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HomeMy WebLinkAboutRDA Agenda Packet 052708CITY OF ATASCADERO COMMUNITY REDEVELOPMENT AGENCY AGENDA Tuesday, May 27, 2008 REGULAR SESSION: 6:00 P.M. City Hall Council Chambers 6907 EI Camino Real Atascadero, California REGULAR SESSION: 6:00 P.M. ROLL CALL: Chairperson Beraud Vice Chairperson Luna Board Member Brennler Board Member Clay Board Member O'Malley APPROVAL OF AGENDA: Roll Call COMMUNITY FORUM: (This portion of the meeting is reserved for persons wanting to address the Board on any matter not on this agenda and over which the Board has jurisdiction. Speakers are limited to three minutes. Please state your name and address for the record before making your presentation. The Board may take action to direct the staff to place a matter of business on a future agenda. A maximum of 30 minutes will be allowed for Community Forum, unless changed by the Board.) 1 A. MANAGEMENT REPORTS: 1. Colony Square Project Update ■ Fiscal Impact: If the Board decides to invest in the Colony Square project, funding would come from Redevelopment Agency funds. Funding for public improvements would also come from bond proceeds and impact fees. ■ Recommendations: Agency Board consider financial investment in the Colony Square project and direct the Executive Director to execute Board direction. [Executive Director] 2. Wrestling Bacchantes Restoration Update ■ Fiscal Impact: None. ■ Recommendation: Agency Board receive and file the report on the status of the restoration of the Wrestling Bacchantes. [Public Works] BOARD ANNOUNCEMENTS AND REPORTS: (On their own initiative, the Board Members may make a brief announcement or a brief report on their own activities. Board Members may ask a question for clarification, make a referral to staff or take action to have staff place a matter of business on a future agenda. The Board may take action on items listed on the Agenda.) C. ADJOURNMENT: ITEM NUMBER: RA A-1 DATE: 05/27/08 Community Redevelopment Agency of Atascadero Staff Report - Executive Director Colony Square Project Update RECOMMENDATIONS: Agency Board consider financial investment in the Colony Square project and direct the Executive Director to execute Board direction. REPORT -IN -BRIEF: The Colony Square project, a mixed-use lifestyle center located on the northeast corner of EI Camino Real and Morro Road, is a major component of the City's downtown area revitalization. Per Board direction, staff has met with the Colony Square development team to determine the financial health of the project and analyze options for financial investment should the Board choose to participate in the project. This report provides an overview of the current state of the project, and a look at the project's future and current financial position. Attached to this report are the findings of the City's economic development consultant, Tim Kelly of Keyser Marston Associates (Attachment A). If the Board decides to consider investment in the project, the policy questions are twofold: 1. Is the project(s), and therefore public investment in the project(s), consistent with the City's economic strategy, vision, and plan for the downtown area? 2. Are the risks of public investment worth contributing towards the potential amenities and additional revenues generated by the project(s)? DISCUSSION: Background: The approved Colony Square project is a multi -phased, mixed-use development including a movie theater, retail shops, restaurants, and residences on a 5.63 acre site. 3 The Italian renaissance designed project consists of approximately 70,000 square feet of residential space, 80,000 square feet of retail/restaurant space, 30,000 square feet of theater (10 screens, 1,750 seats), 20,000 square feet of office space, a public square, and 360 on-site parking spaces. The existing City Hall building is also located on the site of the project. Colony Square has been considered a key component in the redevelopment of downtown Atascadero and has been included in the current downtown economic development strategy. The theater would provide a major draw for the downtown area and the addition of restaurants would assist in making downtown an attractive place to be. The construction of Colony Square has the potential to create a lifestyle center in the downtown area that could be a recreational, cultural, and social hub. The project was featured during the several "Just Listening" meetings, and residents have offered positive comments. The project is being developed by James Harrison of Pismo Beach and Peter Hilf of Santa Barbara. These gentlemen have stated that they are equal partners in the project. Their partnership was formed in 2006. Mr. Hilf has a background in civil engineering and has been involved in construction since the 60's beginning in South America. Mr. Hilf began working on projects in the United States in the early 1970's. He has been involved with the construction or remodeling of several shopping centers in California including Fresno Fashion Fair, Carson Mall, Buena Ventura Plaza, Five Points Shopping Center in Santa Barbara, and the Huntington Center in Huntington Beach. In the late 1980's, Mr. Hilf started his own company acquiring properties throughout southern California. Mr. Hilf states that Colony Square is his main focus at this time. Mr. Harrison, a medical doctor by trade, has had interest in commercial projects for several years. His first commercial development project was renovating the Creamery in San Luis Obispo in the early 1980's. Mr. Harrison bought the former Century Entertainment Center in 1984. By 2003, the center was becoming underutilized and Mr. Harrison assembled a team to look at options. Ultimately, they came up with the idea of Colony Square. Review of the Project's History The Colony Square project was presented to the Planning Commission and City Council at a joint study session on April 12, 2005. The project received approval by the Planning Commission on August 16, 2005. The first plans were submitted to the City thereafter for public and off-site improvements. The Agency first became aware that the project may require additional capital in late March 2007. At the time, the developers weren't sure that additional funding would be necessary, and if it was necessary it would be needed for later phases of the project. After several discussions with the developer regarding the project, and to prepare for a possible request for public investment by the Agency Board, the Agency hired a nationally recognized economic development firm, Keyser Marston Associates of San Francisco, to study whether the project's financial projections and funding were real, 0 whether it would really require financial investment, if it was a regular practice for cities to invest in such projects, and how such investment might take place. Tim Kelly, the president of Keyser Marston, served as the Agency's consultant. The Agency received a response from the consultant on August 7, 2007. The report stated that the financials for the project appeared accurate, costs appeared reasonable, the projected profit margin was tight, and that public investment in complicated projects such as this was not uncommon. In September 2007, the Agency retained legal counsel to work with Colony Square to begin looking at ways the Agency could invest in the project legally and in compliance with State of California Department of Industrial Relations (DIR) regulations that relate to prevailing wage. On November 13, 2007, the Agency Board directed staff to study the project's financial condition further, including review of the project's financials, bank and loan documents, and projected income. Further, the Board directed staff to work with the economic development consultant to determine the project's financial condition and timing for build -out. Over the past several months, staff has been meeting with members of the Colony Square team including their contractors and lenders. Because analysis can only be made based off of the information obtained from the developers themselves (i.e., the financial documents they provide to you), trying to determine the exact position of a project of this nature can be difficult and abstract. Nonetheless, staff and the Agency's consultant believe that a financial and operational picture has been developed. Although there may be different perspectives, this report seeks to provide the Boardwith the best overview possible. Current Status: Construction Update As can be seen from EI Camino Real, the Colony Square project is well underway. The site work is nearly complete. To date, work has involved utility relocation, soil compaction, drainage improvements, installation of the internal streets, curb, and gutter, the town square and streetlights. The building pad for the movie theater has been completed. The next steps involve completing the accessibility improvements, the maintenance agreements and CC&R's, and securing the final map. Staff has been told the agreement between the theater operator and the project has been negotiated. Once these items are completed, a construction loan for the movie theater can be obtained. Construction of the theater is now expected to begin in June 2008 and it is estimated to take 10 to 12 months to complete. It is unclear at this point when construction of the other buildings will occur. Based on the project's financial status, the project will clearly need to be built in phases. This phasing will be discussed later in this report. 5 Financial Update The total approved project cost is expected to be approximately $50 - $60 million. Based on the project's current capital, the project is being built in phases, with the first phase consisting of the roads, sidewalks, a public square, movie theater and related retail shops connected to the theater complex. This portion of the project is expected to cost approximately $18 million. As a consequence of the recent credit crisis, falling property values and the related increase in interest rates, the project's bank financing was reduced last year by over $1 million. Consequently, the Colony Square team now requires a combination of loans and cash of approximately $18 million to complete Phase I. The estimated value of the theater building once completed is $18.7 million. The project has secured a new construction loan from Community West Bank of Santa Maria for $10,075,000., leaving an additional equity need of $8 million. Since the site costs are all but completed, and based off of values provided by the developer, it appears that the team has spent nearly $6 million to date. This money has come from cash from the investors and a loan against the existing property. While it appears there is enough value in the first phase to complete it (project assets equal total project liabilities), the project still needs over $2 million to fulfill the amount of equity needed. As the project moves forward, this additional equity will be needed to pay off the existing loan on the theater parcel. This amount is approximately $3 million. The following table* summarizes the project's current available capital relative to costs: r11 nyuiva aic aPJJiUAnnata anu uasau un UdLd wiaineo oy me uaony oquare ream. The equity need may increase or decrease depending on changes to project costs, interest rates or financing options. At this point, the project should be motivated to quickly invest the additional money needed to move the project forward. In the Keyser Marston report, Mr. Kelly states that the "Development Team has the commitment of a key tenant, the theater operator, and has invested substantial equity into the project. Despite not achieving a desired target rate of return on equity with Building A, [the theater building] completion of Building A creates the value for the balance of Colony Square. Therefore not proceeding with the C Available Capital Expenses Cash and Existing Loan $ 5,700,000 Construction Loan $10,075,000 Payoff of Loan on Theater ($3,000,000) Parcel Land Release Site Costs $5,700,000 Theater Building Construction and Tenant ($9,300,000) Improvements • ' $15,775,000 ($18,000,000 r11 nyuiva aic aPJJiUAnnata anu uasau un UdLd wiaineo oy me uaony oquare ream. The equity need may increase or decrease depending on changes to project costs, interest rates or financing options. At this point, the project should be motivated to quickly invest the additional money needed to move the project forward. In the Keyser Marston report, Mr. Kelly states that the "Development Team has the commitment of a key tenant, the theater operator, and has invested substantial equity into the project. Despite not achieving a desired target rate of return on equity with Building A, [the theater building] completion of Building A creates the value for the balance of Colony Square. Therefore not proceeding with the C project does not seem to be an option. [If they don't move forward] The development team could lose the commitment of the theater operator and there would be no return on the equity invested." Staff agrees with this assessment. If the team does invest an additional $2 million in the project, bringing the equity investment to $8 million, according to Kelly, "the return on equity (net operating income less debt service payment) is projected to be 6.3%. For a project at this stage, which still has construction risks and leasing risks, the return is below what would typically be targeted by a developer." Nonetheless, Building A does generate a positive return for the developers. The only way the developers can begin to make more profit at this point is to spread the site development costs to other buildings by moving forward with their construction as well. The next buildings to be built would be the center buildings adjacent to the square, Buildings F, G and H. At this time, the team has several options for obtaining the additional $2 million in equity. These include: 1. Investment of More Cash from the Development Team- Each of the partners could come up with an additional $1 million or more. This money could be accessed by leveraging personal investments/assets or other properties owned by the developers. Parcel Two of the project, the parcel the Cowgirl Cafe currently sits on, is owned by the partners and is unencumbered. 2. Inclusion of a New Partner- The development team could bring in a new partner to infuse more capital into the project. A new partner would dilute the ownership shares of the existing two partners. The team has indicated they are not interested in pursuing this alternative. 3. Sale of Land- The partners could choose to sell off one of the parcels to another investor to raise the additional capital. While the encumbrance against the parcel would need to be paid back to the bank, this would still yield additional funding for the project that could go towards the equity needed to complete Building A. 4. Additional Loans- The development team could try to find another loan greater than the construction loan being obtained or they could pursue a second loan in the marketplace. The likelihood of both of these options appears slim. The partners have been shopping construction loans for over a year, and because they have chosen to do business with Community West Bank of Santa Maria this is presumably the best deal they were able to find. Staff has had multiple conversations with the bank. During the most recent conversation, the bank indicated they did not want a second loan behind the construction loan they were offering, and that such a loan could change the terms of the first loan. A second loan therefore could be difficult to obtain and could put the first loan at risk. Additionally, the terms for the second loan that the partners desire and have expressed to staff (20 -year term with 30 -year amortization, balloon payments, deferred payment and interest first five -years, etc.) doesn't appear to exist in the 7 market and if it does, the developers have not yet obtained or produced evidence of such a loan. 5. Redesign of Project to Reduce Equity Needed- The development team could redesign the project with the intent to reduce costs. This option has not officially been proposed by the development team, but it is something they have discussed. While some minor cost reducing alternatives could be considered to bring development costs down further, construction drawings for Building A have already been submitted and approved and their building permit is ready. If the project were redesigned, plans would need to be reviewed again, the project may need to go back to the Planning Commission and the design changes could adversely impact value. Because time is money as the project sits vacant, taking additional time would likely delay the project and this does not ultimately positively impact the development team's financial pro forma. Both the consultant and staff agree at present that the additional equity will be funded because it is the only way the developers can generate a return on the investment already made on the project site. Additionally, it would appear that the quickest way to obtain this equity would be to either fund it by leveraging other projects or bring in a new partner. Challenges in Providing Financial Assistance to Private Proiects: Public investment in private projects is regulated significantly in California. It has become more difficult in recent years for cities to invest in private projects as a result in changes to state law. SB 975 became effective on January 1, 2002 and amended Labor Code 1720. This law requires prevailing wages to be paid for certain types of work (construction, alteration, demolition, installation or repair work) done under contract and paid for in whole or part out of public funds. In essence, if more than $1,000 in public funds is invested in a private project, the entire project may become subject to prevailing wages. This could increase costs by as much as 30%. If Colony Square were to become subject to the prevailing wage requirements, the cost of the project would likely be prohibitive and it may be difficult to complete the project at all. In the case of Colony Square, this could require an additional $10-15 million. Resources of this amount are not available. City investment in or near private projects may be exempt from Labor Code 1720 if assistance is applied to affordable housing or if assistance impacts the public and the greater public good and not just the project itself. Examples of this may include investing in affordable housing, providing for off-site public improvements in the area such as street and sidewalk improvements or securing additional public parking in the project. There are off-site public improvements being done in the area , specifically construction of streetscape and median improvements on the southbound side of EI Camino Real expected to cost approximately $400,000. The costs for the medians and streetscape improvements are included in the Streetscape Phase II project costs. Changes in Conditions: Project Phasing The Colony Square project was approved to be built all at once. Condition number four of the conditional use permit states: Approval of this Conditional Use Permit shall be valid for twelve (12) months after its effective date. At the end of the period, the approval shall expire and become null and void unless the project has received a building (or demolition) permit. Any extension requests shall be forwarded to the Planning Commission for approval. In addition, the last building will be finaled within 18 months of the first building being finaled. As part of the process in looking into the project's financial condition, timelines, etc. it has become clear to staff that it is not a financial possibility that the project can be built all at once. It appears that Building A will be constructed first. Following completion or towards the end of completion of Building A, if financing has been obtained based on the increased values offered by a constructed theater, the team will move forward with the buildings in the center of the square, Buildings F, G, and H. Following the completion of these buildings and depending on the market, the developers would move forward with buildings B and C, the buildings across from the theater and adjacent to the Rancho Tee Hotel. The final building to be constructed would be Building D, the building next to Cowgirl Cafe at the rear of the project. In other words, it appears the project will not be fully constructed for three to five years. Additionally, the developers may choose to redesign portions of the project (i.e. remove housing, floors, etc.) to be consistent with the current market conditions. City Staff will be returning to the Planning Commission in the future if the project does pause construction after Building A to discuss the phasing of the project and how this applies to the conditions of approval. If the project is redesigned, the new plans will also need to be returned to the commission for review. Project Financial Analysis According to records obtained by the assessor's office, the parcel Colony Square is located on currently has an assessed value of $6,700,000. The assessed value of the parcel when the Redevelopment Agency was formed was $2,602,751. The Redevelopment Agency collects property tax increment on the difference from the assessed value of the property today to the assessed value of the property when the Agency was established. This amount is $4,097,249 and results in an estimated property tax increment payment of $26,140 for the Agency General Fund. The site is not generating sales tax or other revenues. 9 Once the site is fully developed, the developer estimates the assessed value to be $60 million. This number appears consistent with the project cost. At an assessed value of $60 million, property taxes would be approximately $660,000. Of this amount, the Redevelopment Agency General Fund would receive approximately $366,200. According to a conceptual staff analysis, taxable sales at the full site are estimated to be $5 million annually resulting in annual sales tax payments of $50,000. Based on these estimates, the net increase in taxes resulting from the development could be as much as $400,000 per year. These assumptions are based on full build -out of the project only, and will change if portions of the project are not built. FISCAL IMPACT: If the Board decides to invest in the Colony Square project, funding would come from Redevelopment Agency funds. Funding for public improvements would also come from bond proceeds and impact fees. ATTACHMENT: Attachment A: April 15, 2008, Report by Tim Kelly of Keyser Marston 11n Attachment A KEYSER M R.STON ASSOCIATES,.. ADVISORS IN PUBLIC/PRIVATE REAL ESTATE DEVELOPMENT MEMORANDUM ADVIS(AU'N: To: Jim Lewis REAL ESTATE REDEVELOPh1ENI City of Atascadero AFFOIADAIILE FIOU5104G ECONOMIC Dr.W1,011MENT From: Tim Kelly SA K F RAN CMCO A. JEKRY K.F'YSER TIMOrEI:Y C. KELLY Date: April 15, 2008 KA'rE RAIEI.E FIIN K DF951F hl. KERN ROIIERTJ.4VETMOKE. Subject: Colony Square Lr�s A.NGkLFI CALVIN E. HOLLIS.I1 The purpose of this assignment is to provide advice to the Atascadero Redevelopment KATI{IFEN II..H6AD Agency the financial viability of the commencement of construction in 2008 of g y on nancy JAMB A. RABE PAUL C. ANDERSON Building A in the Colony Square project. Building A contains approximately 60,900 sq.ft. GREGORY D. S004100 of building area, inclusive of an approximately 3.6,500 sq.ft. multiplex theater. Lot size for KEVIN E. ENC81710A1 ;ULIFL.ItgME`P Building A is approximately 60,500 sq.ft., or 1.,39 acres, and represents about 25% of the SAN.DIF.Go total land area. GERALD M. `rmmha PAUL C. MnnRA It is our understanding that the lease with a cinema operator is ready to be executed. It is also our understanding that the development team and its architect have completed working drawings for Building A and that the development team is actively in discussions with construction lenders to finance Building A. The analysis is based on the specific project programmed by the development team. This analysis accepts this program and is not intended to be an evaluation of the land use planning of the project or an assessment of market support. In summary, the analysis evaluates the ability of the real estate values created by Building A to support the anticipated private sector development costs. If the program is changed, then the findings of this analysis would need to be reexamined. The cost and rental information used in this analysis were prepared by the development team. We have accepted this information as being correct. The discussion in this memorandum presumes that the construction lender is committed to moving forward with a $10 million construction loan to fund the costs of Building A. This commitment is key. The terms and conditions of the construction loan need to be confirmed and finalized. 55 PACIFIC AVENUE MALL )-SAN FRANCISCO, CALIFORN'I'A 94111 ),PHONE: 415 398 3050 )� FAX: 415 397 5065 WWW KEYSERMAItSTON.COM 001-002.doc; jf 10285.001 To: Jim Lewis April 15, 2008 Subject: Colony Square Page 2 Summary of Findings The review of the development team's financial pro forma indicates that the investment with the completion of Building A will be approximately $18 million. Of this amount, the anticipated equity investment is $8 million. The review also indicates that return on the equity with the construction of Building A is less than what typically would be expected at this stage of the development process. Clearly, the financial success to the development team depends on the completion of the other buildings to be developed at a later date. Despite not achieving a desired target rate of return on equity with Building A, completion of Building A creates the value for the balance of Colony Square. To not proceed with Building A risks the loss of the commitment from the theater operator and would defer any return on the equity invested. Therefore, not proceeding with the project does not seem to be an option. If the development team desires to enhance its financial returns with the development of Building A, the best option at this time based on the information available to us would be to sell the Agency lot 9 at a fair market value. For reasons stated in this memorandum, a loan from the Agency is not recommended. Summary of Development Pro Forma A review of the development pro forma indicates: 1. The development team has funded substantial dollars for site acquisition and site development costs for the entire 5.63 acre site. 2. The development investment with the completion of Building A is estimated to be approximately $18 million and includes: a. The costs to purchase the residual interest in the former Colony Square and to fund the site improvement costs are estimated to be approximately $8.7 million. This amount excludes any private funds invested in the shopping center prior to the current redevelopment. b. To complete Building A, including tenant improvements, the new investment is estimated to total approximately $9.3 million. 3. The capital structure to finance Building A, land and the site work is estimated to be an approximately $10 million construction loan, based on proposed term sheets that have been provided to us, and approximately $8 million in equity. 001-002.doc; If 10285.001 To: Jim Lewis April 15, 2008 Subject: Colony Square Page 3 Portions of the equity appear to have been funded separately by loans secured the undeveloped portions of the Colony Square property. The stabilized net operating income available to pay the debt service on the loan and the return on equity is projected to be $1,226,000 per year. Achieving this income will occur when 95% occupancy is reached.. The return on equity (net operating income less debt service payment) is projected to be 6.3%. For a project at this stage, which still has construction risks and leasing risks, the return is below what would typically be targeted by a developer. This analysis does not include the carrying cost to get the project to this stage or a return on the historical investment in the project. In summary, the real estate value supported by Building A is limited relative to the investment in buildings, land and site improvements. Until Building A is completed and the theater is open, the development team is not prepared to fund the construction of the next buildings. Buildings F, G, and H represent another 27,500 scift of building area. Discussion of Options Options going forward are: 1. Development team has the commitment of a key tenant, the theater operator, and has invested substantial equity into the project. Despite not achieving a desired target rate of return on equity with Building A, completion of Building A creates the value for the balance of Colony Square. Therefore, not proceeding with the project does not seem to be an option. The development team could lose the commitment of the theater operator and there would no return on the equity invested. 2. Discussions with staff and the development team has identified the following options: a. Loan from the Agency. For reasons stated below, this option has challenges and is not recommended at this time due to significant effort that would be required to satisfy the State Department of Industrial Relations' requirements. b. Development team sells a parcel to the Agency at market rate price, such lot 9. The size of the lot is approximately 56,200 sq.ft. Christopher Smith, MAI in a July 2007 report indicated that value of land in Colony Square to be approximately $35 per sq.ft. The estimated fair market value of lot 9 would then be $1,967,000 (this dollar amount is by way of example only and is not 001-002.doc; jf 10285.001 13 To: Jim Lewis April 15, 2008 Subject: Colony Square Page 4 intended to be a statement as the fair market value). This option would reduce the equity requirement to fund the construction of Building A and enhance the return on the remaining equity invested. c. Development team brings in a new financial partner. However, the development team indicates that they are not interested in pursuing this alternative. Development team redesigns the project with the intent to reduce costs. This option is not being proposed by the development team. In fact, construction drawings for Building A have already been submitted to the City for plan check. Agency Market Rate Loan With certain exceptions, if public dollars are used to financially assist the project, labor costs related to the construction will be required by State law to be paid at prevailing wages. The development team has indicated that the increased cost of prevailing wages cannot be supported by the real estate value of the project and the project would not be built. There are situations in which the use of public dollars to fund costs does not trigger the prevailing wage requirement. Advice from legal counsel is recommended. The following are examples when prevailing wages are not required. If public dollars were used to fund off site public improvements, prevailing wages are not required, except that the public improvements need to be built with prevailing wages. If the redevelopment agency or city funds were used to purchase one of the lots in Colony Square at fair market value (as determined by an appraiser), prevailing wages would not be required. The concept of an Agency loan has been discussed. It is our understanding that, if public dollars are made available as a market rate loan, prevailing wages are not required. The State Department of Industrial Relations (DiR) offers no guidelines as to "market rate." Based on discussions with the developmentteam on how such a loan might be structured, it is clear that a significant effort is needed to determine what would be the terms, interest rate and security for an Agency loan to be market rate. As one illustration of an issue to be addressed, the Agency would .seek security for its loan. A loan secured by,a lien on the property is the obvious approach. However, it is not clear if a construction lender would allow an Agency loan secured by the property as many construction lenders do not allow subordinate liens to be placed on the property. Other issues that need to be resolved would include the term of the loan, the interest rate, the ability to defer interest payments, the ability to assume the loan, and the like. 001-002.doc; jf 10285.001 1A ITEM NUMBER: RA A-2 DATE: 05/27/08 Community Redevelopment Agency of Atascadero Staff Report — Public Works Department Wrestling Bacchantes Restoration Update RECOMMENDATION: Agency Board receive and file the report on the status of the restoration of the Wrestling Bacchantes. DISCUSSION: At the meeting of December 12, 2006, the Board authorized a contract with Ethos for the restoration and conservation of the Wrestling Bacchantes statue. The Bacchantes are currently undergoing restoration and staff will provide a verbal report and PowerPoint presentation on the progress. FISCAL IMPACT: 1.[M 15