Consider Bury & Carlson request to terminate Lease Agreement

Attached is a December 3, 2012 letter from Larkin Hoffman, attorneys for Bury & Carlson ("B&C").  It is this letter which has precipitated this case.  Bury & Carlson leases property from the City and is asking to terminate the lease 18 months early.  In order to enable the Council to better respond to the letter, we are presenting a fairly lengthy background to inform the new City Council members regarding this matter and to refresh previous City Council members as well.

See the attached graphic which shows the 19.89 acre site and its location at Jaspar Street and 143rd Avenue (the "Site").

The City purchased the site from B&C in March 2008 for a purchase price of $1,753,500.00 including relocation expenses.  See attached 02/26/08 City Council case authorizing the purchase.  The purpose of the purchase was for a future public works facility.  The terms of the Purchase Agreement included a lease back of the site to B&C for a ten year term.  The rent payment is payment by B&C (the "Tenant") of the site's annual property taxes with a not to exceed amount.  The "rent" is really a pass through for property taxes as the City uses the "rent" to pay the taxes.  For Example: 2012 total taxes were $44,599.85 on this property (of which per agreement B&G paid $41,674.50) of the $44,599.85 the City received $6,018.70, the County $5,758.59, school district $4,583.83, $2,549.06 other levies and the remainder went to state general tax & fiscal disparities (of which the City is a benefactor).  These numbers reflect that the City's share of the total tax collected for the Site in 2012 is approximately 13.5% plus fiscal disparities.

The City set up an internal loan in the amount of $719,775 (General fund share of the original $1,753,500 purchase price). We have been levying $44,520 annually in the General Fund with this expenditure to be included in the General Fund Budget through 2028. The portion of taxes and fiscal disparities that the City received from the return on taxes helps to offset some of this annual expenditure.  

A term of the Lease provides that the Tenant may terminate the Lease early upon 18 months notice to the Landlord (the "City").  The purpose of the December 3, 2012 letter from B&C's attorney is to seek the City's approval to terminate the Lease March 31, 2013, rather than wait for the 18 month term as provided in the Lease.  Please note that the effect of the B&C Lease termination will be that the Site will become tax exempt and therefore no property tax revenue received from it.

As justification for requesting the early termination, B&C alleges the City is not treating B&C fairly in allowing its competitors to operate similar facilities in the City without obtaining appropriate City zoning approvals.  B&C has cited no specific instances of such circumstances and City staff is unaware of any such unfair treatment. Staff in the past has received complaints of similar uses operating without the appropriate Conditional Use Permits. In each circumstance, the proper code enforcement and corrective action was followed, or appropriate permits filed. At this time, Staff believes that all similar uses are operating with the proper permits.   Staff therefore does not support B&C's early lease termination request.

As an alternative, the Public Works Department would like at this time to request Council approval to terminate part of the Lease as to the southerly 10.37 acre part of the Site shown on the attached graphic.  The public works department has need for this portion of the site now in order to move excess soil piles off the current Public Works ("PW") site.  Presently we store our street sweepings, seal coat rock, black dirt and recycled asphalt piles on the current PW site.  These materials are essential to our operation, but are becoming cumbersome on our current 9 acre site. With the addition of the south half of the B&C property, PW would be able to move these materials to a more appropriate location and out of public view. The B&C property is ideally located and sized for our future PW operations. As the City grows, larger tracts of land will become scarce, especially in an industrial area, that is needed to support an operation such as the PW's.  The original intent of the  purchase of the B&C property was to provide for the future expansion of the PW's department and staff recommends we  continue with that vision.

The Lease does provide for such early termination by the City, requiring of course a proration of the "rent".  See the attached page 3 of the Lease which specifies the rent for the entire Site.  Early termination of the Lease by the City as to the south 10 acres will reduce the rent/tax amount by 50%.  The City Council in the last two years has rejected PW's request for early termination, citing the need for the rent/tax revenue.

 

Staff recommends that the Council deny B&C's early lease termination request and approve an early termination of the Lease by the City for the south 10 acres, thereby reducing the rent/tax amount by 50%.  

The maximum potential loss for the entire site if B&C's early termination is granted is $70,067.00 in lost tax revenue, which is the loss of all the rental amount due March 31, 2014 and half the amount due March 31, 2015.  In the event the City Council agrees with the PW department and elects to terminate the Lease as to the south half of the Site then B&C's early termination will cost the taxing authorities $35,000.00 as B&C's rent obligation is for only one-half of the Site.

Summary:

Loss of TOTAL tax revenue if Lease terminated 18 months early per B&C request NOTE: The City's direct loss under this scenario is $9459. (13.5% * $70,067) + fiscal disparities	($70,067.00)
Loss of TOTAL tax revenue if B&C's request is denied,  but City agrees it wants to exercise its right to terminate early as to the south half of the Site NOTE: The City's direct loss under this scenario is $4725. (13.5% * $35,000) + fiscal disparities	($35,000.00)
Tax revenue maintained if no B&C early 18 month Lease termination and no City early termination as to south half of Site NOTE: The City's tax revenue maintained under this scenario is $9459 + fiscal disparities	$70,067.00

Any loss in tax base/revenue will need to be absorbed by the City's General Fund.
 

Deny B&C's early lease termination request and approve an early termination of the Lease by the City for the south 10 acres, thereby reducing the rent/tax amount by 50%.