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To the Honorable Mayor and City Council <br /> From the City Manager <br /> <br />Proposed Changes <br />Mr. Keech finds that with the recent contraction of the real estate market and <br />reduction in asking renta~ rates, he is unable to obtain the rental rates he anticipated <br />would be available when he negotiated the terms of the Promissory Note. He has <br />been unable to obtain equity partners for Shores Childcare, LLC and believes he will <br />be unable to develop the facility without an improved projected cash flow. He has <br />requested that the City modify the terms of the Promissory Note by: <br /> <br /> 1. Change the terms of the interest rate charged by the City on the Promissory <br /> Note to one of three options: <br /> a. The LAIF rate + 0.0%; <br /> b. 4.57% fixed rate for 10 years (current LAIF rate + 1.50%); or <br /> c. 4.57% fixed for five years with the next five years at LAIF + 0.0%. <br /> <br /> 2. Eliminate the prohibition on subordinate loans secured by the Leasehold <br /> Improvements, and <br /> <br /> 3. Eliminate the due-on-sale clause which requires Mr. Keech to pay off the loan <br /> from the City should he sell the project. <br /> <br />Interest on Loan <br />With respect to the proposed changes in interest rates, the first option -a- (LAIF + <br />0.0%) clearly reduces the income the City will receive over the life of the loan by <br />giving up the 1.50% "spread" over LAIF. If the loan is called after 10 years, the City <br />will have received $450,000 less in interest income than the City would have <br />received under the existing terms of the agreement1. <br /> <br />If the second interest rate option -b- is selected (4.57% fixed rate for 10 years), the <br />City could benefit if market interest rates decline and this rate (4.57%) is higher than <br />what the City could earn in other investments. Alternatively, if market rates rise, the <br />City would forego the ability to earn higher investment income. We recommend <br />against "locking in" to a fixed rate at this level (4.57%) for 10 years. By comparison, <br />a bond issued by a federal agency with the implied backing from the U.S. <br />Government was offering a 5.85% yield-to-maturity on February 6, 2002. <br /> <br />Should the City select the third interest rate option -c- (4.57% fixed for the first five <br />years + LAIF for the next five years), the City could benefit if this interest rate <br />(4.57%) is higher than what the City could earn during the next five years. <br />Alternatively, if interest rates increase, the City would forego potentially higher <br />interest income. By comparison, a bond that matures in five years issued by a <br /> <br />~ Based upon the average LAIF rates from 1996 through 2000. <br /> <br /> Page 4 of 7 <br /> <br /> <br />