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EDA 2001 03 21CHANHASSEN ECONOMIC DEVELOPMENT AUTHORITY SPECIAL MEETING MARCH 21, 2001 Chairman Boyle called the meeting to order at 6:30 p.m. MEMBERS PRESENT: Linda Jansen, Craig Peterson, Bob Ayotte, Jim Bohn, and Gary Boyle MEMBERS ABSENT: Steve Labatt and Mark Kroskin STAFF PRESENT: Todd Gerhardt, Assistant City Manager APPROVAL OF MINUTES: Craig Peterson moved, Linda Jansen seconded to approve the Minutes of the Economic Development Authority meeting dated March 1,2001 as presented. All voted in favor and the motion carried unanimously. MORTGAGE FORECLOSURE ON CHANHASSEN BOWL PROPERTY, CHANHASSEN VENTURES, LLC. Boyle: Todd, would you like to run through the options for us? Gerhardt: Sure. The item before you is the mortgage foreclosure on the Chanhassen Bowl property or Chanhassen Ventures LLC. Staff did a response to some of the questions brought up at our last meeting. We researched the real estate tax implication and bottom line on that is, as long as the bowling alley, if you should happen to buy the bowling alley and it remained open, you would have to pay property taxes. If you bought the bowling alley and closed the doors, and filed for tax exempt before July 1st, the property would be tax exempt for 2002 and until you would change the use of the facility. The use of the facility could not be used for any private business so you either just leave it vacant. You could use it for city storage of material. Temporary. Library, any public type use that you would deem appropriate. Bohn: What would the taxes be on that? Insurance being empty. Gerhardt: Empty? You're looking at insurance probably of, my guess would be oh, $4,000 to $5,000 a year would be my guess. So I think that answers the question you had regarding the taxes. Continue to negotiate with Heritage National Bank. Staff had talked with Tom Jacobson, who is the President of Heritage National Bank and again they are not interested in re-negotiating the first mortgage principal amount. And that if we should decide not to buy the bowling alley, that would be fine with him. He believes he would have enough equity and holding power for what the value of the building has until it did get redeveloped. So I know he's been approached by several other people and I think that's kind of the pat line he's been giving to anybody that's asked to reduce the first mortgage. It was a tough way to negotiate. I mean when you sit on a building that's probably worth $1.2-$1.1 million and he only is obligated $385,000. He has no real reason to negotiate so, even though we've itemized out all the expenses that go along with it, and it eats up that 1.1 fairly quickly, he's got a little better cushion than we do with the $140 was owed us so. And then he's have to pay real estate taxes but I'm sure you'd file a tax petition to try to get the value lowered because I don't believe the bank would continue to run it as a bowling alley so, but I don't know. But we did not get any ground on that so. The next response I had was the different financing options. We looked at a taxable lease revenue bond and the rate on that would be 7.75. Term, we used 12 years with estimated annual payments of about $140,000. I've attached the Sources and Use Statement Economic Development Authority - March 21,2001 showing the source of funds and the use of those funds coming up to a total bond amount of $365,000. In comparing that to what would be basically a private issue, the difference is a little bit in the interest rate and also the cost of issuance so the $35,000 we thought was a little excessive to try to solve a short term problem of 4 to 5 years is what we expect to hold this property for. Option #2, we contacted both the Chanhassen Bank and Americana Bank. And the rate, thanks to the feds this last, yesterday, it's definitely down to 8% so, and that's not negotiating. And both banks are willing to work with us. Some just thought about starting a line of credit and just borrowing off of that and paying interest. Another one recommended amortizing it out like a mortgage. So either would do those types of financing options. We used basically the same term at $143,000 as an annual payment, and there would be a smaller application fee. The banks did say they'd want to see an updated appraisal and would like to look at the current environmental. I got a Phase I environmental from Bob Copeland who was looking at buying the bowling alley property and he also provided me an appraisal that he used as a part of his purchasing of that property. And that appraisal I believe showed a value of $1.2 million. And that dealt with when we were going to remodel the bowl and put Pauly's restaurant in there and some other retail. And with that redevelopment it would have had a value of $3.1 million. But the $1.2 you should know put a heavy emphasis on the building component to that value, and I think we're looking at it the other way around. Having the land to have the value and the building being a liability. So Option #3, which was a Promissory Note between the EDA and the City of Chanhassen. Currently Bruce, in our finance department who invests the city money has been seeing rates of around 5%. 5 ½% with this reduction. It happened yesterday. His money got cheaper too so we are suggesting if you should happen to approve buying the bowling alley tonight, to ask the City Council to enter into a Promissory Note with the EDA and we base that on no out of pocket costs for appraisals, environmental, application fees, lower interest rate. It takes your annual payments from $143,000 down to $60,000 so that reduces your carrying cost. And even that 6% probably could even be lowered down to 5 or 5 ½% of your carrying cost. So outlining the expenses, to pay off the first mortgage it's roughly about $385,000. Pay off the back taxes is roughly $385,000. The 2001 real estate taxes are estimated at about $88,000. So out of pocket costs needed to buy the bowling alley would be $858,000. Other costs that you should be aware of is the City's second mortgage of $140,000. The City's holding cost each year. I threw in one year's holding cost at 6% of $60,000. There's a party wall for part of the movie theater's west wall that needs to be replaced if you should tear down the bowling alley or you'd have to let somebody else, whoever the bowling, disclose that that needs to be done. That's estimated at $50,000. Mr. Bloomberg's parcel that sits on the south side of the entrance to the bowling alley, Mr. Bloomberg has stated that he's looking for around $70,000 for that. Staff has talked to him to see if we could enter into some type of option agreement. He wasn't inclined to do that. He sees this as his holding power to see how the property's redeveloped and how it affects him as a landowner in the area. But he is encouraged by the EDA's efforts to try to redevelop this site. He has also submitted as a part of a group to work on the redevelopment of this area. He would like to be one of the groups considered to redevelop this area with a group of Brad Johnson, Ray Mithun, who is the current owner of the movie theater, and basically everybody that has an interest in that area. So we did get a proposal from that group. We haven't reviewed it in detail yet so once we have we'll make a report back to you next month. So the total other costs are about $370,000 so if you add the total expenses and other costs you're at $1,228,000 potentially after your first year of holding the property. So that kind of leads you into what is our goal here as redevelopers of this site and I think just from a staff's perspective I'm looking for direction from the EDA to kind of prioritize these things that we're looking at trying to control the site. What is going to go in there. To try to get as much money back out of the project as we can. Try to maximize our investment and get it back out. But realizing that that might not be accomplished. That was one of my reasons why I outlined the $1.2 for you so I just want everybody up there to know that if we don't get a million 3, a million 4, a million 5 for it, that we knew that when we went into it. So with that if the EDA is interested in purchasing the bowl property, staff has put a potential motion together for you. The one thing I would ask Economic Development Authority - March 21,2001 to amend that motion under number 1 that you would not include the bid amount. That changes from day to day so the $384,623.00, that may fluctuate so instead of locking us into an exact amount, if you could just purchase and redeem the Chanhassen Bowl property on Wednesday, March 28th period, or for whatever the cost may be at that time. And we've got 3 so we do have a quorum tonight. I would leave it up to the council if they want to act on the promissory note tonight or if you want to wait until the 26th meeting and that would deal with item number 2. And item number 3 would also help us out down the line to authorize the authority's use of a taxable lease revenue bond in the event the city wishes to improve it's liquidity. So if there's summaries in that, we need cash right away that we could go out and buy lease revenue bonds to make us whole in that bond payment so we have asked that you approve that resolution. With that I'll take any questions that the EDA may have. Boyle: Thank you Todd. Should we, once more and I would say somewhat quickly, evaluate the negatives and positives of owning this property again or is that necessary at this stage. That's my question? Craig, what would you like to comment. Peterson: I guess the only thing I'd really like to review is just kind of put Todd on the spot just a little bit and saying what's your professional opinion as far as how long we would more than likely hold it and what do you think of a medium cash scenario would be for the price? I mean are you thinking in the back of your mind, holding it for 6 months and it's $1.4 million or, I mean just give me your gut. Gerhardt: Well I think you're going to hold it for a minimum of 2 years. You're talking about potentially what we want to see on there are retail users and to line of tenants, for the tenants to do their interior space finish up, dealing with banks, going through the city site plan approval process, that takes 3 months and that's if you've got your plans and specs done today. And we're already going up against April here so finding somebody that will go out and market the site. There are people interested. Ken Brink is here from CB Commercial. He's been trying to market it for the last 6 months. He knows of some potential buyers out there, but I think to find the use that you might be looking for on there, it's going to probably take at least 2 years at a minimum is what I guess. Peterson: At a price of? Gerhardt: Well, right now the site, you're up against the high end for the land for what you're buying. $10.00. The only parcel that I'm aware of in the area that has sold for $10.00 or more is the Richfield Bank and Trust building. And it was a bank so banks are one of those type of uses that will pay more for a piece of property for a presence in a community and in Richfield's case they probably could cost average that against some of their other sites that they paid a lot less for. And you look at a bank on this site, it has potential but you've got the drive thru which will play havoc with trying to maximize the density of the site. We do have several other banks in the community already. I think if we were buying this piece of property, I think we're doing it to try to find other retail users than a bank. If you put a mixed use development together on it, that makes it a lot more complicated. Say if you had retail on the bottom and apartments up above. The nice thing is that you're starting to see that more and more in the Twin Cities so banks are feeling better at lending money to those types of projects. It's always scary when you mix uses. That always creates controversy sometimes. I know that the apartments and the restaurant and drug store over in Richfield where Champs was always a bone of contention with the apartment people so that complicates it. I think if you're going to try to get your money out of it, density plays a big factor in it. The denser the project, the more opportunity that you'll get your return out of that investment. So if you're looking at like one single restaurant to go in there, they're only going to be able to probably pay $8.50-$9.00 a square foot for the land area. But somebody will be able to pay a little bit more but it's, you have a better opportunity Economic Development Authority - March 21,2001 with a density type project to get more on your return. If you put the apartments up above and the retail down below, you're both using that same land that the building sits on so. Ayotte: But that's to make money. If our prime objective is simply to control or influence what goes there, my thought would be is a quick turn. Pick it up. Control what goes there. Turn it quickly because we want to mitigate the risk of any additional expenses by going longer down the road. So that's my feeling and I would feel much more comfortable if we would clearly state collectively if that's what our objective's going to be. So if we're going to want to control what goes there and turn it quickly, then we would think less about a more complicated project. True? Gerhardt: That's why I brought it up. I'm looking for that direction from you. I'll work either way with it. I thought I heard in the past that people are more apt to lean towards the appropriate use for this site than to spin it off for an auto repair facility, just as an example. Ayotte: Unless it works on trucks. Gerhardt: Truck repair too. Peterson: What does the 1.2 equate to on square foot when we calculate it? Gerhardt: It's about $10.00 a square foot. Peterson: It is 107 Boyle: That would be the max on it. Gerhardt: Yeah. Peterson: That's if we put up the wall and spend $50,000 there and $50,000 demolishing so that lowers it by about a buck? Gerhardt: Yeah. Jansen: Well and Mr. Chair, if I might add, though the mixed use is complicated, and 2 years might seem like a long period of time, one of the conversations that Todd I believe you had with Len Simich was around the idea of doing a transit friendly development on this particular property, like they're doing in Eden Prairie on the hub that's there. And the only thing that's holding that back right now is the construction of the parking ramp, which is going to happen this spring but they've got users lined up for that site and it's going to be housing on the west side and more commercial and office space on the east side. So we're also looking at the fact that this is our park and ride site and if in fact we could bring in a mixed use on the site, you now have people who are living in an area where they can hop on their transit and then they're also right in the core of the downtown for all of their services. So that is one of those, it is thinking big and it's a lot of visioning but if it's the right thing to do on our downtown area, then to simply try to rush this thing and turn it around might not be in the best interest of having the downtown developed the way we would like it to. And we can certainly explore all of those opportunities and Todd mentioned we've already had one group approach us that would like to work with us on the site. I gather there are others that once this thing works it's way through we may be approached and I think there's a lot of opportunity to it. Versus being too skeptical about the length of time or worrying about the carrying. Economic Development Authority - March 21,2001 Probably ifI put my city council hat on, that's where I look at the cash that we're bringing over to do this, but staff has come up with this clause in here for us to be able to bump that back and have the city be able to go out then for the loan instead. So I thought that was an excellent fall back position on the cash situation. But I don't know, maybe I'm thinking too big picture but I look at it as opportunity though. I'm seeing the risk and wanting to acknowledge that and still push but 2 years is probably real realistic as far as development. That being as fast as it might develop. Boyle: Jim, would you like to say something? Bohn: It's the center of the downtown and there's only so much land in downtown. I think the value's there and I think it's going to come. It may not come today. It may not come tomorrow but maybe next week. I agree with Linda. Boyle: Okay. Are there any other questions? Comments? On the motions, would they be one at a time? Gerhardt: Sure. Boyle: Probably be best. Gerhardt: Yeah. Boyle: So I'm going to ask for a motion for, a motion to approve purchase/redeem the Chanhassen Bowl properties on Wednesday, March 28, 2001. May I have a motion. Peterson: So moved. Boyle: Second? Jansen: Second. Boyle: Discussion. If there is no discussion the motion carries. Peterson moved, Jansen seconded that the Economic Development Authority purchase/redeem the Chanhassen Bowl properties on Wednesday, March 28, 2001. All voted in favor and the motion carried unanimously 5 to 0. Boyle: Number 2. Approve a promissory note to the EDA and the City of Chanhassen in the amount of $865,000 with the proceeds used to pay off the first mortgage and delinquent and current taxes. Motion? Ayotte: So moved. Bohn: Second. Boyle: Discussion? Ayotte moved, Bohn seconded that the Economic Development Authority approve a promissory note to the EDA and the City of Chanhassen in the amount of $865,000 with the proceeds used to pay off the first mortgage and delinquent and current taxes. The City of Chanhassen reserves the right to Economic Development Authority - March 21,2001 require full payment of the total outstanding balance due at any time during the term upon 90 days written notice. All voted in favor and the motion carried unanimously 5 to 0. Boyle: Number 3. Authorize the Authority's use of the Taxable Lease Revenue Bonds in the event the City wishes to improve it's liquidity in the future. Motion? Bohn: Motion it. Boyle: Second? Jansen: Second. Boyle: Discussion. Bohn moved, Jansen seconded that the Economic Development Authority authorize the Authority's use of the Taxable Lease Revenue Bonds in the event the City wishes to improve it's liquidity in the future. All voted in favor and the motion carried unanimously 5 to 0. Boyle: Do the council members want to proceed with the promissory note portion tonight or do you want to wait until the 26th? Jansen: Do it tonight? Okay. Gerhardt: Before the EDA adjourns, I'd just like to publicly update you on the Presbyterian Homes. Some of you may be a little surprised not to see it on the agenda. Last Wednesday I received a phone call from Julie Frick who's the Executive Director of the Carver County HRA. She is very interested in the Presbyterian Homes project and is looking at maybe investing some money into this project and entering into a long term lease on some of the affordable units. So we were hoping to have our numbers done last week and evaluated a proforma but her interest in that project would change all the numbers dramatically. So Alan Black from Presbyterian Homes has been communicating with Julie and they're working on the numbers now so I would hope to have something back to you within the next 2 to 3 weeks. Boyle: Great. Jansen: That's really great news. A positive delay. Gerhardt: Yep, we like that. Money's always good. Boyle: What is this second page, I just now saw it. It was laying here. Gerhardt: That's some language that we're going to include in that promissory note that wasn't included in the original and so, I'm sure your motion included that language in there. Jansen: As amended? Gerhardt: We'll make sure Nann has that in the minutes. Chairman Boyle adjourned the Economic Development Authority meeting. Economic Developmem Authority - March 21,2001 Submitted by Todd Gerhardt Assistant City Manager Prepared by Nann Opheim