Discuss Development Management Incentive Compensation - McDonald's

Purpose:  To authorize Development Management Compensation as it relates to McDonald's.

Background:  In October 2012, the HRA discussed Development Management Compensation.  The case for discussion included development fee worksheets.  The worksheet was based on the then current pro-forma values, projected development costs, and maximum values established in the contract. 

The HRA approved the proposed development management compensation in 2012, however since that time a number of substantial changes were made to the project, including:
-actual development costs for the site are now known
-the McDonald's building was reduced in size
-the final allocation of costs to McDonald's is known
-the number of projects moving forward as part of this development went from three (i.e., Super America, Wiser Choice, and McDonald's), to solely McDonald's

Most recently, the HRA reviewed the proposed incentive compensation for the McDonald's project at their regular meeting of March 11 and did not recommend a payment, but directed staff to consult further with the attorneys and attempt to reach a compromise with Landform.

As a result of the above fundamental and substantial changes to the project, the contract with Landform allows for the reconsideration of the incentive fee compensation.  Consequently, a recalculation of the incentive fee was conducted and presented to the HRA for discussion.  The fee was proposed to go from the estimated $51,441 to a fee based upon actual amounts, of $36,184.  Based upon additional feedback from the HRA, the HRA attorneys, and Landform, staff reconsidered this number.

As previously discussed, the meeting minutes from the October 23, 2012 HRA Regular Meeting reflect that the discussion at the time indicated that there would be revisions to the fees if substantial changes occurred in the project.

The HRA can make payment on the estimated project costs approved in 2012, or the modified costs based on actual development costs.  Due to the fact that there has been a fundamental and substantial change to the project, with a significant impact to the incentive fee, staff had previously recommended that the incentive fee be based upon today's  actual numbers. 

Notably, Landform objects to any reduction in the incentive compensation at this time and has threatened litigation.  The City's HRA Attorney has indicated that it is within the City's discretion to modify this fee, since there appears to be significant differences from when this project was first approved in 2012.  Since the last meeting, Landform (via legal counsel), has indicated that they will not negotiate the final payment, and would proceed with a law suit if not paid the full amount.

Staff believes that an incentive fee needs to be paid, per contract, to Landform for this transaction.  In other words, based upon previous legal opinions, staff is not recommending non-payment as an option.  There was previous concern that Landform was acting as a broker in receiving "incentive" fees, however the co-mingling of activities of development management and possible broker activity makes it impractical to pursue this approach.

Site improvement costs were originally presented by Landform, as project engineer, to be representative of the costs of developing the parcel.  These numbers appear to be greatly in excess of standard and actual development costs incurred by McDonald's in developing the site.  The attorneys have advised that we could argue this calculation, or pay the previously agreed amount, while formally stating our objections in a transmittal letter.  The calculation of any incentive fees that may be calculated between now and June 30, 2014 (the end of the Landform contract) would then be based upon City estimated costs.  No additional Development Manager Fee Worksheets were approved other than for Super America, which has since dropped interest in any Ramsey property.  Future sales for different projects would be subject to new incentive fee calculations.  By paying the previously approved amount for the McDonald's project, the City is not establishing a precedent and additional legal fees would be avoided.

The only change to the originally approved amount recommended at this time is to correct for an apparent mathematical error that was  discovered in reviewing the Development Manager Worksheet.  The Development Soft Costs, by contract and in accordance with the worksheet, cannot exceed 20% of the sum of the lands sales price, pro-forma building value, and site improvement costs.  In the original calculation the Development Manager used $450,000, which is 21.2 percent.  Adjusted to 20%, the soft costs would be $424,411, resulting in a total development incentive fee of $50,929, or a reduction of $512.

Funding for the incentive fee will be allocated from the proceeds of the recent land sale to McDonald's.

It is recommended that the HRA approve a modified incentive fee calculation and make payment to Landform in the amount of $50,929 (original amount $51,441, less the mathematical error of $512), in accordance with the payment schedule outlined in the contract.  The initial payment will be accompanied by a letter stating the City's objection to the fee calculation.

Motion to approved the payment of an incentive fee to Landform for the McDonald's project in the amount of $50,929, to be paid in accordance with the payment schedule outlined in the contract.