HomeMy WebLinkAboutR07-Economic Development Agency
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ECONOMIC DEVELOPMENT AGENCY
OF THE CITY OF SAN BERNARDINO
REOUEST FOR COMMISSION/COUNCIL ACTION
FROM: BARBARA J. LINDSETH
Acting Director
SUBJECT:
DUD SECTION 108 LOAN
APPLICATION - HARRIS'
DEPARTMENT STORE
BUILDING ACQUISITION
DATE: November 29, 1994
Svnopsis of Previous CommissionlCouncWCommittee Actionrs):
On November 21,1994, the Mayor and Cmnmon Council set December 5,1994, at 3:00 p.m., in the City Hall Council
Chambers as the date, time and place to hold a Public Hearing to meet the citizen participation requirements established
by the U.S. Department of Housing and Urban Development (HUD), relative to the filing of a Section 108 Loan
Guarantee Application and a CDBG Business Retention Loan relative to the Harris' Department Store Acquisition.
Synopsis continued on next n8@'e__
Recommended Motionr s ):
OPEN PUBLIC HEARING
CLOSED PUBLIC HEARING
(Mavor and Common Council)
MOTION:
That the Mayor and Cmnmon Council approve the U.S. Department of Housing and Urban
Development (HUD) Section 108 Loan Application and a CDBG Business Rctention Loan for
the Harris' Department Store Building Acquisition project; and authorize the Mayor and Acting
Director to execute all necessary documents. Further, that staffbe authorized to submit said
application to HUD.
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Adniinistrator
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BARBARA J. LINDSETH
Acting Director
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Contact Person(s): Barbara J. LindsethlLaura Muna-Landa
Phone: 5081
Project Area(s): Central City Proiect rCCP) Ward(s): One (\)
Supporting Data Attached: StaffReoort. Section 108 Loan Aoolication
FUNDING REQUIREMENTS: Amount:$IO 500000 Source: HUD Section 108 Authoritv
Budgct Authority: Rcauested
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Commission/Council Notes:
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BJL:LML:paw:hudsec.cdc
COMMISSION MEETING AGENDA
MEETING DATE: 12/05/94
Agenda Item No. ~
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STAFF REPORT
HUD SECTION 108 LOAN APPLICATION
HARRIS'DEPARTMENT STORE BUILDING ACQUISITION
NOVEMBER 29, 1994
PAGE -2-
SynQPsis of Previous Commission/Council/Committee Action(~) Continued:
On November 29, 1994, the Community Development Citizens Advisory Committee (CDCAC)
met to review the attached application. A subcommittee of the CDCAC met with representatives
of Harris' Company later on the same day. The CDCAC will reconvene on December 2, 1994 at
which time it is expected that the CDCAC will recommend approval of said application to the
Mayor and Common Council.
BJL:LMI.:paw:hudsee.cde
COMMISSION MEETING AGENDA
MEETING DATE: 12/05/94
Agenda Item No. ~
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ECONOMIC DEVELOPMENT AGENCY
OF THE CITY OF SAN BERNARDINO
STAFF REPORT
BUD SECTION 108 LOAN APPLICATION
HARRIS' DEPARTMENT STORE BUILDING ACOUlSITION
BACKGROUND
Section 108 of the Housing and Community Development Act of 1974, as amended, authorized a program of
community development loan guarantee assistance (HUD Section 108 Loan). Under this program, the
Housing and Urban Development (BUD) Department provides cities that receive entitlement grants with
front-end financing for large scale community and economic development projects that cannot be financed
from annual grants. As with all Community Development Block Grant (CDBG) program activities, the
projects financed under the Section 108 Program must either principally benefit low-and-moderate income
persons, aid in the elimination or prevention of slums and blight, or meet other community development
needs having a particular urgency.
The Harris' Company principally and directly benefits low-and-moderate income persons through its
provision of goods and services, as well as the retention and creation of jobs and, therefore, is an eligible
project for a BUD 108 loan. The Harris Company is located in a low income census tract (CT 57). This
activity benefits low and moderate income persons pursuant to Section 570.208 (a)(4) in that it will retain
450 jobs in San Bernardino, 262 of which are low and moderate income, 105 of which are very low income
Records indicate that Harris' currently employs 162 full-time and 100 part-time employees oflow and
moderate income; and ninety-two (92) full-time and thirteen (13) part-time very low income employees.
Additionally, fifty (50) new jobs are anticipated to be created over the next five (5) years.
ANALYSIS
The City is requesting a BUD Section 108 Guaranteed Loan in the amount of $7,350,000 over a term of
twenty (20) years at BUD prevailing interest rates. The loan amount is based upon a purchase price and
anticipated appraised value of $1 0,500,000 (70% loan to value ratio). These funds will be used to assist The
Harris Company, a major tenant, with the acquisition of the building they currently occupy and lease, thus
maintaining the economic viability of the Carousel Mall. The use of a CDBG Float loan in the amount of
approximately $3,150,000 or 30% of the appraised value not to exceed $3,500,000, in conjunction with the
Section 108 loan is necessary to make this project viable. The combination of these two (2) loans will result
in significant savings to the Harris Company and a corresponding decrease in annual debt service as
compared with lease payments. As per the requirements of a Section 108 Guaranteed Loan, the City's
Community Development Block Grant will be used to secure this loan. In addition, the Harris Company will
pledge a first trust deed on the subject property. The CDBG Float Loan will be secured by an A rated,
irrevocable, due on demand, direct pay, letter of credit. The attached HUD Section 108 Guaranteed Loan
Application provides further explanation of the deal points of the Harris' Building Acquisition project.
BJL:LML:paw:hudsec.cdc
COMMISSION MEETING AGENDA
MEETING DATE: 12/05/94
Agenda Item No.
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STAFF REPORT
HOD SECTION 108 LOAN APPLICATION
HARRIS'DEPARTMENT STORE BUILDING ACQillSITION
NOVEMBER 29, 1994
PAGE -2-
The current condition of the Carousel Mall necessitates the use of the Section 108 Loan Application. The
economic downturn in the 1990's has begun to erode the strength of the Carousel Mall and other elements of
the downtown. The Carousel Mall now has 120,000 square feet of vacant space. Today, the Carousel Mall is
threatened with the potential closure of Harris Department Store, a 241,200 square foot, five stol)'
department store. Harris Department Stores currently leases the store building. Under the terms of their
current lease, Harris' faces a minimum 15% rent escalation effective February, 1995. With recently decreased
sales and increasing lease payments, Harris Company is planning to close its department store in San
Bernardino and relocate its corporate offices to Riverside, unless it is able to successfully acquire its building
under favorable terms. The potential loss of a key anchor of the Carousel Mall located on "E" Street, the
main arterial street of the downtown core could precipitate the total failure of the Carousel Mall and the
surrounding business area. Closure of the Carousel Mall would result in the direct and immediate loss of an
estimated 1600 jobs without considering the spinoff impact on neighboring businesses.
The successful acquisition of the Harris Department Store building is dependent upon the approval of the
Section 108 loan, which will provide the City with the fmancial means to engage in a public/private
partnership by providing a low interest loan to the Harris Company. Acquisition of the subject property will
result in substantial savings to Harris Company through elimination oflease payments, build up in equity,
and a depreciable asset. Such savings will give the Harris Company the means to ride out the economic
downturn and the incentive to reinvest and expand its current operations in San Bernardino over the next five
(5) years.
The City has also shown its commitment to the overall retention and revitalization of the Carousel Mall
through its investment in architectural design fees to assist the Mall with developing renderings of a proposed
expansion, as well as facade and common area improvements.
It is appropriate for the Mayor and Common Council to open the public hearing to receive citizen comments
and then close the public hearing.
Staff recommends adoption of the form motion.
Ii, ~QJCA ~I ~iiu v:-
BARBARA J. LINDSETH, Acting Director
Development Department
BJL:LML:paw:hudsec.cdc
COMMISSION MEETING AGENDA
MEETING DATE: 12/05/94
Agenda Itern No.l
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HUD SECTION 108 GUARANTEED LOAN APPLICATION
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APPLICANT/ENTITLEMENT PUBLIC ENTITY:
City of San Bernardino
Development
201 North "E" Street, Third Floor
San Bernardino, CA 92401
PROJECT ACTIVITYILOCATION
The Harris Company
300 North "E" Street
San Bernardino, CA 92416
LOAN REQUEST
The City of San Bernardino is requesting a HUD Section 108 Guaranteed Loan in the amount of
$7,350,000 over a term of20 years at HUD prevailing interest rates. The loan amount is based
upon a purchase price and anticipated appraised value of $10,500,000 (70% loan to value ratio).
These funds will be used to assist The Harris Company, a major tenant, with the acquisition of the
building they currently occupy and lease, thus maintaining the economic viability of the mall. The
use ofa CDBG Float loan in the amount of approximately $3,150,000 or 30% of the appraised
r' value not to exceed $3,500,000, in conjunction with the Section 108 loan is necessary to make
"'- this project viable. The combination of two (2) loans will result in significant savings to The
Harris Company and a corresponding decrease in annual debt service as compared with lease
payments. As per the requirements of a Section 108 Guaranteed Loan, the City's Community
Development Block Grant win be used to secure this loan. In addition, The Harris Company win
pledge a first trust deed on the subject property. The CDBG Float Loan win be secured by an A
rated irrevocable, due on demand, direct pay, letter of credit.
MEETING THE COMMUNITY DEVELOPMENT OBJECTIVE
The Harris Company is located in a low income census tract (CT 57). This activity benefits low
and moderate income persons pursuant to Section 570.208(a)( 4) in that it win retain 450 jobs in
San Bernardino, 262 of which are low and moderate income, 105 of which are very low income.
Records indicate that Harris' currently employs 162 fun-time and 100 part-time employees oflow
and moderate income; and ninety-two (92) fun-time and thirteen (13) part-time very low income
employees. Additionally, fifty (50) new jobs are anticipated to be created over the next five (5)
years.
ELIGmLE ACTIVITIES
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Pursuant to Section 570.701(i), this project qualifies under Section 570.203(b) as a Special
Economic Development Activity. The City win provide assistance to a for-profit business (Harris
Department Stores) in the form of a loan to carry out an economic development project. The
amount of financial assistance is based upon the City's determination that the assistance is
necessary and appropriate to carry out a business retention and creation activity. The Harris
Company has indicated its intention to close its operation in San Bernardino if no assistance is
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received and it is not successful in acquiring the subject property.
PROGRAM INCOME
The project is projected to generate the following program income based upon a projected
interest rate of eight (8%) percent interest rate over a term of twenty (20) years.
Year I through Year 20: $737,748
MontWy Debt Service: $12,479
BACKGROUND OF THE EXISTING PROJECT
The Harris Company is a key anchor/tenant at the Carousel Mall, which is located in the heart of
the downtown San Bernardino, immediately across from the Civic Center and the Radisson Hotel.
The Carousel Mall represents the economic retail heart of the downtown. It currently employs
approximately 1,600 persons, the majority of which are low and moderate income residents. The
914,386 square foot mall is anchored by Harris, IC Penney and Montgomery Wards department
stores.
The creation of the Carousel Mall in 1970 was public-private partnership. In a unique and
successful venture, the Redevelopment Agency of the City of San Bernardino purchased and
developed the parking areas/structures, as well as interior common areas of the mall with the
infusion oflocal and federal dollars. Until recently, the mall has enjoyed a history of vitality and
success, maintaining occupancy levels in excess of95% up until 1992/93. The mall has been a
catalyst for the expanded retail development across the street where Mervyn's, Best, Marshall's,
Food for Less, Payless, and shops and restaurants have been developed adding approximately
337,060 square feet of retail strength to the downtown. With the economic viability of the
downtown, the City was able to attract a Radisson Hotel to the heart of the downtown to
complement the civic and retail elements. To date, sales tax revenues generated for the last
twelve (12) months ending September 30, 1994 are close to $1,000,000.
However, the economic downturn in the 1990's has begun to erode the strength of the Carousel
Mall and other elements of the downtown. The mall now has 120,000 square feet of vacant
space. Today, the Carousel Mall is threatened with the potential closure of Harris Department
Store, a 241,200 square foot, five (5) story department store. Harris Department Stores currently
leases the store building. Under the terms of their current lease, Harris' faces a minimum 15%
rent escalation effective February, 1995. With recently decreased sales and increasing lease
payments, Harris Company is planning to close its department store in San Bernardino and
relocate its corporate offices to Riverside, unless it is able to successfully acquire its building
under favorable terms. The potential loss ofa key anchor of the Carousel Mall located on "E"
Street, the main arterial street of the downtown core could precipitate the total failure of the Mall
and the surrounding business area. Closure of the Carousel Mall would result in the direct and
immediate loss ofan estimate 1,600 jobs without considering the spinoff impact on neighboring
businesses.
The successful acquisition of the Harris Department Store building is dependent upon the
approval of the Section 108 loan, which will provide the City with the financial means to engage
in a public/private partnership by providing a low interest loan to the Harris Company.
Acquisition of the subject property will result in substantial savings to Harris Company through
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elimination ofIease payments, build up in equity, and a depreciable asset. Such savings will give
the Harris Company the means to ride out the economic downturn and the incentive to reinvest
and expand its current operations in San Bernardino over the next five (5) years.
Approval of this project also ensures the immediate retention of 450 Harris jobs in San
Bernardino, 82% or 367 of which are below low and moderate income criteria. (This count does
not take into consideration employees hired on a seasonal basis). It is anticipated that
approximately fifty (50) full-time low and moderate income jobs will be created over the next five
(5) years due to the acquisition and resulting expansion. In addition, retention of The Harris
Department Store will assist the long-term viability of the Carousel Mall and help ensure the
retention of an additional 1,150 jobs throughout the Mall.
The City has also shown its commitment to the overall retention and revitalization of the Carousel
Mall through its investment in architectural design fees to assist the Mall with developing
renderings of a proposed expansion, as well as facade and common area improvements.
FINANCIAL DESCRIPTION
The HUD Section 108 loan application will be in the amount $7,350,000 over twenty years at
HUD prevailing interest rates. The loan amount is based upon a purchase price and contingent
upon an appraised value of$10,500,000 (70% loan to value ratio). An appraisal is currently
under the process of being prepared on the Harris Building. The City's future Community
Development Block Grant (CDBG) will be pledged as security for this loan. In addition, the City
will require a first trust deed on the subject property.
A CDBG float loan in the amount of between $3,150,000 and $3,500,000 (depending upon the
result of the appraisal) for a term of one (1) year with annual renewals for a total term of five (5)
years will be processed to fund the 20% gap, subject to Community Development Block Grant
regulations. The CDBG float loan will be secured by an irrevocable, direct pay, callable upon
demand letter of credit. Interest will be charged at the prime rate at closing, adjustable annually.
Interest payments shall be set aside in a sinking fund account, under City control, and shall be
credited to the final repayment of any outstanding principal balance for the loan as of the final
maturity date of the loan.
The City is using standard underwriting guidelines to include review of financial statements and
income tax returns to substantiate financial capacity, review of equity positions, security in the
form of a trust deed on the subject property and any applicable letters of credit.
hud108.app
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COMMUNITY DEVELOPMENT
CrnzENSAD~SORYCOMMITTEE
The Citizens Advisory Committee met on December 2, 1994, and recommended approval
of a financing plan for the acquisition of the Harris building in the Carousel Mall according to the
schedule outlined below:
Property Acquisition
USES
$10,500,000
HUD 108 Loan
CDBG Float Loan
SOURCES
$7,350,000
3150000
$10,500,000
. The security for the 108 Loan is a first trust deed at a 70% loan to value ratio.
An MAl appraisal acceptable to the City of San Bernardino, in its sole
discretion will be required.
An Enviromnental Phase I Report acceptable to the City of San
Bernardino, in its sole discretion will be required.
. In addition, Hams Corporation will execute financial covenants identical to the financial
covenants contained in their private line of credit agreement.
. A 10-year operating covenant will be required of Hams as long as other major department
stores in the Carousel Mall remain open (IC Penneys, Montgomery Ward).
. In the event that Harris Department Store ceases to operate as a department store at the
property location, then the Section 108 Loan is immediately due and payable.
. Hams will prov.ide a minimum of$I,OOO,OOO of physical improvements to the property
within 12-months of the close of the acquisition financing for the property according to
the following 'Schedule:
AM01JNT
MONTHS FROM
DATES OF CLOSE
$333,000
$333,000
$333,000
o - 4 months
5 - 8 months
9 - 12 months
. The securityfor-the CDBG Float Loan will be an "A" rated Letter of Credit which is
irrevocable, canable on demand, and directly payable to the City of San Bernardino.
The Float Loan will be for a one-year term with annual renewals for up to a
total loan term of five years, interest will be charged at the prime rate at
closing (currently 8.5 %), adjustable annually. Interest payments shall be set
.aside in a sinking fund account, for the benefit of Harris, but under City
.control, and shall be credited to the final repayment of any outstanding
':principle balance for the loan as of the final maturity date for the loan.
/ d./s/11 HARRIS OLE c ~ C.
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