The City worked with a consulting firm, Strategy 5, to assess the feasibility of selling the Park 4 parking structure to a private party.  Strategy 5 estimated a value of $4.6 million and the Council established a minimum asking price of $4,675,000.  Strategy 5 assisted staff with requesting proposals to purchase the garage and published the solicitation in national trade publications and locally.  The City received one offer, from United Industries/United Properties (UP).  UP's initial offer did not include a price but it asked for permission to appraise the property, which was granted.  The appraisal price and UP's offer is for $2,620,000.  The Council requested that staff, Charlie Hamwey and Al Swanson review the offer but this committee made no recommendation to the Council.  The Council received a staff presentation on the proposal at its February 22, 2011, work session.  The City Council did not approve or disapprove the sale but asked staff to negotiate further with UP in order to obtain a higher price.  Staff has been discussing the purchase with UP officials and developed three options for the Council's consideration.  Staff is requesting that the City Council act to dispose of the garage or to retain it in the City's ownership.  

The City Council could:

• Approve selling the garage to UP for $2,620,000.
• Approve selling the garage to UP for $3,100,000 and to finance a portion of the purchase price.
• Reject the UP offer and 1) attempt to sell the garage to another private party or 2) retain the garage and authorize staff to make operational changes that should improve function and net income. 

If Council approves selling the garage to UP, staff would work with legal staff to finalize all required documentation and to convey the property at the earliest possible date.  The funds would be deposited in the Parking Fund and could be used to retire Park 2 garage debt in order to reduce operating expenses.

Staff met with UP officials and discussed whether there are conditions that would prompt UP to offer a higher price for the property.  Subsequent to that discussion, UP offered to purchase the property for a higher price if the City would finance a portion of the price.  The offer proposes to pay $620,000 (20%) at closing and to finance $2,480,000 over ten years at the City's annual average earnings rate plus .5%, with a floor of 1% and a cap of 4%.  The City uses that rate for internal borrowing, that is, when one fund borrows from another fund, such as when the Public Safety Fund borrowed money from the Solid Waste Fund in order to finance and build Fire Station #7.  The present earning rate is .73%, so the lending rate would be 1.23% this year.  The estimated annual payment, if this interest rate did not change over the loan term, is $265,000     

If Council rejects the UP offer, it could direct staff to market the garage again or to change its operations.  Marketing the garage again is not likely to yield positive results because of low credit availability and because UP is the only logical local buyer because its properties surround the parking garage.  If the City retains the garage, staff will proceed with a plan that has been dormant for over a year that would eliminate hourly, transient parking in Park 4 and eliminate 1 FTE employee in the Parking Division.  The change would reduce operating costs and even if none of the hourly parking revenue is offset by renting the newly available monthly parking spaces, net income will increase.  United Properties expressed some concerns about eliminating the hourly parking spaces, primarily because they are needed periodically by the bank or other UP tenants.  Staff has developed an option that should work for those occasional needs and will produce a little more revenue.   

City staff is recommending the first option; sell the garage for $2,620, 000.  The best use of this money is to retire a portion of the debt on the Park 2 garage.  The financial impact is explained below. 

Staff recommends that the $2,620,000 payment be used to retire a portion of the Park 2 debt.  Money was borrowed in 2006 in order to expand that structure and the City still owes $5,200,000. The City borrowed those funds from Koch Financial at an average annual interest rate of 5.4%. The loan was subsequently sold to Capital One but that did not change the interest rate or annual debt payment.  Before 2007, the Parking Fund had never paid debt costs because the City issued downtown Tax Increment Finance (TIF) bonds to construct all four of the City's garages. The annual debt payment is approximately $495,000. If the Park 4 purchase price is used to retire half of the Park 2 debt and the remainder is refinanced at a lower interest rate, the Parking Fund could save as much as $200,000 per year. Selling Park 4 reduces the Parking Fund's net income by up to $150,000/year, so the net gain would be at least $50,000 per year.  Staff believes that the City should refinance the Park 2 debt whether or not the Park 4 proceeds are used to retire a portion of that debt.  Annual bond interest rates are 1.5% - 2% lower today than they were in 2006.  Even though refinancing has up-front costs, the lower borrowing rate still produces present value net savings.  If Council decides to accept the UP request to finance the sale, staff recommends that the down payment and the annual payments be used to retire debt and to assist with the annual debt payment that will remain after refinancing a portion of the Park 2 debt. 

The stakeholder committee made no recommendation.  The staff recommends that the City Council accept the cash purchase offer of $2,620,000 from United Industries/United Properties and use the funds to retire a portion of the Park 2 debt in order to improve the Parking Fund's financial position.