Iowa Finance Authority Loan for Caradco LLLPMasterpiece on the Mississippi
TO: The Honorable Mayor and City Council Members
FROM: Michael C. Van Milligen, City Manager
SUBJECT: Collateral for $4.5 Million IFA Loan to Caradco Building, LLLP
DATE: July 12, 2011
Dubuque
All-America City
2007
Economic Development Director Dave Heiar is recommending approval of a $4.5 million
loan utilizing funding from the Iowa Finance Authority (IFA) to Caradco Building, LLLP
accepting as collateral the items described in his memorandum.
The City Council has prioritized the redevelopment of the Historic Millwork District for
mixed use with an emphasis on downtown housing options. The Millwork District would
be a large scale project able to fulfill much of the needed demand for rental housing.
A study was conducted for IFA in November 2009 to determine the additional need for
housing within Dubuque. The study showed an additional 556 housing units are
needed in the area, noting the most desirable units being in the downtown core area.
The Millwork District would be a large scale project able to fulfill much of the needed
demand for rental housing.
Housing has become a significant issue in Dubuque since IBM decided to locate its
1,300 employee Global Service Delivery Center. In addition, tighter lending
requirements have increased the demand for rental units. A lack of rental housing has
caused trouble for new residents to find a place to live.
Even prior to the IBM announcement, the City had studies that indicated a need for
additional downtown housing. The consultants who prepared the Master Plans for the
Port of Dubuque, the Downtown and the Historic Millwork District emphasized the need
for downtown housing.
A solution is needed soon for this housing shortage because other companies in
Dubuque are also starting to increase their employment numbers. Companies have
started to see challenges in recruiting a qualified workforce because housing is
unavailable in the area.
The City received a $5.6 million federal TIGER grant to assist in infrastructure upgrades
for the Millwork District. This grant will replace underground utilities and reconstruct
complete streets for the District.
City staff has worked with Caradco Building LLLP to formulate a funding package to
redevelop the property located at 900 Jackson Street.
The Carr, Ryder & Adams Company Main Plant Building (Caradco), a former millwork
factory, occupying an entire city block, was built between 1880 and 1906. The
renovation of this building is expected to act as a catalyst for the revitalization of the
Historic Millwork District. With its foundation of historic, architecturally unique
warehouses, the district will become an urban mixed -use development containing
mixed - income housing, commercial space, and public gathering places, incorporating
sustainable and energy- efficient technologies.
The project includes the creation of 72 apartments on the second and third floors of the
building. In addition to the residential units, the Caradco Building will feature
approximately 35,000 square -feet of first -floor commercial space to attract and support
new downtown businesses. The developer is also exploring the use of 12,000 square -
feet of lower level space for community service projects. The project plans also include
an environmentally sensitive HVAC system and other measures to enhance the
building's energy efficiency.
In March 2011, a Development Agreement for the redevelopment of the Caradco
property was approved by the City Council. Some of the key elements of the
Development Agreement include the following:
1) The City is committing to complete the street reconstruction project funded by the
TIGER Grant from the Federal Highway Administration.
2) The project will receive $720,000 in incentives through the Downtown Housing
Incentive Program ($10,000 per new housing unit).
3) Caradco Building, LLLP will receive a 15 year TIF incentive on the value of the
assessable improvements. This can be taken as an up -front TIF with a minimum
assessment agreement or as a 15 year TIF rebate.
4) Contingent upon sufficient collateral acceptable to the City, the project will
receive the proceeds from a $4,500,000 loan from the Iowa Finance Authority.
This will be a 20 year loan at 3% interest.
5) Contingent upon a subrecipient agreement and loan documents, an $8.9 million
CDBG award from the State of Iowa to assist in the creation of workforce housing
in the building.
2
6) Developer will spend approximately $28 million to create 72 residential units at
900 Jackson Street. This renovation will also include approximately 35,000
square feet of commercial space on the main floor.
It should be noted that there is always some risk to the City when providing a loan
guarantee. The City has previously accepted grants and /or loans to assist local
projects, but not on this scale. The City previously agreed to a $500,000 loan from the
IFA to assist the White Street condominium project. This was also a loan to the City,
from which the City in turn loaned $250,000 to the developer. The City also assisted
the Dubuque County Historical Society with the National Mississippi River Museum
expansion project. The federal government committed $5 million of National Scenic
Bylaws /SAFETEA -LU funding toward this expansion. The City was required to provide
this funding upfront and was reimbursed by the federal government. In the event of a
default, the City was obligated to repay the grant. The Dubuque County Historical
Society provided satisfactory collateral.
I concur with the recommendation and respectfully request Mayor and City Council
approval.
Michaol C. Van Milligen
MCVM:jh
Attachment
cc: Barry Lindahl, City Attorney
Cindy Steinhauser, Assistant City Manager
Teri Goodmann, Assistant City Manager
David J. Heiar, Economic Development Director
Aaron DeJong, Assistant Economic Development Director
John and Mary Gronen
3
Masterpiece on the Mississippi
TO: Michael Van Milligen, City Manager
FROM: David J. Heiar, Economic Development Director
SUBJECT: Collateral for $4.5 Million IFA Loan to Caradco Building, LLLP
DATE: July 12, 2011
Dubuque
nwanericacity
I
2007
PURPOSE
The intent of this memorandum is to provide information relating to the required collateral for
a $4.5 million loan provided by the Iowa Finance Authority to the City of Dubuque which will
be loaned by the City to Caradco Building, LLLP. The City held a public hearing on this loan
on June 21, 2010.
BACKGROUND
The City Council has prioritized the redevelopment of the Historic Millwork District for mixed
use with an emphasis on downtown housing options. The Millwork District would be a large
scale project able to fulfill much of the needed demand for rental housing.
Housing has become a significant issue in Dubuque since IBM decided to locate its 1,300
employee Global Service Delivery Center. In addition, tighter lending requirements have
increased the demand for rental units. A lack of rental housing has caused trouble for new
residents to find a place to live. In June 2010, the Greater Dubuque Development
Corporation (GDDC) discovered approximately 170 vacant rental units, or about a 2%
vacancy rate within Dubuque.
A study was conducted for IFA in November 2009 to determine the additional need for
housing within Dubuque. The study showed an additional 556 housing units are needed in
the area, noting the most desirable units being in the downtown core area. The Millwork
District would be a large scale project able to fulfill much of the needed demand for rental
housing.
Even prior to the IBM announcement, the City had studies that indicated a need for
additional downtown housing. The consultants who prepared the Master Plans for the Port
of Dubuque, the Downtown and the Historic Millwork District emphasized the need for
downtown housing.
A solution is needed soon for this housing shortage because other companies in Dubuque
are also starting to increase their employment numbers. Companies have started to see
1
challenges in recruiting a qualified workforce because housing is unavailable in the area.
This loan program from IFA would provide additional funding for these projects.
The City received a $5.6 million federal TIGER grant to assist in infrastructure upgrades for
the Millwork District. This grant will replace underground utilities and reconstruct complete
streets for the District.
City staff has worked with Caradco Building LLLP to formulate a funding package to
redevelop the property located at 900 Jackson Street.
The Carr, Ryder & Adams Company Main Plant Building (Caradco), a former millwork
factory, occupying an entire city block, was built between 1880 and 1906. The renovation of
this building is expected to act as a catalyst for the revitalization of the Historic Millwork
District. With its foundation of historic, architecturally unique warehouses, the district will
become an urban mixed -use development containing mixed - income housing, commercial
space, and public gathering places, incorporating sustainable and energy- efficient
technologies.
The project includes the creation of 72 apartments on the second and third floors of the
building. In addition to the residential units, the Caradco Building will feature approximately
35,000 square -feet of first -floor commercial space to attract and support new downtown
businesses. The developer is also exploring the use of 12,000 square -feet of lower level
space for community service projects. The project plans also include an environmentally
sensitive HVAC system and other measures to enhance the building's energy efficiency.
At the January 18, 2011 meeting, the City Council approved a Community Development
Block Grant (CDBG) Housing Disaster Recovery Fund Contract between the Iowa
Department of Economic Development and the City of Dubuque on behalf of the Caradco
Building project. The amount of the award was $8.9 million. The CDBG financial assistance
will be a 10 -year forgivable loan (non- receding), forgiven in full at the end of the 10 -year
compliance period. If the assisted rental project is sold or transferred, or converted to an
alternate (non - residential) use during the 10 -year period following completion and
acceptance, the entire amount of the CDBG forgivable loan must be repaid by the
developer.
In September 2010, the City Council approved an offer to purchase the former Eagle
Window and Door office building site for $698,973 to accommodate the anticipated parking
needs in the Historic Millwork District. This property is located between Elm and
Washington Streets south of 10 Street. Since that time, the existing block building has
been deconstructed and the City has acquired this property.
In March 2011, a Development Agreement for the redevelopment of the Caradco property
was approved by the City Council. Some of the key elements of the Development
Agreement include the following:
1) The City is committing to complete the street reconstruction project funded by the
TIGER Grant from the Federal Highway Administration.
2) The project will receive $720,000 in incentives through the Downtown Housing
2
Incentive Program ($10,000 per new housing unit).
3) Caradco Building, LLLP will receive a 15 year TIF incentive on the value of the
assessable improvements. This can be taken as an up -front TIF with a minimum
assessment agreement or as a 15 year TIF rebate.
4) Contingent upon sufficient collateral acceptable to the City, the project will receive the
proceeds from a $4,500,000 loan from the Iowa Finance Authority. This will be a 20
year loan at 3% interest.
5) Contingent upon a subrecipient agreement and loan documents, an $8.9 million
CDBG award from the State of Iowa to assist in the creation of workforce housing in
the building.
6) Developer will spend approximately $28 million to create 72 residential units at 900
Jackson Street. This renovation will also include approximately 35,000 square feet of
commercial space on the main floor.
DISCUSSION
Major elements of the loan agreement between the IFA and the City are as follows:
• The $4.5 million loan has an upfront commitment fee of .5% payable from the first
draw of funds.
• Loan terms: 20 year loan first 10 years interest only at 3 %; second 10 years
principal and interest at 3 %, 20 year amortization.
• Dubuque loan pool would be loaned to Millwork developers on terms negotiated
by the City. Loan repayments can be used by the City to make additional loans
during the 20 year term.
• At least 50% of the completed units developed with loan proceeds will be rented
to families whose annual income is no more than 120% of the area median
income (today that equates to $52,560).
• The IFA loan is directly to the City and would be secured by the full faith and
credit of the City's general obligation bonding authority.
• The loan can be repaid at any time without penalty.
It should be noted that there is always some risk to the City when providing a loan
guarantee. The City has previously accepted grants and /or loans to assist local projects,
but not on this scale. The City previously agreed to a $500,000 loan from the IFA to assist
the White Street condominium project. This was also a loan to the City, from which the City
in turn loaned $250,000 to the developer. The City also assisted the Dubuque County
Historical Society with the National Mississippi River Museum expansion project. The
federal government committed $5 million of National Scenic Bylaws /SAFETEA -LU funding
toward this expansion. The City was required to provide this funding upfront and was
reimbursed by the federal government. In the event of a default, the City was obligated to
repay the grant. The Dubuque County Historical Society provided satisfactory collateral.
The principals of Caradco Building, LLLP, John and Mary Gronen, are proposing to borrow
from the $4.5 million loan pool. They offer to use their interests in cash, money markets and
3
real estate holdings in the City of Dubuque as their collateral to secure this loan from the
City.
Business Investments (Real Estate)
Gronen Properties, LLC
Rouse & Dean Foundry Building, LLC
North Cascade Road Developers, LLC
Pine Box, LLLP
Gronen Restoration, Inc.
Upper Main Commercial
Interstate Building, LLLP
Caradco Building, LLLP
Address
1056 Main Street
990 Washington Street
(Timber Hyrst Subdivision)
1789 Elm Street
1056 Main Street
1042 -1098 & 1069 -1091 Main St.
131 W. 10th Street
900 Jackson Street
Special Notes:
1). 20% owner of Timber Hyrst Subdivision
2). 50% owner of Interstate Building, LLLP
3). With Intercreditor Agreement (see memo for details)
Type of
Mortgage
Cash /money market
1 mortgage
Lien'
2 mortgage
Cash /money market
2 mortgage
g mortgage
1 mortgage
Existing Estimated Net
First Market Value
Mortgage May 1, 2011
N/A $140,000
N/A $92,400
N/A $807,540
$176,229 $1,009,107
N/A $595,000
$456,719 $834,046
$972,943 $712,029
$677,611 $1,125,629
$5,315,751
The Gronen's have consulted with Tom Kane, a local appraiser and real estate broker, to
determine values on these properties. It is estimated that the net value of their interests in
two business ventures and six properties is approximately $5.3 million. The business
ventures (Gronen Properties, LLC and Gronen Restoration, Inc.) will provide $735,000 of
liquid collateral in the form of cash and money markets. These values and estimates have
also been reviewed for accuracy by Honkamp Krueger prior to submittal to City staff.
The City would receive a 2 mortgage on three of the properties, a 1 mortgage on the
Rouse and Dean Foundry Building, a lien on 20% of the North Cascade Road Developers,
LLC and a joint 1 mortgage with American Trust on the Caradco Building, LLLP. Some of
these properties are jointly owned with other business partners. The City would be placing a
lien on the Gronen's portion of the properties. While some of their assets are not extremely
liquid, the City would recover its money over time if there was a default by the Gronens. The
most liquid assets are the cash /money markets. First mortgages provide solid equity
positions and puts the City in control of the assets. A second mortgage would require the
City to buyout the 1 mortgage to have control of the property.
There will also be an intercreditor agreement between the American Trust and the City to
allow the bank to have a priority lien. Based on the proforma for this project, federal and
state historic tax credits will be utilized to repay American Trust. Historic Tax Credits are
brought into the project upon completion of the rehabilitation and final approval by SHPO
and the National Park Service. Based on completion of this project by December 2012, we
anticipate these funds will be brought into the proforma by the end of 2013 or early 2014. At
that point, the mortgage to American Trust should be paid in full.
The real risk period for the City would appear to be the time between the closing on the
loan, and the recovery of the tax credits (2013 or early 2014). During this window, much of
the City's collateral will be in the form of a 2 mortgage on three properties. Upon the
completion of the Caradco Building, LLLP project, it is anticipated that the market value of
the property should be between $5 and $6 million. When the Historic Tax Credits are
received (2013 or early 2014), the City will automatically have the sole first mortgage on the
Caradco Building, LLLP, which should more than cover the City's loan, staff will recommend
that we release the mortgages on the other seven properties.
4
The loan terms between the City and Caradco Building, LLLP have not yet been finalized,
but I anticipate the terms to be the same or very similar to the terms the City has with IFA.
Caradco Building, LLLP will also be responsible for any administrative costs associated with
this loan which includes the upfront commitment fee to IFA and bond counsel costs incurred
by the City.
RECOMMENDATION /ACTION STEP
Is to have the City Council approve a $4.5 million loan utilizing the funding from IFA to
Caradco Building, LLLP secured by the cash, money markets and real estate holdings noted
in this memorandum and to authorize the City Attorney to prepare the required liens and
mortgages and authorize the City Manager to execute the same.
Attachment
F: \USERS \Econ Dev \CARADCO \IFA Loan Collateral\20110705IFA Loan Collateral Caradco Memo 3 .docx
5