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HomeMy WebLinkAboutR3- Economic Development ECONOMIC DEVELOPMENT AGENCY OF THE CITY OF SAN BERNARDINO RE-QUEST FOR COMMISSION. ACTION FROM: BARBARA J.LINDSETH SUBJECT: SECOND AMENDMENT TO Acting Director PORTUGAL&NEAL OWNER PARTICIPATION AGREEMENT DATE: February 1, 1995 ------------------------------------------------------------------------------------------------------------------------------------------ Synopsis of Previous Commission/Committee Action(s): On May 10, 1990,the Redevelopment Committee recommended the item regarding approval of an Owner's Participation Agreement with Portugal and Neal be continued to the next Redevelopment Committee meeting. On May 24, 1990,the Redevelopment Committee recommended approval of an Owner's Participation Agreement with Portugal and Neal. Synopsis of Previous Commission/Council/Committee Action(s)Continued: li ----------------------------------------------------------------------------------------------------------------------------------------- Recommended Motion(s): (Community Development Commission) MOTION: That the Community Development Commission approve a Second Amendment to the Portugal&Neal Owner Participation Agreement,resulting in an interest rate reduction on the developer's existing loan with the Agency and authorize the Acting Director to execute all necessary documents. Administrator BARBARA J.LINDSETH Acting Director ------------------------------------------------------------------------------------------------------------------------------------------- Contact Person(s):John Wood/Craig Murray Phone: 5081 Project Area(s): South Valle Ward(s): Three(3) Supporting Data Attached: Staff Report: FUNDING REQUIREMENTS: Amount: $ N/A Sourrce: N/A Budget Authority: N/A ---------------------------------------------------------------------------------------------------------------------------------------- Commission/Notes: 13JL:CKM:Ppolmea1.cdc(adw) COMMISSION MEETING AGENDA MEETING DATE: ;r2 _5 /06/9 CAgenda Item No. 3 Economic Development Agency Request for Commission Action Portugal & Neal First Amendment to Owner Participation Agreement February 1, 1995 Page -2- Synopsis of Previous Commission/Committee Action(s) Continued: On June 4, 1990,the Community Development Commission approved a motion to execute an Owner's Participation Agreement with Portugal and Neal. On January 6, 1991, the Redevelopment Committee recommended approval of a first amendment to the Owner Participation Agreement with Portugal &Neal. On January 17, 1992,the Community Developineint Commission authorized the execution of a first amendment, and related required documents, to the Owner Participation Agreement between the Redevelopment Agency and Portugal& Neal. On January 26, 1995, the Redevelopment Committee recommended approval of a Second Amendment to the Portugal& Neal Owner Participation Agreement. BJL:CKM:Pportneal.cdc(adw) COMMISSION MEETING AGENDA MEETING DATE: 2/06/95 Agenda Item No. ECONOMIC DEVELOPMENT AGENCY STAFF REPORT ------------------------------------------------------------------------------------------------------------------ Second Amendment to Portugal & Neal Owner Participation Agreement On June 4, 1990, an Owners Participation Agreement (OPA)was entered into with Portugal& Neal (P&N) for the development of a 74,258 square foot commercial center, located at the southeast corner of Redlands Boulevard and Club Center Drive. Pursuant to the OPA, the Agency used funds from a credit line with Wells Fargo Bank to make a direct loan of$3.25 million to P&N for construction of the project. In the process, considerable blight remediation was achieved, along with significant increases in both area tax bases and jobs. The following are staff estimates of project achievements: 1. New sales tax increment - $110,000/yr. 2. New property tax increment - $40,000/yr. 3. New utility tax increment - $3,340/yr. II 4. New,permanent, full-tune jobs - 100 5. Substantial blight removal and beatification The interest rate of the loan was fixed at 11% for the first four years,whereupon it changed to an adjustable rate, which gradually increased. By year eight,the rate was to be prime plus six points (almost 15%, based upon today's prime rate). This was by design, to encourage the developers to obtain permanent refinancing prior to this tune. The amortization period for the loan was set at 20 years. Collateral for the loan consisted of a first trust deed against the property plus the personal guarantees of Dwight Portugal and Rich Neal, the principals of P&N. Portugal& Neal also received a not-to-exceed $120,000 offsite improvement grant for this project. On February 10, 1992, a first amendment to the OPA was executed,providing for a one year debt service moratorium. The request was prompted by the econoinically-debilitating effects of the Southern California recession. Under the first ainendinent, interest was permitted to accrue and was then added to the outstanding principal balance. Thus,the principal balance went from $3,298,034, at the onset of the amendment, to $3,660,818 at the end. Monthly payments increased from$34,413 to $34,863, to cover payoff of the increased principal balance. BJL:CKM:portneal.cdc(adw) COMMISSION MEETING AGENDA MEETING DATE: 2/6/95 Agenda Iem No. Economic Development Agency Staff Report Second Amendment to Portugal& Neal Owner Participation Agreement February 1, 1995 Page -2- In addition, the developer agreed to obtain permanent refinancing by the end of year seven. Under the original OPA, while it would have been costly to do so, P&N could technically have had up to 20 years to obtain permanent financing. Pursuant to the first amendment, the amortization period was, however,extended from 20 to 30 years. Finally, it was stipulated in the amendment that the deferred interest,which totalled$362,784, could be utilized only for the construction of tenant improvements for new leaseholds. At the present time, developers and property owners continue to find themselves mired in the recessionary conditions plaguing Southern California. Portugal &Neal, a small, local developer, has managed the project to the utmost of its ability and made considerable sacrifices to ensure its ultimate success. For example,Mr. Portugal (father-in-law of Mr. Neal) sold a recreational vehicle park he owned in Oregon, as well as his home, and moved in with Mr. Neal in order to generate some cash to assist the development. Portugal & Neal has also liquidated other personal assets, increased its marketing efforts and cut its expenses to assist in making the project more viable. In recent months,two tenants have vacated their premises, five others required rent reductions in order to stay in business, one downsized in its space requirements and one other is in negotiations with Portugal & Neal for a rent reduction. If concessions must be made to this latter tenant (and it appears likely that they will), the developers could experience a rather significant decrease in project revenues,which could begin to negatively impact P&N's ability to service the debt on the Agency's loan. It is important to note that,thusfar, P&N has done all it has agreed to do with regard to the OPA requirements. It has developed a project which the entire City can take pride in and has, at all times,kept the payments on the Agency's loan current. Moreover,the developers have expended funds from their meager resources in a serious effort to obtain permanent refinancing. Toward this end, the firm of E.H. Wood& Associates was retained to explore the possibilities with its considerable contacts in the lending industry. To date, these efforts have been to no avail. Largely due to the scrutiny of federal regulators, it is virtually impossible to obtain commercial real estate financing in today's market unless the project and its developers are unusually strong, financially speaking. Such is, unfortunately,not the case with P&N and its project. Also contributing to the difficulty in locating permanent financing is the building's relatively high vacancy rate of 29%. BJL:CKM:portneal.cdc(adw) COMMISSION MEETING AGENDA MEETING DATE: 2/6/95 Agenda Iem No. Economic Development Agency Staff Report Second Amendment to Portugal& Neal Owner Participation Agreement February 1, 1995 Page -3- In light of the foregoing and the fact that P&N must rebuild some capital reserves if it is to be able to offer tenant improvements to new,prospective lessees, it has requested that its interest rate be lowered to snatch that which the Agency pays on its Line of Credit. This would effectively result in a simple pass-through of interest from P&N to pay interest payments on the Agency's Line of Credit. On January 26, 1995,the Redevelopment Committee considered this item and recommended approval. After further discussion with staff, the developer agreed to an interest rate of.25 percent over the rate being paid by the Agency to provide for Agency staff administration expenses. This would result in approximately $9,000 the Agency would retain each year. In return, P&N will use its best efforts to complete the landscaping on an adjacent parcel which is owned by a different party. This parcel,which is actually nothing more than a small,valueless remnant, was created when Club Center Drive was constructed to connect Redlands Boulevard with Caroline Street. The owner has been recalcitrant in permitting P&N to landscape it and, as a result, it remains the project's only real eyesore. Portugal& Neal has offered to snake a renewed and more vigorous effort to finally get this remnant landscaped. There would be a stipulation that, if and when the project reaches a 95% occupancy level, the interest rate on P&N's loan would revert to the previous rate, as dictated by the amended OPA. In conclusion, if the developer's request cannot be accommodated, there is a real possibility that the loan will go into a default status during the near tern. Because of the developer's reputation for integrity and excellent record in its dealings with the Agency, and because the project has been, but for the effects of the recession, an unqualified success, staff recommends approval of P&N's request. Staff recommends adoption of the form motion. BARBARA J. LINDSETII, Acting Director BJL:CKM:portneal.cdc(adw) COMMISSION MEETING AGENDA MEETING DATE: 2/6/95 Agenda Iem No.