Consider Settlement Offer for Water and Sewer Cost Contribution and Reimbursement Agreement; Case of 21st Century Bank

The purpose of this case is to consider a Settlement Offer from 21st Century Bank to settle the remaining Watermain and Sanitary Sewer Cost Contribution/Reimbursement Agreement in the amount of $50,000, which is set to expire in 2026. The original offer from 21st Century Bank was for $95,000 and Staff has negotiated that offer to $50,000. The realistic potential liability to the City ranges from $100,000 to $200,000 when factoring in growth forecasts in the Reimbursement Area. In summary, Staff believes that this will likely result in a long-term cost savings to the City. It is repeated that the original Developer financed an otherwise City obligation (future development expense reimbursed through Trunk Fees) and was therefore entitled to reimbursements of Trunk Fees for other areas that benefited from the extension of these trunk lines. 

In the early 2000s, the City entered into a Reimbursement Agreement with Oakwood Land Development for a $6 Million Watermain and Sanitary Sewer Extension that served both the Brookfield and Sweetbay Ridge/Woodlands Neighborhoods. At that time, the Developer (Oakwood Land Development) agreed to construct a major extension of the City's Water and Sanitary Sewer Trunk Lines to service these areas. These improvements are typically paid for by Developers through standard Trunk Fees. In this case, the trunk lines 'leapfrogged' several undeveloped areas. In this case, the City did not want to take on the risk of areas outside of these two neighborhoods not developing and not recouping these costs through Trunk Fees from other developments. In this case, Oakwood Land Development agreed to take on obligations outside of their project and in exchange would be reimbursed through future trunk fee collections. Unfortunately, reimbursements slowed signficantly during the 2008 Recession. 

In 2009, Oakwood Land Development defaulted on loans on the project and 21st Century Bank foreclosed on land assets and assumed the Reimbursement Agreement. The City has amended the Reimbursement Agreement once to extend the sunset date to 2026. Copies of the original and amended agreement are attached. 

Of the $6 Million Reimbursement Amount, the City has only reimbursed through transfer of Trunk Fees or credits to Trunk Fees in Brookfield in the amount of approximately $1M. While there is still a significant liability on the books in terms of total reimbursement amount, the Agreement will expire in 2026. 21st Century Bank will in no way achieve the full Reimbursement Amount due to lack of development within the Reimbursement Area. 

Staff acknowledges that this is a complex issue and members are encouraged to ask questions. As stated above, the likely outcome of this settlement is an actual cost-savings to the City. The City will likely be obligated to reimburse certain trunk fees as it has been doing since 2006 if we don't accept this offer. The long-term cost to settle now as opposed to 2026 is forecasted to demonstrate a cost-savings. 

30 minutes

By way of reinforcing the overall obligations and benefit to the City:

1. In 2006, Oakwood Land Development agreed to take on additional obligations to extend Trunk Water and Sanitary Sewer that would have normally been the obligation of the City and/or other Projects/Developers. In exchange, the City agreed to forward future Trunk Fees collected from projects that benefited from this Trunk Line Extension for a period of time. 
2. In 2009, Oakwood defaulted on a loan with 21st Century Bank. 21st Century Bank foreclosed on certain assets of Oakwood Land Development and assumed the Reimbursement Agreement above.
   1. Prior to the foreclosure, Oakwood Land Development was reimbursed $492,308. 
   2. 21st Century Bank acquired the remaining undeveloped area in Brookfield as of 2009 through foreclosure. Rather than a payment from 21st Century Bank reimbursement back to 21st Century Bank, the City simply credited these amount in Brookfield 4th through 8th Additions ($315,386).
   3. Woodlands (undeveloped phase of Sweetbay Ridge) was subject to the reimbursement and Trunk Fees from this Development were reimbursed to 21st Century Bank ($221,575). 
   4. Total Reimbursement To Date = $1,029,269.
3. While the total reimbursement amount is far higher, the realistic potential liability to the City ranges from $100,000 to $200,000 due to the expiration date of the Reimbursement Agreement, less than the current offer of $50,000.
4. The liability on the books impacts our long-range water and sewer planning. By agreeing to the Settlement Agreement amount today, we will be able to re-evaluate our Trunk Fee Charges moving forward. 

While the area north of Trott Brook ('Additional Reimbursement Area' in Reimbursement Area) is included in the Reimbursement Area, it will require the extension of new Trunk Water and Sanitary Sewer. The costs of these extensions are not reimbursable to 21st Century Bank and 21st Century Bank is not likely to see any reimbursement from this area prior to 2026. 

The area just south of the new Brookside Elementary School ('Harmony Farms' in the Reimbursement Agreement) has a high degree of potential to develop prior to the sunset clause of 2026. If that were to occur, the cost of reimbursement to 21st Century Bank would exceed the current settlement offer. There is no guarantee that this area will develop prior to 2026, but it is possible. 

The settlement would be paid for through the City's Water and Sanitary Sewer Accounts. This would not be a General Fund Expenses. The settlement would reduce our liability on our financial records. 

Staff acknowledges that there is some risk in accepting this offer. It is possible that there are no fees to reimburse 21st Century Bank due to lack of development between now and 2026, although that is unlikely. Staff believes the risk tolerance is low of having a higher reimbursement amount by waiting to see if the Harmony Farms area develops after 2026. It is more likely that the level of development that will occur will result in a reimbursement amount higher than the current settlement amount. Additionally, the settlement amount itself appears to be fairly low. While there is some risk involved, Staff believes this to be a fair offer and takes a potentially significant liability off the books. 

Motion to recommend that the City Council accept the Settlement Offer from 21st Century Bank related to the Watermain and Sanitary Sewer Cost Contribution/Reimbursement Agreement.