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01SEP2010

Internal Auditor Hired, Fire Station Closures Ending

We were able to share two pieces of good news this morning: City Council has hired Kristy Bork, CPA, to fill the vacant Internal Auditor position. Also, the rotating fire stations closures in effect since April 2009 should end by October.

Bork joins the City from BKD, LLP, where she has worked since 2004 and was a Supervising Accountant. Her duties there included conducting financial statement audits of non-profit health organizations. She graduated from Missouri State University with bachelor’s and master’s degrees in accounting. She is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants. Bork’s total starting salary will be $63,435.84.

She will report to the City Council Finance Committee. The Internal Auditor position is one of three positions that are hired by, and report directly to, City Council under Springfield’s City Charter. The other two are the City Manager and the City Clerk.

The rotating fire station closures will actually be reduced starting today. By Oct. 1, the Fire Department believes it will be able to end all rotating fire station closures. The Department is able to end all closures because it anticipates a reduction in the use of leave time by October. The department has had several personnel off on various types of leave, including military and sick leave, and a second set of new recruits will complete their initial training soon thereafter. The Fire Department will receive its final ISO evaluation later this year, so these staffing increases come at the right time for the department, and the community.

posted by Mike Brothers, Public Information

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31AUG2010

Questions & Answers: Heer's Financing

We heard many questions about the Heer's financing plans leading up to the Aug. 23 Council vote on the deal. Some of those questions were from Councilmembers themselves, and several were from the public. We've compiled them below, with answers. If you have more questions that don't appear below, let us know and we'll add them to the FAQ.

What will be in Heer’s once it’s renovated?

The first floor of Heer’s will include a Mike Shannon’s Steak and Seafood Restaurant, banquet space and a boutique bowling alley/restaurant/bar.  The upper floors will contain 63 market rate apartments with the following amenities:  rooftop pool and deck; common study den; fitness center; security system; and high-speed Internet access.  Residential tenants will have access to indoor parking on the lower level.

How will the renovation of Heer’s be financed?

Total: $29,314,507

*Includes $4,094,267 developer fee only paid if excess revenue over debt service

Is HUD actually making the $11.8 million loan itself?

No. HUD has stated its intent to back a loan that will be made by a private lender or bank.

What is the source of the City’s loan?

The City has a Small Business Loan Program that was started with federal Community Development Block Grant (CDBG) funds.  The federal money must be used to eliminate slum and blight or to benefit low-to-moderate income persons.  Council established the loan program in the 1980’s to assist with center city redevelopment. 

Will this deal mean that money won’t be available to other small businesses wanting to borrow from the Small Business Loan Program?

The amount of this loan will account for about 92 percent of our Loan Program deposits at this point.  The City receives about $60,000 monthly in revolving loan fund income. Annually $1 million comes into the fund.  This includes revolving loan payments as well as loan payoffs when the property is sold or the loan is refinanced. In the event that the City has an opportunity to participate in a project and does not have adequate funds, we will assist the borrower in exploring other sources, such as the Springfield Finance Development Corporation and the Ozarks Regional Community Development Corporation.

Is this really a “small” business loan? Does this project truly qualify, and is there a precedent for this size of loan from this program?

Yes, this project qualifies for the Small Business Loan Program. The program does not have a cap on the amount of a single loan. The City has made two loans larger than this one ($3 million and $2.4 million), as well as several loans of $500,000.

What is the track record of the SBLP as far as write-downs or defaults?

The SBLP’s loan loss ratio is less than 1 percent since its inception about 25 years ago.

What is the MDFB loan?

The Missouri Development Finance Board (MDFB) is considering loaning the City of Springfield $1 million that will be passed through to developer Kevin McGowan as a loan.  This loan will be in addition to the City’s $2 million Small Business Loan.  The Finance Board works directly with communities and does not make direct loans to individuals. The MDFB meets Sept. 21 and expected to vote on this loan proposal at that time.

What is the repayment source for the City and MDFB loans?

The City and MDFB loans will be repaid from Tax Increment Finance (TIF) and Community Improvement District (CID) taxes generated at Heer’s. The TIF district will capture 100 percent of the incremental increase in property taxes (known as PILOTS – Payments In Lieu Of Taxes) after the building is renovated.  The term sheet requires that the Developer agree to a fixed PILOT payment equal to 70 percent of the annual payment on the $3 million loan.  The TIF will also capture 50 percent of the incremental increase in sales taxes (known as EATS – Economic Activity Taxes) from businesses in Heer’s.  In addition, the CID will levy a 1 percent sales tax that will be used for loan repayment.

What is the impact on the School District, Library, and other taxing jurisdictions who receive property and sales taxes?

Taxing jurisdictions who levy a property tax will continue to receive property taxes on the “before-rehab” value of the building.  Only the “after-rehab” value is captured.  For those taxing jurisdictions who levy a sales tax, they will receive 50 percent of the sales taxes generated at Heer’s.

Will the City have to repay the MDFB loan if there isn’t enough TIF and CID revenue to make the loan payments?

No.  The MDFB has agreed to make a limited recourse loan to the City, meaning that the repayment is limited to the TIF and CID revenues.  MDFB will have first priority on those revenues, however, so in the event of a shortfall in revenues, their payment will be paid first and the City will receive the remainder. 

What happens if there isn’t enough TIF and CID revenue to repay the City loan?  Will the City have to dip into the General Fund?

The City’s $2 million loan is derived from two sources.  Approximately $1.54 million is from revolving loan fund income – money that comes into the program in the form of loan payments and loan payoffs when a property is sold or refinanced.   Approximately $460,000 of our $2 million loan will come from HUD Section 108 funds that the City borrowed from HUD in 2006.  Because of the two sources of funds, there are two impacts in the event of default or inadequate revenue to service the debt.  First, we will have severely restricted our ability to participate in other commercial renovations.  Second, we are obligated to repay the $460,000 HUD Section 108 loan.  Our first line of defense for repaying this loan is the revolving loan fund income — about $60,000 monthly.  The second line of defense is our annual Community Development Block Grant (CDBG) allocation.  The City received about $1.35 million this year. The final defense will be the General Fund.

It’s been said that the developer will not receive the loan until certain criteria have been met. What are the criteria?

The money won’t be loaned unless the following collateral is provided:

These are also conditions to closing the loan:

Is it true that unless the City money is loaned, then there is no deal?

Yes. All of the pieces of this proposal are dependent upon approval of all of the other pieces.

Why not reduce the scope of the project by $3 million?

HUD bases its loan guarantee on the market study, which takes into account finishes and amenities when determining market demand and rents. Removing amenities and reducing finishes will result in changes to the market demand and potential rents that can be achieved. That will result in less money coming from the HUD but won’t reduce the amount needed from other sources.

What are the Historic Tax Credit bridge loans?

Income-producing properties listed on the National Register of Historic Places that are renovated to specific standards may be eligible for federal and state tax credits.  The federal tax credits are equal to 25 percent of the qualified rehabilitation expenses and the state tax credits are equal to 20 percent of the qualified rehabilitation expenses.  Because the credits are not awarded until after the project is completed, the developer must obtain short term financing to bridge the period between when construction starts and the credits are awarded.

What is the prospect for the commercial bank that has not been determined, as noted on page 3 of the term sheet under “State Historic Tax Credit Bridge Loan”?

Conversations are ongoing. This is a key issue and probably the most difficult piece to finalize. The City is grateful that the Missouri Development Finance Board (MDFB) has indicated an interest in issuing additional infrastructure tax credits to secure the state tax credit bridge loan, and we believe that this may be the deciding factor for bank participation.

Will the Developer be able to draw his Development Fee as soon as the financing is in place for the project?

No.  The term sheet stipulates that the Development Fee, as well as the Predevelopment and Holding Costs, cannot be paid or reimbursed until the State Historic Tax Credit Bridge Loan is repaid.  At that point the Predevelopment and Holding Costs can be reimbursed but the Development Fee can’t be paid until the PILOTS, EATS, and CID revenues provide 1.1 times the amount of coverage on the payments on the $3 million loan.

How long has this financing structure, as a whole, been in the works?

The original term sheet was approved in July 2007 and the original development agreement that followed was approved in August of 2007. That agreement was then amended in July 2008. The developer has pursued financing for the project throughout this time. The original plans were significantly altered by the economic recession, leading to the proposal that was brought to Council this week.

Are there contingencies built in for cost overruns?

Under ‘Sources and Uses’ on page 2 of the term sheet, the developer indicates that there is $836,263 in construction contingency and an additional $195,000 in project contingency. Construction contingency is for overruns on the construction work. Project contingency is for overruns on soft costs such as fees, taxes, and outside consultants.

Will the City have to dip into the General Fund if the project costs more than anticipated, or if revenue projections aren’t enough to cover the cost of the loan in the first place?

Cost overruns will be the developer’s responsibility. 

The City is working with the developer to make sure that revenue projections are conservative. We will have a fixed property tax payment (PILOT) that will cover 70 percent of the $3 million loan’s debt service. The remainder will be covered by sales taxes generated at the project. A fixed payment is obviously a much more stable source of revenue for the loan pay-back than sales taxes, which can fluctuate. There are protections in the term sheet whereby the developer can’t take out development fees until debt service coverage on the $3 million reaches 1.1 times the amount of coverage on the payments on the loan.

Do the cost estimates for the Mike Shannon’s Restaurant include the cost of equipment?

There is $1,485,315 in the budget for the commercial tenant improvement allowance.  Mike Shannon’s and the bowling alley will bear additional costs for tables and chairs, linens, silverware, etc.

Why is the City dissolving one Community Improvement District (CID) and forming another one at a later date?

The 2006 Heer’s Tower CID was geared toward former developer Vaughn Prost’s project with residential condominiums on the upper floors and commercial tenants on the first floor. It contemplated a special assessment property tax in addition to a sales tax. This is not the current financing model.  It also is named Heer’s Tower – a name the current developer isn’t using. The CID will either need to be terminated and a new CID created or it will need significant revisions. It will probably be easiest to terminate the existing CID and introduce a new CID.

What is a Tax Increment Finance District (TIF)?  How many are in Springfield?

A TIF District is an economic development tool that uses the incremental increase in taxes to pay for project costs.  A typical TIF “captures” 100 percent of the incremental increase in property taxes and 50 percent of the incremental increase in sales taxes.  The term sheet allocates these revenues for repayment of the City and MDFB loans.  The City Council is authorized to establish a TIF district after a detailed process involving public hearings at the TIF Commission and City Council.  A TIF may exist for up to 23 years.  There are two TIF Districts in Springfield.  Revenues from the Jordan Valley Park TIF are used to retire the debt on the Expo Center.  The Commercial Street TIF captures the incremental increase in revenue for public infrastructure improvements in the district.

What is the difference between Blue Urban and the Heer’s Building LLC?

Blue Urban is the development company owned by developer Kevin McGowan. Heer’s Building LLC is the entity that will develop the building.  As is commonly practiced, developers place each property into a separate Limited Liability Company (LLC).  The majority owner of Heer’s Building LLC is Mike Shannon and the managing member is Kevin McGowan.

Will any jobs be created as a result of the renovation?

Yes.  Approximately 181 temporary jobs with an estimated payroll of $8,220,000 will be created during construction.  The general contractor is HBD Construction from St. Louis but 82 percent of the subcontractors will be from the Springfield area.  That includes 40 local subcontracting companies with 140 on-site construction jobs.  After construction, it is estimated that there will be 60 new permanent jobs created with an annual payroll of approximately $1,675,000.

Realistically, what are the other options?

Because of the economy and the tight market for financing projects of any kind, let alone larger ones such as this, the most realistic option after this proposal is to board up the building and wait until the market turns around and commercial banking loosens up.

Should demolition be an option, what would that cost?

The Colonial Hotel, formerly located at Jefferson Avenue between McDaniel and Park Central East, cost more than $260,000 to demolish in 1997.  (It’s a Missouri State University parking lot now.) Demolishing Heer’s would be more difficult — and more costly — because it isn’t as accessible as the Colonial was. Colonial was open to St. Louis, Jefferson, and McDaniel streets. Heer’s is open on the “short” sides to McDaniel and Olive but it’s within 12 feet of the Landers State Office Building and about as close to the Heer’s parking deck.  This seems to indicate it will have to be a carefully executed demolition, not just swinging a wrecking ball.

Was City Council’s 9-0 vote to approve the term sheet at its Aug. 23 meeting the final action on this matter?

No, the vote was simply a statement of intent. Each of the individual pieces of the plan that are under the City’s control (revisions to the Development Agreement, CID, TIF District, the loan itself) will need to come before Council separately for final approvals.

What are the next steps?

The deadline for applying for the HUD Loan Guarantee is October 6.  Before a final application can be submitted, the developer has to obtain letters of commitment on each piece of the financing described in Question 2.  The Missouri Development Finance Board will consider its participation in the project at their September 21 meeting.  If all information is submitted in a timely manner to HUD and they agree to the final terms of the Loan Guarantee, then the financing could close and construction begin in March 2011.  A 14 month construction period is anticipated so the building could be ready for occupancy in spring 2012.

posted by Mike Brothers, Public Information

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23AUG2010

Council Gives Approves Heer's Financing Framework

The topic of the night, as expected, was the Heer’s building redevelopment financing plan. Council ultimately voted 9-0 to approve the term sheet after more than two hours of discussion. Final approval of the individual pieces comes later.

The discussion kicked off with an overview of the project by City Economic Development Director Mary Lilly Smith. She said the building will contain 63 market-rate apartments. “Market rate” means just that — it is not low-income housing, she said. It will also include a rooftop pool, fitness center, indoor parking and 33,000 square feet of commercial space anchored by a Mike Shannon’s Steak & Seafood restaurant. The project is estimated to create 181 construction jobs and about 60 permanent jobs.

The financing structure for the $29.2 million project is complex, and includes a mixture of loans, tax credits and the developer’s contribution. The cornerstone is an $11.8 million loan from the Department of Housing and Urban Development; $5.1 million in federal historic tax credits; $4.9 million in state historic tax credits; $4.4 million developer contribution and $3 million in loans from the City and the Missouri Development Finance Board.

The City’s portion consists of a $2 million loan from the long-established Small Business Loan Program, and an additional $1 million loan from the Missouri Development Finance Board, which will be “passed through” the City to the developer. It has a 23-year term at 5 percent interest with limited recourse for the City. Specifically, this means that if the revenues from those sources are not enough to pay back the City’s loan, the City is not required to use money from the General Fund or any other source to pay it back. The loan will not be granted to the developer until the project is at least 50 percent complete.

The collateral? Developer Kevin McGowan has agreed to contractually obligate himself to fixed payments in lieu of taxes (PILOTs) equal to 70 percent of the debt. The remaining 30 percent of the debt will be repaid with sales tax revenues from a Community Improvement District (CID) and a Tax Increment Financing (TIF) District.

There are also several conditions the developer must meet to get the loan, including: Executing 100 percent of first floor retail for construction of the restaurant and bowling alley; construction contacts and evidence of availability of funds to complete them; an acceptable market study showing adequate demand for the residential units; closing of all loans simultaneously, and a several more items.

Next, Smith answered several questions that were prepared by Mayor O’Neal based on the things he has heard in conversation and in e-mails from citizens. We will post all of those questions and answers on our website this week. They include: Is this really a “small” business loan? Will we have money available in that loan program for other small businesses if we do this? Who, exactly, is involved in Heer’s LLC? What would it cost to tear the building down? And many more.

Eleven people spoke during the public hearing, both for and against the measure before the Council unanimously approved the resolution. This is only a signal of intent, and it allows McGowan to go forth with approval of the HUD-backed loans and other pieces, as all of the parts of the deal are dependent upon each of the other parts. McGowan’s deadline with HUD is Oct. 6. The final approval of all of the local pieces (the loan, CID, TIF) will come later, perhaps as early as November.

In other business:

• Council approved liquor license requests for Gelato Mio, 207 Park Central Square, and Mama Jean’s, 1110 E. Republic Road.

• Approved by a 6-3 vote a petition to extend the Airport Plaza Community Improvement District for a period not to exceed 50 years, or the reimbursement of project costs.

• Expanded the duties of the Citizens Sales Tax Oversight Committee to include the ¼-cent Sales Tax for Capital Improvements and the 1/8-cent Sales Tax for Transportation, in addition to its original duty of examining the ¾-cent Police-Fire Pension Sales Tax revenues.

posted by Mike Brothers, Public Information

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12AUG2010

Is the City Upholding Its Pension Fund Commitments?

Those who closely followed the events leading up to last year’s vote on the ¾-cent Police/Fire Pension Fund sales tax might recall that City Council passed a resolution that outlined eight commitments it said the City would uphold should voters approve the tax.

Five of those commitments were suggestions from the Police/Fire Pension Fund Citizens’ Task Force, which spent the summer of 2009 analyzing the pension fund shortfall issue. The task force gave is final report to Council one year ago this week. Voters approved the sales tax in November.

Since that time, the City has taken many steps to continue to shore up the pension fund situation — including all of the commitments made last year. Five are completed and three are in progress. The commitments in progress include:

Those already completed include:

The Council also pledged not to seek any new city sales taxes during the lifetime of the pension sales tax. It has also formed the Citizens' Sales Tax Oversight Committee as a way of providing futher accountability to the process of collecting and depositing the pension fund sales tax revenue.

At Monday’s City Council meeting, City Manager Greg Burris reviewed the commitments and recapped where the City stands on each one. We have a short video of that presentation (4 min, 30 sec) for those who would like to know more, including the amount of revenue the sales tax and the sale of surplus properties have generated so far.

Some of these steps have not been easy, with the passage of the sales tax at the top of that list. We continue to be grateful for voters’ willingness put that cornerstone in place, and we want to present this information as way of showing that the City is living up to its commitments.

posted by Mike Brothers, Public Information

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11AUG2010

How Springfield Landed Expedia's Expansion

The Chamber of Commerce has something of a behind-the-scenes look at what it took to usher in Expedia's expansion of its Springfield operations, announced last week. We thought it might of interest. The City is one of the partners in the Springfield Business Development Corporation, along with the Chamber, Greene County and City Utilities. When the 500-job expansion is complete, Expedia/Hotels.com will rank in the top 20 of the Springfield metro’s largest employers. With 8,000 employees worldwide, 10 percent of Expedia’s overall workforce will be in Springfield.

Link: How Springfield Landed the Expedia Expansion

posted by Mike Brothers, Public Information

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11AUG2010

Tax Oversight Group Looks At Revenues, Deposits

The chair of the new Citizens’ Sales Tax Oversight Committee, Dr. Richard Thompson, characterized the group’s second meeting Tuesday night as “still learning to walk” in that the group is continuing to learn about the City’s finances in preparation of its oversight duties. Those duties, by the way, will likely be expanded in two weeks, when Council votes on an ordinance to include the ¼ cent and 1/8 cent sales taxes into the group’s oversight responsibilities.

Thompson likened the group’s role to a focus group with accountability and educational components. The group can help educate the public on the more complex points of the sales tax funds, and can help answer the question, “Is the City living up to voters’ expectations?” Mayor Jim O’Neal also addressed the group and said he hopes it can help bust persistent “myths” about the sales tax funds and the projects they pay for.

Finance Director Mary Mannix Decker began with an overview of the collection and distribution process for sales taxes in general.

Generally, the City receives revenues about two months after being paid by consumers. There are exceptions, depending on when businesses are required to pay their taxes. Mannix Decker passed out a distribution schedule that outlines how monthly, quarterly and annual reporters are determined based on their amount of taxable sales. In a calendar quarter, the City typically receives a large check (quarterly reporters), a medium-sized check (monthly reporters) and a smaller one (those who are lagging behind in payments).

“There tends to be a lot of fluctuation month-to-month,” she said, saying the City tries to focus on year-to-date numbers because this tends to smooth out over time. Just a recent example, the City's sales tax check July was up 16 percent, while the August check was down 8 percent. Such swings, both up and down, are not unusual from month to month.

Ballot language authorizes, directs and binds the revenue into the “silos” discussed at the committee’s first meeting. Independent auditors keep an eye on where the money goes. The state reports to the auditors the amounts it has given to the City, and the auditors make sure the figures match up with the City’s books.

Next, Mannix Decker went over the revenues from the 3/4-cent pension fund sales tax. The tax was effective April 1. The first bit of revenue came in May, from people who paid motor vehicle sales taxes. The June check represented the first monthly reporters and the July and August checks represented the first complete pictures of revenues. So far, $4.1 million has been collected and deposited into the Pension Fund. The documents provided some directly from the City’s financial software system. Some of the committee members asked to the see the Pension Fund’s income and balance statements, and the City will provide those before its next meeting.

Finally, Public Works Co-Interim Director Phil Broyles presented some background on the 1/4-cent sales tax for capital improvements.

The oversight committee’s next meeting will be held Tuesday, Sept. 21.

posted by Mike Brothers, Public Information

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