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Memo - SuperValu N Anex Redevelop . Economic Development MEMORANDUM TO: Honorable Mayor and City Council FROM: ~im Kerrigan DA TE: July 25, 2002 SUBJECT: SUPERVALU North Annex Property . PURPOSE OF MEMO City Staff recently met with representatives of SUPERVALU, at which time they outlined a proposal to address the future marketing and redevelopment of this property. In response to this proposal, staff stated that they would discuss it with the Council at the July 30 work session and try to secure some direction on how to move forward with this matter. OVERVIEW The 1998 development agreement that was executed between SUPERVALU and the HRA to facilitate construction of the SUPERVALU distribution facility had a section dealing with the future redevelopment of the North Annex property. This allowed for SUPERVALU to first have a period of time to try to find a developer for the site and, if unsuccessful in the endeavor, the HRA would then be able to enter into an option agreement to purchase the property. The HRA option period as presently defined in the agreement would begin in November of this year. The purchase price identified in the option agreement would be established through an appraisal process undertaken by both the HRA . and SUPERVALU, To meet timelines, these appraisals have now been started. Memo to Mayor and Council, July 25,2002 - Page 2 . PRIMARY ISSUES TO CONSIDER What is now being proposed by SUPERVALU? SUPERV ALU is proposing to delay the commencement date for the HRA option for a two- to three-year period. During this period they would aggressively market the property on a national basis. If this proposal is acceptable, we would ask that a new agreement be executed with the HRA that detailed the following: 0 The HRA would use its best efforts to either extend the term of the existing tax increment district or create a new tax increment district. This would be done annually to address the five-year rule. (Activities to be funded with tax increment must be completed in a five-year period.) This would presently be April 2004 for the North Annex property. 0 SUPERV ALU would provide the necessary property for construction of the . Monroe Avenue/Excelsior Boulevard intersection. The property north of Excelsior Boulevard would be provided at no cost, and the property on the south side of the roadway would be at a purchase price to be determined. SUPERVALU would also be required to pay for modifications to their Monroe facility. 0 SUPERV ALU would have the ability to demolish the North Annex buildings. They would be reimbursed for the cost of demolition and environmental remediation first from existing available excess increment over and above what is required for the intersection improvements and then from the increment generated as a result of future redevelopment. 0 If SUPERVALU were unsuccessful in finding a developer during the extended market period, at the time that the HRA option was implemented there would be a fixed purchase price of $10,739,072.61. (This is SUPERV ALU's net book value for this property. It should be noted that the sale price to Medica for this property would have been $12,250,000.) What is staff's recommendation? Staff feels that for the most part the SUPERVALU proposal is reasonable. The HRA will not lose any of its rights as relate to the option, but rather delay the time . that the option period commences. SUPERVALU has stated they would contract with a national broker to market the property. This would be a more aggressive effort than City staff would undertake to market this property. . Memo to Mayor and Council, July 25, 2002 - Page 3 If the Council were agreeable to the SUPERVALU proposal, staff would recommend a new agreement to also address the following: 0 Site conditions should the North Annex buildings be demolished 0 How the City can gain control of the three-acre site north of Second Street North for snow storage 0 SUPERVALU to pay all costs in conjunction with this matter 0 SUPERVALU would need to keep the HRA updated periodically on the marketing efforts ATTACHMENTS . Redevelopment agreement between the HRA and SUPERVALU dated 7/20/98 (re: the Distribution Facility Project) - Section 3.9 (re: North Annex redevelopment) - Section 5.3 (re: Reimbursement of redevelopment costs) . Summary of North Annex option agreement . . . or the building located on the Redevelopment Property or that the same is suitable for the Redeveloper's proposed development. If the Redeveloper determines to proceed with its acquisition of the Redevelopment Property neither the Authority nor the City shall have any liability to the Redeveloper on account of any conditions or defects with respect thereto. Section 3.8. Copies of Reports. The Redeveloper shall furnish to the Authority, at no cost to the Authority, copies of all reports, assessments, studies, smveys and other documentation acquired by or prepared on behalf of the Redeveloper by independent consultants in connection with its proposed acquisition of the Redevelopment Property and relating to soils, environmental, title and survey matters. Section- 3.9. North. Annex Property. (a) At the time of the conveyance of the Redevelopment Property and, as a condition to the Authority's conveyance of the Redevelopment Property to the Redeveloper, the Redeveloper shall execute and deliver the Option for recording :in the appropriate office for the recording of such instruments against the North Annex Property, as an encumbrance prior to all other interests in the North Annex Property, other than such interests as the Authority may in writing approve. If the Authority and the Redeveloper have been unable by July 23, 1998, to agree in writing on a list of :interests in the North Annex Property, if any, to which the encumbrance of the Option is subject, then either the Authority or the Redeveloper may by giving notice to the other party by July 23, 1998, terminate this Agreement with the same effect as is stated in Section 3.3 with respect to the failed . satisfaction of a condition contained therein. The Redeveloper shall provide to the Authority such documentation as the Authority may reasonably require as to the nature and location of any interest that the Redeveloper may request be superior to the Option. Such documentation shall be provided within such time as will allow the Authority to complete its review of the proposed interests by July 23, 1998. The Authority's participation in the Redeveloper's development of the Minimum Improvements as described in this Agreement is predicated, in part, on the Redeveloper's granting to the Authority the rights contained in the Option. @ (b) Until the end of the second year following the Redeveloper's receipt of a Certificate of Occupancy for the MinimlUll Improvements, the Redeveloper shall be entitled to present to the Authority and the City for their consideration a proposal describing a plan for the development of the North Annex Property by the Redeveloper. The Authority agrees that it will not exercise its rights under the Option, or will delay exercising such rights, if the following conditions are met with respect to such development proposal on or before two (2) years after the issuance of the Certificate of Occupancy by the City for the Minimum Impro~ements: (i) The proposed development complies with the Business Park Zoning Ordinance; (ii) The proposed development consists of at least 350,000 square feet of buildings; (iii) At least fifty percent (50%) of the proposed development must be office space and not more than forty-percent (40%) of the remaining fifty percent (50%) may be for . warehouse use; provided, that if the Business Park Zoning Ordinance requires more office or allows less warehouse space, then those use requirements of the Business Park Zoning Ordinance must be met; 10 - I d . (iv) The Redeveloper demonstrates to the satisfaction of the Authority that the proposed development will occur within a time frame acceptable to the Authority and the City, which time frame shall include completion of the demolition of the existing improvements on the North Annex Property within one (1) year after the Commencement Date, as defined in the Option, and the completion of construction within two (2) years after said Commencement Date; and (v) The Authority and the Redeveloper enter into an agreement detailing the improvements to be constructed by the Redeveloper on the North Annex Property, the timing of such construction, the rights of the Authority if such construction does not occur, including an extension of the Authority's rights under the Option, and such other terms as the Authority and the Redeveloper agree are appropriate. (c) Within the later of: (i) thirty (30) days after the completion of construction of the Redeveloper's development approved in accordance with (b) above as evidenced by the issuance of a certificate of occupancy by the City; or (ii) thirty (30) days after request by the Redeveloper, the Authority will execute and deliver to the Redeveloper an instrument, in recordable form, evidencing the termination of the Option. Section 3,10. Performance of the County Purchase Agreement. The Authority and the . Redeveloper acknowledge that the Authority's execution of the County Purchase Agreement occurred solely in anticipation of the execution of this Agreement and for the purpose of acquiring the Redevelopment Property for the development by the Redeveloper of the Minimum Improvements. Further, it is the intent that under no circumstances will the Authority or the City be obligated to acquire the Redevelopment Property or to pay any costs under the County Purchase Agreement except in order to secure such property for the Redeveloper's development. The Authority and the Redeveloper shall cooperate with one another in the performance of all inspections, tests and. approvals that are necessary to fulfill such contingencies, and the Redeveloper shall notifY the Authority, in writing prior to the expiration of the time period for exercising contingencies provided in the COtulty Purchase Agreement should the Redeveloper desire to exercise any of the conditions precedent provided in this Agreement or have the Authority exercise any of the contingencies stated in the County Purchase Agreement. At such time as a contingency stated in the County Purchase Agreement has been removed or waived, tbis Agreement shall no longer be subject to or contingent upon any contingency or condition precedent relating to the same matter or issue. At such time as the Authority is unconditionally bound to perform the County Purchase Agreement, the Redeveloper shall also be unconditionally bound to perform this Agreement. Notwithstanding the previous sentence, Section 3.3 contains certain conditions which, if not satisfied, may be the basis for termination of this Agreement at a time when the County Purchase Agreement is no longer contingent. Upon such termination, the money provided by the Redeveloper to the Authority for payment of the Eamest Money under the County Purchase Agreement will not be refundable to the Authority by the County and, therefore, not recoverable by the Redeveloper. . 11 . . . is not created, neither the Authority or City will have any obligation to the Redeveloper on account thereof, and such failure will not affect the Redeveloper's other obligations under this Agreement. Section 5,3. Reimbursement of Public Redevelopment Costs. (a) The Authority will consider reimbursing the Redeveloper for certain transportation-related public improvements incurred in connection with the Redeveloper's planned overall business campus development. Also, the Authority acknowledges that a portion of the cost of acquiring the Acquisition Parcels, the cost of demolishing the improvements currently located on the Acquisition Parcels, and demolition costs assQciated with the redevelopment of tbe North Annex Property constitute extraordinary costs of development that would not be required if the development were to occur on land not occupied by improvements. Therefore, the Authority will consider reimbursing the Redeveloper for costs of acquisition and demolition of the Acquisition Parcels in excess of the fair market \Talue of the land only and the cost of demolishing the improvements on the North Annex Property. .Fair market value of the land comprising the Acquisition Parcels will be determined pursuant to a process agreed upon by the Authority and the Redeveloper. (b) The only source of fanqs that the Authority will consider usirrg to make the reimbursements described in tbis Article is a portion of the tax increment received from the Redeveloper's development on the Redevelopment Property, Any reimbursement will be a revenue obligation only, and not a general obligation of the Authority or the City, to be made . only using tax increment after it has been received by the Authority. The Authority intends, in any event, to withhold from the tax increment that may be used for reimbursements ten percent (10%) of the tax increment received in each year to be used for its own purposes. Also, the only tax increment that will be deemed available to be used for reimbursement shall be the tax increment generated with respect to development undertaken by the Redeveloper on the Redevelopment Property that is received during the seven (7) year period commencing in the first year in which the Authority receives tax increment from the tax increment district that may be created pursuant to Section 5.2. (2E) (c) It is intended that any reimbursement for public reQ~velopment costs as discussed in this Article V will be subject to satisfaction of all of the following conditions precedent: (i) The Authority and City having been legally able to and having created a tax increment financing district as discussed in Section 5.2 and the Authority being legally authorized to spend tax increment to make reimbursements for public redevelopment costs agreed to by the Authority and the Redeveloper, (ii) The Redeveloper having acquired at least one of the Acquisition Parcels and having demolished the improvements located on the parcel acquired. (iii) The Redeveloper having constructed new improvements consistent with . its business campus development as shown on the Site Plan and consistent with applicable zoning, which new improvements have a value for real 18 ~ . property tax purposes that equals or exceeds the value for property tax purposes of the improvements demolished on the Acquisition Parcels. (iv) The Authority and Redeveloper having negotiated and executed an amendment to this Agreement or a new agreement providing terms that the Authority and the Redeveloper, each in its sole discretion, find acceptable concerning the amount, including any rate of interest that may be agreed to by the Authority and the Redeveloper, and terms of the Authority's reimbursement obligations, the Redeveloper's construction convenants, wage and job goals, and such other matters as the Authority and the Redeveloper agree are appropriate. Section 5.4. Authority's Costs. All costs incurred by the Authority in connection with the implementation of the provisions of this Article V, including, without limitation, the costs of investigating and creating the tax increment district discussed in Section 5.2, the costs of reviewing and analyzing Redeveloper's development proposals, and the costs of negotiating and preparing the agreement or agreements referred to in Section 5.3(c)(iv), and all costs related to the foregoing shall be paid by the Redeveloper upon demand by the Authority, subject to the pre- approval requirement in Section 3.2(b) and notwithstanding Section 3.2(d). . . 19 -- -- .--- ---- . . <f SUMMARY OF OPTION AGREE:MENT AND DECLARATION OF RESTRICTIVE COVENANT . BETWEEN HOPKINS HOUSING AND REDEVELOPMENT AUTHORITY AND SUPERV ALU, INC. 1. Grant of Option. The option provides for a time period during which the Authority has the right to buy the North Annex Property from the Redeveloper. 2. Option Term. The option agreement covers a period of time starting at the closing on the Redeveloper's acquisition of the County Property and ending on a date four and one-half years after the date that the Redeveloper receives a certificate of occupancy for the Redeveloper's office/warehouse development on the County Property. For the first two years after the completion of the County Property development) the Redeveloper has the right to submit development proposals as described in number 4. below. If the Redeveloper does not submit and implement a proposal that complies with 4. below) the Authority can market the property for development. The actual period during which the Authority must commit to buy the North Annex Property begins at the beginning of the third year after completion of the first phase of the developnlent on the County Property and continues for one and one half years. The time period during which the Authority or its assigns may actually close on its purchase of the North Annex Property begins after the end oithe third year after completion of the office warehouse on the County Property and continues for one and one half years. 3. Purchase P.rk~. The purchase price to be paid by the Authority is fair market . value. Fair market value will be determined through an appraisal process under which the Redeveloper and the Authority will each have an appraisal of the property done. The process of determining fair market value starts in the second year after the issuance of the certificate of occupancy for the development on the County Property. If the two appraisals are no more than 5% apart, the purchase price will be the average of the two appraisals. If the two appraisals are more than 5% apart, a third appraisal wilt be done. If the highest and lowest of the three appraisals are within 5% of the' middle appraisal, the price will be the middle appraisal. If the highest and lowest of the three appraisals arc more than 5% higher or lower of the middle appraisal, the price will be the average of the two closest appraisals. The process will be repeated one year later through updates by the same appraisers of their appraisals, in the third year after the issuance of the certificate of occupancy. The actual purchase price will be based on the result of the second appraisal process. 4. E.edeveloper's Rights to Develop. Notwithstanding the option, the Redeveloper will have the right within the first two years of the option tenn to submit a proposal to the Authority for development of the North Annex Property. The proposal must provide for a development that complies with the City's Business Park Zoning Ordinance in force at that time. In addition, the development must consist of at least 350,000 square feet of development of which at least 50% must be office. Not more than 40% of the other 50% can be for warehouse use. If the City's Business Park Zoning Ordinance in effect at that time requires a higher percentage of office and less warehouse) the development must comply with the ordinance. If . Rjdlagreem~lltlhop1dnssupervaluoption3UmrnaJy - . the Redeveloper submits a satisfactory development proposal, the Authority and Redeveloper enter into an agreement detailing the rights and obligations of the parties with respect to such development. The Authority will then refrain from exercising its option. If the Redeveloper fails to construct such development, the option rights will remain in effect for a period of time, to be described in the agreement to be entered into between the Authority and the Redeveloper. The Redeveloper has agreed that the timing of such development will be such that constnlction of the new development will be substantially complete by a date four years after completion of the warehouse/office development on the County Property. 5. Dec1~ation of Restrictive CoveJUIDt. Until termination of the option term, the Redeveloper can not sell the North Annex Property without the Authority's consent, except for development that complies with 4. above. Otherwise, the Authority can withhold its consent for any reason. . .