments by the Agency of amounts due the City, including funds drawn from the Wells Fargo Bank Loan, into a designated account earmarked solely for funding redevelopment priority capital projects.
Second Implementing Agreement No. 9340
This agreement provides the City the option to purchase Agency real properties in order to secure performance of Agency obligations required under Cooperation Agreement No. 9267 and Implementing Agreement No. 9318. Following a complete inventory of the Agency’s properties and preparation of legal documents, staff recommends that the City Manager receive authority to exercise the options pursuant to the Second Implementing Agreement.
Payments for Bond Counsel services will be made directly by the Agency. The bank loan will provide $60,000,000 to finance the Projects. Staff recommends the proceeds be deposited into account 17990.601007. Additionally, appropriations totaling $150,000 are requested to account number 17274.522220 for the costs of the bank loan including financial advisor and outside bond counsel services. Any additional budget actions that may be required as a result of this Council and Agency action will be brought back at a later time.