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Dubuque Initiatives_Roshek Building_Third Amendment to Development AgreementMasterpiece on the Mississippi Dubuque AN- America City 2007 TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: Third Amendment to the Development Agreement with Dubuque Initiatives DATE: August 31, 2011 Economic Development Director Dave Heiar is recommending approval of a resolution amending the Development Agreement between the City of Dubuque and Dubuque Initiatives for the redevelopment of the Historic Roshek Building. The amendment would allow future State and Federal Tax Credit proceeds be used for payments on indebtedness incurred for the redevelopment of the Roshek Building covered under the City's guarantee. A Development Agreement between the City and Dubuque Initiatives was approved on February 17, 2009 and amended on April 29, 2009 and May 16, 2011 to provide incentives and a guarantee for the redevelopment of the Roshek Building. The rehabilitation was done to encourage IBM to create 1,300 IT jobs in Dubuque with a $60 million annual payroll and to allow an almost $50 million renovation of a building on the National Historic Register. The $25 million Guaranty signed by the City required that proceeds from State and Federal Historic Tax Credits, New Markets Tax Credits, or a Developer Fee be required to pay down debt, thus limiting the exposure to a default by Dubuque Initiatives. Currently, the debt remaining covered by the Guaranty is $11,007,932.48. Approximately 60,000 square feet remain available for lease in the building for office uses on floors 2, 3, and 4, two tenant spaces are available in the Lobby, and 3 booth spaces are also available in the Lobby. The original proforma for the Roshek Building anticipated the entire building would be fully leased by the end of 2011. At current anticipated lease rates only approximately 82% of the vacant remaining space needs to be leased to cover the current shortfall. The current shortfall between the debt payments made to the Banks and the funds received from rents is $58,415 per month. To date these shortfalls have been covered by DI from their current cash assets. In the next twelve months, DI will be unable to handle this shortfall, and then would need to call for assistance from the City's Guarantee. DI will be receiving the final 10% of the Federal HTCs from the project in late August/early September amounting to $2,111,331 and is requesting to reserve these monies to cover future cash flow shortages. Based on the terms of the Development Agreement, DI is obligated to use those funds to make principal payments on notes covered under the City's $25 million 20 -year guarantee. These funds, should they be allowed to be held for handling future debt service payments, represent approximately 36 months of shortfall given the assumption that no additional space is leased. This timeframe would be extended should the building lease additional space to future tenants. Using these funds for debt service rather than principal repayment moves the estimated debt payoff timeframe to 19 years, assuming the monthly rent shortfall can be corrected within the 3.5 years. The terms of the Development Agreement state that any debt still remaining after the 20 year guarantee will need to be paid by the City. The attached amendment to the Development Agreement would approve allowing the remaining Federal and State HTC proceeds be held for payments on indebtedness incurred for the redevelopment of the Roshek Building covered under the City's guarantee. In the event the project continues to have a shortfall after fully utilizing DI's funds and the $2,111,331 for debt payments, DI will be forced to call for the assistance through the City's guarantee. This assistance would most likely come in the form of a cash infusion to DI or leasing a portion of the building where the rents would facilitate the debt remaining on the project. I concur with the recommendation and respectfully request Mayor and City Council approval. Michel C. Van Milligen MCVM:jh Attachment cc: Bill Callahan, President, Dubuque Initiatives Rick Dickinson, Executive Director and Chief Operating Officer, Greater Dubuque Development Corp. Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager Teri Goodmann, Assistant City Manager David J. Heiar, Economic Development Director Dave Heiar, Economic Development Director 2 Masterpiece on the Mississippi Dubuque All- AmedcaCity 111 ri 2007 TO: Michael C. Van Milligen, City Manager FROM: David J. Heiar, Economic Development Director SUBJECT: Third Amendment to the Development Agreement with Dubuque Initiatives DATE: August 22, 2011 INTRODUCTION This memo is to seek City Council approval of a resolution amending the Development Agreement between the City of Dubuque and Dubuque Initiatives for the redevelopment of the Historic Roshek Building. The amendment would allow future State and Federal Tax Credit proceeds be used for payments on indebtedness incurred for the redevelopment of the Roshek Building covered under the City's guarantee. BACKGROUND A Development Agreement between the City and Dubuque Initiatives was approved on February 17, 2009 and amended on April 29, 2009 and May 16, 2011 to provide incentives and a guarantee for the redevelopment of the Roshek Building. The rehabilitation was done to encourage IBM to create 1,300 IT jobs in Dubuque. The $25 million Guaranty signed by the City required that proceeds from State and Federal Historic Tax Credits, New Markets Tax Credits, or a Developer Fee be required to pay down debt, thus limiting the exposure to a default by Dubuque Initiatives. Currently, the debt remaining covered by the Guaranty is $11,007,932.48. An additional Line of Credit was approved by the City Council on January 18, 2011 to be included in the guarantee, which will be used for new tenant buildout expenditures, should the tenant need such assistance. An additional rent will be paid by the new tenant to pay for funds drawn on the Line of Credit. DISCUSSION Approximately 60,000 square feet remain available for lease in the building for office uses on floors 2, 3, and 4, two tenant spaces are available in the Lobby, and 3 booth spaces are also available in the Lobby. The original proforma for the Roshek Building anticipated the entire building would be fully leased by the end of 2011. At current anticipated lease rates only approximately 82% of the vacant remaining space needs to be leased to cover the current shortfall. 1 The current shortfall between the debt payments made to the Banks and the funds received from rents is $58,415 per month. To date these shortfalls have been covered by DI from their current cash assets. In the next twelve months, DI will be unable to handle this shortfall, and then would need to call for assistance from the City's Guarantee. DI will be receiving the final 10% of the Federal HTCs from the project in late August/early September amounting to $2,111,331 and is requesting to reserve these monies to cover future cash flow shortages. Based on the terms of the Development Agreement, DI is obligated to use those funds to make principal payments on notes covered under the City's $25 million 20 -year guarantee. These funds, should they be allowed to be held for handling future debt service payments, represent approximately 36 months of shortfall given the assumption that no additional space is leased. This timeframe would be extended should the building lease additional space to future tenants. Using these funds for debt service rather than principal repayment moves the estimated debt payoff timeframe to 19 years, assuming the monthly rent shortfall can be corrected within the 3.5 years. The terms of the Development Agreement state that any debt still remaining after the 20 year guarantee will need to be paid by the City. The attached amendment to the Development Agreement would approve allowing the remaining Federal and State HTC proceeds be held for payments on indebtedness incurred for the redevelopment of the Roshek Building covered under the City's guarantee. In the event the project continues to have a shortfall after fully utilizing DI's funds and the $2,111,331 for debt payments, DI will be forced to call for the assistance through the City's guarantee. This assistance would most likely come in the form of a cash infusion to DI or leasing a portion of the building where the rents would facilitate the debt remaining on the project. RECOMMENDATION I am recommending approval of the attached resolution approving the Third Amendment to the Development Agreement allowing Dubuque Initiatives to use future State and Federal Historic Tax proceeds to be used for payments on indebtedness incurred for the redevelopment of the Roshek Building covered under the City's guarantee. ACTION STEP The action step is to approve the attached resolution. F: \USERS \Econ Dev \IBM \CIty DI Agreements\20110822 Memo DI DA 3rd amendment.docx 2 Prepared /Return to: David Heiar, Economic Development, 50 W. 13th Street, Dubuque, IA 52001 (563) 589 -4393 RESOLUTION NO. 311 -11 RESOLUTION APPROVING THE THIRD AMENDMENT TO THE ROSHEK BUILDING DEVELOPMENT AGREEMENT Whereas, a Development Agreement (the Agreement), dated February 17, 2009, was entered into by and between the City of Dubuque, a municipal corporation of the State of Iowa (City), and Dubuque Initiatives (Developer); and Whereas, this Development Agreement was amended (First Amendment) on April 27, 2009; and Whereas, this Development Agreement was amended (Second Amendment) on May 16, 2011; and Whereas, City and Dubuque Initiatives now desire to amend the Development Agreement as set forth attached Third Amendment, and Whereas, Dubuque Initiatives desires to use the remaining Federal and State Historic Tax Credit proceeds to be used for payments on indebtedness incurred for the redevelopment of the Roshek Building and covered under City's Guaranty. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF DUBUQUE, IOWA: Section 1. That the Third Amendment of the Dubuque Initiatives Development Agreement is hereby approved. Section 2. That the Mayor is hereby authorized and directed to execute said Third Amendment on behalf of the City of Dubuque and the City Clerk is authorized and directed to attest to his signature. Section 3. That the City Manager is authorized to take such actions as are necessary to implement the terms of the Third Amendment as herein approved. Passed, approved and adopted this 6f" day of Sept 'rO'pe�, 2011 Kev Firnstahl, acting City CI-rk F: \USERS \Econ Dev \IBM \CIty DI Agreements\20110906 DI DA 3rd amendment reso.doc Roy D. Buol, Mayor THIRD AMENDMENT TO DEVELOPMENT AGREEMENT BETWEEN THE CITY OF DUBUQUE AND DUBUQUE INITIATIVES This Third Amendment to Development Agreement, dated for reference purposes the 6thday of Sept , 2011, is made and entered into by and between the City of Dubuque, Iowa (City) and Dubuque Initiatives (Developer). Whereas City and Developer previously entered into a Development Agreement dated the 17th of February, 2009 (the Development Agreement), pursuant to which City provided a guaranty for certain indebtedness to be incurred for the redevelopment of the Roshek Building (the Guatanty); and Whereas the Development Agreement was amended by the First Amendment dated the 27th of April, 2009; and Whereas the Development Agreement was amended by the Second Amendment dated the 16th of May, 2011; and Whereas City and Developer have agreed to further amend the Development Agreement as set forth herein to allow for Federal and State Historic Tax Credit proceeds to be used for payments on indebtedness incurred for the redevelopment of the Roshek Building and covered under the Guaranty. NOW, THEREFORE IT IS AGREED BY AND BETWEEN THE PARTIES AS FOLLOWS: 1. Section 3.3(2) of the Development Agreement is amended by adding the following new subsection (e): (e) Proceeds from Federal and State Historic Tax Credits received by Developer after August 1, 2011 shall be held and may be used by Developer for payments on indebtedness incurred for the redevelopment of the Roshek Building and covered under the Guaranty. CITY OF DUBUQUE, IOWA By: Roy D. ol, Mayor By: Ke ' S. Firnst: I, Acting City Clerk DUBUQUE INITIATIVES William H. Callahan, President F: \USERS \Econ Dev \IBM \City DI Agreements\20110906 3rd Amendment to DI DA.docx