AgdaPkt 2002-02-25 - Laserfiche WebLink

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IREPORT To the Honorable Mayor and City Council From the City Manager federal agency with the implied backing from the U.S. Government was offering a 4.43% yield to maturity on February 6, 2002. Given that Mr. Keech is not willing to pay the original interest rate (LAIF + 1.50%) and presuming that the Council desires to retain the childcare center, the question becomes with which of his three interest rate proposals is the City most comfortable. Option -a- (LAIF + 0.0%) is the most risk-averse option. If interest rates raise, then the City earns more interest income. Option -b- is the riskiest option as the City is "locking into" an interest rate for the next 10 years. Option -c- is a hybrid approach between options -a- and -b-. Staff is most comfortable with option -a- as it presents less risk to the City. To put the interest rate issue in context, for each 1% differential in the rate charged Mr. Keech and the rate available in the credit markets, the City would gain or lose $32,000 per year, with this amount declining as principal is repaid each year. Subordinated Loan Provision In the event of default by Shores Childcare, LLC, the City will take possession of the Leasehold Improvements and would incur unknown expenses to operate the childcare facility. Although the City has agreed to finance not more than 80 percent of the project cost (the remaining 20 percent must be financed by owner equity and/or subordinate financing), recovery of the unpaid balance of the note will be dependent on the net operating income of the childcare facility and office space, vacancies in either or both of which may have precipitated the default. The existence of a subordinate note means that the subordinate note-holder would have to pay off the City's note prior to taking control of the property. This has some limited upside benefit to the City in that if the project is worth the value of the two notes, the City is assured repayment of its loan without having to take control of the project. If it is not worth that much, the subordinate note-holder may decide to walk away from its investment, which puts the City in the same position as if there never had been a subordinate note-holder. If the subordinate note-holder buys the project in foreclosure, it will have to abide by the terms of the ground lease and continue to use the facility only for childcare and compatible office. Due-on-Sale Clause Elimination of the due-on-sale clause of the note means that the City may have to wait at least 10 years (the note is due in 20 years, but callable at the City's option in 10 years) to get the money it loaned Shores Childcare, LLC back. Eliminating the due-on-sale clause improves the project cash flow to a potential buyer, making it more likely that Mr. Keech would be able to sell the project. The City will continue to be able to call the note in 10 years, regardless of who owns the project. Page 5 of 7