HomeMy WebLinkAboutFS 2014-08-19 Item 2F - Resolution - Financing Plan for Urban Renewal Tukwila International BoulevardTO:
City of Tukwila
Jim Haggerton, Mayor
INFORMATIONAL MEMORANDUM
Mayor Haggerton
Finance & Safety Committee
FROM: Peggy McCarthy, Finance Director
DATE: August 13, 2014
SUBJECT: Financing Plan for Urban Renewal Tukwila International Boulevard (TIB)
Redevelopment Project
ISSUE
Council is being asked to approve the proposed financing plan for the urban renewal Tukwila
International Boulevard (TIB) Redevelopment Project.
BACKGROUND
In 2013, the City began budgeting for a project intended to reduce crime through acquiring key
properties within the City's urban renewal zone. On April 22, 2013 the City Council approved an
ordinance authorizing the City to use condemnation, if necessary, to purchase up to seven
properties in the urban renewal zone. Those properties were the: Boulevard Motel, Great Bear
Motel, Jet Inn Motel, Knight's Inn Motel, Pawn Shop, Smoke Shop, and Spruce Motel. The City
then conducted appraisals, contacted the property owners, and began evaluating the properties
to determine a purchasing strategy.
On August 27, 2013 the City helped the Federal Government seize three crime-involved
motels: Boulevard Motel, Great Bear Motel, and Traveler's Choice Motel.
As a result of the motel seizures, and the inability to reach a mutually agreeable purchase with
the owner of the pawn shop property within the timeframe necessary to meet the needs of a
potential commercial tenant, the City ended negotiations on that property and determined instead
to purchase the Traveler's Choice motel, the only seized motel that was not originally in the urban
renewal plan. The Council was briefed on these matters early in 2014.
In August 2014 the City purchased two of the seized motels at the appraised value (the Great
Bear and Traveler's Choice) from the Federal Government and is close to completing the
purchase of the Boulevard Motel. The City then plans to purchase the Spruce Motel and Smoke
Shop.
On August 4, 2014, the Council authorized the use of interfund loans to temporarily finance the
property purchases until a financing plan could be developed and executed.
The current estimated cost of the project, excluding property management costs, is $6,100,000;
the estimated proceeds from the future sale of the land is $2,250,000 yielding a net estimated
cost to the City of $3,850,000.
39
INFORMATIONAL MEMO
Page 2
DISCUSSION
The City, in conjunction with its financial advisor the PFM Group, considered various financing
options for the redevelopment project. Based on in-depth analyses, the recommended plan is as
follows:
• Enter into a $2,250,000 taxable line of credit for acquisition costs estimated to be
recoverable through future property sales; funds would be drawn as needed and the line
would be paid off upon sale of the land.
• Issue $3,850,000 20-year taxable bonds for the estimated net cost to the City.
• Annual debt service under this plan would approximate $313,000 for 2015 — 2016 and
$287,000 for 2018 — 2034,
A detailed discussion and analysis of the options is presented in the attached Recommended
Financing Plan for Tukwila International Boulevard (TIB) Redevelopment Project. In the Plan,
Scenario 3 is the recommended option.
RECOMMENDATION
Council is being asked to approve the resolution adopting the proposed financing plan and
consider this item at the August 25, 2014 Committee of the Whole meeting and subsequent
September 2, 2014 Regular Meeting.
ATTACHMENTS
-Recommended Financing Plan for Tukwila International Boulevard (TIB) Redevelopment Project.
-Draft Resolution: Adopting a Financing Plan for the Urban Renewal Tukwila International
Boulevard (TIB) Redevelopment Project.
40
The PfM Group
City of Tukwila, Washington
Recommended Financing Plan for
Tukwila International Boulevard (TIB) Redevelopment P 'ect
August 19, 2014
Overview Financing Goals
The City plans to acquire certain improved property on Tukwila International Boulevard for the
purpose of redevelopment. As part of its redevelopment plan, the City will demolish the
improvements and offer the vacant land for sa|e, subject to certain development conditions. It is
estimated that the property acquisitions will occur in 2014 and early 2015 and cost
approximately $5.100.000. The City estimates it may take up to three years (or possibly more)
to sell the property, which is estimated to produce proceeds of $2,250,000. While the City
expects the redevelopment to provide long term strategic benefit to the City, the transactions
are expected to result in a net cost to the City of $3,850,000.
The City wishes to finance the cost for the acquisition of property, estimated at $6.100.000. in
order to amortize the cost over a period of twenty years. The City would also like to have the
ability to use proceeds from the sale of properties (estimated at $2.250.000) to redeem or
prepay debt, in order to reduce overall interest cost.
Financing Considerations
In reviewing the City's financing options, we focused on two questions, which are addressed in
this section:
1) Could the City use lower cost tax-exempt financing for a portion of the p j ct under
Internal Revenue Service (IRS) ru|es, and under what conditions; and
2) Given the short term nature of an estimated $2,250,000 of p ject cost, can we reduce
the term and, therefore, the overall cost, for a portion of the borrowing without taking on
an inordinate amount of risk?
Taxable versus Tax Exempt Bmrrowing Considerations
While the City can benefit from tax exempt borrowing for p jects defined by the IRS as
governmental purpose," certain projects tsmreconsideredbythe|R8tnbe''non'governnoenta|"
due to the actual or perceived private benefits of the pr j*ot. Tax exempt financing offers the
City savings in interest cost, but requires that certain restrictions are met in regard to use of the
proceeds and to whom the properties will be sold. Taxable financing provides the City with the
most flexibility in the use of proceeds, timing of the sale of the properties and who they may
entertain bids from in the sale of the property.
The PFM Group
In order to issue tax exempt bonds, the City must reasonably anticipate the ability to meet IRS
restrictions as summarized by Foster Pepper PLLC, the City's Bond Counsel.
1) The properties financed must be sold no later than 18 months after the date of the first
expenditures on purchase of the Property;
2) The City may not enter into any kind of agreement with the purchaser of the property to
receive additional payments associated with the property (for example, no agreements
that the purchaser will pay extra if the property is not developed in three years); and
3) The amount of tax exempt financing does not exceed the actual sale proceeds received
by the City when the property is sold.
4) Alternatively, the City could commit to restrict the sale of property to a non-profit
purchaser and qualify for tax exempt financing although this would restrict the potential
pool of purchasers, and could result in lower sales prices for the properties.
Due to the limitations above, the City would be compelled to meet certain time constraints,
limitations in terms, or limitations in who could buy the property, all of which may reduce the
overall value and effectiveness of the redevelopment pr ject. Given the expectation that the
City would use the proceeds of sale to prepay or redeem debt, effectively the benefit of tax
exempt financing would primarily apply to the $3,850,000 of debt financed for a longer term.
We evaluated the difference in debt service between an all taxable bond issuance ($6,100,000)
and a combination ($2.25 million taxable and $3.85 million tax-exempt) and determined it is
approximately $380,000 or $19,000 per year for 20 years. On a net present value basis, this
benefit would be lower. Given the relatively small potential savings from using a portion of tax
exempt bonds, and the level of conditions or restrictions it would impose upon the City, the City
would be best served by using a fully taxable financing for the project.
Options to Reduce Overall Financing Cost
Because a portion of the financing will be paid from proceeds of the sale of property, estimated
to occur within three years, we reviewed financing options that included a combination of short
term financing ($2.250.000) and long term financing ($3.850.000). as compared to options for
long term financing with the option of defeasing or prepaying bonds with sale proceeds.
2
42
The PFM Group
These options are summarized be|Vw, and are based on an all-taxable financing p|on, as
discussed above. Appendix A includes more detailed descriptions of the three Scenarios,
Scenario ---�--
Number
—
Descripon of Scenario
Debt
Service
Net Present
Value D/S
Comments ---
Benefits and Risks
1
Issue $G.1OO.O0Oof2O'yoar
bonds in 2014. Use
proceeds of property sales
to prepay bonds on the first
possible date, in 10 years
$8.220.351
$6.171.160
• Lock in today's rates
• Minimize interest rate risk
• Potential higher total debt
service overall
• Higher near-term payments
2
Borrow $G.1UO.OU8 for short
term in 2014; issue long
term bonds for the net
amount of borrowing (est.
�3.850.000)in2017
7.870.365
5.70 .787
• Lower short term interest
rates
• If long term rates rise less
than 1.5O%kz185Y6
between 2014 and 2017,
lower total O/8
• High degree of interest rate
exposure on $3,850,000
3
Issue $3,850,000 of 20-yea
bonds in 2014 and enter
into a $2,250,000 Line of
8.053.175
5.029.711
• Lock in today's rates on
$3,850,000 long term
portion
Credit in 2014, due in 2017
• Lower short term rates on
$2,250,000 portion
• Matches term of each
portion with expected need
• Interest rate risk on short
term portion, but for a short
term period
• At current market rates,
savings estimated at
$165.000. Even if short
term rates rise to3.85%
(from about 1.0% today),
same cost as Scenario 1
Recommendation
Given the City's goals of financing the acquisition of pnoporty, with the ability to use proceeds
from the sale of properties (estimated at $2.250.000) to redeem or prepay deUt, in order to
reduce overall interest nost, we recommend Scenario 3, which is a combination of short term
financing of $2,250,000 and long term financing of $3.850.000. The interest rate risk for this
scenario is limited to the smaller amount and shorter term, and is expected to provide overall
debtnen/icenavingscnmparedk)a|nnQtmrmisnuancenf$5.1OO.00OoTbmndstoUay.
As shown in Appendix B. Scenario 3 will also provide for a lower annual debt service payment
and more effectively spread the financing cost over a twenty year term.
4
44
The PIM Group
Appendix A
Description of Scenario 1:
Scenario 1 assumes the City issues all of the estimated $6.1 million in project costs up front in a
taxable bond issuance (20 year term) in October 2014. The use of the sale proceeds (at the
time of sale), estimated at $2.25 million, will be used to fund an early redemption account, to caII
the bonds at their ten year par caII. This scenario produces approximately $8,220,361 in total
debt service over the 20 year Iife of the financing. The present value of the debt service,
discounted at 3.8096. is approximately $6.171.610.
Benefits:
• Mitigate interest rate risk by locking in financing today
• Timing of sale proceeds will have minimal effect on overall financing costs
• Take advantage of historically low interest rate environment
• Simplicity in financing process
Risks:
• If rates remain the same the financing would have the greatest cost
• If $2,250,000 bonds are not prepaid from property sales proceeds, the full $6.1 million
will be outstanding for a greater amount of time, creating costs greater than shown here
Estimated Average Annual Deb Service 2015—ZOZ4: $451.000
Estimated Average Annual Debt Service 2025 — 2027: $340.000 (excluding prepayment from $2.250.000)Eshma0ad
Average Annual Debt Service 2028 : $52.000
Description of Scenario 2:
Scenario 2 assurnes the City issues short term financing for the estimated $6.1 million in p jeo
costs in October 2014. As properties are so|d, the sale procaods, estimated a\$2.25 miUion,
would be used, along with $3,85 million financed as a long term taxable bond insuence, to take
out the short terrn financing. This scenario produces approximately $7,870,365 in total debt
service over the 20 year Iife ofthe financing. The present value of the debt service, discounted
at 3.80Y6. is approximately $5.703.787.
Benefits:
• Utilize short term rates up front
• If interest rates remain the same the financing cost would be lower than scenario 1
5
Rinks:
°
Take out finance timing is uncertain, contingent upon sale of property
�
Significant interest rate risk
• If interest rates rise more than 1.50% - 1.85% between now and 2017, the overall cost of
the financing would be greater than scenario 1.
• Interest rates have been 1.596 higher than today's rates approximately 85% of the time
over the past 20 years.
Estimated Average Annual Debt Service 2015-2O1O: $93,000
Estimated Average Annual Debt Service 2018-2O34: $314.000
Description of Scenario 3:
Scenario 3 assumes the City undertakes the financing in two parts in October 2014:
1. A 3 to 5 year line of credit for $2.25 million in project costs in October 2014. The line of
credit would be drawn as needed to purchase property and re-paid upon sale of
property. Although the line of credit would carry a variable rate of interest, the current
rates are approximately 1.0Y6. leaving significant buffer for interest rate risk.
2. A$3.85 million 2O' year taxable bond, also issued in October 2O14.
This scenario produces approximately $8,063,175 in total debt service over the 20 year life of
the financing. The present value of the debt service, discounted at 3,80%. is approximately
$6,029,711.
Benefits:
• Mitigate interest rate risk by locking in a large portion of the financing today
• Flexibility with the timing of a portion of funding using the line of credit
• Take advantage of historically low interest rate environment
• Lower debt service than Scenario 1
Risks:
• More interest rate exposure than Scenario 1, but much less than Scenario 2
• If properties are not sold in 3 to 5 years, the City may need to refinance the debt for long
term, which may result in higher interest rates over the long term.
Estimated Average Annual Debt Service 2O15-2O16: $313.000
Estimated Average Annual Debt Service 2O18-2V34: $287.000
6
46
The
Period
Ending
12/1/2015 $ 451,439 $ 451,439 $ 96,197 $ 313,733
12/1/2016 453,154 453,154 91,119 312,919
12/1/2017 450,949 450,949 2,338,463 2,556,417
12/1/2018 452,396 452,396 312,726 288,614
12/1/2019 452,721 452,721 316,700 285,622
12/1/2020 451,805 451,805 314,945 286,910
12/1/2021 450,123 450,123 317,118 287,670
12/1/2022 452,730 452,730 313,378 287,927
12/1/2023 454,177 454,177 313,738 287,484
12/1/2024 3,079,744 449,744 313,469 286,526
12/1/2025 337,694 449,565 312,610 285,033
12/1/2026 341,714 453,585 315,924 288,079
12/1/2027 339,713 451,583 313,476 285,459
12/1/2028 52,005 453,876 315,403 287,443
12/1/2029 450,242 316,619 288,822
12/1/2030 450,857 312,094 289,574
12/1/2031 450,490 312,124 284,681
12/1/2032 - 449,302 316,497 284,457
12/1/2033 - 452,278 314,989 288,682
12/1/2034 - 454,184 312,780 287,128
Croup
Appendix B
Annual Debt Service Schedule
Scenario 1 (1) Scenario 1 b (2)
Scenario 2 Scenario 3
Total $8,220,361 $9,035,194 $7,870,175 $8,063,175
Present Value $6,171,160 $9,035,194 $5,703,787 $6,029,711
(1) Assumes the $2,250,000 in property sale proceeds are escrowed to the first call date for the Bonds
(2) Assumes the $2,250,000 in property sale proceeds are not used to call Bonds prior to maturity
7
47
48
AFT
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
TUKWILA, WASHINGTON, ADOPTING A FINANCING PLAN
FOR THE URBAN RENEWAL TUKWILA INTERNATIONAL
BOULEVARD (TIB) REDEVELOPMENT PROJECT.
WHEREAS, the City of Tukwila plans to, and has, acquired certain improved
property on Tukwila International Boulevard for the purpose of redevelopment; and
WHEREAS, as part of the redevelopment plan, the City will demolish the
improvements and offer the vacant land for sale, subject to certain development
conditions; and
WHEREAS, it is estimated that the property acquisitions will cost approximately
$6,100,000; and
WHEREAS, the City estimates it may take up to three years to sell the property,
which is estimated to produce proceeds of $2,250,000; and
WHEREAS, while the City expects the redevelopment to provide long term strategic
benefit to the City, the transactions are expected to result in a net cost to the City of
$3,850,000; and
WHEREAS, the City wishes to finance the cost of the acquisition of property in
order to amortize the cost over a period of 20 years; and
WHEREAS, the City would like to have the ability to use proceeds from the sale of
properties to redeem or prepay debt in order to reduce overall interest cost;
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF TUKWILA,
WASHINGTON, HEREBY RESOLVES AS FOLLOWS:
W: \Word Processing \Resolutions \Financing Plan for Urban Renewal TIB Project 8 -14 -14
PM:bjs
Page 1 of 2
49
The City Council hereby adopts a financing plan for the Urban Renewal Tukwila
International Boulevard (TIB) Redevelopment Project whereby the City of Tukwila will
secure a 3- to 5 -year $2,250,000 taxable line of credit to finance acquisition costs
estimated to be recoverable through future property sales, and whereby a 20 -year
$3,850,000 taxable bond will be issued for the estimated net acquisition cost to the City.
PASSED BY THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, at
a Regular Meeting thereof this day of , 2014.
ATTEST /AUTHENTICATED:
Christy O'Flaherty, MMC, City Clerk De'Sean Quinn, Council President
APPROVED AS TO FORM BY:
Filed with the City Clerk:
Passed by the City Council:
Resolution Number:
Rachel Turpin, Assistant City Attorney
W: \Word Processing \Resolutions\Financing Plan for Urban Renewal TIB Project 8 -14 -14
PM:bjs
50
Page 2 of 2