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CARADCO Building LLLP_Iowa Finance Authority LoanMasterpiece on the Mississippi Dubuque bitd All- America City II1' 2007 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, now Caradco Landlord LLLP DATE: August 11, 2011 Economic Development Director Dave Heiar is recommending a modification in the collateral provided by Caradco Building, LLLP, now Caradco Landlord LLLP, for the $4.5 million IFA loan. The investment documents for the North Cascade Road developer's LLC do not allow this investment to be used. The developers will still be providing $4,508,211 of collateral on the $4.5 million. loan. I concur with the recommendation and respectfully request Mayor and City Council approval. Mi hael C. Van Milligen MCVM:jh Attachment cc: Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager David J. Heiar, Economic Development Director 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: August 10, 2011 Dubuque Aq- anedcaCity 2007 PURPOSE The intent of this memorandum is to provide updated information relating to the required collateral for the $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 Development Agreement was between the City and Caradco Building, LLLP since Cardadco Building, LLLP owned the real estate where the project is located. For tax credit purposes, Caradco Building, LLLP is transferring the real estate to Caradco Landlord, LLLP. Cardadco Building, LLLP has requested that the City approve assignment of the Development Agreement to Caradco Landlord, LLLP. BACKGROUND On July 18, 2011, the City Council approved a combination of real property and liquid assets as collateral for the $4.5 million IFA backed loan for the Caradco Building, LLLP, now Cardaco Landlord, LLLP, project. The list of approved collateral was as follows: 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 Type of Mortgage Cash /money market 1 s` mortgage Lien' 2"d mortgage Cash /money market 2 "" mortgage 2 "d mortgagee 1 n mortgage' Existing Estimated Net First Market Value Mortgage Mav 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 Special Notes: 1). 20% owner of Timber Hyrst Subdivision 2). 50% owner of Interstate Building, LLLP 3). With Intercreditor Agreement Attached is the July 12, 2011 memorandum which provides more details about the project and the financing. DISCUSSION The developers are working toward closing on the financing package for this project. As we have been reviewing all the legal documents and agreements associated with closing on the package, it has been called to the City's attention that it is not possible to get a lien on North Cascade Road Developers, LLC (Timber Hyrst Subdivision). The operating agreement for Cascade Road Developers does not allow ownership interested to be pledged as security. This removes $807,540 from the total pledged collateral of $5,315,751. The remaining collateral is valued at $4,508,211 which is slightly more than their proposed $4,500,000 loan value. RECOMMENDATION /ACTION STEP To have the City Council acknowledge and approve the change in the collateral for the Caradco Building, LLLP, now Caradco Landlord, LLLP, project by removing the Gronen's interest in North Cascade Road Developers, LLC from the collateral list. attachment F: \USERS \Econ Dev \CARADCO \IFA Loan Collateral\20110810_Updated Collateral Memo IFA Loan to Caradco_1.docx 2 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 kitlid aannerica city 11111! 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 10th 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 Type of Mortgage Cash /money market 15f mortgage Lien' 2nd mortgage Cash /money market 2nd mortgage 2nd mortgagee 1st mortgage3 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 Special Notes: 1). 20% owner of Timber Hyrst Subdivision 2). 50% owner of Interstate Building, LLLP 3). With Intercreditor Agreement (see memo for details) 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 2nd mortgage on three of the properties, a 1st mortgage on the Rouse and Dean Foundry Building, a lien on 20% of the North Cascade Road Developers, LLC and a joint 1st 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 1st 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 2nd 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