PUBLIC HEARING: Adopt Resolution #20-082 Approving a Business Subsidy,  Authorizing Execution of a Tax Increment Finance (TIF) Agreement, Right of Re-Entry Agreement and Terms of an Interfund Loan; Case of Ramsey Hotel Group, LLC Cobblestone Hotels)

The purpose of this case is to consider final approval of the Business Subsidy, Tax Increment Financing (TIF) Development Agreement,  Right of Re-Entry Agreement and the Terms of an Interfund Loan related to the Cobblestone Hotel Project.

Tax Increment Financing Agreement

A Public Hearing is required for the requested business subsidy of $311,020 by the Developer for the land cost write-down.  Part of the TIF Subsidy process involves the authorization of an inter fund loan which allows the City to reimburse itself through TIF for the land cost write-down ($311,020) and project legal and administrative costs (up to $25,000) plus 5% interest.  Once the public hearing is completed for the above aspects of the business subsidy for the project, further discussion relating to specifics relating to the land transaction (Right of Re-Entry Agreement) will occur and is included in the attached Resolution #20-082 for City Council consideration.

Land Sale - Right of Re-Entry Agreement

Ramsey Hotel Group, LLC has requested that the City close prior to site plan approval in order to guarantee financing of its project.  Due to COVID-19 most lenders have become tighter with the issuance of loans in business sectors relating to retail and hospitality.  Ramsey Hotel Group, does not want to proceed with formal submittal of its site plan and the purchasing of the architectural drawing plan set without signed loan documents from its lender.  Typically, a commitment letter is sufficient for borrowers as to the their comfort level moving forward.  The Lender is requiring that the Ramsey Hotel Group, LLC own the land (additional equity) in order to close on the financing.  Due to the uncertainty in the lending environment Ramsey Hotel Partners requires that its financing is guaranteed and requesting that it close simultaneously on the city land and its financing prior to site plan approval.

A reminder that the Purchase Agreement spells out an initial transaction of $1, with the City recouping the sales price through Tax Increment Financing (TIF). Protection from the scenario where a project does not occur, meaning tax increment is not generated, is key in this instance. Additionally, the City's standard policy to wait until Site Plan Approval before closing retains leverage to experience the desired design. Staff does not want to lose this leverage. A Right of Re-Entry Agreement has been drafted to protect the City's interest in the property in the event that the Developer does not perform.  A compromise scenario is outlined below. 

Notification is not required.

Observations:
The request for a Business Subsidy in the form of a land write-down (reduced sales price) triggers the need for business subsidy analysis. The Anoka County Assessor reviewed the proposed project and has it valued at $4.275M.  There are many positive components to construction of a 60 Unit, 4-Story Hotel with Restaurant that address EDA, City Council and community goals. They include, but are not necessarily limited to the following.

• Estimated Tax Assessed Value $4.275M (Minimum Assessment Agreement in TIF Development Agreement)
• Estimated Annual Property Taxes $137,000
• Estimated Annual TIF for District 14 (COR) $72,800 (1.1M in TIF from 2023-2040)
• Filling demand for more lodging in the City of Ramsey
• High-Quality Full-Service Restaurant
• Pool for Hotel Guests
• 12FT, 13PT (25 total new jobs) 
• Sale of a City parcel in the The COR with the City receiving $311,020 (Est. 5-6 year payback based on TIF Run)
• Parcel begins to generate taxes (currently tax exempt)
• Increased traffic/commerce to the COR/City

Project Analysis - Public Hearing - Need for Subsidy - TIF Development Agreement
The City is proposing a land cost write-down business subsidy of $311,020.  A public hearing is required as part of this business subsidy process. In order to ensure that the assistance is truly needed for the project to move forward, the Business Assistance Application has been reviewed/underwritten by Ehlers, the City's Financial Advisor.  The underwriting will addresses whether the rate of return by the Developer is within industry standards, is truly needed for the project to success (satisfy the TIF, "But For" Test) and includes a reasonable return on investment for the City.  Ehlers has completed the underwriting including the land write down resulting in a cash return of 4.8% and a cash on cost return of 7% by year 3, which are below industry standards.  In April 2020, Ehlers has reviewed the sworn construction statement and has provided an updated analysis memo that still supports the initial findings and also has a quicker reimbursement period (5-6 years of TIF) of the land cost for the City. The TIF Agreement includes a Minimum Assessment Agreement (4.275M) which solidifies the timing of the city reimbursement.  Both memos are attached.  It is clear that provision of the land cost write down is not unduly enriching the developer, but it is providing enough incentive to draw investment into the City of Ramsey.  "But-for" the provision of the incentive, the project would not occur in the City of Ramsey.

Interfund Loan  
The City is required to adopt an inter fund loan resolution allow the city to reimburse eligible costs with TIF revenue.  The eligible costs include $311,020 (land cost write-down) and $25,000 (Administrative and legal costs) and they are included i the attached resolution for Council consideration.

Land Sale - Right of Re-Entry Agreement:

The request to close on the land prior to site plan approval requires the City to put in place agreements that guarantee that the City interest in the land and quality of the project are protected.  The City typically uses a Right of Re-Entry Agreement and Purchase Agreement to assure that the Developer obtains required City approvals, constructs the project to city standards and completes the project on time. This also reserves the City's right to take back the land if the developer does not perform.  City Attorney Langel and Staff have worked together to draft a more restrictive Right of Re-Entry Agreement that protects the City's interest in the event that the Developer does not deliver on the project.  The Developer and Lender have reviewed to th attached Right of Re-Entry Agreement and are comfortable executing and filing it at the simultaneous closing of the land and financing and it is authorization is included in teh attached resolution for City Council consideration.  In addition, there will be future documents from Community Development that outline processes moving forward relating to the platting and associated development fees, and sureties.

Key terms of the Right of Re-Entry Agreement include the following:

• Seller shall have the right, but not the obligation, to either impose a penalty against the Property pursuant to Paragraph 3 of the Purchase Agreement, or to re-enter and take possession of the Property pursuant to Paragraph 4 of the Purchase Agreement, in the event that any of the following Conditions are not satisfied by Buyer
  • Buyer must obtain site plan approval and a certificate of occupancy for the construction of a minimum 60-unit 4-story hotel with restaurant compliant with COR zoning requirements prior to January 1, 2022.
  • Buyer must maintain proof of sufficient financing from the date of closing until issuance of a certificate of occupancy.  Said proof shall be in the form a letter of credit in an amount equal to 110% of the value of construction remaining to be completed, or a sworn statement from the bank(s) financing the development indicating that Buyer has cash accounts and/or loan proceeds sufficient to cover 110% of the value of construction remaining to be completed.  The form for the proof of financing is subject to approval by the City.  If Buyer utilizes a sworn statement in lieu of a letter of credit, the City reserves the right to periodically request updated statements throughout the construction period of the project until a certificate of substantial completion is issued.
• Seller may impose a separate penalty of $311,020 against the Property if site plan is not approved and the certificate of occupancy is not obtained pursuant to the deadline set forth above.  The penalty is due upon written notice to Buyer from Seller of the failure to satisfy a contingency.  In the event the penalty is not paid within 30 days of receipt of the notice, Seller may, but is not required to, certify the penalty to Anoka County as an assessment against the Property.
  • Buyer waives any and all rights under Minnesota Statutes, chapter 429, and any other applicable law, including any right to notice of hearing and hearing, the right to object, and the right to appeal the assessment.  Buyer further waives any requirements of the City Charter that may apply to said assessment.
• As an alternative to imposition of a financial penalty and not in addition thereto, Seller may re-enter and take physical possession of the Property.  Title to the Property shall be restored in Seller, and Buyer shall execute whatever documents and undertake whatever steps are necessary to establish and confirm Seller’s fee simple interest in the Property free of any claims or encumbrances, including mechanic’s liens.

This case is being handled as part of normal Staff duties. If financial assistance is provided, TIF District 14 will also be a funding source.

The EDA has formally recommended approval of the Business Subsidy, TIF Development Agreement and the Right of Re-Entry Agreement protecting the city interest in the development property and supporting the early land sale transaction.  

Motion to adopt Resolution #20-082 Approving a Business Subsidy and Authorizing Execution of a Development Agreement, Right of Re-Entry Agreement and Terms of an Interfund Loan; subject to City Attorney approval as to legal form.