To: Honorable Mayor and Members of Town Council
From: Trish Muller, Finance Director
Title
Ordinance Approving a Two Million Five Hundred Thousand Dollar Term Loan with Firstbank On Behalf of The Castle Rock Downtown Development Authority and In Conjunction Therewith Approving a Promissory Note, Sales and Property Tax Pledge Agreement, and Account Pledge Agreement; and Providing for Its Emergency Adoption on Second and Final Reading (Second Reading)
Body
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The Ordinance was approved on first reading on September 6, 2016 with a vote of 6 to 0 with no changes
Executive Summary
The purpose of the memo is to request approval of the two million five hundred thousand dollar ($2,500,000) term loan with Firstbank on behalf of the Downtown Development Authority (“DDA”). The proceeds from this term loan will be used by the Town to fund the loan to partially pay for the festival park project.
Staff is presenting to Council the term loan options in order to for the DDA to fund the festival park project. This term loan pays for approximately half of the project with pledges of the DDA property and sales tax increment financing (“TIF”) to repay this loan over 20 years. The property tax TIF and the sales tax TIF are the DDA’s main source of funding for downtown growth and redevelopment projects.
The provisions of the term loan include:
• 20 year term
• Interest to be determined at closing
• Interest payable quarterly, principle of $125,000 due annually
• One-time administration fee of $25,000
• Downtown Development Authority TIF cash account held at Firstbank
• Minimum cash balance on account with first bank to cover 1.2x annual debt service.
• Pledge of property and sales tax TIF
The Town would need to close on the term loan and have the funds in its account prior to granting any contract for this project. Assuming the Town grants a construction contract for the festival park project, the anticipated closing date on the term loan would be on October 10, 2016. Firstbank has provided a loan commitment letter to the Town to secure the funding source.
Creation of the DDA and Use of the TIF
The Downtown Development Authority was established in November, 2008 via voter approval and created through Ordinance No. 2008-39. As stated in Section 8 of the ordinance, “The Town may issue debt for the Authority up to $30,000,000, with a maximum repayment cost of $45,000,000 for approved plans of development as a voter approved revenue change. Such debt may be issued for the Authority by the Town for the purpose of paying the costs of creating and implementing any plan of development …” The ordinance also specifies a maximum net effective interest rate of seven percent (7%) per annum.
In August, 2014, the Downtown Development Authority Board held a work session with Town Council to affirm their recommendations to revitalize and redevelop Downtown Castle Rock. This strategic approach included a recommendation by the DDA to activate the TIF mechanism through the Town’s issuance of debt on behalf of the DDA. This debt would provide the leverage needed to jump start the growth and development within the core of Castle Rock.
Council further directed staff to work to implement the proposed Downtown Tax Increment Program at the January 6, 2015 Council meeting and also noted the Downtown TIF program as a strategic priority for long term planning purposes at the January 27, 2015 meeting.
On February 17, 2015 and March 3, 2015, Council approved a budget amendment, on first and second reading respectively, which established the Downtown Development Authority TIF Fund (the special fund) and transferred the $800,000 in 2015 TIF funds from the General Fund, Transportation Fund and the Community Center Fund.
Since Council’s direction in January, 2015, Town staff has been working closely with the DDA and Firstbank to structure a term loans for the Festival Park projects. The purpose of this memo is to provide council with the details of the Festival Park term loan and to seek Council approval of the ordinance.
Details of the Term Loan
Based on the sales and property tax trending for the DDA TIF, Firstbank has authorized a loan to the Town in the amount of $2,500,000. The loan proceeds would be used to pay for approximately half of the Festival Park project. This term loan pledges the property and sales tax increment financing (“TIF”) to repay this loan over 20 years. The property tax TIF and the sales tax TIF are the DDA’s main source of funding for downtown growth and redevelopment projects.
The provisions of the term loan include:
• 20 year term (Fully amortized over 20 years, with a balloon payment in year 10)
• Interest to be determined at closing
• Interest payable quarterly, principle of $125,000 due annually
• One-time administration fee of $25,000
• Downtown Development Authority TIF cash account held at Firstbank
• Minimum cash balance on account with first bank to cover 1.2x annual debt service.
• Pledge of property and sales tax TIF
• Reserve fund accrual to account for the full balloon payment in year 10. Reserve is structured at 2% of the balloon payment each year for the first 3 years, 13% of the balloon payment the next four years and 20% of the balloon payment the last two years.
The Town would need to close on the term loan and have funds in the account prior to granting any contract for this project. Assuming the Town grants a construction contract for the festival park project, the anticipated closing date on the term loan would be October 10, 2016. Firstbank has provided a loan commitment letter to the Town to secure the funding source (Attachment B).
Promissory Note (Exhibit 1)
This promissory note details the amount of the note ($2,500,000) with an interest rate that will be established at closing for a term not to exceed 20 years. There is a one- time administration fee of $25,000 and payments of accrued interest are due quarterly and principle payments of $125,000 annually.
The terms specified in the Promissory Note are in accordance with the debt issuance requirements established in Ordinance 2008-39, which created and established the Downtown Development Authority.
Sales and Property Tax Pledge Agreement (Exhibit 2)
This agreement states the Town and DDA are pledging future sales and property tax TIF revenues to pay back the Note of $2,500,000 over the term of the loan (Fully amortized over 20 years, with a balloon payment in year 10).
Once the Town has incurred debt on behalf of the DDA, any TIF generated through property tax is deposited directly into the special fund. Sales tax TIF is required to be deposited into the special fund in order to supplement any amount needed to meet the account pledge requirement. Any additional sales tax TIF deposited into the special fund is done at the discretion of council.
Account Pledge Agreement (Exhibit 3)
This agreement states the Town will keep the special fund account at Firstbank and at a minimum deposit at least 1.2 times the amount of the annual debt service, or approximately $230,000. Additionally, the Town agrees to accrue a balloon reserve amount of $11,094.20 for each of the years 2017-2019, $72,112.30 for each of the years 2020-2023 and $110,942 for years 2024 and 2025. This first ten years of the loan, if needed, will then be refinanced for a second 10 year loan.
Budget Considerations
The proceeds from the term loan with Firstbank and the distribution of the funding to the Festival Park project would be reflected in the Town’s special fund, the Downtown Development Authority TIF Fund. Future property tax TIF and sales tax TIF would be pledged as revenue for the Town’s term loan repayment with Firstbank.
Staff Recommendation
Staff recommends that Town Council approve the Ordinance on first reading as written.
Proposed Motion
“I move to approve An Ordinance Approving a Two Million Five Hundred Thousand Dollar Term Loan With Firstbank On Behalf of The Castle Rock Downtown Development Authority and in Conjunction Therewith Approving a Promissory Note, Sales and Property Tax Pledge Agreement, and Account Pledge Agreement”
Attachments
Attachment A: Ordinance
Exhibit 1: Promissory Note
Exhibit 2: Sales and Property Tax Agreement
Exhibit 3: Account Pledge Agreement
Attachment B: Loan Commitment