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01-23-17 CC WS MinutesCITY OF SHOREWOOD CITY COUNCIL WORK SESSION MONDAY, JANUARY 23, 2017 in CONVENE CITY COUNCIL WORK SESSION 5755 COUNTRY CLUB ROAD COUNCIL CHAMBERS 6:00 P.M. Mayor Zerby called the meeting to order at 6:00 P.M. A. Roll Call Present. Mayor Zerby; Councilmembers Johnson, Siakel, and Sundberg; Attorney Keane; Administrator Lerud; City Clerk Panchyshyn; Finance Director DeJong; Planning Director Nielsen; Director of Public Works Brown; and, Engineer Homby Absent: Councilmember Labadie B. Review Agenda Sundberg moved, Johnson seconded, approving the agenda as presented. Motion passed 4/0. 2. WATERS PROJECT Administrator Lerud stated that for a number of months there has been discussion about the senior living project in Excelsior called The Waters of Excelsior (The Waters.) Council had asked Council to review alternative financing options and compare the efficiency of them when compared to the pay -as- you -go Tax Increment Financing (TIF) Note proposed by Excelsior. Council directed him to hire a public financial advisor to conduct that review so he hired David Drown with David Drown Associates to do that. During its January 9, 2017, meeting Council asked that Mr. Drown come and explain his findings to Council. Mr. Drown distributed a copy of a one page document comparing the TIF pay -as- you -go option proposed by the developer /Excelsior and a TIF Revenue Bond option. Mr. Drown noted his company provides municipal financial advisor services. He has been doing that for about 35 years and his company has been doing it for about 20 years. He explained he reviewed Excelsior's TIF Plan and did not find anything causing him concern. He did not think the proposed financing structure was the most efficient option; he thought the interest rate was somewhat high. Based on his experience he thought the financing could be done with a commercial lender at a lower interest rate. It could potentially be tax exempt which would lower the interest rate even more. The financing proposal on the table is called pay -as- you -go TIF Note. If the developer pays its property tax and does not default on any of the terms of the deal the developer would receive 97 percent of the property taxes back as payment on a note until the developer has been reimbursed $2.5 million worth of costs plus interest at an interest rate close to 6 percent. The developer's expenses approximate $1,696.000. There would be about $413,000 in costs for Excelsior to make improvements to the CITY OF SHOREWOOD WORK SESSION MEETING MINUTES January 23, 2017 Page 2 of 8 intersection area near the project site. Thirty months of capitalized interest would be close to $391,000. The capitalized interest would be extra money that would be borrowed and set aside to cover the first couple of years' worth of bond payments. That is needed because Tax Increments do not materialize up front; there is an approximate two year lag before they begin to flow. The pay -as- you -go TIF amount of $2.5 million would likely be paid off in about 17 years. He noted that the good thing about pay -as- you -go would be the developer or its lenders borrowed all of the money. If something were to go wrong it would be their problem. He then explained the alternative financing TIF Revenue Bond calculations. He used the developer's number in terms of increment projections, value and so forth to show how the payments would likely work. He also based his calculations on being able to find a bank that would lend the money in exchange for the TIF payments at a tax exempt interest rate. After doing some research he found out there is some interest in the lending community to do a tax exempt TIF Revenue Bond. He has a semi - binding proposal of an interest rate 3.25 percent. That interest rate would reset in 5 — 7 years. For the first 5 — 7 years it would be significantly less. If the 3.25 percent interest rate would be in effect for the life of the TIF District the term of the District would be reduced to 13 years. Reducing the term by four years would mean there would be four years of Tax Increments that would not be needed. The Tax Increments would be over $300,000 for each of those four years. That amounts to about $1.2 million in tax revenue that would not have to be rebated to the developer or the developer's bank. Of that $1.2 million the county, school district, and other jurisdictions receive their share. The remaining share for Excelsior and Shorewood combined would be about 28 percent of that or about $360,000. A TIF Revenue Bond is a security that would be issued and sold by either Shorewood or Excelsior. It would not be a General Obligation (GO) bond. The Revenue Bond would not carry the full faith and credit of either City. Most of Shorewood's other bonds do. The Revenue Bond would simply say if the developer pays its taxes and a city gets them as Tax Increments that and only that would be a source of revenue that would be used to make payments on the Revenue Bond. It is somewhat like pay -as- you -go. If the Tax Revenue Bond is processed properly the interest rate could be tax exempt. As tax exempt the buyer would receive a federal tax benefit from that transaction. That is a major part of the reason the starting interest rate would be lower. Also, bankers are a little hungrier for business than the lenders the developer has been talking with. If something goes wrong there would be no obligation or recourse to a city. It is the exact same security pledge which is TIF is the only way it would be paid. Whether the payments go to the developer as in a pay -as- you -go payment or if the payments go to a bank as payments on a tax exempt TIF Revenue Bond the security would be exactly the same and the risk situation would be exactly the same. Under no circumstance could the taxpayers in the community have to cover a shortfall. Going with the TIF Revenue Bond structure would be a little more complicated; but, it would be more efficient and get rid of the TIF District four years earlier. The project would be back on the tax rolls earlier. Mr. Drown noted he thought that the TIF Revenue Bond funding structure deserves consideration. Councilmember Sundberg asked Mr. Drown what he thought the interest rate would be 5 — 7 years out. Mr. Drown stated one -half of the world thinks the interest rates are going to go up from where they currently are and the one -half thinks they are going to go down. Mr. Drown explained that if history is considered over the last 10 years there was not any point in time when things would have caused the CITY OF SHOREWOOD WORK SESSION MEETING MINUTES January 23, 2017 Page 3 of 8 initial interest of 3.25 percent to go over 6 percent when reset. He thought there could be a cap put on how high the security rate could be increased. The worst case would be the TIF Revenue Bond interest rate could be increased to about 6 percent which is the rate for the pay -as- you -go TIF Note. Councilmember Sundberg asked if Excelsior is fixed on a pay -as- you -go TIF Note. Administrator Lerud clarified Excelsior's policy is pay -as- you -go. Administrator Lerud noted that going with the TIF Revenue Bond structure would be of value to both Excelsior and Shorewood. Jay Jensen, representing The Waters Senior Living, explained The Waters was very interested is getting the most efficient financing possible for its project. He assumes Excelsior would be interested as well. He noted that he had spoken with Mr. Drown over the phone. He explained The Waters development agreement with Excelsior stipulates that 20 percent of the units in the senior living facility have to be affordable for at least 10 years. Excelsior's "stick" to keep the units affordable would be to shut off the TIF if that does not happen. He asked how the developer's guarantee would interrelate with trying to get a tax exempt TIF Revenue Bond. Mr. Drown stated a different stick would have to be substituted to secure that, but noted he does not know what that stick would be. Mr. Drown stated if the TIF Revenue Bond structure seems to have merit to Council he explained that one of the actions Council could consider would be to approve the current financing pay -as- you -go proposal Excelsior has put forward while reserving the right to consider and possibly substitute a more efficient financing rate to get the deal done if and when that becomes a possibility. That would give the developer the commitment to let the developer know that there would be some type of TIF financing and that it could move forward with its project. Then there would be time to consider a more efficient financing structure. He thought the developer would be acceptable to receiving a cash payment up front rather than payments over time. Councilmember Sundberg stated that approach would be a softer way to present things to Excelsior. Mayor Zerby asked Mr. Jensen at what point would his firm feel comfortable moving forward with beginning its architectural work. Mr. Jensen stated he thought Shorewood's and The Waters' and hopefully Excelsior's interests are aligned in that the parties want the lowest interest rate possible. He then stated he thought Mr. Drown had recommended moving forward with the pay -as- you -go path while continuing to explore financing vehicles that are more financially efficient. Councilmember Sundberg stated she thought that was discussed during Council's January 9, 2017, meeting. Councilmember Siakel stated that early on during this process Shorewood asked the developer and Excelsior representatives for more details and more specifics about financing but they were not provided. She expressed her frustration about that. It is now about one and one -half years later and Shorewood staff and Council have gotten the details and they are being asked to rush through them. She stated she thought staff and Council are acting in the best interests of its constituents. Siakel noted she does not regret taking the time. In response to a comment from Councilmember Siakel, Mr. Drown stated even without a rate cap there would be no feasible way where the term of the TIF District would be longer for the TIF Revenue Bond structure than it would be for the pay -as- you -go TIF Note structure. It is only a question of how much money would be saved. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES January 23, 2017 Page 4 of 8 Mr. Jensen noted he worked on government financing for many years. He explained the tradeoffs for this are a shorter duration, a lower interest rate and security that the developer does what it has said it is going to do. He stated he thought Mr. Drown suggested trying to keep the lower interest rate while preserving a stick for security. Mr. Drown concurred with Mr. Jensen's characterization. Councilmember Siakel thanked Mr. Drown for his time and noted she was more comfortable after having had this discussion to allow Attorney Keane and staff to take the next step. Councilmember Johnson stated his only concern was if Council approved things conditionally that there may not be transparency on the financing review going forward. Mr. Drown stated if people want to take a serious look into the TIF Revenue Bond structure he thought that would take about a month to work out the details and present a binding proposal to purchase a TIF Bond. Councilmember Siakel asked if that would require Excelsior to revise its policy. Attorney Keane clarified that Shorewood would be the intermediary funding source for the TIF Revenue Bond. Mr. Drown clarified it is Excelsior's TIF deal and it is Excelsior's development contract and TIF Agreement. That Agreement states that Tax Increments are going to go to the developer. Going to the TIF Revenue Bond structure would change the flow of Tax Increments; it would change the contracts. Instead of Excelsior making Tax Increment payments to the developer Excelsior would send its Tax Increment payments to Shorewood and Shorewood would use them to pay the bonded debt. The contracts and the paper work would have to be changed. Excelsior would have to be an active willing participant. Mayor Zerby stated he thought Excelsior's concern was about risk; Excelsior believes the pay -as- you -go structure minimizes its risk with the project versus the TIF Revenue Bond structure. Mr. Drown stated if things do not go right while there is a TIF Revenue Bond outstanding, the question would be if there would be some potential impact on a city's financial condition. Would there be some impact on reputation that would hurt a city in some way? If Shorewood would do the financing rather than Excelsior those are the questions Shorewood should be asking. He stated he thought it was likely that Shorewood has done an IDB conduit deal in the past. An IDB conduit is a bond issue with the City's name on it with the source of revenues for bond payments being the stream of revenues from a project. The City would not be under any obligation to cover shortfalls. What has been proposed for considerations would essentially be the same thing. IDBs get done all of the time. In his 35 years of working in this area he has never seen a material adverse impact on the credit rating or the financial condition of the cooperating city because people understand it is not a city bond. Mr. Jensen noted that when he was an issuer for the City of Minneapolis he did a lot of IDBs. He explained the challenge in this situation is how to keep the TIF Revenue Bond tax exempt and that would be by keeping it pure so that it is really a governmental action. If he were to put his Shorewood hat on he would do the TIF Revenue Bond structure in a second. If he were to put his Excelsior hat on then all of the developer agreements with Excelsior that require the developer to make good on the affordable housing units would be very tricky to do from a legal stand point if the financing structure changes. He questioned how the bond could be tax exempt while maintaining the stick that if the affordable housing requirement is not satisfied that the TIF would be shut off. If he was to be the banker that buys the TIF Note and a number of years out the TIF is shut off then that would be a significant problem. The risk is how to have security so that the developer does what it is supposed to do. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES January 23, 2017 Page 5 of 8 Councilmember Siakel asked how many total units would be in the facility. Mr. Jensen responded 115 and there would have to be 24 affordable units. Mayor Zerby asked what the TIF structure is for Oppidan's senior living project in Shorewood. Attorney Keane stated it is pay -as- you -go. Zerby then asked what the interest rate is for that. Keane responded 5.5 percent. Mr. Jensen noted The Waters project is similar to Oppidan's with the exception that The Waters has the affordable units' requirement for 10 years. Mayor Zerby stated based on what he has heard it sounds as if Shorewood should have gone with the TIF Revenue Bond structure for the Oppidan project. Attorney Keane concurred. Councilmember Siakel asked how much it would set The Waters project back by changing to a TIF Revenue Bond financing structure. Would it be many months? Attorney Keane responded no. Todd Frostad, owner of the Southlake Office Building located at 23505 Smithtown Road, stated for Excelsior the enforceability of the affordability requirement is going to be a challenge if the financing structure is changed to TIF Revenue Bond from the current proposal of a pay -as- you -go TIF Note. For Excelsior it would be Excelsior's control over the developer for the plan that was approved, proposed and vetted before the Excelsior community. Mr. Jensen stated in the ideal world it would be to continue on the current path of the two cities working together on the pay -as- you -go structure. It would then be up to him, Administrator Lerud, Mr. Drown, Attorney Keane and the firm Kutak Rock LLP that Keane is part of to continue work on alternate financing. He noted that someone would have to give the legal opinion that the TIF Revenue Bond could be tax exempt. The Kutak Rock legal firm has as good experience as anyone in the country when it comes to tax exempt financing. Keane stated there was discussion at his firm about tax exempt bond financing structure earlier in the day and no one raised any red flags about the tax exempt opinion noting the affordability issue was not part of that discussion. Councilmember Johnson asked if Excelsior representatives would be involved in that discussion. Attorney Keane stated that would be between Kutak Rock representatives and Shorewood representatives. Mr. Jensen stated he has been doing tax exempt bonding since the mid- 1970s. He reiterated that from his vantage point he does not think there is a firm in the country that has more experience with tax exempt financing than Kutak Rock has. Councilmember Sundberg stated if a decision is made to further investigate the TIF Revenue Bond financing structure she asked if that would delay the project. Mr. Jensen stated his hope is that for now to continue with the pay -as- you -go financing structure. If he, Administrator Lerud, Attorney Keane, Mr. Drown and Excelsior representatives can find a way to shorten the term of the TIF District everyone would benefit. He then stated he has been involved in a lot of discussion with Excelsior about how to shorten the term of the TIF District. The TIF Revenue Bond option brought forth by Mr. Drown had not been considered before. Councilmember Sundberg noted that she likes Excelsior's affordability requirement of 20 percent of the units for a minimum of ten years. Councilmember Siakel stated she thought The Waters offered to do that. Attorney Keane stated it was Excelsior's policy. Mr. Jensen clarified it is The Waters policy. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES January 23, 2017 Page 6 of 8 Mayor Zerby stated the stick to ensure the affordability units for 10 years of ending the TIF is Excelsior's. Administrator Lerud asked if affordability is income or asset based for the senior renter. Mr. Jensen stated it is not clear because the Metropolitan (Met) Council interprets it noting based on discussions he has had it is somewhat asset based. The maximum income they can have is 60 percent of the median income. Councilmember Johnson asked if there has been any conversation with Excelsior representatives about a TIF Revenue Bond financing structure. Administrator Lerud responded they are aware of what Shorewood is discussing and the numbers presented this evening are in line with what he has discussed with Excelsior Manager Luger. Administrator Lerud reiterated Excelsior's policy is pay -as- you -go. Mayor Zerby stated based on discussions during Council's January 9, 2017, meeting The Waters is hesitant to move forward with preparing architectural drawings which will be quite costly until it The Waters is assured there are no potential obstacles. Mr. Jensen stated it is in all of the parties (Excelsior, Shorewood and The Waters) best interests to shorten the term of the TIF District as much as possible; The Waters more than the Cities. He hopes the Cities will give him and staff from both cities the latitude to craft the most efficient financing structure possible. Councilmember Sundberg questioned if Shorewood has any leverage with proposing a different financing structure. Councilmember Johnson expressed his preference would be for Shorewood to continue to further assess a TIF Revenue Bond financing structure before taking action on what is on the table during the regular meeting following this work session. Councilmember Siakel stated when Council takes action during its regular meeting it could attach conditions to the action. Mayor Zerby clarified it would probably come as a recommendation from Council and not a condition. Mr. Frostad stated he thought Excelsior would be receptive to a recommendation. Excelsior representatives have not had the opportunity to discuss the alternative TIF Revenue Bond financing structure benefits. He suggested it be presented to Excelsior from a cooperative financial benefits perspective so the receptivity would be greater. The Bond structure would be in all three parties' best interest. Engineer Homby explained the meeting packet included a memorandum (memo) authored by him summarizing the updates to the draft Urban Forest Management Plan (the Plan) Council discussed during its October 10, 2016, work session. The packet also included a copy of the updated Plan. The updates to the Plan include a 10 -year implementation budget (it had been shorter than that in the draft Plan) ranging in cost from $72,000 — $85,000 annually, a draft policy for homeowner /site visits, public education, and a. right -of -way tree policy. He noted that Gail Nozal and Jon Schmidt from S &S Tree and Horticultural Specialists, Inc. were present. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES January 23, 2017 Page 7 of 8 Ms. Nozal explained that the Plan was changed to incorporate more tree replacement plantings over the first three years of implementing the Plan. The Plan budgets 100 site visits per growing season (May — September) which would be scheduled through City Hall. Councilmember Sundberg asked Ms. Nozal if there has been a lot of site visit participation in cities where such a benefit is offered. Ms. Nozal stated that varies. She noted that emerald ash borer was found in the City of Maple Grove last week and that will likely generate a spike in phone calls. Public education will raise awareness about the City's program. She anticipated the calls will start slow and grow from there. She encouraged doing a review at the end of the 2017 season. Ms. Nozal explained S &S is currently working with the City of North Oaks and it takes calls for oak wilt for four other cities. Engineer Homby clarified that the intent is to schedule a number of site visits for one day for efficiency reasons. Ms. Nozal noted that on average a site visit takes about 30 minutes. If a property owner has issues that will take longer than that S &S would recommend they call an arborist. Councilmember Sundberg asked if there is something for addressing invasive plant management on City - owned property in the Plan. Ms. Nozal stated they did not make a lot of revisions to that section in the Plan. Sundberg asked if there is a big problem with, for example, Buckthorn on City property. Director Brown stated there is an endless amount of Buckthorn in Freeman Park. Ms. Nozal stated the biggest challenge cities face is eradicating /mitigating invasive plants on City property when there is private property abutting it where that is not being addressed. Mayor Zerby expressed concern about people bringing in firewood that is from infested trees. He noted he is aware of one resident who is receiving firewood from a tree trimer in the area and he does not think that firewood is processed. Ms. Nozal noted that she has seen ash firewood along the trail. Engineer Homby explained the memo includes a policy regarding trees in the public right -of -way (ROW) and easements. The policy restricts planting in the ROW in most instances. When there is no ROW or easement trees should not be planted any closer than 15 feet from the edge of public roadway pavement. Trees and shrubs should not be planted in locations where they could block vehicle drivers' sight lines. Councilmember Sundberg asked if Public Works would be responsible for clearing sight lines. Director Brown responded yes and clarified that depending on each individual situation S &S may be asked to assist with the clearing. Councilmember Siakel stated by extending the Plan to be a 10 -year plan she thought it would be much more financially manageable. Councilmember Sundberg stated she liked the education component of the Plan. Mayor Zerby stated he liked the education piece about air quality. Councilmember Siakel stated she could support getting started with executing the Plan and she suggested reevaluating the Plan after a few years. Administrator Lerud stated staff has discussed doing that after about three years. Mayor Zerby stated he considers the Plan like a Capital Improvement Program for the urban forest. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES January 23, 2017 Page 8 of 8 Director Brown stated staff intends to bring the Plan back during Council's February 13, 2017, meeting for adoption. Council indicated a readiness to do that. Engineer Homby noted that the Plan is a policy and if there are things that can be approved upon or added that can be done. uvnnn�, Siakel moved, Sundberg seconded, Adjourning the City Council Work Session of January 23, 2017, at 6:44 P.M. Motion passed 4/0. RESPECTFULLY SUBMITTED, Christine Freeman, Recorder -Se' rhy, ayo parwt.( A!4� Jean Panchyshyn, City Clerk