Memo- Loan for Hopkins Center for the Arts
I City Manager's Department I
Memorandum
To:
Hopkins HRA Board Members
Steve Mielke
Copy:
From:
Date:
Subject:
none
Jim Parsons
June 5, 1997
$615,000 Loan for Hopkins Center for the Arts
Rusty Fifield of Ehlers Associates and Steve Bubul of Kennedy & Graven have
prepared a matrix showing the HRA's options for financing $615,000 of the cost of the
Hopkins Center for the Arts (attached). The matrix describes the strengths and
weaknesses of each option.
There are three categories of sources for the $615,000 in financing:
1) Bond market,
2) Commercial lenders,
3) Internal financing.
Staff recommends that the HRA consider internal financing as the preferred source for
$615,000 in loan funds for the project. The HRA could implement an internal financing
by issuing a bond for the amount and purchasing the bond itself. This option provides
the HRA with maximum flexibility, including the opportunity to sell the bond to a private
lender or investor at some future date. This option provides the greatest flexibility in
structuring to meet cash flow needs. The HRA could set the terms of such internal
financing, including a longer duration. And, the HRA would receive interest and
principal payments on the project.
If a secondary option were required, staff would recommend that the HRA pursue the
Norwest lease purchase proposal as the best of the commercial lender proposals. The
Norwest proposal is straightforward, costs of the transaction are minimal as opposed to
the cost of issuing a bond, and the interest rate would be comparable to the suggested
internal finance rate.
MAY 30 '97 12:28PM EHLERS & ASSOCIATES
P.2/3
To:
Steve Mielke
Jim Parsons
Rusty Fifield
Arts Center Finance Options
May 30. 1997
Memo
From:
Subject:
Date:
Steve BubulllIld I have prepared a matrix that compares the basic options available to finance the
local share of the Arts Center. Please review this information and provide me with comments. I
will make needed changes, add a cover memo and send you a packet for distribution to the City
Council.
You should note two factors that apply to ali of the options:
1. The City Council should pass a reimbursement resolution at the earliest opportunity. To
preserve the abUity tQ use bond proceeds to reimburse for preVIOusly incurred expenses,
the reimbursement resolution must be adopted not more than 60 days after the
expenditure is made.
2. The relationship between the City and facility users, especially Child's Play Theater, will
cause the bonds to have "qualified private activity" status. This status places a 2% eap on
costs of issuance (including discount) and requires a public hearing prior ro issuance.
Call me with any questions.
NN"\f'lN'c)OTA\~OP}(J)is\(iEN~lU.l,\A,K'r.on wpo
Ehlers and Associates, Inc.
2950 Norwest Centl!r <t. 90 South Sevl!nth Street
Minneapolis. Minnesota 55402
(612) 339-8291 <Go FAX (612) 339-0854
rusty@ehlers-inc.com
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N'orn&Z'# IHVSrTMENT
~R\IICES
Michael S. Olauson
Senior Vice President
Norwesllnveslment Services, Inc.
608 Second Avenue South, 9th Floor
Northstar East BUIlding
MinneaDolis. Minnesota 55479-0746
612/667-7421
612/667-9906 (Fax)
March II, 1997
BY FAX AND MAlL
Steve Mielke
City Manager
City of Hopkins
1010 First Street South
Hopkins, Minnesota 55343
Dear Steve:
The Public Finance Division of NOlWest Investment Services, Inc. and Nonvest Bank _
Hopkins are pleased to submit the following governmental lease-purchase proposal for your
consideration:
Lessee;
City of Hopkins
Lessor:
Norwest Investment Services, Inc. or its
assignee(s].
Project:
Hopkins Center for the Arts
Lease Type;
Tu-ex:empt lease-purchase with Ground Lease
Finance Amount:
$615,000.00
Anticipated Funding Date:
Unspecilied
Lease Tenn:
20-year amortization, with l2-year balloon
Lease Payments:
(23) semi-annual payments of $26,391. 74,
followed by final payment of$359,171.83
Interest Rate to Lessee:
5.90%
Uscrow Funding Option:
At closing, lease proceeds could be deposited into
SOIGO 'd
90:GI 301 L6-11-~~W
Mr. Mielke
March 11, 1997
Page 2
an eSCrow account from which paymen.ts eould be
disbursed to contractors as required. The balance
in the escrow accoun.t, beginning at closing,
would earn interest at a governmental money
matkct rate and said interest would be paid (or
compounded) to the Lessee. If the "draw
schedule" on the escrow fund made it feasible,
longer term, fixed rate investments could be made
with all or part of the escrow fund. No charge for
Escrow.
Other f~s, closing costs:
None
Bond RatinglInsurance:
Not Required
Trustee:
Not Required
Debt SeJVice Reserve:
None anticipated
Net LClISe:
This is a net lease transaction whereby insurance,
maintenance, and any applicable taxes are the
responsibility of the Lessee. All IDax\UfactUrer's
guarantees and warranties will be passed on to the
Lessee.
Insurance:
Lessor requires personal property damage
insurance equal to the cost of the equipment and
also minimum liability insurance of a combined
single limit of $500,000. Lessor must be named
additional insured.
Non-Appropriations Lease:
The lease payments are subject to annual
appropriation of funds by Lessee.
Purchlllie Option:
$1 at end oflease term.
Tax StatuslLegal:
This lease is subject to the Lessee being qualified
as a governmental entity or "political subdivision"
within the meaning of Section 103(a) of the
Internal Revenue Code of 1986 as amended.
Lessee agrees to cooperate with Lessor in
providing evidence as deemed necessary or
90/EO 'd
90:21 301 L6-II-H~W
Mr. Mielke
MlU"ch 11, 1997
Page 3
~e Rate:
Credit Information:
Proposal Only:
desirable by Lessor to substantiate Lessee's and
this transaction's tax-exempt status, inclUding
Lessee's providing an attorney's opinion. It is
assumed that the transaction will be "bank-
qualified" under the $10 million small issuer
exemption as defined in the Tax Reform Act of
1986.
The interest rate quoted is cffcctive for 10 days
from this date. Thereafter the rate is subject to
adjustment according to money market
conditions. Upon credit approval, the applicable
rate will be valid for 30 days.
A$ requested by Lessor.
This is a proposal only and does not represent a
commitment to lease. It is subject to approval by
Lessor's credit committee and it expires April 30,
1997.
Thank you for your interest in Norwest's tax-exempt lease-purchase program. I would
consider this a "working proposal" so please do not hesitate to contact me or Bonnie with
any questions or concerns.
Yours sincerely,
.t~,q~~
~1ael S. Olauson
Senior Vice President
Public Finance Department
Norwest Investment Services, Ine..
cc: Bonnie Kennedy
g:1J\p\d\Hop~i...oloc
MSRB Rule 0-38. NISI bas entered. mtQ urangements with its aftiliate4 banks uncler \llhieh. NISI may pay compens.ation to
them o{up to 10'>6 ufwr net {CC' {orrefemls an4 ~ in fiOOiag. soliciting. and obtairu.og business..
Salva 'd
LO:21 301 L6-II-H~W
Child's Play Theatre
City of Hopkins
Exhibit A
Costs Funded Pa)'JDcnt RJJ.te 24'ayments ! uvcl Payment Closing Fees Avenge Life
5615,000.00 5.900% :% per year 526,391.74 ISO. 001 9.68 )'ears
:S.1I01I% Rare l,-et.....1I42913 Payment Dates 116.14 months
Commencement: ADr 15, 1997 1st: 10/lSJ97
Closinl!: Date: ADr 15, 1997 2nd: 4flS/98
Total Payment tntcrest l>rincipaI After Payment Mter Payment Pa~""cnt Due
Pmt Dqe Payment Due Payment DUe Princip:J.\ Termination Date
Balance V.lue
5615,000.00 Apr IS, 1997
1 526,391.74 $18,142.50 $8,249.24 $GOG,750.76 5625.959.55 ad IS, 1997
2 526,391.74 517,899.15 58,492.59 SS98,258.16 5616,625.20 Apr 15, 1998
3 526,391.14 517,648.62 58,743.13 5589,515.04 5607,036.50 Oct 15, 1998
4 $26,391.74 517,390.69 59,001.05 5580r<;13.99 5591.1~.50 Apr 15, 1999
5 526,391.74 517,125.16 59,%66.58 SS71,%41.41 5581,068.09 Oct IS, 1999
6 526,391.14 516,851.80 $9,539.94 S561,707.47 5576,673-96 Apr IS, 2000
7 $2'-,391.74 516,570.31 59,821.37 5551,886.10 $565,996.58 Oct 15, 2000
II 526,391,14 516,280.64 510,111.10 5541,775.00 SS55,028.24 Apr 15. 2001
9 S26,39L 74 S15,982.36 510,409.38 S531,365.62 5543,761.02 Od 15, 2001
10 $26,39L 14 515,675.19 510,116.46 5520,649.16 5532,186.17 Apr 15, 2002
11 Sl6~91.74 515,359.15 Sll.032.59 S509,616.57 SS20,297.12 Od 15, 2002
12 526,391.14 515,033.69 511,3S8.0S 5498,zsa.52. 5508,083.47 Apr 15, 2003
13 526,391.14 514,698.63 Sll,693.1l 5486,565.41 5495,537.01 Oct 15, 2003
14 526,391.74 S14,353.C,X 512,038.06 5474,527-35 S482,648.65 Apr 15, 2004
15 $26,391.74 513,998.56 512,393.18 5462,134.16 S469,409.08 Oct 15, 2004
16 $26,391.74 SI3.632.96 512.758.78 5449,375.38 5455,808.7d. Apr 15, 2005
17 526,391.74 513,256.51 513,135.11 5436,240.21 5441,837.19 Oct IS, 2005
III 526,391.74 512,869.09 SI3,5:U.66 5422,717.s5 S421,486.12 Apr 15, 2006
19 $26,391.74 S12,4 70.11 513,921.51 5408,795.98 $412,743.38 Oct 15, 2006
20 526,391.74 512,059.48 514,332.26 5394,463.72 $397,598.90 Apr 15, 2007
21 526,391.74 511,636.68 SU,7!;!;./}6 5379,708.66 5382,041.12 Od 15, 2007
22 $26,391.14 $11,201.41 $15,190.34 $364,518.32 $366,060.62 Apr 15. 2008
2J S26,:J91.74 510,153.29 515.638.45 5348,819.81 $349,544.03 Oct 15, 2008
2.1 5359,111.83 SlO,291.96 $348,819.87 SO.OO 51.00 Aut 15, 2009
U:'u\fiCHAEL\[nOP.XLS]Lease
3f1l197 12:01 PM NORWEST
c;n/<;f1'';
(O:2I 3n~ ~S-~~-~H1...
MAY-16-199~ 15:05
FBS PUBLIC FINANCE
512 973 0583 P.02/05
--,
FBS Investment
Services, Inc.
Member NAsa & SIPC
Suite 1400
100 &>uth FIfIh S1reet
Minn<lQPOl;s, MN 55402
May 15, 1997
Mr. Steven C. Mielke
City Manager
City of Hopkins
1010 First Street South
Hopkins, ~ 55343
Dear Mr. Mielke:
On behalf of FBS Investment Services, Inc. ("FBSISI"), I would like to thank you for
giving us the opportunity to review and propose on the $615,000 financing of the
proposed Hopkins Center for the Arts (the "Project"). It appears as though the City of
Hopkins is now approaching the end of a long and laborsome road to the ultimate
development of this Project. This undoubtedly demonstrates the City's commitment to
maintaining the viability of a metropolitan downtown. We hope the following
information is helpful as you move forward in this pmcess. As with any project of this
size, this is truly a "work in progress" and FBSISl would be happy to serve as a partner
with you in making your Project a success.
Based on the information that you have provided us, we believe there are a few critical
pieces to the puzzle that may be missing before the appropriate financing option may be
determined. As stated earlier, there is no doubt that the City of Hopkins is committed to
the Project based on the last six years of planning and analysis. This obviously is a key
step in assuring that the Project is ultimately developed. However, we would like to
proceed by asking a few questions, then presenting what may be a few financing options
that assume that those questions are resolved. A few questions for you and the City
include:
. Based on you RFP and the information included in your packet, we are
not able to determine what we may take as security in this financing. It
appears as though the $615,000 funding request will not be secured by a
general obligation pledge of the City, which implies that our only real
source of security is the building itself and possibly the land underneath
the building. Based on our conversations with Mr. Parsons, it is our
understanding that the City would like to minimize the collateral offered
fot this financing. If so, what can we as financing agent realistically
expect in the form of security for this transaction? Also, has the City
ruled out the possibility of using their general obligation pledge?
lnvestmem prOducts are not FDIC insured, are not depOSits of, obligations of or guaranteed by FBS
Investment Services, Inc., the bank, or any of their a1firiates and involve investment risks, including possibJe
loss of fhe principal Invested. FBS Investment Services, Inc. is a Wholly owned subsidiary of First Bank Nafional Association.
Minneapolis Office: 100 South Fifth Street, Minneapolis. Minnesota
~t P::ll d ntfll"..o' :'t":(? Minn~r::l ~trAt:ot ~int P~lll MinnA'l:;nb
MAY-16-1997 15:06
FBS PUBLIC FINANCE
612 973 0583 P.03/06
Hopkins Center for the Arts
May IS, 1997
Page 2
· Based on all the funding sources identified by the City, it would be
reasonable to believe that there would be more than adequate security if a
morrgage were taken on the Project. However, if the State has first lien
on the Project if the Project goes into default, will the financing agent be
able to obtain a clean interest in the Project and related property?
· The packet states that the City is willing to cover any operating shortfalls
of the Project. In what form will the City's willingness to cover these
shortfalls be documented? Is the City able to offer some sort of operating
deficit guaranty for this transaction? Again, if the City is committed to
the Project, is there any way they can offer their general obligation
pledge?
· What is the City's back-up plan if the second round of private donations
does not come through? It appears as though the results of that campaign
will not be known until after this piece of the financing is to be secured.
Will any potential gap be funded by the City?
. Will the State assure that the grant will be available before the non-state
funding has been closed? Will they be able to commit based on a
preliminary commitment by the named funding source?
· Your packet states that the three primary tenants will have commitments
in place long before the Project is completed. Will it not be necessary to
have those commitments in place before construction starts?
. The School District has committed to contribute $100,000 per annum for
the first five years of operations. What happens in the sixth year?
· We are o~suming that in all cases the financing will qualify for tax-exempt
funding. Based on your RFP, we are not certain this is the case. Is it
correct to assume that local bond counsel will be making this
determination? We will proceed assuming that this is the case.
With these questions in mind, we will try to discuss possible financing alternatives based
on the assumptions that these questions will be resolved prior to the successful
completion of any financing.
Lease-Purchase Aereement
One possible financing alternative fOf this transaction is a tax-exempt lease purchase
agreement Under this scenario, we must assume that the entire facility will be secured
by the lease agreement while the land will be secured under a ground lease_ Again, we
MAY-16-1997 15:06
FBS PUBLIC FINANCE
612 973 0583 P.04/06
Hopkins Center [or !he Arts
May 15, 1997
Page 3
with the State and the grant they are providing for this transaction. However, this is
certainly a viable alternative for this financing.
This financing would be structured with one mamrity, either a 12 or 15 years, with
annual or semi-annual level principal and interest paydowns. This is a very popular
financing vehicle because it is typically very easy to document and usually less costly to
bring the transaction to market.
Revenue NoteIBond secured bv Proiect Revenues and a Morteage
Another possible financing alternative will be a financing backed by a mortgage on the
Project and the related real estate. We again have the issue of whether or not we can
obtain a clean security interest, but this may also be a viable alternative for this
financing.
This transaction would look a little bit more like a typical bond financing. It may be
structured with either one term maturity or a combination of serial and term maturities.
Again, we would recommend that this transaction be structured out 12 to 15 years.
Under both of these scenarios, we assume that the primary source of revenue for making
debt service payments is the revenue collected from the three primary tenants who will
be occupying the building and any other revenue sources as outlined in the information
packet you sent to us.
Term
Under both scenarios we have recommended a term not to exceed 15 years. We have
done this for two primary reasons. Because the Project would not be considered essential
purpose, we believe it may be in the City's best interest to keep the amortization as short
as possible. Also, we have assumed the transaction will be bank qualified. The City will
have the best chance of capturing the largest pool of investors, which includes banks, by
keeping the maturity to IS years or less. The .larger the pool of investors, the better the
interest rate.
Interest Rate
Because we still have a few questions that remain outstanding, we would like to provide
you with an estimate of where we think interest rates would be if the financing were
brought to market today. We will assume that both of our proposed financing
alternatives will be priced the same because the underlying security is basically the same.
Again, both scenarios will be supported primarily by the revenues of the Proje<:t, with a
MRY-15-1997 15:07
FBS PUBLIC FINHNCE
512 973 0583 P.05/06
Hopkins Center for the Arts
May 15, 1997
Page 4
col1ateral pledge on the Project the related real estate. BaSed on this assumption, we
estimate the rate of interest to be approximately:
12 Year Financing*
15 Year Financing*
5.65%
5.80%
* A combination of serial bonds and terms bonds may result in a lower average interest
rate. We have assumed one bullet maturity for pUlposes of this analysis.
Under the 12 year fmancing scenario, we have assumed a 7 year lock-out for early
repayment of debt. Under the 15 year financing scenario, we have assumed a 10 year
lock-out period for early retirement of debt. These terms are subject to negotiation on
behalf of the City.
Costs of Issuance
Again, it is difficult to determine the cost associated with this financing without ful1y
understanding the underlying security and structure. However, following is a estimate
of financing costs associated with either financing scenario:
Legal Expenses*
Trustee
Miscel1aneous
$3,000-$15,000
$2,500
$5,000
*
Legal expenses include the drafting of all related lease/ground lease documents,
mortgage related documents, closing certificates, filing fees and opinions. Legal
expenses for the Lease option would be approximately $3,000. Legal expenses for
the Revenue NoteIBond may be significantly higher, dependent on how the
transaction is ultimately structured (private placement or public offering).
Placement Fees
$15.00/$1,000 for the 12 year financing
$17.50/$1,000 for the 15 year financing
The costs associated with escrowing funds, if necessary, will be paid by the Placement
Agent.
Bond Ratin!!
We have assumed this financing wil1 be unrated.
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FB5 PUBUC FINANCE
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Hopkins Center for the Ans
May IS, 1997
Page 5
Insurance ReQuirements
The City must demonstrate that the Project will be properly insured prior to closing.
This includes risk and liability insurance, This may also include the issuance of
performance bonds during the construction period,
Debt Service Reserves
FBSISI will most likely not require the funding of a debt service reserve,
We realize that this proposal has left you with almost as many questions as answers.
However, we are hopeful that once we have gone through the exercise of resolving some
of the outstanding issues, we may be able to provide you with more guidance on your
best financing option,
Again. thank. you for giving FBSISI the opportunity to provide you with our ideas about
this financing. We would be happy to sit down with you and other City representatives
to discuss your options in greater detail to determine the proper course of action. Please
feel free to call us if you have any questions regarding this letter, We look forward to
hearing from you in the near future.
Respectfully submitted,
FBS Investment Services, Inc.
~~
~p
Salverda
Vice President
(612)971-381 ]
Christine K. Haugen
Assistant Vice President
(612)973-1014
TOTAL P.06
A Marquette Bank
Golden VaUey_~
Office of Marquette Bank, N.A.
8200 Golden Valley Road
Golden Valley. MN 55427
(612) 797.8500
Wednesday, May 21,1997
Jim Parsons
City of Hopkins
1 010 First Street South
Hopkins, MN 55343
Dear Jim:
Thank you for the opportunity to bid on financing the Hopkins Center for the Arts
project. However, at this time I regret we are unable to propose a financing option.
As you requested, I have indicated below some hurdles we were unable to overcome
after researching various options. First, the project is a non-appropriated project.
The issue relating to this is the funding needs to be approved annually and is not
guaranteed.
Secondly, if the project is non-appropriated, we then look to see if proceeds are for
essential use projects. Essential use projects reduce the risk of being non-
appropriated as they are more likely to be funded on an annual basis. This project is
deemed to be non-essential.
If you have further questions, please call me. Again, I thank you for the opportunity
and wish you well in the project.
Sincerely,
~ "
. .l ., l' /
I f: I "
L/! '" v'y ~( .
Terri DeVeau
z./ cd
/
i ------
CC Steve Mielke
HOPKINS CENTER FOR THE ARTS
INTERNAL FINANCING OF $615,000 IN CAPITAL COSTS
AS NOTED BY JOHN SCHEDLER, CITY FINANCE DIRECTOR
Principal:
$615,000
Interest Rate:
5.5%
Term:
20 years
Issue date:
June 1,1997
Date of first payment
of principal:
Dec. 1, 1998
Principal + Interest cost for the first 5 years to Dec. 1, 2001: $243,500
Budgeted revenue to Dec. 1, 2001: 245.000
Surplus $ 1,500
Principal estimated repayment per year for first 6 years is $25,000, then
gradually increases each year over next 14 years as interest payments
decrease.
Debt service cost would be constant at $55,000 per year.
Internal Finance.doc