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Caradco Landlord, LLC_IFA Collateral AmendmentMasterpiece on the Mississippi Dubuque bierd All-America City 1 2007 TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: Collateral Amendment for $4.5 Million IFA Loan to Caradco Landlord, LLC DATE: April 11, 2012 In March 2011, a Development Agreement for the redevelopment of the Caradco Building property was approved by the City Council. Part of that agreement included a $4,500,000 loan to the City by the Iowa Finance Authority. 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. Economic Development Director Dave Heiar recommends City Council approval of an amendment to the loan documents for the $4.5 million loan provided by the Iowa Finance Authority to the City of Dubuque, which has in turn been loaned by the City to Caradco Landlord, LLC for the Caradco Building Project. Caradco Landlord, LLC, the project developer, is in the process of closing on a New Market Tax Credit transaction. The New Market Tax Credit transaction will assist the project significantly in that it will bring additional funds to the project and reduce project risk. The New Market Tax Credit transaction will result in replacing approximately $6.5 million of American Trust loan funds with approximately $6.5 million of funds from a new party, the New Market Tax Credit investor. The City's collateral priority position will not change. In order to allow for the New Market Tax Credit transaction to occur, Caradco Landlord, LLC is requesting amendments to the following agreements: 1. Intercreditor Agreement; 2. Master Disbursement Agreement; 3. Master Subordination Agreement and Estoppel Certificate; and 4. Joint Mortgage. The New Market Tax Credit transaction will require amending the above documents to include the New Market Tax Credit investor -MRC XI, LLC -as a party to the documents. MRC is a single purpose entity created by Midwest Renewable Capital, LLC. Midwest Renewable Capital, LLC is an Iowa based Community Development Entity (CDE) that received a New Market Tax Credit allocation which will be invested in the project. That entity has created MRC for the purpose of facilitating the Caradco New Market Tax Credit transaction. Under the proposed amendments, American Trust would reduce its position to $4,663,971.00 and MRC would substitute into that portion of the financing which was reduced from American Trust's original commitment, in the amount of $6,458,371.00. It is important to note that MRC will actually be placing additional funds into the transaction as shown in the proposed revised Intercreditor Agreement and Master Subordination Agreement. However, only the $6,503,101.00 loan, identified in the documents as "MRC Loan A ", is secured by the mortgage. Under the existing agreements, American Trust's collateral position would be terminated upon receipt of the state and federal historic tax credits, leaving the City with the sole first mortgage to secure the $4.5 million IFA loan. Under the proposed amendments, both American Trust's and MRC's collateral positions will terminate upon receipt of the state and federal historic tax credits, leaving the City, again, in the position of having the sole first mortgage to secure the IFA loan. The City's collateral position is not substantially effected by the amendments because in both the original transaction and under the proposed amendments, the City's position is subordinate to approximately $11,000,000.00 of prior security interests. 2 The proposed amendments also contain other terms and provisions intended to facilitate the new market tax credit transaction. The revised documents are typical of a New Market Tax Credit transaction. The proposed amendments have been reviewed by City Attorney Barry Lindahl and attorney Bill Noth, the City's bond counsel. Revisions requested by Mr. Lindahl and Mr. Noth have been incorporated in to the proposed amendments. 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. Heiar, Economic Development Director' 3 Masterpiece on the Mississippi Dubuque kattil AII- America City 2007 TO: Michael Van Milligen, City Manager FROM: David J. Heiar, Economic Development Director SUBJECT: Collateral Amendment for $4.5 Million IFA Loan to Caradco Landlord, LLC DATE: April 10, 2012 PURPOSE The intent of this memorandum is to provide information relating to proposed amendments to the loan documents for a $4.5 million loan provided by the Iowa Finance Authority to the City of Dubuque, which has in turn been loaned by the City to Caradco Landlord, LLC for the Caradco Building Project. The City held a public hearing on this loan on June 21, 2010 and later approved the loan. 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 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 Landlord, LLC 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. 2 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 Landlord, LLC 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. Major elements of the loan agreement between the IFA and the City which was referred to in number 4 above, 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 3 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. In July 2011, the City Council approved a $4.5 million loan to the principals of Caradco Landlord, LLC, John and Mary Gronen. The Gronens used their interests in cash, money markets and real estate holdings in the City of Dubuque as collateral to secure this loan from the City. Business Investments (Real Estate) Gronen Properties, LLC Rouse & Dean Foundry Building, LLC Pine Box, LLLP Gronen Restoration, Inc. Upper Main Commercial Interstate Building, LLLP Caradco Building, LLLP Address 1056 Main Street 990 Washington Street 1789 Elm Street 1056 Main Street 1042 -1098 & 1069 -1091 Main St. 131 W. 10th Street 900 Jackson Street Special Notes: 1). 50% owner of Interstate Building, LLLP 2). With Intercreditor Agreement (see memo for details) Type of Mortgage Cash /money market 1st mortgage 2otl mortgage Cash /money market 2 "d mortgage 2nd mortgage' 1st mortgagee Existing First Mortgage N/A N/A $176,229 N/A $456,719 $972,943 $677,611 Estimated Net Market Value Ma v 1. 2011 $140,000 $92,400 $1,009,107 $595,000 $834,046 $712,029 $1,125,629 $4,508,211 The Gronens had 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 five properties is just over $4.5 million. The business ventures (Gronen Properties, LLC and Gronen Restoration, Inc.) provided $735,000 of liquid collateral in the form of cash and money markets. These values and estimates had also been reviewed for accuracy by Honkamp Krueger prior to submittal to City staff. The City received a 2nd mortgage on three of the properties, a 1st mortgage on the Rouse and Dean Foundry Building, and a joint 1st mortgage with American Trust on the Caradco Building. Some of these properties are jointly owned with other business partners. The City's mortgages on the Gronen's portion of the properties have been recorded. 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 put the City in control of the assets. A second mortgage would require the City to buy out the 1st mortgage to have control of the property. Pursuant to the joint first mortgage, American Trust loaned the project $11,000,000 and the City loaned $4,500,000. Both loans are a first mortgage. However, there is also an Intercreditor Agreement between American Trust and the City which gives the bank priority in the event of a default. Based on the original proforma for this project, federal and state historic tax credits will be utilized to repay the American Trust loan. Historic tax credits are brought into the project upon completion of the rehabilitation and final approval by SHPO and the National Park 4 Service. Based on completion of this project by December 2012, we anticipate these funds will be brought into the project by the end of 2013 or early 2014. At that point, the loan to American Trust would have been be paid in full. At that point, American Trust would have been be released from the joint first mortgage and the City would be the sole party to that mortgage which will have first priority over all other debt on the project. The risk period for the City is the time between the closing on the American Trust and City loans, and the recovery of the tax credits in 2013 or early 2014. During this window, much of the City's collateral will be in the form of the 2nd mortgages on three other Gronen properties. Upon the completion of the 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 in 2013 or early 2014, the City will have the sole first mortgage on the project, which should more than cover the City's loan. At that time, staff will recommend that we release the security on the other five Gronen properties. The loan terms between the City and Caradco Landlord, LLC are the same as the terms the City has with IFA. Caradco Landlord, LLC 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. DISCUSSION The loan documents, liens and mortgages as described above have been signed and recorded on the Caradco project. However, in an effort to further the project, the Gronens, on behalf of Caradco, are in the process of closing on a new market tax credit transaction. The new market tax credit transaction will assist the project significantly in that it will bring additional funds to the project and reduce project risk. In simple terms, the new market tax credit transaction will result in replacing approximately $6.5 million of American Trust loan funds with approximately $6.5 million of funds from a new party, the new market tax credit investor. The City's collateral priority position described above will not change. In order to allow for the new market tax credit transaction to occur, Caradco Landlord, LLC is requesting amendments to the following agreements: 1. Intercreditor Agreement; 2. Master Disbursement Agreement; 3. Master Subordination Agreement and Estoppel Certificate; and 4. Joint Mortgage. The new market tax credit transaction will require amending the above documents to include the new market tax credit investor -MRC XI, LLC -as a party to the documents. MRC XI, LLC is a single purpose entity created by Midwest Renewable Capital, LLC. Midwest Renewable Capital, LLC is an Iowa based CDE that received a new market tax credit allocation which will be invested in the project. That entity has created MRC XI, LLC for the purpose of facilitating the Caradco new market tax credit transaction. 5 Under the proposed amendments , American Trust would reduce its position to $4,663,971.00 and MRC XI, LLC would substitute into that portion of the financing which was reduced from American Trust's original commitment, in the amount of $6,458,371.00. It is important to note that MRC XI, LLC will actually be placing additional funds, beyond the $6,458,371.00, into the transaction as shown in the proposed revised Intercreditor Agreement and Master Subordination Agreement. However, only the $6,503,101.00 loan, identified in the documents as "MRC Loan A ", is secured by the mortgage. A comparison of the loan amounts and the parties' respective positions as the transaction now exists and under the proposed amendments is as follows: Loan Amounts and Priority Position under Loan Amounts and Priority Position Existing Documents: under Proposed Documents 1. American Trust and Savings Bank $12,342,474.00 (now reduced to $11,000,000.00) 2. City of Dubuque $4,500,000.00 1. American Trust and Savings Bank $4,663,971.00 2. MRC XI, LLC $6,503,101.00 3. City of Dubuque $4,500,000.00 4. MRC XI, LLC $2,999,129.00 Under the existing agreements, American Trust's collateral position would be terminated upon receipt of the state and federal historic tax credits, leaving the City with the sole first mortgage to secure the $4.5 million IFA loan. Under the proposed amendments, both American Trust's and MRC's collateral positions will terminate upon receipt of the state and federal historic tax credits, leaving the City, again, in the position of having the sole first mortgage to secure the IFA loan. The City's collateral position is not substantially effected by the amendment s because in both the original transaction and under the proposed amendments, the City's position is subordinate to approximately $11,000,000.00 of prior security interests. The proposed amendments also contain other terms and provisions intended to facilitate the new market tax credit transaction. The revised documents are typical of a new 6 market credit transaction. The proposed amendments have been reviewed by City Attorney Barry Lindahl and attorney Bill Noth, the City's bond counsel. Revisions requested by Mr. Lindahl and Mr. Noth have been incorporated in to the proposed amendments. RECOMMENDATION /ACTION STEP The City Council is requested to authorize the City Attorney to review and approve the proposed amendments to the project documents and authorize the City Manager to execute the same on behalf of the City. F: \USERS \Econ Dev \CARADCO \IFA Loan Collateral\20120411IFA Loan Collateral Caradco Memo Amend Restated D.docx 7