02-27-2002 Council Agenda - Laserfiche WebLink

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Es HLO C l E s I N C ERS MEMORANDUM S 1 S ! i DATE: February 11, 2002 TO: Joel Hanson, City of Little Canada FROM: Mark Ruff RE: Public Financing of Office Building As we have discussed previously, public financing of a construction loan for an office/retail facility would be unusual for a city. Our firm has not participated in any similar type of financing. The most similar project was in Hopkins, in which we did assist the City with full public financing of an 80 -unit townhome redevelopment several years ago. The good news is that the Hopkins project was very successful. We would offer a few comments regarding the financing. Advantages: Interest rate. Mr. Morton mentioned the high costs of issuance associated with a bond issue. Even thought this project would have costs of issuance of approximately 2% of the principal amount, the lower interest costs would more than offset the costs. We would anticipate that a 3- year temporary taxable G.O. tax increment bond would have an interest rate of approximately 4.25% to 4.75 %. Flexibility. The bond issue could be designed to be callable after only one year, which would allow pre- payment of the bonds if the project were successful in the short-term. Control. With construction financing, the City could control the type of tenant and the mix of tenants encouraged to initially lease the project. Risk/Reward. In exchange for the risk of lending the project funds up- front, the City could require a payment in excess of the loan amount at the permanent loan closing as a reward for its participation. The extra funds could be utilized for other redevelopment in the area. Patience of the City. Even if the developer did default on the project, the City could finance project on a longer -term basis to wait for the office market to return to a higher level of demand. Disadvantages: Risk. There is a reason that private lenders are hesitant to participate in this project. The project could fail and the City could be left to cover 100% of debt service plus operating costs on a facility with no tenants. The City may face pressure to rent to tenants paying lower rent in the short -term, which may cause problems for cash flow in the longer term.