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FALCON HEIGHTS CITY COUNCIL MINUTES • June 8, 2005 -3- Public hearing on a housing program and the issuance of multifamily housing revenue bonds to finance a housm~ program under Minnesota Statutes Chapter 462C (continued) Council member Lindstrom asked if the cost of audits is included in the contract-that these costs are passed on. Attorney Halla said the indemnification will specifically mention that they are responsible for all legal costs, not only should anything come up with the project, but specifically for a tax audit. Mayor Gehrz said she had two questions. One goes back to the very basic principle of the ability of cities to utilize their lending authority for non-profit or tax exempt entities, and this is governed by the Federal IRS. Attorney Halla said there are actually two provisions. One is a State provision, 462C, which permits the City to issue bonds, and Internal Revenue Code, Section 103, and some other sections that say that the interest on those bonds is tax exempt. So it is a blending of State authority and Federal tax exemption. If there were no Federal tax exemption, people probably wouldn't be asking the City to do this. The City has issued general obligation debt before for City purposes, but the way a conduit transaction is set up the City's name will be on the bonds. The City issues the bonds pursuant to a trust indenture with, in this case, Wells Fargo Bank. Oppenheimer will buy those bonds. The money will be loaned, pursuant to a loan agreement between the City and the borrower to acquire the project, The Pines of Hutchinson. In that loan agreement the borrower will agree to pay everything that the City appears to be obligated to pay on the bonds and they will pay it directly to Wells Fargo. Wells Fargo will turn around and give the money to the bond holders. Once the bonds are issued, the City is totally out. The City will need to sign a raft of documents in connection with this but after that the payment stream runs from the borrower to Wells Fargo Bank. Mayor Gehrz said that in compensation for doing this and dealing with the raft of documents that will involve mostly the City Administrator and her, the City gets $25,000 at the time these papers are signed and the bonds are issued. Attorney Hallas said it is not unusual for cities to charge fees. The Port Authority of Saint Paul and Minneapolis charges a half percent to 1 % the first year and then a percent during the following years. A lot of cities have discovered that this is an important source of revenue. In this case, without the City of Falcon Heights stepping in or someone like Falcon Heights, Hutchinson probably would not have done the deal and the borrower would not have gotten tax exempt financing. It is a just compensation for what is happening. Mayor Gehrz said the City auditors attended the May 25 Council meeting and were asked where the $25,000 would show up on the financial report. They provided that information and it was to the City Council's satisfaction. Council member Talbot said that Hutchinson has a $10 million limit. He asked if they have exceeded it with this bond issue. Attorney Halla said they have not exceeded it but if they were to do this particular bond issue they would exceed it by about $5 million.