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IBM Development Agreement_Incentives Agreements 2 2 09 MaterialTHE CITY OF Dubuque L~LJB E "'~' _ i Masterpiece on the Mississippi 2007 TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: Incentive Agreement for IBM and Development Agreement for Dubuque Initiatives DATE: January 29, 2009 Economic Development Director Dave Heiar is recommending that consideration of the Incentive Agreement for IBM and the Development Agreement for Dubuque Initiatives be tabled until the February 16, 2009 City Council Meeting in order to finalize the contract language. I concur with the recommendation and respectfully request Mayor and City Council approval. ~~ ~ ~ ~. Michael C. Van Milligen ~ MCVM/jh Attachment cc: Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager David J. Heair, Economic Development Director THE CITY ©F ~V L Masterpiece on the Mississippi TO: Michael Van Milligen, City Manager {~ FROM: David J. Heiar Economic Develo ment Director ~ p ~~ Dubuque All-AmedcaCily .~~.~ 2007 SUBJECT: Incentive Agreement for IBM and Development Agreement for Dubuque Initiatives DATE: January 29, 2009 BACKGROUND On January 26, 2009 the City Council conducted a public hearing on the $25 million loan guarantee for Dubuque Initiatives to fund improvements for the Roshek Building. DISCUSSION Following the hearing, the City Council postponed action on the Incentive Agreement for IBM and the Development Agreement with Dubuque Initiatives pending finalization of the contract language. The Council set February 2 as the date to act upon the agreements. The contract language has not yet been finalized. RECOMMENDATION/ACTION STEP I recommend that the City Council defer action on both the Development Agreement with Dubuque Initiatives and the Incentive Agreement with IBM until the Feb 16, 2009 Council meeting. F:\USERS\DHeiar\IBM\20090129 Delay Agreements memo.doc TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: IBM DATE: January 26, 2009 Over the last four months the Greater Dubuque Development Corporation, Dubuque Initiatives and the City of Dubuque have had numerous visits from representatives of the IBM Corporation and hours of meetings. These meeting were held at McGraw Hill, the University of Dubuque, the Mississippi River Museum and Aquarium, the Community Foundation of Greater Dubuque, and the Grand River Center. Participants in the meetings included representatives of the following: • Greater Dubuque Development Corporation • City of Dubuque • University of Dubuque • Loras College • Clarke College • Northeast Iowa Community College • University of Wisconsin -Platteville • Southwest Wisconsin Technical College • Kirkwood Community College • Iowa Workforce Development • Dubuque Initiatives • Iowa Department of Economic Development • McGraw Hill • Gronen Properties • Community Foundation of Greater Dubuque • Governor Chet Culver was also able to participate in some of the meetings. IBM was looking for a location for a new Technology Service Delivery Center that would employ 1,300 people. Dubuque was in competition with cities in five other states for this project. To implement the project, Dubuque Initiatives needed to purchase the 255,000 sq. ft. Roshek Building at 700 Locust Street to provide 130,000 sq. ft. of leasable space to IBM to accommodate their 1,300 employees that they intended to hire by December 31, 2010. The anticipated cost of the base renovation of the building is over $24 million, with another $14 million in tenant improvements ($6.5 million for the IBM space). The $14 million in tenant improvements will be financed by Dubuque Initiatives, with the repayment of the cost built into tenant leases, or they will be financed by the individual tenant. Dubuque Initiatives met with a consortium of the banks and credit unions in Dubuque to discuss a 20-year interest only loan for $25 million to support the base building renovation. I offered to recommend to the City Council that the City would guarantee the repayment of the loan so that Dubuque Initiatives could borrow the money. Dubuque Initiatives is an economic development not-for-profit with a mission to facilitate downtown reinvestment. Members of the Dubuque Initiatives Board include: President William Callahan, Vice President Molly Grover, Secretary Marty McNamer, Director Dirk Voetberg, Director Michael Van Milligen, Director Roy Buol, Director Rick Dickinson, Director Kevin Lynch and Attorney Dave Clemens. The City has very little exposure related to the debt because all of it is projected to be repaid through Federal Historic Tax Credits, Federal New Market Tax Credits, State Historic Tax Credits, Tax Increment Financing revenues from the portion of the Roshek Building not leased by IBM, and building tenant lease revenues. The project may also receive Federal Energy Tax Credits. Based on the current financial analysis, the entire debt will be retired without any City contributions by the year 2028 (later than the last financial analysis in the previous memo dated January 15, 2009). However, to give the banks and credit unions comfort that if need be the City had the capacity to repay the debt, Economic Development Director Dave Heiar is recommending approval for the authority to issue taxable General Obligation Bonds and to guarantee up to $25 million in debt for Dubuque Initiatives to renovate the Roshek Building. It is anticipated that these General Obligation Bonds will never need to be issued. The major provisions of the Dubuque Initiatives Development Agreement include: 1. Dubuque Initiatives will rehabilitate approximately 255,000 sq. ft. of the former Roshek Building at an estimated cost of $39 million. 2. The improvements will be completed in phases, with the first phase (floors 8 and 9) being completed by July 1, 2009. The 5, 6, and 7 floors will be completed by November 1, 2009. 3. The City will provide Dubuque Initiatives with a 20 year property tax rebate. A portion of the rebate (based on percent of building leased) will go to IBM. The remainder of the rebate will be utilized by Dubuque Initiatives to repay the debt incurred to rehabilitate the building. The portion of the rebate utilized for debt payments will stop either at the end of the 20-year term or when the debt is paid, whichever is first. 4. The City will provide a $10,000 Design Grant, a $10,000 Facade Grant, and a $15,000 Financial Consultant Grant. 5. The City will provide a $25 million loan guarantee for the rehabilitation improvements. 6. Dubuque Initiatives and the City agree to work together to fund the improvements by applying for State and Federal Historic Tax Credits, New Market Tax Credits and Iowa Department of Economic Development funding. 7. Dubuque Initiatives agrees to commit 10% of the net benefit of New Market Tax Credits to an endowed fund called the "IBM Fund for Sustainable Dubuque". The major provisions of the IBM Incentive Agreement include: 1. The City will provide a 20-year TIF rebate on increased property taxes over the Urban Renewal base year of 1967. IBM will receive apro-rated share of this rebate based on the percentage of the building that is leased. 2. The City will provide a $300,000 Rehabilitation loan to IBM. The loan requires 3% interest payments for the first five years. Principle and interest payments begin in year six; however, a $2,000 credit is used to offset the principle for every job created/retained during the first 5 years. The credit is up to the loan amount of $300,000. 3. The City will commit $125,000 annually for three years to GDDC to work exclusively with IBM on workforce recruitment. 4. Greater Dubuque Development Corporation will provide 5 years of free membership to Access Dubuque Jobs.com. 5. IBM will work with City to apply for various grants and tax credits. 6. The City will provide free shuttle service to the Port of Dubuque parking areas to accommodate the influx of employees in the downtown area. 7. The City will explore additional parking (and funding) for the downtown area. 8. IBM will create 1,300 new positions by December 31, 2010. 9. IBM agrees to sign a 10-year lease with renewal options for the Roshek Building. IBM Corporation plans to hire 1,300 employees over the next ten years at an average salary of over $46,000 per year (including overtime), investing over $800 million in Dubuque over that ten years. These are high quality information technology jobs. Should IBM experience great success in Dubuque with this Technology Service Delivery Center, there is the possibility of even more jobs in the future. It is also believed services and supplies needed by IBM will allow existing local companies to grow or attract new business to Dubuque. The corporate annual payroll of over $60 million will help existing retail and commercial businesses in Dubuque. The addition of 1,300 people to the Dubuque job market will energize the local real estate market for home sales and apartment rentals. This project will also accelerate the development of the Historic Millwork (Warehouse) District. I believe that IBM is the John Deere of the 21St Century. This project will make Dubuque a destination for people educated in Information Technology, helping all companies in Dubuque. In fact, Greater Dubuque Development Corporation President Mike Blouin reports that over 41,173 visits lasting longer than 20 minutes have been made to the AccessDubuqueJobs.com web-site since the IBM announcement on January 15, 2009. Dubuque benefitted from some major points in the process: • The 18,000 college students and the colleges that exist locally, and more within 100 miles, like UW Madison, UNI and University of Iowa, that will provide a steady stream of potential employees. • The awards the City has won like All American City from the National Civic League, One of 100 Best Places for Young People from America's Promise Alliance and Most Livable City from the U.S. Conference of Mayors ® The City's Sustainability Initiative including: Environmental/Ecological Integrity, Economic Prosperity and Social and Cultural Vibrancy. ® The upcoming redevelopment of the Historic Millwork (Warehouse) District to provide places for IBM workers to live and play. ® A reason cited by IBM was the extraordinary Public/Private cooperation and partnership that exists in Dubuque. As Greater Dubuque Development Corporation President Mike Blouin has said, the IBM project will be transformational for the Dubuque Economy. I respectfully request Mayor and City Council approval of the authority to issue General Obligation Bonds and to provide the loan guarantee. It is further recommended that the public hearing be held and closed on the Development Agreement with Dubuque Initiatives and the IBM Incentive Agreement and City Council action be tabled until the regularly scheduled City Council meeting on Monday, February 2, 2009, to provide time to finalize the language. ~' ~ ~ ~ ~ _ _~ Michael C. Van Milligen MCVM:jh Attachment cc: Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager David Heiar, Economic Development Director TO: Michael C. Van Milligen, City Manger FROM: David J. Heiar, Economic Development Director '`r-~= ~, RE: Development Agreement with Dubuque Initiatives to Rehabilitate Roshek Building (Dubuque Building) and an incentive agreement with IBM DATE: January 26, 2009 BACKGROUND The State of Iowa, the City of Dubuque, Greater Dubuque Development Corporation, Iowa Workforce Development, the area colleges, and Dubuque Initiatives, have been working with IBM Corporation, a world leader in the information technology industry, to create 1,300 IT positions in the former Roshek Building. IBM has approximately 380,000 employees worldwide and is a globally integrated enterprise that targets the intersection of technology and effective business. The company seeks to be a partner in its clients' success by enabling their own capacity for distinctive innovation. To help clients achieve growth, effectiveness, efficiency and the realization of greater value through innovation, IBM draws upon the world's leading systems, software and services capabilities. The company's business model is built to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and information technology (IT) solutions; and, providing long-term value to shareholders. The company's strategy is to focus on the high-growth, high-value segments of the IT industry. The company's global capabilities include services, software, hardware, fundamental research and financing. The broad mix of businesses and capabilities are combined to provide business insight and solutions for the company's clients. The company has exited commodity businesses like personal computers and hard disk drives, and strengthened its position through strategic investments and acquisitions in emerging higher value segments like service oriented architecture (SOA) and Information on Demand. In addition, the company has transformed itself into a globally integrated enterprise which has improved overall productivity and is driving investment and participation in the world's fastest growing markets. The company's major operations comprise a Global Technology Services segment; a Global Business Services segment; a Systems and Technology segment; a Software segment; and a Global Financing segment. Global Services is a critical component of the company's strategy of providing IT infrastructure and business insight and solutions to clients. While solutions often include industry-leading IBM software and hardware, other suppliers' products are also used if a client solution requires it. Contracts for IBM services can range from less than one year to over 10 years. Within Global Services there are two reportable segments: Global Technology Services and Global Business Services. Global Technology Services (GTS) segment primarily reflects IT infrastructure services and business process services, delivering value through the company's global scale, standardization and automation. This is the business segment that will establish a new site in Dubuque. The Roshek Building, located at 700 Locust Street, was originally built in 1928 as the Roshek's Department Store, has 9 full floors, basement, and sub-basement totaling 255,000 square feet. The building lies in the heart of the downtown, right next to the Town Clock Plaza, the center of the downtown business community and is in need of significant rehabilitation estimated at $38 million to accommodate this major development project. Dubuque Initiatives finalized the purchase of this building on January 16, 2009. Renovations would begin early in February, with the company occupying the building in phases starting June 2009. They anticipate 350 employees in the building in June, an additional 350 employees sixty days later, and the remaining 600 employees early in 2010. IBM has signed a ten year lease proposal with two 5 year incremental renewal options conditional upon receipt of State and local incentives. Dubuque Initiatives, with the assistance of GDDC, has met with representatives of the local banks to discuss the need for up to a $25 million construction loan to accommodate this rehabilitation project (see attached copy of Financing Term Sheet). Grants and tax credits are critical to making this phenomenal development project a reality. This project would have many beneficial impacts including the restoration of a major historic building in the downtown area, the creation of many tremendous IT positions, and the ability to attract and retain many young professionals in Dubuque and Iowa. This project would provide a rapid jump start to residential development in the Historic Millwork (Warehouse) District. With the creation of 1,300 new positions, this project would also create a ripple, or actually a wave effect on the entire downtown. It is difficult to truly measure the total impact of adding over $60 million to the annual payroll in Downtown Dubuque. DISCUSSION The Iowa Department of Economic Development will be considering an application on behalf of IBM on February 19 for financial assistance in the amount of $12,150,000. The Northeast Iowa Community College is working with IBM to provide over $8.5 in the Iowa New Jobs Training Program. Greater Dubuque Development Corporation, Alliant Energy, and Black Hills Energy have also proposed various incentives totaling $52,500 collectively. Attached is the proposed Development Agreement with Dubuque Initiatives which defines the commitments by both the City and Dubuque Initiatives. The following is a summary of the major provisions of this agreement. 1. Dubuque Initiatives will rehabilitate approximately 255,000 sq. ft. of the former Roshek Building at an estimated cost of $39 million. 2. The improvements will be completed in phases, with the first phase (floors 8 and 9) being completed by July 1, 2009. The 5, 6, and 7 floors will be completed by November 1, 2009. 3. The City will provide Dubuque Initiatives with a 20 year property tax rebate. A portion of the rebate (based on percent of building leased) will go to IBM. The remainder of the rebate will be utilized by Dubuque Initiatives to repay the debt incurred to rehabilitate the building. The portion of the rebate utilized for debt payments will stop either at the end of the 20 year term or when the debt is paid, whichever is first. 4. The City will provide a $10,000 Design Grant, a $10,000 Facade Grant, and a $15,000 Financial Consultant Grant. 5. The City will provide a $25 million loan guarantee for the rehabilitation improvements (details are covered in a separate memo). 6. Dubuque Initiatives and the City agree to work together to fund the improvements by applying for State and Federal Historic Tax Credits, New Market Tax Credits and Iowa Department of Economic Development funding. 7. Dubuque Initiatives agrees to commit 10% of the net benefit of New Market Tax Credits to an endowed fund called the "IBM Fund for Sustainable Dubuque". Also attached is the proposed Incentive Agreement with IBM. The major provisions of this agreement are as follows: 1. The City will provide a 20 year TIF rebate on increased property taxes over the Urban Renewal base year of 1967. IBM will receive apro-rated share of this rebate based on the percentage of the building that is leased. 2. The City will provide a $300,000 Rehabilitation loan to IBM. The loan requires 3% interest payments for the first five years. Principle and interest payments begin in year six; however, a $2,000 credit is used to offset the principle for every job created/retained during the first 5 years. The credit is up to the loan amount of $300,000. 3. The City will commit $125,000 annually for three years to GDDC to work exclusively with IBM on workforce recruitment. 4. Greater Dubuque Development Corporation will provide 5 years of free membership to Access Dubuque Jobs.com. 5. IBM will work with City to apply for various grants and tax credits. 6. The City will provide free shuttle service to the Port of Dubuque parking areas to accommodate the influx of employees in the downtown area. 7. The City will explore additional parking (and funding) for the downtown area. 8. IBM will create 1,300 new positions by December 31, 2010. 9. IBM agrees to sign a 10 year lease with renewal options for the Roshek Building. The final versions of these agreements have not been finalized. This proposed project would provide significant help to the distressed census tract in which the Roshek Building is located. Dubuque's Census Tract-1 has 24.9% of its population at or below the federal poverty line and the average income in 58.9% of the area average. The average salary for the 1,300 IT positions is expected to be over $46,000/yr which would create an annual payroll for the Dubuque operation of $60 million. The company also provides a tremendous benefit package. The magnitude of this proposed development is recognized by all who have had the opportunity to work on various aspects of this project. The State of Iowa Department of Economic Development and Governor Culver have assembled aggressive proposals to encourage IBM to locate in Iowa. ACTION STEP The action step for the City Council is to hold the public hearing and to postpone action on the attached resolution prepared by Bond Counsel Bill Noth, which approves both the Development Agreement with Dubuque Initiatives and the Incentive Agreement with IBM until February 2, 2009. F:\USERS\DHeiar\IBM\Loan guarantee to DI approval memo.doc January 26, 2009 TO: Michael C. Van Milligen, City Manger FROM: David J. Heiar, Economic Development Director RE: Loan Guarantee for Dubuque Initiatives to Rehabilitate Rosheck Building (Dubuque Building) to assist in bringing IBM to Downtown Dubuque BACKGROUND The State of Iowa, the City of Dubuque, Greater Dubuque Development Corporation, Iowa Workforce Development, the area colleges, and Dubuque Initiatives, are currently working with IBM Corporation, a world leader in the information technology industry, to create 1,300 IT positions in the Roshek Building. IBM has approximately 380,000 employees worldwide and is a globally integrated enterprise that targets the intersection of technology and effective business. The company seeks to be a partner in its clients' success by enabling their own capacity for distinctive innovation. To help clients achieve growth, effectiveness, efficiency and the realization of greater value through innovation, IBM draws upon the world's leading systems, software and services capabilities. The company's business model is built to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and information technology (IT) solutions; and, providing long-term value to shareholders. The company's strategy is to focus on the high-growth, high-value segments of the IT industry. The company's global capabilities include services, software, hardware, fundamental research and financing. The broad mix of businesses and capabilities are combined to provide business insight and solutions for the company's clients. The company has exited commodity businesses like personal computers and hard disk drives, and strengthened its position through strategic investments and acquisitions in emerging higher value segments like service oriented architecture (SOA) and Information on Demand. In addition, the company has transformed itself into a globally integrated enterprise which has improved overall productivity and is driving investment and participation in the world's fastest growing markets. 11F~ag~ The company's major operations comprise a Global Technology Services segment; a Global Business Services segment; a Systems and Technology segment; a Software segment; and a Global Financing segment. Global Services is a critical component of the company's strategy of providing IT infrastructure and business insight and solutions to clients. While solutions often include industry-leading IBM software and hardware, other suppliers' products are also used if a client solution requires it. Contracts for IBM services can range from less than one year to over 10 years. Within Global Services there are two reportable segments: Global Technology Services and Global Business Services. Global Technology Services (GTS) segment primarily reflects IT infrastructure services and business process services, delivering value through the company's global scale, standardization and automation. This is the business segment that will establish a new site in Dubuque. The Roshek Building, located at 700 Locust Street, was originally built in 1928 as the Roshek's Department Store, has 9 full floors, basement, and sub-basement totaling 255,000 square feet. The building lies in the heart of the downtown, right next to the Town Clock Plaza, the center of the downtown business community and is in need of significant rehabilitation to accommodate this major development project. Over the past several weeks, there have been many telephone conferences with McKesson and CB Richard Ellis to discuss the purchase of the Roshek Building. It was agreed that Dubuque Initiatives would not only sign a Purchase and Sale Agreement, but that there would also be three separate leases with McKesson for the various operations that are currently located in the building. City staff, including City Attorney Barry Lindahl, has worked with Dubuque Initiatives to negotiate the terms of the Purchase Agreement and Leases. The purchase agreement was approved by Dubuque Initiatives on December 19, 2008. McKesson has given Dubuque Initiatives authority to meet with current tenants in the Roshek Building to discuss relocation options to accommodate IBM's needs. Rick Dickinson has made these contacts, and many of the tenants have already made plans to quickly relocate. Dubuque Initiatives closed on this purchase on January 16, 2009. Early in this process, GDDC met with Durrant to review a previously assembled cost estimate for building renovations. The required renovations were estimated to cost $25 million including major needed improvements to the heating and cooling, roof, and ADA accessibility. Dubuque Initiatives plans to lease 130,000 sq ft to the Company. Dubuque Initiatives has hired John Gronen, Jeff Morton, and Jim Urell to take a closer look at the building and the needed repairs. The most recent estimated cost for the building structural improvements is in the $38 million range. This does include approximately $6.5 million for the build out costs; which would be collateralized with an IBM lease. Dubuque Initiatives has $4.2 million in assets and intends to commit up to $2 million to this project. Renovations would begin early in February, with the company occupying the building in phases starting June 2009. They anticipate 350 employees in the building in June, an additional 350 employees sixty days later, and the remaining 600 employees early in 2010. 2~P~ge IBM has signed a ten year lease proposal with two 5 year incremental renewal options conditioned on State and local incentives. Dubuque Initiatives, with the assistance of GDDC, has met with representatives of the local banks to discuss the need for up to a $25 million construction loan to accommodate this rehabilitation project (see attached copy of Financing Term Sheet). The local banks and credit unions have agreed to work together in providing this financing, if the City guarantees up to $25 million of the loan. It should be noted that bonds will only be sold to guarantee the loan payments if needed. Bonds will not be sold to "finance" the loan. The City would act as a guaranty for up to $25 million of Dubuque Initiatives' line of credit for this project. This guaranty would be secured by the full faith and credit of the City, and intended to be funded with Urban Renewal General Obligation bonds in the event that the City would be required to perform under this guaranty. According to Bill Noth, our bond counsel with Ahlers & Cooney P.C., the City would complete the preliminary proceedings to issue bonds in an amount sufficient to fund this guaranty so that the City Council and the lenders relying on this guaranty know that the City has lawful power to fund the guaranty should the need ever arise in the future. The City Council has set the required public hearing on the bond proposal and the published notice of the hearing has informed citizens of their right to petition for an election on the bond proposal. If no petitions are received signed by at least 10% of the number of citizens who voted in the last regular City election, the City Council may take additional action for the issuance following the public hearing without the necessity of an election. At some future date, if the City were to perform on its guaranty, the City Council could proceed directly with the sale of the bonds when the balloon payment was due and would not be required to hold any additional hearings or take other actions before doing so. If petitions are filed and are equivalent to 10% of the voters in the City's last regular election, the City Council must choose to either hold a special election to issue the bonds or issue a resolution to declare that the proposal to issue the bonds has been abandoned. The City then has the choice to guarantee the loan without the ability to issue debt, so any required payment would need to come from another revenue source or to abandon the project. Since this guarantee is a condition of the loan, the City would lose the IBM project and the associated 1,300 jobs without providing the guarantee. Obviously there is some risk; however, if we are successful in obtaining tax credits and grants, the City may never have to sell the bonds. If for some reason IBM does not lease longer than 10 years, Dubuque Initiatives will have prime rehabilitated office space to rent to other interested parties. Therefore, it is anticipated that some lease revenue will always be available to help repay the mortgage. IBM will not lease the entire building. Dubuque Initiatives anticipates that additional revenue will be generated by leasing this excess space. Honkamp & Krueger has run a cash flow analysis on both an accrual and on a cash basis for this project, copies of both are attached to this memo. Based on this analysis the minimum improvement loan is expected to be paid off in the 20th year. This cash flow analysis continues to be adjusted as work on funding sources changes. The current major assumptions by Honkamp Krueger & Co. used for the bases of this analysis include: 3~Pag~ 1. Dubuque Initiatives will commit up to $2,000,000 to the project for initial expenses and/or to ensure positive cash flow for the first three years. 2. Dubuque Initiatives can borrow up to $29 million for 20 years at 5.85% with an adjustable rate every 5 years. Interest only payments are due until maturity, but Dubuque Initiatives intends to make payments on the note using tax credits and excess cash flow. 3. IBM will pay an extra lease rate to offset the $6.5 million build out costs associated with their specific needs. 4. The value of tax credits are, New Market $7, 951,107 Federal Historic $8,613,902 State Historic $9,788,525 5. For the first 10 years Dubuque Initiatives will receive a 2% developer fee which will also be applied to the Note. 6. $800,000 will be used for relocation of current tenants. 7. There will be initial costs and annual fees associated with the various tax credit programs. It should be noted that the assumptions do not include any potential energy credit which could range from $1.80 to $5.40 per sq ft. There is also some discussion on the Federal level that the Historic tax credit may increase from 20% to 26% which would further enhance the projects cash flow. John Gronen and Paul Butler represented this project when they attended a National New Market Tax Credit conference in Boston (October 22-24). They returned with several Community Development Entities (CDE's) extremely interested in this project. A national representative of U.S. Bank also visited Dubuque in early November to tour the building. Gronen is working with Dubuque Initiatives to pursue Federal and State Historic Tax Credits. Federal Historic Tax Credits are always available if the rehabilitation complies with their guidelines. Due to the cap put on State Historic Tax Credits, we can not necessarily count on them at this time. John Gronen, Jill Conners, and Teri Goodmann have been making contacts with the Governor, local legislators and key State Legislators to raise the State Historic Tax Credit annual cap from $20 million to $50 million and to make sure State Historic Credits are available for this project. It is estimated that total tax credits for Federal Historic, State Historic and NMTC will total over $18 million. In the meantime, City staff has begun the process of investigating other grants and tax credits to help make this project cash flow. The Economic Development Administration (EDA) has invited the City to submit a grant application. They actually visited Dubuque in early November to gather more information. The regional EDA office in Denver, Colorado has expressed some concern about mixing EDA funds with Federal Historic Tax Credits. We have scheduled a conference call to discuss the details to make sure those funding sources are compatible. We have also discussed the potential use of EDA funds for parking ramps in the downtown to accommodate the additional 41Pag~ employees. The proposed Federal Stimulus package may also be utilized to meet the anticipated parking structure needs. Grants and tax credits are critical to making this phenomenal development project a reality. This project would have many beneficial impacts including the restoration of a major historic building in the downtown area, the creation of many tremendous IT positions, and the ability to attract and retain many young professionals in Dubuque and Iowa. This project would provide a rapid jump start to residential development in the Historic Millwork (Warehouse) District. With the creation of 1,300 new positions, this project would also create a ripple, or actually a wave effect on the entire downtown. It is difficult to truly measure the total impact of adding over $60 million to the annual payroll in Downtown Dubuque. This proposed project would provide significant help to the distressed census tract in which the Roshek Building is located. Dubuque's Census Tract-1 has 24.9% of its population at or below the federal poverty line and the average income is 58.9% of the area average. The average salary for the 1,300 IT positions is expected to be over $46,000/yr which would create an annual payroll for the Dubuque operation of $60 million. The company also provides a tremendous benefit package. The magnitude of this proposed development is recognized by all who have had the opportunity to work on various aspects of this project. The State of Iowa Department of Economic Development and Governor Culver have assembled aggressive proposals to encourage IBM to locate in Iowa. A detailed incentive package outlining all the community partners is attached. RECOMMENDATION/ACTION STEP Following the public hearing, the Council will need to approve the attached resolution, prepared by Bond Counsel Bill Noth, to approve the potential sale of G.O. Bonds which would guarantee up to a $25 million loan to Dubuque Initiatives. F:\USERS\DHeiar\IBM\Loan guarantee to DI memo.doc 5~Page C`I ~.~S`7' lJC`T'I IV 7' .~'IIVCING TE S E7' Dubuque Ini~icc~ives . _ BORROWER: Dubuque Initiatives, Inc. (DI), a private Not-for-Profit Organization organized under a SOIc-3 status. PURPOSE: Provide construction build-out funds and end financing for the redevelopment of the Dubuque Building (the "Property"), far leasing to IBM (the "tenant") and other tenants. LOAN TYPE: Commercial Real Estate Construction and Term Loan LENDERS: A consortium of Dubuque-area Lenders, lead by Dubuque Bank & Trust and including the following: American Trust & Savings Dupaco Community Credit Union DuTrac Community Credit Union Premier Bank U.S. Bank Fidelity Bank East Dubuque Savings Bank State Central Bank Liberty Bank PROJECT COST: The project cost is estimated at $38 million for the deconstruction, modernization and code-compliant requirements of the 260,000 s.f. property. Reconstruction will also inchide complete renovations to the Lobby and mezzanine Levels of the properly and expanded office space for existing tenants. In addition, DI and the tenant will require construction . and term loan funds to build-out to tenant specifications that are currently estimated at $6.5 million. LOANAMOUNT: Up to $25 million using adraw-down Construction Financing structure that will then convert to Term Financing and a $6.5 1 million Tenn Credit Facility for the tenant build-out based on the lease term. EOUITYCONTIBUTION.• Dubuque Initiatives is a private, non-profit economic development organization dedicated to downtown re- development. Although organized as a S O l c-3, it has more than $4MM in net assets including significant amounts of cash or readily-convertible to cash assets. DI stands ready to invest up to $2 million toward the project, to be used in tl7e unlikely event that the property does not cash flow from the rents received. The organization will also be seeking equity contributions from a variety of other sources such as New Markets Tax Credits ($7.275 million); Federal and State Historic Tax Credits ($16.75 million) as well as other State or Local funds that would help reduce the overall lease rate being charged to the tenant. LOAN TO PROJECT COST.' Yet to be determined, but end debt financing is expected to be in the range of 33.33 %. ESTIMATED LOAN CLOSING: February 2009 ESTIMATED PROJECT . COMPLETIDN.• Phase I needs to be completed for the tenant by June 2009 LOANRATE: Construction: Fixed at 5.85% Term Loan: Fixed at 5.85% LOAN TERM.• Construction: up to 12-months Term Loan: up to120-months on initial tenant-related loan and up to 240-months on other structured financing with re-pricing options every 60- months on the Term Facility. AMORTIZATIOIVr• Construction: Monthly interest-only payments Term Loan: Monthly interest-only payments. 2 DI will be required to use all excess cash flows related to any tax credits, grants or those derived from rental of the property directly toward debt reduction after all interest cost. GUARANTORS Repayment shall be guaranteed by the City of Dubuque in an amount not to exceed $25 million. SECURITY.° Promissory notes will be secured with an Assignment of the $2 million deposit account. The tenant build-out debt will include an Assignment of Rents on the subject property. PREPAYMENT PENALTIES: The Borrower may pxepay the Loan Amount in whole or in part at any time without prepayment penalty. CLOSING COSTS:, Borrower will be responsible for paying all closing costs incidental to the Loan Amount. PRE=CLOSING DOCUMENTS: Prior to closing, the Borrower shall have delivered to Lender and Lender has reviewed and is satisfied with the following: (1) Attorney's title opinion as required under Iowa Iaw showing good and merchantable title on the Property. (2) Btulders' risl~ hazard insurance policy on the Property against direct loss or damage for the replacement cost of the improvements in amounts not less than the maximum Loan Amount or the full replacement value of the improvements, whichever is greater. (3) All agreements, contracts and other related agreements . including but not limited to the Lease Agreements. (4) Consents, permits and approvals from all govenunental authorities required in comiection with the construction of the improvements to the Property. (5) Borrower's organizational documents. (6) Borrower's projected opening balance sheet and annual income and expenses relating to the Property. 3 OTHER LOAN CONTINGENCIES:. (1) Borrower agrees to maintain the following Minimum Debt Service Coverage Ratio: Year 1: No requirement during the construction period Year 2: I.OOx Year 3: 1.15x Year 4: 1.15x Year S: 1.15x For purposes of this covenant, the Debt Service Coverage Ratio shall be defined as Borrower's Earnings before Interest Expense, Taxes and Depreciation divided by Principal and Interest Payments. (2) Borrower agrees to maintain a minimum net worth of not less than $2 million. (3) Construction to comply with all local, state and federal standards. (4) Commitment subject to the teams and conditions of a Commercial Construction Loan Agreement (5) Borrower to provide quarterly financial statements, annual financial statements and tax returns on a timely basis going forward. (6) Guarantors to provide annual financial statements on a timely basis going forward. (7) Final Commitment is subject to approval from the consortium of Lenders. 4 I I I I , 1.1 l.lgl.le Inltlatl!/eS I11Cer1tIVeS $5,594,447 City of ®ubuque Incentives* $13,9~~,0 Mate of Iowa Incentives $x,500,000 Northeast Iowa Community College New Jobs Training rogram $52,500 Additionallncentives i *while not a part of the ®evelopment Agreement with I M the City intends to pursue Federal funding to create a new parking ramp at the intersection of Stn Street and fluff Street in downtown ®ubuque to add an additional 900 parking spaces one block from the Roshek Building at an estimated cost of $20,133,000. u u u nii tiv~ inc... ntiv $23,827,986* Purchase and renovate the Roshek Building $ 600,000 Estimated New Market Tax Credit allocation to establish the IBM Fund for a Sustainable Dubuque at the Community _ Foundation of Greater Dubuque $24,427,986 °T®Ti4L *Repayment guaranteed by the City of Dubuque after applying all Federal and State Tax Credits to this 20 year interest only loan from a cons®rtium of local banks and credit unions. The credits and grants include Federal and State Historic Tax Credits, Federal Energy Credits, Federal New Market Tax Credits and an Iowa Department of Economic Development Grant. itv f u u u Incentive ®. .. $ 3,584,447 20 year Property Tax Rebate: $1,828,068 to IBM $1,756,379 to Dubuque Initiatives $ 1,300,000 10 years of free shuttle bus service to parking in the Port of Dubuque $ 35,000 Fagade Planning and Design Financing Consultant Grant to Dubuque Initiatives $ 375,000 Greater Dubuque Development Corporation staff person to support IBM employee recruitment efforts $ 300.000. Forgivable loan $ 5,594,447 Total $11,700,000 Direct Financial Assistance $ 1,848,600 Iowa New Jobs Tax Credit $ 50,000 Iowa Jobs Training Program (260F) TBD Refundable Research &.Development Tax Credit $13,988,600* Total State of Iowa Incentives *Absence of sales tax on Computers and Peripherals saves IBM another $500,000 t I unit/ II Inc ntiv s °Tr inin r r itin I Inc niv $30,000 AccessDubuqueJobs.com five year access. $15,000 Alliant Energy: maximum reimbursement of $15,000 for Electrical Audit Custom rebates and "Performance Edge" incentives will be formulated based on audit results. $ 7,500 Black Hills Energy: up to $7,500 comprehensive Energy Audit for natural gas usage Will maximize custom and prescriptive rebates. $52,500 Total Additional Incentives T'he oche uildin LIC , LC chedule of rojected Income First Twenty Years of Operations Table of contents gage(s) ® _ __ Accountant's Report Schedule of Projected Income -Cash Basis 2 Supplementary Information Schedule of Assumptions 3 Accountant's eport To the Members The Roshek Building QALICB, LLC We have compiled the accompanying schedule of projected income -cash basis of The Roshek Building QALICB, LLC for the years ended December 31, 2009 through December 31, 2028, in accordance with attestation standards established by the American Institute of Certified Public Accountants. The projected schedule was prepared for the City of Dubuque to use in securing the guarantee of the construction loan for the project. , A compilation is limited to presenting projected information that is the representation of management and does not include evaluation of the support for the assumptions underlying such information. We have not examined the projected schedule and!, accordingly, do not express an opinion or any other form of assurance on the accompanying schedule or assumptions. Furthermore, there will usually be differences between projected and actual results, because events and circumstances frequently do ::,not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. The accompanying projected schedule of income and 'this report are intended solely for the information and use of the City of Dubuque and are not intended to be and should not be used by anyone other than this specified party.. HONKAMP KRUEGER & CO., P.C. Dubuque, Iowa January 26, 2009 Printed 1/26/20093:29 PM The Roshek Building QALICB, LLC Version 4.5 Schedule of Project Income -Cash Basis For the Years Ending December 31, 2009- December 31, 2028 PRELIMINARY DRAFT Revenue: Base Rents Common Area Rents Tenant Specific Rents Total Revenue Operating Expenses: General & Administrative Expenses Tennant Specific Expenses Property Tax Property Tax Rents Property Tax Rebates Property Tax Expense Total Property Tax Total Operating Expenses Gross Proflt Otherlncome(Expenses) Federal Historic Tax Credit Expense Tax Credit Purchase Option Tax Credit and Consulting Fees Interest Expense Tenant Relocation Expense Commercial Development Entity Management Fee (1%Qualified Equity Investment) Commercial Development Entity & Investment Administrative Cost Local Legal Fees Local Consulting Fees Local Accounting Fees Total Other Income (Expenses) Net Income(Loss) Before Tax Income Tax Net Income(Loss) After Tax 2009 2010 2011 2012 2013 2014 2015 2016 592,258 815,590 931,998 921,637 920,301 903,970 885,473 885,473 161,614 591,959 670,097 782,219 839,792 865,887 891,982 918,077 547,739 1,421,400 1,421,400 1,421,400 1,421,400 1,421,400 1,421,400 1,421,400 1,301,611 2,828,949 3,023,495 3,125,256 3,181,493 3,191,257 3,198,855 3,224,950 729,000 750,870 773,396 796,598 820,496 845,111 870,464 896,578 182,063 475,000 475,000 475,000 475,000 475,000 475,000 475,000 (32,254) (50,666) (59,970) (105,757) (105,757) (106,976) (108,231) (109,525) (33,896) (30,417) (36,002) (63,490) (63,490) (64,222) (64,976) (65,752) 73,500 90,092 106,636 188,052 188,052 190,220 192,452 194,752 7,350 9,009 10,664 18,805 18,805 19,022 19,245 19,475 918,433 1,234,879 1,259,060 1,290,403 1,314,301 1,339,133 1,364,709 1,391,053 383,178 1,594,070 1,764,435 1,634,853 1,867,192 1,852,124 1,834,146 1,833,897 - (172,278) (172,278) (172,278) (172,278) (172,278) (172,278) (172,278) - - - - - - - (430,695) (400,000) - - - - - - - (203,386) (1,115,236) (777,245) (740,532) (701,614) (675,962) (632,857) (585,554) (800,000) - - - - - - - (95,958) (318,047) (318,047) (318,047) (318,047) (318,047) (318,047) (222,089) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) - - - - - - - (200,000) - - - - - - - (100,000) - - - - - - - (1,879,344) (1,645,561) (1,307,570) (1,270,858) (1,231,939) (1,206,288) (1,163,182) (1,450,616) (1,496,166) (51,491) 456,865 563,995 635,253 645,837 670,964 383,281 $ (1,496,166) $ (51,491) $ 456,865 $ 563,995 $ 635,253 $ 645,837 $ 670,964 $ 383,281 __ - Printed 1126/2009 3:29 PM Version 4.5 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 885,473 885,473 945,273 945,273 945,273 945,273 945,273 979,073 979,073 979,073 979,073 979,073 946,545 975,012 1,003,480 1,034,320 1,065,160 1,095,999 1,129,211 1,163,086 1,197,980 1,233,920 1,270,937 1,309,066 1,421,400 1,421,400 1,055,744 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 3,253,418 3,281,885 3,004,497 2,454,593 2,485,433 2,516,272 2,549,484 2,617,161 2,652,053 2,687,993 2,725,010 2,763,139 923,475 951,180 979,715 1,009,106 1,039,380 1,070,561 1,102,678 1,135,758 1,169,831 1,204,926 1,241,074 1,278,306 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 (110,857) (112,228) (113,641) (115,097) (116,596) (118,140) (119,730) (119,730) (119,730) (119,730) (119,730) (119,730) (66,551) (67,375) (68,223) (69,097) (69,997) (70,924) (71,879) (71,879) (71,879) (71,879) (71,879) (71,879) 197,120 199,559 202,072 204,660 207,325 210,071 212,899 212,899 212,899 212,899 212,899 212,899 19,712 19,956 20,207 20,466 20,733 21,007 21,290 21,290 21,290 21,290 21,290 21,290 1,418,187 1,446,136 1,474,922 1,504,572 1,535,112 1,566,568 1,598,968 1,632,048 1,666,121 1,701,216 1,737,364 1,774,596 1,835,231 1,835,749 1,529,575 950,020 950,320 949,704 950,516 985,113 985,932 986,777 987,646 968,543 (535,333) (466,878) (419,697) (354,573) (320,548) (284,463) (246,250) (205,695) (160,692) (112,940) (62,273) (8,512) (535,333) (466,878) (419,697) (354,573) (320,548) (284,463) (246,250) (205,695) (160,692) (112,940) (62,273) (8,512) 1,299,896 1,368,871 1,109,878 595,447 629,773 665,242 704,267 779,416 825,240 873,837 925,374 980,030 113,661 141,250 37,653 - - - - - - - - - 5 1,186,237 S 1,227,621 5 1,072,225 $ 595,447 ~^ 629,773 $ 665,242 5 704,267 $ 779,416 $ 825,240 $ 873,837 $ 925,374 $ 980,030 See Accompanying Notes and Accountant's Report 2 T'he Roshek uilding QALIC, LLC ummary of ignificant Assumptions and Accounting Policies NOTE 1. Nature of Presentation The schedule of projected income -cash basis for The Roshek Building QALICB, LLC (the "Company") presents, to the best of management's knowledge and belief, the Company's cash basis income for the projected periods. Accordingly, the projection reflects managements' judgment, as of January 26, 2009, the date of this projection, of the expected conditions and its expected course of action. The assumptions disclosed herein are those that management believes are significant to this projection. There will usually be differences between projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material NOTE 2. Summary of Significant Accounting Policies Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. It is anticipated cash will approximate $100,000 each year to cover current operating expenses. An additional three percent of gross base rents will be accumulated annually for future replacement reserves. The replacement reserves can be used to fund cash deficits, if necessary. Income Taxes The Company, with the consent of its members, will elect under the Internal Revenue Code and similar provisions of 'the Iowa income tax law, to be a Limited Liability Company. The Company will make an=election pursuant to the Internal Revenue Code to be taxable rather than tax-exempt and to be taxed as a C corporation. Use of Estimates The .:preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Roshek Building QALIC ,LLC Summary of Significant Assumptions and Accounting Policies NOTE 3. Nature of Operations The Roshek Building QALICB, LLC (the "Master Landlord") intends to purchase and remodel the Roshek Building. The Roshek Building QALICB, LLC will have two members-a LLC owned 100% by Dubuque Initiatives, Inc. (90% owner) and the Roshek Building Master Tenant, LLC (the "Master Tenant") (10% owner). The Master Landlord will enter into a lease with the Master Tenant, of which all membership interests are owned by a community development entity (CDE) also known as the historic tax credit investor ("HTC Investor"). The HTC Investor will own 99.9% of new market tax credits. The Master Tenant will lease the project from the Master Landlord for a period of time long enough to transfer the tax ownership of the building to it, which allows the federal historic tax credits (HTC) to be passed through to this entity. By virtue of the Lease, and apass-through election, the federal HTC's become claimable `by the owners of the Master Tenant rather than by the Master Landlord. After the end of the seven-year new market tax credit compliance period, Dubuque Initiatives, Inc. will have an option to purchase the ownership interests in the Master Tenant from the HTC Investor so that it can become the 100% owner of Master Tenant. Details of the purchase option have not been determined as of the forecast date. However, it is expected the purchase option. would be approximately 5% of the federal historic tax credit amount. The aforementioned information and entity structure is still being designed. Therefore, the assumptions in this forecast will change as the structure is clearly defined. This forecast assumes that. income-:and expense will go through The Roshek Building QALICB, LLC for this forecast. NOTE 4. Initial Capitalization during the Forecast Period The Company will capitalize the project by obtaining financing from a local financial institution. The Company will also qualify for specific tax credits. The Company intends to use these tax credits to fund a portion of the construction. In addition, Dubuque Initiatives, snot-for-profit organization, has committed up to $2,000,000 to the project in the first three years of operations if necessary to ensure positive cash flow from operations. In subsequent years, the City of Dubuque will fund the difference until the project is self-sustaining. 4 The Roshek building QALIC , LLC ummary of significant Assumptions and Accounting Policies NOTE 5. Revenue Base Rental Revenue -has been forecasted to be $2.08 per square foot for floors four through nine. This rate assumes IBM will occupy those floors as they become available. That will increase to $2.54 per square foot in years 11 through 19 and $2.80 per square foot in year 20. All other floors have varying rates per square foot by tenant. Basement rent'is forecasted at $2 per square foot subsequent to the current tenants' termination. The forecast assumes 85% occupancy on floors not occupied by IBM. Common area maintenance (CAM) rental revenue - is forecasted at_$3.15 per square foot with an expected 3% inflationary increase per year. IBM specific rents -IBM has a strict maintenance policy and electrical requirements that are above and beyond that of a normal lease. Therefore, IBM .has agreed to pay an additional $3.48 per square foot per floor per year to assure that those requirements are met. Total expenses approximate $95,000 per floor. IBM Build out rent -IBM also has an option to do a build-out of the space it will occupy. Estimated costs of that build-out are $6,500,000. The landlord will charge the tenant a fixed amount per square foot over the life of the lease to recover the cost incurred for the build-out. This forecast assumes IBM has exercised the above option. NOTE 6. Expenses Expenses are forecasted based on actual historical data provided by the previous owner. Generally, expenses are assumed to increase for inflation. The forecast assumes a 3% inflation rate during the forecast period. The following are detailed assumptions for expenses: General and Administrative (G&A) - G&A is comprised of maintenance, property management fees, insurance, security, and utilities to operate and maintain the building. IBM-Specific Expenses -IBM has a strict maintenance policy and electrical requirements that are above and beyond that of a normal lease. The Company intends on hiring staff to cover such expenses at a profit. However, the forecast shows the expense equal to revenue to be conservative. The oshek wilding ALIC, LLC umrnary of ignificant Assumptions and Accounting Policies NOTE 6. Expenses (Continued) Property Taxes -The Company has received tax increment financing (TIF) funds' from the City of Dubuque. The Company will pay the taxes as required by the City, and :subsequent to that payment, the City will re-distribute a portion of those funds back to he Company. The Company charges IBM their portion of taxes based on space leased as part of the lease agreement. The portion the Company receives will be net of the portion paid by IBM. The Company estimates it will be reimbursed approximately 90% of taxes paid 'less the amount IBM pays. Federal Historic Tax Credit Expense -The Company will `incur annual expenses relating to its members and fees that will be incurred on their behalf. The Company has forecasted a fee of 2% of the gross historic tax credit amount annually. Tax Credit and Consulting Fees -The Company has hired an independent consulting firm to assist in securing state and federal historic tax-credits as well as new market tax credits. Fees due to this firm are expected to be $400,000... This fee includes fees for setup of new investors and their respective attorney fees. Purchase Option -The Company wll'have the option to acquire 100% of the Master Tenant for a fee of 5% of the gross historic tax credit amount after the 7'h year of the agreement. New Market Tax Credit Expense -The Company will incur costs to setup the project, these related costs will be due at closing. Tenant Relocation Expenses -The landlord has set aside approximately $800,000 to assist current tenants in their relocation. Commercial Development Entity (CDE) Management Fees -The Company will annually pay a management fee equivalent to 1 % of the Qualified Equity Investment. The fee will expire upon. the exercise of the purchase option. Investment and CDE Administrative Fees -The Company expects to pay an annual fee of $4.0,000 relating to administrative costs to the CDE's. Local Legal, Consulting, and Accounting Fees -The Company expects to incur various local consultations during the initial setup of the investment. 6 a The Roshek Building QALICB, LLC Schedule of Assumptions For the Years Ending December 31, 2009 -December 31, 2028 PRELIMINARY DRAFT Floor by Floor Tennant Assumptions Floor Leasable Space Occupancy Construction Begins Construction Ends Move in dates Move Out Date Tennant 91h 26,701 100% 2/1/2009 5/31/2009 6/1/2009 12/31/2028 IBM 8th 26,153 100% 2/1/2009 5/31/2009 6/1/2009 12/31/2028 IBM 7th 26,153 100% 4/1/2009 7/31/2009 8/1/2009 12/31/2028 IBM 6th 24,840 100% 7/1/2009 10/31/2009 11/1/2009 12/31/2028 IBM Slh 26,153 100% 7/1/2009 10/31/2009 11/1/2009 12/31/2028 IBM 4th 26,094 100% 12/1/2009 3/31/2010 4/1/2010 12/31/2028 Other 3rd 26,094 100% 12/7/2009 3/31/2010 4/1/2010 12/31/2028 Other 2nd 9,659 85% 12/1!2009 3/31/2010 4/1/2010 12/31/2028 Other Mezzanine 1,692 85% 4/1/2010 7/31/2010 4/1/2009 12/31/2028 Other Main Level 10,343 85% 2/1/2009 3/31/2009 8/1/2010 12/31/2028 Other Basement 31,484 85% 12/1/2009 3/31/2010 1/1/2012 12/31/2028 Other Tax Credits Name Percentage Dollar Value Proceeds Expenses Purchase Option Fed Historic TC 20% 1.10 8,613,902 2% 5% State Historic TC 25% 1.00 9,788,525 NMTC 39% 0.74 7,951,107 400,000 Energy TC CDE Management Fee(Annual) 318,047 CDE Atlmin Fee(Annual) 40,000 loan Rates Start Date Term in Years Percent 2/1/2009 5 5.85% 2/1/2014 15 6.00% construction costs Building Cost 350,000 land Cosi 100,000 Soft Costs 1,866,795 General Building Shell (EMedor) 2,358,000 Exlemal 2-9 10,992,000 External 1st & Mezzanine 3,038,000 Exterior Lower Level 1,313,000 Internal 2-9 10,944,000 Intemal 1st & Mezzanine 1,338,000 Leasehold Improvements 6,500,000 Construction Fees LOC Interest Rate 5.85% General Req 4 Project Contingency 10 Contractor Fee 4.5 Tax Assumptions Income Tax Rate 40 Building Depreciation Life 39 Lease Improvements Life 39 1°he oshek uilin LI , LL Forecasted financial Statements First Twenty Years ®f rations 7°able of Contents __ Accountant's Report Financial Forecasts Forecasted Balance Sheets Forecasted Income Statements Forecasted Statements of Cash Flows Summary of Significant Assumptions and Accounting Polices Supplementary Information Page(s) 2 3 4 5-10 Schedule of Assumptions 11 ~4ccountant' sport To the Members The Roshek Building QALICB, LLC We have compiled the accompanying forecasted balance sheets, forecasted income statements and members' equity, and forecasted statements of cash flows of The Roshek Building QALICB, LLC as of December 31, 2009 through December 31, 2028 and the first twenty ,years of operations, in accordance with attestation standards established by the American.. Institute of Certified Public Accountants. A compilation is limited to presenting in the form of a forecast .and- supplementary schedule information that is the representation of management and does not include evaluation of the support for the assumptions underlying the forecasts. We have not examined the forecasts and, accordingly, do not express an opinion or any other form of assurance'on the accompanying statements, assumptions, and supplementary information. Furthermore, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. H®NKAMP KRUEGER ~ C®., P.C. Dubuque, Iowa January 26, 2009 Printed 1/26/20093:05 PM The Roshek Building QALICB, LLC Version 4.5 Forecasted Balance Sheets Years 1 - 20 Starting December 31 , 2009 PRELIM INARY D RAFT ASSETS 2009 2010 2011 2012 2013 2014 2015 2016 2017 Current Assets Cash and Cash Equivalents $ 11,699,142 $ 1,156,415 $ 974,407 $ 863,126 $ 784,224 $ 680,075 $ 557,532 $ 100,004 $ 100,004 Cash Reserve for Repairs 17,768 42,235 70,195 97,844 125,454 152,573 .179,137 205,701 232,265 Total Current Assets 11,716,910 1,198,651 1,044,602 960,971 909,677 832,647 736,669 305,705 332,269 Property and Equipment, at Cost Land 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 Building 350,000 350,000 350,000 350,000 350,000 350,000 350,000 350,000 350,000 Building Improvements 14,763,208 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 Leasehold Improvements 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 Total Property and Equipment 21,839,958 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 Less: Accumulated Depreciation (234,071) (1,097,041) (2,112,787) (3,128,533) (4,144,280) (5,160,026) (6,175,772) (7,191,518) (8,207,264) Property and Equipment, Net 21,605,887 38,617,057 37,601,311 36,585,565 35,569,819 34,554,073 33,538,327 32,522,580 31,506,834 Total Assets $ 33,322,797 $ 39,815,708 $ 38,645,913 $ 37,546,536 $ 36,479,496 $ 35,386,720 $ 34,274,996 $ 32,828,286 $ 31,839,104 LIABILITIES AND MEMBERS' EQUITY Long-Term Liabilities Developer Account Payable $ 793,584 $ 793,584 $ 793,584 $ 793,584 $ 793,584 $ 793,584 $ 793,584 $ 793,584 $ 498,377 New Market Tax Credit Loan 7,951,107 7,951,107 7,951,107 7,951,107 7,951,107 7,951,107 7,951,107 - - Federal Historic Tax Credit Loan - 8,613,902 8,613,902 8,613,902 8,613,902 8,613,902 8,613,902 8,613,902 - State Historic Tax Credit Loan - 9,788,525 9,788,525 9,788,525 9,788,525 9,788,525 9,788,525 9,788,525 - IBM Build Out Loan 6,380,002 5,803,719 5,192,804 4,545,177 3,858,631 3,135,764 2,368,822 1,554,577 690,111 Construction Debt 19,176,340 7,759,570 7,759,570 7,759,570 7,759,570 7,759,570 7,759,570 7,759,570 7,759,570 Total Long-Term Liabilities $ 34,303,034 $ 40,710,406 $ 40,099,491 $ 39,451,864 $ 38,765,318 $ 38,042,452 $ 37,275,510 $ 28,510,157 $ 8,948,058 MEMBERS' EQUITY Undesignated (998,005) (936,933) (1,523,773) (2,003,173) (2,411,275) (2,808,304) (3,179,651) 4,112,427 22,658,781 Designated Replacement Reserve 17,768 42,235 70,195 97,844 125,454 152,573 179,137 205,701 232,265 Total Members' Equity (980,237) (894,698) (1,453,578) (1,905,329) (2,285,822) (2,655,731) (3,000,514) 4,318,128 22,891,046 Total Liabilities and Members' Equity $ 33,322,797 $ 39,815,708 $ 38,645,913 $ 37,546,536 $ 36,479,496 $ 35,386,720 $ 34,274,996 $ 32,828,286 $ 31,839,104 Printed 1/26/2009 3:05 PM Version 4.5 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 908,789 258,829 287,187 315,546 343,904 372,262 400,620 429,992 459,365 488,737 518,109 547,481 358,833 367,192 415,550 443,908 472,266 500,624 529,996 559,369 588,741 618,113 1,456,270 100, 000 100, 000 100, 000 100, 000 100, 000 100, 000 100, 000 100, 000 100, 000 100, 000 100, 000 350,000 350,000 350,000 350,000 350,000 350,000 350,000 350,000 350,000 350,000 350,000 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 32,637,348 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 6,626,750 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 39,714,098 (9,223,010) (10,238,756) (11,254,502) (12,270,249) (13,285,995) (14,301,741) (15,317.487) (16,333,233) (17,348,979) (18,364,725) (19,380,471) 30,491,088 29,475,342 28,459,596 27,443,850 26,428,104 25,412,358 24,396,612 23,380,865 22,365,119 21,349,373 20,333,627 $ 30,849,922 $ 29,862,534 $ 28,875,146 $ 27,887,758 $ 26,900,370 $ 25,912,982 $ 24,926,608 $ 23,940,234 $ 22,953,860 $ 21,967,486 $ 21,789,898 7,451,794 5,909,549 5,342,460 4,741,045 4,104,162 3,428,253 2,678,208 1,882,340 1,037,875 141,873 - $ 7,451,794 $ 5,909,549 $ 5,342,460 $ 4,741,045 $ 4,104,162 $ 3,428,253 $ 2,678,208 $ 1,882,340 $ 1,037,875 $ 141,873 $ - 23,139,299 23,665,797 23,217,140 22,802,809 22,423,946 22,084,109 21,818,408 21,598,530 21,427,248 21,307,504 21,242,417 258,829 287,187 315,546 343,904 372,262 400,620 429,992 459,365 488,737 518,109 547,481 23,398,128 23,952,984 23,532,686 23,146,712 22,796,208 22,484,729 22,248,400 22,057,894 21,915,985 21,825,613 21,789,898 $ 30,849,922 $ 29,862,534 $ 28,875,146 $ 27,887,758 $ 26,900,370 $ 25,912,982 $ 24,926,608 $ 23,940,234 $ 22,953,860 $ 21,967,486 $ 21,789,898 See Accompanying Notes and Accountant's Report 2 Printed 1126120093:05 PM 1'he Roshek building QALIC, LLC Version 4.5 Forecasted Income Statements For the Years Ending ®ecember 31, 2009- ®ecember 31, 2028 PRELIMINARY ®RAFT Revenue: Base Renis Common Area Rents Tenant Specific Rents Total Revenue Operating Expenses: General & Administrative Expenses Tennant Specific Expenses Property Tax Property Tax Rents Property Tax Rebates Property Tax Expense Total Property Tax Total Operating Expenses Gross Profit Otherlncome(Expenses) Tax Credit Income Federal Historic Tax Credit Expense Tax Credit Purchase Option Tax Credit and Consulting Fees Interest Expense Depreciation Tenanl Relocation Expense Commercial Development Entity Management Fee (1 % Qualified Equity Investment) Commercial Development Entity & Investment Administrative Cost Local Legal Fees Local Consulting Fees Local Accounting Fees Total Other Income (Expenses) Net Income(Loss) Before Tax Income Tax Net Income(Loss) Aker Tax 2009 2010 2011 2012 2013 2014 2015 2016 592,258 815,590 931,998 921,637 920,301 903,970 885,473 885,473 161,614 591,959 670,097 782,219 839,792 865,887 891,982 918,077 547,739 1,421,400 1,421,400 1,421,400 1,421,400 1,421,400 1,421,400 1,421,400 1,301.611 2,826,949 3,023,495 3,125,256 3,181,493 3,191,257 3,198,855 3,224,950 729,000 750,870 773,396 796,598 820,496 845,111 870,464 896,578 182,083 475,000 475,000 475,000 475,000 475,000 475,000 475,000 (32,254) (50,666) (59,970) (105,757) (105,757) (106,976) (108,231) (109,525) (33,896) (30,417) (36,002) (63,490) (63,490) (64,222) (64,976) (65,752) 73,500 90,092 106,636 188,052 188,052 190,220 192,452 194,752 7,350 9,009 10,664 18,805 18,805 19,022 19,245 19,475 918, 433 1, 234, 879 1, 259, 060 1, 290, 403 1, 314, 301 1, 339,133 1, 364, 709 1, 391, 053 383,178 1,594,070 1,764,435 1,634,853 1,867,192 1,852,124 1,834,146 1,833,897 - - - - - - - 7,951,107 - (172,278) (172,278) (172,279) (172,278) (172,278) (172,278) (172,278) - - - - - - - (430,695) (400,000) - - - - - - - (203,386) (1,115,236) (777,245) (740,532) (701,614) (675,962) (632,857) (585,554) (234,071) (862,970) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (800,000) - - - - - - - (95,958) (318,047) (318,047) (318,047) (318,047) (318,047) (318,047) (222,089) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) (40,000) - - - - - - - (200,000) - ~ - - - - - - (100,000) - - - - - - - (2,113,415) (2,508,531) (2,323,316) (2,286,604) (2,247,685) (2,222,034) (2,178,928) 5,484,745 (1,730,237) (914,461) (558,881) (451,751) (380,493) (369,910) (344,783) 7,318,642 $ (1,730,237) $ (914,461) $ _____(558,881) $ (451,751) $ (380,493) $ (369,910)_ $ (344,783) $ 7,318,642 Printed 1/26/2009 3:05 PM Version 4.5 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 885,473 885,473 945,273 945,273 945,273 945,273 945,273 979,073 979,073 979,073 979,073 979,073 946,545 975,012 1,003,480 1,034,320 1,065,160 1,095,999 1,129,211 1,163,088 1,197,980 1,233,920 1,270,937 1,309,066 1,421,400 1,421,400 1,055,744 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 3,253,418 3,281,885 3,004,497 2,454,593 2,485,433 2,516,272 2,549,484 2,617,161 2,652,053 2,687,993 2,725,010 2,763,139 923,475 951,180 979,715 1,009,106 1,039,380 1,070,561 1,102,678 1,135,758 1,169,831 1,204,926 1,249,074 1,278,306 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 475,000 (110,857) (112,228) (113,641) (115,097) (116,596) (118,140) (119,730) (119,730) (119,730) (119,730) (119,730) (119,730) (66,551) (67,375) (68,223) (69,097) (69,997) (70,924) (71,879) (71,879) (71,879) (71,879) (71,879) (71,879) 197,120 199,559 202,072 204,660 207,325 210,071 212,899 212,899 212,899 212,899 212,899 212,899 19,712 19,956 20,207 20,466 20,733 21,007 21,290 21,290 21,290 21,290 21,290 21,290 1,418,187 1,446,136 1,474,922 1,504,572 1,535,112 1,566,568 1,598,968 1,632,048 1,666,121 1,701,216 1,737,364 1,774,596 1,835,231 1,835,749 1,529,575 950,020 950,320 949,704 950,516 985,113 985,932 986,777 987,646 988,543 18,402,426 - - - - - - - _ _ - _ (535,333) (466,878) (419,697) (354,573) (320,548) (284,463) (246,250) (205,695) (160,692) (112,940) (62,273) (8,512) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) (1,015,746) 16,851,347 (1,482,624) (1,435,443) (1,370,319) (1,336,294) (1,300,209) (1,261,996) (1,221,441) (1,176,439) (1,128,686) (1,078,019) (1,024,258) 18,686,578 353,125 94,132 (420,299) (385,973) (350,505) (311,480) (236,329) (190,506) (141,909) (90,372) (35,716) 113,661 141,250 37,653 - - - - - - - - - $_ 18,572,917 5 211,875 S 56,479 $ (420,299) 5 (385,973) $ (350,505) $ (311,480) $ (236,329) $ (190,506) $ (141,909) 5 (90,372) $ (35,716) See Accompanying Notes and Accountant's Report 3 Printed 1126/20093:05 PM The Roshel( Building Qi4LICB, LLC Version a.5 Forecasted Statements of Cash Flows For the Years Ending December 31, 2009- December 31, 2028 PRELIIVIIN~4RY ®RAFT Cash Flows From Operating Activities: Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation Net Cash Provided by Operating Activities Cash Flows From Investing Activities: Acquisition of Property and Equipment Replacement Reserve Developer Fee AP Net Cash (Used) by Investing Activities Cash Flows From Financing Activities: Payments on IBM Build Out Debt Proceeds from IBM Build Out Debt Payments on Construction Debt Proceeds from Construction Debt Payments on Tax Credit Debt Proceeds from Tax Credit Debt Dubuque Initiatives Developer Fee Reinvestment Dubuque Initiatives Initial Contributions Net Cash (Used) by Financing Activities Net Increase in Cash Cash, Beginning of Year Cash, End of Year Supplemental Disclosures Cash Flows Information: Cash Paid during the Yearfor Interest 2009 2010 2011 2012 2013 2014 2015 2016 $ (1,730,237) $ (914,461) $ (558,880) $ (451,751) $ (380,493) $ (369,910) $ (344,783) $ 7,318,642 234, 0 71 862, 970 1, 015, 74 6 1, 015, 746 1, 015, 746 1, 015, 746 1, 015, 746 1, 015, 746 (1,496,166) (51,491) 456,866 563,995 635,253 645,837 670,964 8,334,388 (21,839,958) (17,874,141) - - - - - - (17,768) (24,468) (27,960) (27,649) (27,609) (27,119) (26,564) (26,564) 793,584 - - - - - - - (21,064,141) (17,898,608) (27,960) (27,649) (27,609) (27,119) (26,564) (26,564) (119,998) (576,283) (610,915) (647,627) (686,546) (722,867) (766,942) (814,245) 6,500,000 - - - - - - - - (18,402,426) - - - - - - 19,178,340 6,983,656 - - - - - - - - - - - - - (7,951,107) 7,951,107 18,402,426 - - - - - - 750,000 1,000,000 34,259,449 7,407,372 (610,915) (647,627) (686,546) (722,867) (766,942) (8,765,353) 11,699,142 (10,542,727) (182,008) (111,281) (78,902) (104,149) (122,542) (457,528) - 11,699,142 1,156,415 974,407 863,126 784,224 680,075 557,532 $ 11,699,142 $ 1,156,415 $ 974,407 $ 863,126 $ 784,224 $ 680,075 $ 557,532 $ 100,004 $ 203,386 $ 1,115,236 $ 777,245 $ 740,532 $ 701,614 $ 675,962 $ 632,857 $ 585,554 Printed 1128/2009 3:05 PM Version 4.5 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 $ 18,572,917 $ 211,875 $ 56,479 $ (420,299) $ (385,973) $ (350,505) $ (311,479) $ (236,329) $ (190,506) $ (141,909) $ (90,372) $ (35,716) 1, 015, 746 1, 015 , 746 1, 015, 746 1, 015, 746 1, 015, 746 1, 015, 746 1, 015, 746 1, 015, 746 1, 015, 746 1, 015, 746 1, 015, 746 1.015, 746 19,588,663 1,227,622 1,072,225 595,447 629,773 665,242 704,267 779,418 825,240 873,837 925,374 980,030 (26,564) (26,564) (28,358) (28,358) (28,358) (28,358) (28,358) (29,372) (29,372) (29,372) (29,372) (29,372) (295,207) (498,377) - - - - - - - - - - (321,771) (524,941) (28,358) (28,358) (28,358) (28,358) (26,358) (29,372) (29,372) (29,372) (29,372) (29,372) (864,466) (690,111) - - - - - - - - - - - (307,776) (1,542,244) (567,089) (601,415) (636,883) (675,909) (750,045) (795,868) (844,465) (896,002) (141,873) (18,402,426) - - - - - - - - - - - - 295,207 498,377 - - - - - - - - - (19,266,892) (702,680) (1,043,867) (567,089) (601,415) (636,883) (675,909) (750,045) (795,868) (844,465) (896,002) (141,873) - - - - - - - - - - - 808,785 100, 004 100, 004 100, 004 100, 004 100, 004 100, 004 100, 004 100, 004 100, 004 100, 004 100, 004 100, 004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 100,004 $ 908,789 $ 535,333 $ 466,878 $ 419,697 $ 354,573 $ 320,548 $ 284,463 $ 246,250 $ 205,695 $ 160,692 $ 112,940 $ 62,273 $ 8,512 See Accompanying Notes and Accountant's Report 4 The Roshek uilding QALICB, LLC summary of significant Assumptions and Accounting Policies NOTE 1. Nature of Presentation These financial forecasts for The Roshek Building QALICB, LLC (the "Company") .present, to the best of management's knowledge and belief, the Company's expected financial-;;position, results of operations, and cash flows for the forecast periods. Accordingly, the forecasts reflect managements' judgment, as of January 26, 2009, the date of these forecasts,.-of the expected conditions and its expected course of action. The assumptions disclosed herein are those that management believes are significant to the forecasts. There will usually be differences between forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. NOTE 2. Summary of Significant Accounting Policies Cash and Cash Eauivalents The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. It is anticipated cash will approximate $100,000 each year to cover current operating expenses. An additional three percent of gross base rents will be accumulated annually for future replacement reserves. The replacement reserves can be used o fund cash deficits, if necessary. Property and Eauiament Property, equipment, and leasehold improvements are carried at cost and will be depreciated over the estimated useful lives of the assets, ranging from 10 to 39 years, using the straight-line method. Major expenditures for improvements and those which substantially increase useful lives will be capitalized. Maintenance, repairs, and minor renewals will be expensed as paid. When assets are- retired or otherwise disposed of, their costs and related accumulated .depreciation will be removed from the accounts and resulting gains or losses will be included in income. Income Taxes The Company, with the consent of its members, will elect under the Internal Revenue Code and similar provisions of the Iowa income tax law, to be a Limited Liability Company. The Company will make an election pursuant to the Internal Revenue Code to be taxable rather than tax-exempt and to be taxed as a C corporation. l'he Roshek uilding ALIC ,LLC ummary of ignificant Assumptions and Accounting Policies NOTE 2. Summary of Significant Accounting Policies (Continued) Use of Estimates The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities ..and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates'also affect the reported amounts of revenues and expenses during the reporting-period. Actual results could differ from those estimates. NOTE 3. Nature of Operations The Roshek Building QALICB, LLC (the "Master Landlord") intends to purchase and remodel the Roshek Building. The Roshek Building QALICB; LLC will have two members-a LLC owned 100% by Dubuque Initiatives, Inc. (90°l0 owner) and the Roshek Building Master Tenant, LLC (the "Master Tenant") (10% owner). The Master Landlord will enter into a lease with the Master Tenant, of which all membership interests are owned by a community development entity (CDE) also known as the historic tax credit investor ("HTC Investor"). The HTC Investor will own 99.9% of new market tax credits. " The Master Tenant will lease the project from the Master Landlord for a period of time long enough to transfer the tax :ownership of the building to it, which allows the federal historic tax credits (HTC) to be .passed 'through to this entity. By virtue of the Lease, and apass-through election, the federal HTC'S become claimable by the owners of the Master Tenant rather than by the Master Landlord. After the end of the seven-year new market tax credit compliance period, Dubuque Initiatives, Inc. will .have an option to purchase the ownership interests in the Master Tenant from the HTC Investor so that it can become the 100% owner of Master Tenant. Details of the purchase option have not been determined as of the forecast date. However, it is expected the purchase option would be approximately 5% of the federal historic tax credit amount. The aforementioned information and entity structure is still being designed. Therefore, the assumptions in this forecast will change as the structure is clearly defined. This forecast assumes that income and expense will go through The Roshek Building QALICB, LLC for this forecast. The Roshek uilding ALIC , LLC ummary of significant Assumptions and Accounting Policies NOTE 4. Initial Capitalization during the Forecast Period The Company will capitalize the project by obtaining financing from a local financial institution. The Company will also qualify for specific tax credits. The Company intends to'use these tax credits to fund a portion of the construction. In addition, Dubuque Initiatives, anot-for-profit organization, has committed up to $2,000,000 to the project in the first three years of_operations if necessary to ensure positive cash flow from operations. In subsequent years;--the City of Dubuque will fund the difference until the project is self-sustaining. This forecast assumes that Dubuque Initiatives does contribute $1,750,.000 during 2009 and 2010. NOTE 5. Property and Equipment The Company intends to invest approximately $39,700,000 ?in property and improvements as follows: Land $ 100,000 Building 350,000 39 Year Life Building Improvements 39,250,000 39 Year Life Building Improvement costs include capitalized interest of approximately $780,000. NOTE 6. Developer Fee Payable The developer of the project, Dubuque Initiatives, Inc. will receive a developer fee equal to 2.0% of the Qualified Rehabilitation Expenditures. This fee is payable as cash flow permits, but is required to be paid within the first 10 years of operations. NOTE 7. Long-Term Debt The Company will obtain a note payable to a local financial institution under which it can borrow up to ..$29,000,000. Borrowings under this agreement are anticipated to bear interest at 5.85%, with art adjustable rate every five years. This forecast assumes the rate will increase to 6% in the 5t" year and continue at that rate. This agreement is expected to be a 20-year note due December 31, 2028. The agreement will require interest only payments due until maturity. The Company intends to make principal payments on the note using tax credits received and excess cash flow annually. The debt will be collateralized by the property. In addition, the City of Dubuque will be guarantor of the note. The Company is also providing $6,500,000 in specific building improvements based on IBM's request. These costs are being paid by the Company and will be re-paid by IBM as part of the The Roshek Building ALIC, LLC Summary of Significant Assumptions and Accounting Policies NOTE 7. Long-Term Debt (Continued) lease agreement. The tenant will pay an additional $7.28 per square foot leased ,per year over 10 years to re-pay the cost of those improvements. The Company will obtain a note payable to a financial institution under which it can borrow up to $6,500,000 to fund these building improvements. Borrowings under this agreement are anticipated to bear interest at 5.85%. The agreement will require monthly principal and interest payments of $77,852. This agreement is expected to be a 10-year note due .December 31, 2018. The note is unsecured. NOTE 8. Tax Credits and Forgivable Debt The Company will qualify for federal and state historic tax credits as well as new market tax credits as a result of this project. These credits-.are expected to be received within a 24-month period. This forecast assumes that the credits will be received in 2009 and 2010 at the following amounts, based on the estimated closing date,. estimated construction completion dates and estimated timing of acceptance of certificates.... .Amount Estimated to be Received on Gross Credit Tax Credit the Dollar Amount New Markets Tax Credit $ 0.74 $ 7,951,107 Federal Historic Tax Credit $ 1.10 $ 8,613,902 State Historic Tax Credit $ 1.00 $ 9,788,525 The receipt of the tax credits has been forecasted similar to a forgivable loan. The Company will record the cash from the credits when received. Anon-interest bearing note will also be created .for each credit amount received. These notes will be carried until the Purchase Option is exercised, which is expected to be seven years from receipt of the credits. At that time, the non-interest bearing loan will be forgiven, and the full amount of the tax credits will be recognized as income. The new market tax credit amount received will be net of the 10% allocation to the Community Foundation of Greater Dubuque and the Commercial Development Entity allocation fee, a total of $636,122. All other annual fees have been forecasted as expenses in the income statement. 8 The Roshek building ~4LIC , LLC ~ummaly of significant ~-ssumptions and ~-ccounting Policies NOTE 9. Revenue Base Rental Revenue -has been forecasted to be $2.08 per square foot for floors four through nine. This rate assumes IBM will occupy those floors as they become available.. That will increase to $2.54 per square foot in years 11 through 19 and $2.80 per square foot in year,20. All other floors have varying rates per square foot by tenant (other current tenant rates include CAM charges). Basement rent is forecasted at $2 per square foot subsequent to the current tenants' termination. The forecast assumes 85% occupancy on floors not occupied by IBM. Common area maintenance (CAM) rental revenue - is forecasted at $3.75 per square foot with an expected 3% inflationary increase per year. IBM specific rents -IBM has a strict maintenance policy and electrical requirements that are above and beyond that of a normal lease. Therefore, IBM has agreed to pay an additional $3.48 per square foot per floor per year to assure that those requirements are met. Total expenses approximate $95,000 per floor. IBM Build out rent -IBM also has an option to do a build-out of the space it will occupy. Estimated costs of that build-out are $6,500,000. The landlord will charge the tenant a fixed amount per square foot over the life of the lease to recover the cost incurred for the build-out. This forecast assumes IBM has exercised the above option. NOTE 10. Expenses, Expenses are forecasted :based on actual historical data provided by the previous owner. Generally, expenses are assumed to increase for inflation. The forecast assumes a 3% inflation rate during the forecast period. The following are detailed assumptions for expenses: General and Administrative (G&A) - G&A is comprised of maintenance, property management fees, insurance, security, and utilities to operate and maintain the building. IBM-Specific Expenses -IBM has a strict maintenance policy and electrical requirements that are above and beyond that of a normal lease. The Company intends on hiring staff to cover' such expenses at a profit. However, the forecast shows the expense equal to revenue to be conservative. Property Taxes -The Company has received tax increment financing (TIF) funds from the City of Dubuque. The Company will pay the taxes as required by the City, and subsequent to that payment, the City will re-distribute a portion of those funds back to the Company. 1'he R®shek building A~IC , LLC urnrnary ®f inificant ~,ssurnpti®ns and Acc®unting ®licies N®TE 10. Expenses (Continued) The Company charges IBM their portion of taxes based on space leased as part of the lease agreement. The portion the Company receives will be net of the portion paid by IBM. The Company estimates it will be reimbursed approximately 90% of taxes paid less the amount IBM pays. Federal Historic Tax Credit Expense -The Company will incur annual expenses relating to its members and fees that will be incurred on their behalf. The Company' has forecasted a fee of 2% of the gross historic tax credit amount annually. Tax Credit and Consulting Fees -The Company has hired an independent consulting firm to assist in securing state and federal historic tax credits as well as new market tax credits. Fees due to this firm are expected to be $400,000. This fee includes fees for setup of new investors and their respective attorney fees. Purchase Option -The Company will have the option to acquire 100% of the Master Tenant for a fee of 5% of the gross historic tax credit amount after the 7'h year of the agreement. New Market Tax Credit Expense -'The Company will incur costs to setup the project, these related costs will be due at closing. Tenant Relocation Expenses -The landlord has set aside approximately $800,000 to assist current tenants in their relocation. Commercial Development Entity (CDE) Management Fees -The Company will annually pay a management fee equivalent to 1 % of the Qualified Equity Investment. The fee will expire upon the exercise of the purchase option. Investment and CDE Administrative Fees -The Company expects to pay an annual fee of $40,000 relating to administrative costs to the CDE's. .Local :Legal, Consulting, and Accounting Fees -The Company expects to incur various local consultations during the initial setup of the investment. 10 The Roshek Building QALICB, LLC Schedule of Assumptions For the Years Ending December 31, 2009 -December 31, 2028 PRELIMINARY DRAFT Floor by Floor Tennant Assumptions Floor Leasable Space Occupancy Construction Begins C onstruction Ends Move in dates Move Out Date Tennant 9th 26,701 100% 2/1/2009 5/31/2009 6/1/2009 12/31/2028 IBM 8th 26,153 100% 2/1/2009 5/31/2009 6/1/2009 12/31/2028 IBM 71h 26,153 100% 4/1/2009 7/31/2009 8/1/2009 12/31/2028 IBM 6th 24,840 100% 7/1/2009 10/31/2009 11/1/2009 12/31/2028 IBM 51h 26,153 100% 7/1/2009 10/31/2009 11/1/2009 12/31/2028 IBM 4th 26,094 100% 12/1/2009 3/31/2010 4/1/2010 12/31/2028 Other 3rtl 26,094 100% 12/1/2009 3/31/2010 4/1/2010 12/31/2028 Other 2nd 9,659 85% 12/1/2009 3/31/2010 4/1/2010 12/31/2028 Other Mezzanine 1,692 85% 4/1/2010 7/31/2010 4!1/2009 12/31/2028 Other Main Level 10,343 85% 2/1/2009 3/31/2009 8/1/2010 12/31/2028 Other Basement 31,484 85% 12/1/2009 3/31/2010 1/1/2012 12/31/2028 Other Tax Credits Name Percentage Dollar Value Proceeds Expenses Purchase Option Fed Histodc TC 20% 1.10 8,613,902 2% 5% State Histodc TC 25 % 1.00 9,788,525 NMTC 39% 0.74 7,951,107 400,000 Energy TC CDE Management Fee(Annual) 318,047 CDE Admin Fee(Annual) 40,000 Loan Rates Start Date Term in Years Percent 2/112009 5 5.85 2/1/2014 15 6.00% Construction Costs Building Cost 350,000 Land Cosi 100,000 Soft Costs 1,866,795 General Building Shell (Exterior) 2,358,000 Exernal 2-9 10,992,000 External 1st & Mezzanine 3,038,000 EMedor Lower Level 1,313,000 Intemal 2-9 10,944,000 Intemal 1st 8 Mezzanine 1,338,000 Developer Fee 793,584 Leasehold Improvements 6,500,000 Construction Fees LOC Interest Rale 5.85 General Req 4 Project Contingency 10 Contractor Fee 4.5 Tax Assumptions Income Tax Raie 40% Building Depreciation Life 39 Lease Improvements Life 39 11