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HomeMy WebLinkAbout03-11-2008TO: Sebastian City Council FROM: Al Minner, City Manager RE: LOPRESTI LEASE CLARIFICATION AND INFORMATION DATE: Tuesday, March 11, 2008 On Monday, I received an e-mail from Councilmember Dale Simchick regarding the LoPresti Lease. Because of the nature of those questions, their technical answers, and because the questions are pertinent to the potential discussion points, I thought it would good for all to see this information in written format. If you have any other questions on this matter, please feel free to contact me at your earliest convenience. SCHEDULES "A" AND "B" ARE NOT SEPARATE. WHAT IS THE NEGOTIATED RENTAL PRICE FOR THE HANGER AND THE ADMINISTRATIVE AREA AND HOW MANY SQUARE FEET IS EACH AREA? WHAT WAS THE RATIONALE FOR THESE PRICES? In the LoPresti Lease, Schedule "A" is the written description for the "Public Works Wing" of the Airport Administrative Facility. It is the westem most 'Swing" and contains approximately 1,700 square feet. In addition, the City is also providing LoPresti with use of the "Flight Plan Room", which is a common area immediately adjacent to the wing. In consideration of all area (common or otherwise) that LoPresti will use, the chargeable leased area is a total of 1,800 square feet. Schedule "B" is a written description of the hanger, which will provide LoPresti with 15,000 square feet of fabrication area. The base rationale for determining rent levels in both the hanger and the administrative wing is fair market value. This basis was provided by Florida Department of Transportation (FDOT). Because FDOT grant funds are the root revenue source for hanger construction, every effort was made to keep safe the grant assurances and we sought/received written FDOT approval for the LoPresti Lease. FDOT approval Includes the lease components, as well as market values for the administrative wing and hanger. As advised by FDOT, to determine fair market value, the City retained the services of Adam Preuss Appraisal Services. Mr. Preuss is a local (Sebastian, FL) certified appraiser. Based on market comparisons, Mr. Preuss determined that fair market value was (1) $8.00 per square foot for administrative office rental; and, (2) $2.00 per square foot for hanger space. These findings were approved by FDOT and provided the bases for determining market rate to LoPresti: ITEM UNIT COST Administrative Wing $8.00 SQ. FT. Hanger $2.00 SQ. FT TOTAL SQUARE FEET TOTAL 1,800 $14,400 15,000 $30,000 $449400 HOW DID THE CITY ARRIVE AT THE TOTAL ECONOMIC REBATE? The total economic rebate is $8,400 per year for up to 10 years if LoPresti (1) provides 45 new jobs; (2) establishes its East Coast Sales/Marketing/Distribution Center for the Fury aircraft; and, (3) moves its existing enterprises to the Sebastian Municipal Airport. While there are many positive aspects of this lease, the rebate portion of the lease was not developed using traditional economic development tools. Generally, economic development tools offer tax incentives or provide "public" improvements to entice industrial development or defray construction costs. In that sense, the LoPresti rebate is not standard because the incentives were based on what tools were immediately available to the Airport (i.e., primarily the hanger grant). Going forward, the City of Sebastian will need to make every effort to ensure the City has good economic development tools at its ready. To date, I am aware that the Chamber of Commerce Economic Development Committee will be making said recommendations. However, the LoPresti incentives are based on what the Airport can do now to entice economic development. Below is a list of factors that led to the Economic Rebate proposal: 1. One of the only tools at the City's immediate use is the ability to use FDOT money to build hanger space. This message was presented in a memo submitted to Council on November 27, 2007, titled "Airport Hanger Performa/Economic Development Action". One of the recommendations of that correspondence considered using grant money to build a "speculative" building, which could lure economic development. The "speculative" building concept significantly lowers the development costs for industry, while providing a "turn key" operation that immediately keeps manufacturing operations moving. In many cases, if you build it, companies do not always come. There is risk in this concept that may leave economic development seed money stranded. In Sebastian's situation, the risk is minimal because there is a customer willing to rent the facility; therefore, no capital is left stranded and the investment pays immediately. 2. The LoPresti Lease provides the financial vehicle to borrow the matching money. The above mentioned $1.425 million grant must be matched. With the airport running a little short on cash, the LoPresti incentive allows construction of the "speculative building" without risking City or Airport cash. As it applies to this case, the cash match needed is $285,000. At the "bottom line" of the LoPresti agreement, the lease will provide $36,000 of new revenue. This is enough revenue to cover the costs of borrowing the cash match. 3. The LoPresti Lease provides the City the ability to make a bad investment pay-off. In FY 03, the City of Sebastian invested over $1.3 million in the Airport/Public Works Facility. This money was matched by an FDOT grant in the amount of $850,000. Originally, the building was planned to house the Public Works and Engineering Departments, but this plan provided additional costs to the General Fund. Instead, I proposed to Council in September 2006, that the facility be used for economic development purposes. That way the City's investment could provide jobs and lure industry. At the present time, the City already has a considerable investment that is not returning. So, by leasing administrative space to LoPresti, the stranded administrative wing investment can begin to return for the City in terms of (1) economic development incentives; and (2) providing the vehicle to build a marketable aviation hanger complex. 4. The LoPresti Lease provides 45 new jobs and the ability to build a foundation for additional "Florida Targeted" manufacturing jobs. In the end, the LoPresti rebate is defendable and universally fair for other targeted industry that may be interested in locating at the Sebastian Airport. WHERE IS THE MONEY FOR THE GRANT MATCH COMING FROM? The match needed for the grant is $285,000. It is anticipated that the Airport will borrow this money or shift project funding from previously scheduled grants. Whichever the case, Council will be required to approve the transaction. The financial plan needed to borrow has not been completed to date, because the first step is to approve the lease and rebate. If Council approves the lease and economic development rebate, staff will be back to Council with additional financial details in one of two forms: 1. The Pure Borrowing Plan: One alternative for the Airport is to borrow $285,000. These funds can be borrowed at 10 years for an annual lease payment of approximately $34,770. Hence, the LoPresti Lease payment leaves the Airport financially whole in the transaction. The traditional lending vehicle for this path is a bank loan. This would provide quick access to money. However, the General Fund is in a position to lend money too. In fact, in today's turbulent investment world, lending to another City managed fund makes some sense and would save interest payments from being paid to an outside agency. Nevertheless, if the General Fund makes a loan, these funds would need to come from unrestricted cash and with the "budget crunch on", parting with some cash is difficult. -OR- 2. The Hybrid Plan: Hence the hybrid path. In FY 05 the Airport reserved $125,000 for a road grant. This cash can be shifted now, reducing the amount needed to borrow for the hanger grant match to $160,000. This transaction would reduce an annual payment to $19,520, leaving $16,480 in cash immediately available in the Airport Fund. The down side to this approach is it takes cash away from a scheduled project. However, that cash can be replenished by applying for a USDA job creation grant or if other job creation occurs, such as an access road, that could be a "public improvement" that qualifies for other economic development incentives funded by the state. WHAT IS THE PROCESS FOR BUILDING THE HANGER? The 15,000 square foot hanger will immediately be Airport property. LoPresti is only renting the facility. As such It will be a City project to build and design by January 1, 2009, if Council approves the LoPresti lease and economic development rebate. Currently, Joe Griffin is working on the details for either an RFP or a design build plan for the construction of the hanger. Based on this decision, contracts for engineering and construction will be brought before Council, similar to all other construction projects that have occurred in Sebastian. As always, if you have any questions on this issue, please feel free to contact me at your earliest convenience.