M E M O R A N D U M

 

 

TO:              Yonkers City Council                                    

 

FROM:            The Real Estate Committee

                        Councilman Dennis Robertson, Chair

                        Council President Chuck Lesnick, Co-Chair

 

DATE:            March 28, 2006                                                                     

 

RE:              Master Developer Designation Agreement for Downtown Yonkers

 

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In its review of the MDDA for the proposed public/private partnership with Struever Fidelco Capelli, LLC, in addition to the advice given by the Corporation Counsel’s office and the Special Legal Counsel to the City Council, the Council solicited the advice of Hawkins Delafield & Wood LLP, bond counsel to the City; Robert J. Flower & Co., a real estate appraisal firm; and  G. L. Blackstone & Associates LLC (“GLBA”), a national commercial real estate consulting firm based in Mount Vernon, NY.

 

Attorneys from Hawkins have advised that the legal effect of City Council approval of the MDDA will be to provide a framework agreement between the City and the developers that will both (1) provide a good faith commitment by the City to explore public funding of infrastructure, and (2) satisfy the developers as to the City's willingness to proceed exclusively with them and negotiate project-specific agreements.  Such negotiations will determine the terms and conditions for authorization by the City Council of the City's infrastructure funding, after submission of project specific agreements  to the required approval proceedings under state and local laws

 

In essence, the intent of the MDDA is to provide guidance regarding the actual deals to be negotiated and detailed in the subsequent transactional documents.  It is not intended to speak to every item that is to be negotiated by the City.  This memorandum is provided to summarize the consultants’ assessment of materials submitted to date – most significantly a draft of the Master Developer Designation Agreement (“MDDA”) between and among various municipal entities and the developer and a preliminary sources and uses of funds budget for the development of the Chicken Island component of the first phase of the development.  We also summarize Council discussion of the matter.

 

Based on a review of the submitted background materials, conversations with the City Council and City corporation counsel, GLBA provided its opinion of the MDDA and the proposed use of tax increment financing ("TIF") bonds issued by the City as an economic development tool.  In a consultation with the City’s corporation counsel, GLBA was advised of the intent of the MDDA as an intermediary document.

 

Specifically with regard to TIF bonds, the view of the attorneys from Hawkins Delafield was that the MDDA did not commit the City to providing tax increment financing, but that such financing may prove to be feasible once certain project details have been confirmed and analyzed, such as: (1) the cost of the infrastructure to be financed by City TIF bonds, (2) the associated annual debt service on such TIF bonds based on a marketable financing structure, (3) the annual incremental property tax revenues resulting from the TIF project area which are pledged to pay such debt service, and (4) the availability of other revenues streams to supplement such property tax revenues.  In addition, it is bond counsel's understanding that the developers are interested in pursuing Empire Zone program benefits from the State, which may provide for reimbursement to the developers of a portion of such incremental property taxes paid within the TIF project area.  While such State reimbursement payments could not be legally pledged to secure the City's TIF bonds, they could be contractually pledged to secure TIF bond debt service or the developers could share the benefits by designating that certain project costs would be funded from such Empire Zone reimbursements.

 

In essence, the proposed intent of the MMDA is to serve the following purposes:

 

§         Provide a template of major negotiating points to guide the negotiation and drafting of the subsequent transactional documents.

§         Provide assurances to the developer that the executive and legislative branches of Yonkers city government will proceed in good faith with negotiations with the developer – thus providing the developer with comfort that time and money spent moving the project through stages of predevelopment are spent at commercially acceptable levels of risk.  In this sense, the document serves as an exclusive negotiating agreement which is a common tool for undertaking the redevelopment of publicly-owned land.

§         Provide assurances to the developer that the City of Yonkers – and, specifically, the City Council – will in good faith consider exploring the use of tax increment financing as a funding source for the initial phase of the Project.

§         Describe the contemplated framework for a public/private partnership, as that term is used in economic development parlance, between the City and the developer.

§         Provide upfront an outline of how various items of risk are to be negotiated for allocation between the City and the developer.       

 

It is essential for the effectiveness of any public/private partnership that both sides feel comfortable with the prospective allocations of costs and investment, benefits and returns, and risks.  It is also important to recognize that the developer’s negotiations with the municipality are shaped by its current and prospective framework of negotiations with anchor tenants, lenders, contractors and external sources of equity capital – all of which are critical stakeholders whose interests must be reconciled with those of the public sector in order to ensure project execution.  The consultant comments below are focused on the relative municipal costs/investment and risks inherent in undertaking this major redevelopment project.  While GLBA acknowledge that not all of the following items might be incorporated into the MDDA, that consultant recommended that they be incorporated into the subsequent transactional documents such as the Project Specific Agreements and the Land Disposition Agreements.

 

 

COSTS

 

The City will incur certain costs in undertaking this public/private partnership and facilitating the development of the Project.  However, only certain categories of municipal costs were contemplated in the MDDA for reimbursement:

 

1. Section 1.2 provides for reimbursement of the staff time costs of up to two project management personnel assigned by the City to work with the developers.
2. Section 1.9(g) provides for reimbursement of the City’s consultants in connection with the review of the Proposed Projects, but only in connection with SEQRA.  A cap of $100,000 is imposed on such reimbursement although it may be increased at the sole discretion of the developer.

 

Accordingly, at the request of the Council, the developer agreed to reimburse up to a limit of $200,000 consulting fees unrelated to the SEQRA process (e.g., the negotiation of the Project agreements and structuring a TIF bond issue).

 

Other costs that would be incurred by the City are not mentioned as being subject to reimbursement, in part or in whole, under the current terms of the MDDA.  These costs would include the following:

 

1. Any costs incurred by the CDA in seeking amendments to the Master Plan in permitting the development of Parcels H & I.
2. The incremental increased level of police services required for preventive patrols, traffic coordination and crime investigation generated by the components of the new development such as the ballpark and the shopping center.
3. The incremental increased levels of fire protection, street maintenance and general administrative costs associated with the development.
4. Any public relations costs that might be incurred by the City in responding to public reaction to the Project or facilitating community or intergovernmental support for the Project.
5. Aside from the cost categories cited in the first paragraph above that are subject to reimbursement to the City, there is no explicit or separate option fee payable as consideration for tying up the disposition of the municipal parcels.  This could be acknowledged as a concession on the City’s part in the MDDA or a subsequent transactional document as an inducement to the developer.

 

The drafting of the MDDA effectively provided for the Project land costs and infrastructure costs to be totally underwritten and financed by the public sector.  However, at a meeting with the Council, the developer agreed that public funds would not be sought to purchase municipal property.  GLBA reported that land cost write-downs are a typical tool used to encourage the development of blighted or underutilized areas although the amount of the write-down is often based on the determination of a funding gap.  The funding gap is that portion of the total development costs of a project that is not covered by sources of private capital seeking risk-adjusted and market-rate returns.  GLBA suggested that the agreement by the City to directly or indirectly provide non-recoverable funding or grant funding to the developer for all land acquisition costs – in the absence of evidence of the actual funding gap – should be deemed to be a significant concession on the part of the municipality.  The developer subsequently acknowledged that no public funding would be sought to finance the acquisition of municipal property.  MDDA provisions that speak to the land cost write-downs and the full coverage of infrastructure costs are as follows:

 

1. Section 1.5, first paragraph, last sentence.
2. Section 1.7, last sentence.  Provides for a reimbursement to the developer in the form of a credit against the purchase price of municipal parcels for any infrastructure costs funded by the developer.

 

Lastly, GLBA reported that the mixed-use nature of this Project contemplates the vertical integration of differing uses that are contemplated to be financed and possibly owned by differing parties.  To the extent there are Project components that are to be funded by the public sector, care should be taken that there are reasonable allocations of the cost of constructing various elements among the various uses.  For example, if the final Project plans envision that a privately-financed element is to be stacked on a parking garage (a use to be funded by the public sector), there should be a clear understanding of how the increased structural system costs of the parking garage are allocated between the private and public components.

 

COMMITMENTS OF POLITICAL CAPITAL & PUBLIC SUPPORT

 

As is the case with most public/private partnerships, the successful execution of the Project will require that the municipality and its political leadership use the power and the prestige of their offices to obtain Project benefits such as the following:

 

1. In a post-Kelo environment, Section 1.4(b)(i) requires the City to use condemnation in connection with privately-owned parcels of the Chicken Island Project.  Section 1.5 as well.  GLBA advised that since holdout parcels can be deadly to the execution of a redevelopment plan, the use of eminent domain is an essential tool as a last resort.
2. Section 1.7 suggests the establishment of a TIF district.  TIF is a widely-used tool in other states to facilitate commercial revitalization.  Although authorized in NYS, TIF has rarely been used and is considered controversial by some in this state.  Instituting a TIF program is recommended but may require the expenditure of political capital to obtain state legislative amendments, intergovernmental support, and rally community support for an unfamiliar funding tool.  GLBA recommended expanding the language of Section 1.9(d) to include a representation that the developer will cooperate with the City in meeting the requirements for establishing a TIF district and issuing a TIF bond program.  Such cooperation may include, but not be limited to, the following:
   1. Providing information to establish the economic development impacts of the Project, e.g., jobs created, projected sales tax revenues, other projected economic activity taxes, business license revenues, etc.
   2. Providing information necessary to establish that requested subsidies meet any “but for” requirements of any applicable regulatory bodies or oversight authorities such as the NYS Comptroller.
   3. Providing information necessary for the underwriter and bond counsel of any TIF bond program or other municipal bond program for the Project, e.g., credit strength of anchor tenants, real estate tax assessment agreements in tenant leases, waivers of property tax appeals, etc.
   4. Cooperating in the structuring of any TIF bond program to meet the tax-exempt requirements of the Internal Revenue Code for private activity bonds.  It is in the interest of both the City as well as the developers that such bonds are issued as tax-exempt obligations, if possible, (as opposed to being taxable) in order to lower the interest rate on the debt and maximize the potential bond proceeds for a projected stream of tax increment.

 

RISKS

 

The following are various risks to be borne by the municipality that should be noted given the current drafting of the MDDA:

 

1. Section 1.8(c).  This section or no other language of the MDDA prohibits the possibility of any one of the three development entities exiting from the material management of the Project prior to its completion – without municipal approval.  The City will be proceeding into this agreement based on its confidence in the abilities of the recruited three entities and should have approval rights over any material changes of the Project development team during a reasonable time frame of the Project’s life cycle.
2. To the extent that Public Funding is agreed to for all infrastructure costs and that funding will primarily come from TIF, the City should be aware that the MDDA does not provide for a cap on such public sector funding of infrastructure costs.  In other words, there is open-ended exposure to the City for covering those costs.  It should also be noted that, while the definition of Infrastructure in Section 1.1 does not include land acquisition costs, the sources and uses of funds budget for the Gateway Project does include land acquisition in the costs to be covered by TIF.
3. Project Execution Risk.  If TIF funding is to be provided upfront (as opposed to provided on a pay-as-you-go reimbursement basis) for costs such as land acquisition and infrastructure, the City in issuing TIF bonds will be at risk if the subsequent construction of components of the Project are significantly delayed or do not proceed.  There should be developer performance milestones established as conditions precedent to the funding of certain stages of public sector subsidies such as TIF.  These performance milestones should be crafted to ensure that they are commercially reasonable given the normal sequencing and synchronization of developer activities and could include, but not be limited, to the following:
   1. Provision of evidence that the developer has reached mutually acceptable levels of preleasing for the retail and office components.
   2. Provision of evidence that the developer has obtained binding financial commitments for all debt and equity required for financing specific Project components.
   3. Provision of materials demonstrating that commercially reasonable measures have been obtained to fix the cost of construction of specific Project components and/or that reasonable contingencies have been included in construction estimates.

 

There are other risks inherent in the use of TIF and just a couple are cited below.  However, both GLBA and bond counsel advised that these universal risks can be mitigated to acceptable and fiducially-responsible levels through careful planning and structuring:

 

1. Lack of Projected Tax Increment.  While the underwriting of a TIF bond program will be based on projections of the incremental real estate taxes to be generated by the Project or over a geographic area inclusive of the Project, there is no certainty that the estimated future tax revenues will be as projected or that tax revenues will grow as required to make debt service on the bonds.  This risk is mitigated, in part, by underwriting the increment using debt service coverage ratios ranging from 1.50 x to over 2.0x the debt service.
2. Reduction of Taxable Value.  Tax revenues allocated to the agency that issues the bonds are determined by the incremental taxable value in the Project and the current rate or rates at which property in the Project is taxed.  A reduction of taxable values of property in the Project caused by economic factors beyond the issuing agency’s control, such as a revaluation of property in the Project, relocation out of the Project by one or more users, or the complete or partial destruction of property in the Project could cause a reduction in or delay the receipt of the tax revenues from which the pledged revenues securing the bonds are derived.  This risk can be controlled, in part, by the developer’s careful crafting of the retail tenant mix to ensure that the Project is leased to financially strong tenants with a track record of successful operation in similar retail environments.

 

 

Among the various uses to be incorporated into the mixed-use development, GLBA also suggested that the ballpark is probably the riskiest component of the Project.  The MDDA also provides for the mitigation of certain risks to the developer:

 

1.      Entitlement Risk.  The closing of Company purchases of municipal land does not occur until after all government approvals for the development of the Project are final (Section 1.5, 2^nd paragraph, last sentence).

2.      Construction Risk.  To the extent that the MDDA or any subsequent agreement provides that all infrastructure costs are to be funded or reimbursed by public sector funding, the risk of construction cost escalations attributable to market conditions or actions of the developer are transferred to the public sector.

 

 

OTHER COMMENTS & RECOMMENDATIONS

 

GLBA advised that there was a strong rationale for proceeding with negotiations of a public/private partnership with the developer:

 

1. Mixed-use projects incorporating retail and entertainment components have attracted considerable interest from signature retailers looking for new locations. 
2. Given the proposed scale of the Project, its successful execution would become a national model of urban revitalization and generate national attention for the City in the commercial real estate industry.
3. To the extent the Project does require public subsidy to establish thresholds of financial feasibility, TIF offers a funding source that is locally controlled , subject to approval of the terms and conditions of the negotiated sale of TIF bonds by  the State Comptroller.  In addition, TIF generally has the capability to generate more public sector funding for project support than any other economic development tool.  To illustrate, GLBA reported that Prince George’s County in Maryland has dedicated $160 million in TIF bonds toward the cost of infrastructure improvements for the National Harbor project underway by a local developer.  That project is a $2 billion complex of hotels, shops and restaurants that will be developed in phases over 10 years. 
4. Although the preliminary and proposed $100 million of TIF investment is a substantial absolute dollar figure, it along with the $40 million of proposed revenue bonds represents only 16.5% of the estimated $850 million cost of the Gateway component of Phase I.  Accordingly, $1 of public sector investment would leverage $6 of private investment.  GLBA reported that this subsidy ratio compares favorably with other publicly-supported retail projects.
5. Successful implementation of a TIF program – even one-quarter of the amount proposed – would establish the City of Yonkers as a leader and pioneer of the use of this economic development tool in the State.
6. The development team includes developers of prominent standing in the commercial real estate industry and proven success in mixed-use projects and the components contemplated in the Yonkers project.     

 

Other GLBA comments and recommendations included the following:

 

1. Downpayment Deposits.  Section 2.6 provides for a downpayment deposit of $200,000 for each Proposed Project.  GLBA suggested that this would appear to be concessionary given the proposed purchase prices.
2. Potential Moral Obligation.  Although TIF programs typically are issued by legally separate and distinct entities that don’t provide the full faith and credit of the municipality, TIF bonds may be viewed by the financial markets as having the “implicit” moral backing of the City – even though the City would not be legally required to make debt service payments in the event of nonpayment by the issuing agency.  Therefore, the nonrepayment of TIF debt, under certain circumstances, could have an adverse impact on the City’s general obligation debt.  Given the City’s financial history, it would be critical for the City and the developer to be cognizant of this and work cooperatively to prevent this eventuality.
3. Purchase Price of Municipal Land.  There was a concern among councilmembers that the stipulated purchase price of municipal property at a value of $1.2 million per acre is inadequate and may bear little relationship to the investment value to the developer as part of an integrated development plan which the municipality is helping to effectuate.  Dr. Flower’s opinion on this matter was the value of all municipal parcels could be considerably higher.  As this pricing issue was a sticking point, one way suggested to resolve it would be to leave the stipulated pricing and terms as is and add an additional element in the form of an earnout formula that can be negotiated prior to execution of the subsequent transactional documents.  The earnout feature could allow for an additional payment or bonus to be paid to the City after some component of the Project has been completed (e.g., the shopping center), reached stabilized operations, and achieved some mutually acceptable threshold of cash flow available for distribution.  A formula suggested by Robert Flower would involve an “indexed fee” that would allow the City to receive a percentage of the sales price of residential units after the developer achieves a breakeven threshold.  Given the uncertainties and difficulties associated with pinning down what both sides could accept as the true value of the land, the Council has accepted the proposed figure of $1.2 million per acre and recognizes that there are other items of value to the City that can be addressed in the subsequent agreements.

 

Lastly, councilmembers were concerned about the language of the MDDA’s default provisions.  Specifically, it was important that the City Council be assured that nothing in the MDDA is intended to deprive the Council, or any other City board or commission, of its ability to review and approve or disapprove requested actions related to any of the proposed projects.  At the Council’s request, the developer agreed to this modification and, in return, was provided an acknowledgement that the City would make all good faith efforts to effectuate the MDDA.