Interdepartmental Correspondence Sheet City of Cincinnati October 17, 2005 To: Finance Committee From: David E. Rager, City Manager Mo Subject: Inwood Village Development Project Document # 200510555 ‘The City Council at its session on 10/03/2005 referred the following item for review and report: MOTION, dated 09/30/2005, submitted by Councilmember Smitherman, that the city administration provide the Finance Committee with a comprehensive update on the status of Inwood Village development project. ‘On June 2, 2005, City Council passed an Ordinance that authorized the City Manager to execute a forgivable loan agreement with Dorian Development VI, Limited (the Developer), in the amount of $1,500,000, to assist the Inwood Village project. The source of the City’s funds for this project is Community Development Block Grant (CDBG). Prior to the submission of that ordinance to City Council, the Department of Commu Development and Planning (DCDP) and the Developer engaged in extensive negotiations. Those negotiations resulted in DCDP presenting to the Developer, in a letter dated March 24, 2005, an outline of the City’s proposed participation in the project. (Attached Is a copy of the March 24" letter). On March 28, 2005, the Developer, in writing, accepted the proposed City participation. The following are the relevant conditions that were agreed to by the Developer: * Bank Commitment: One condition was the receipt of a firm bank commitment. This is important as it demonstrates that the Developer has alll the funds necessary to complete the project. To date DCDP is ot in receipt of a firm bank commitment. It is not prudent for the City to disburse funds to a project Prior to receipt of evidence that the project can be completed. To date, the Developer has only provided a letter of interest from LaSalle Bank dated May 20, 2005, with an expiration date of May 30, 2005.’ (Attached is a copy of the May 20" letter). This is not a firm ‘commitment letter. * Market Study: One condition was the receipt of a third party market study demonstrating financial viability of the entire project consistent with the proposed financing and marketing plan. It is not prudent for the City to disburse funds to this project unless and until it is demonstrated that there is a market for the proposed condominiums at the proposed purchase price and location. A copy of a report Prepared by Downtown Cincinnati Inc. was provided to DCDP that described the character and price of condominiums recently sold within the city’s basin area and surrounding neighborhoods. This report provides minimal insight into how the market can be expected to respond to the product to be produced in Inwood Village. LaSalle Bank is reported to have had an in-house market analysis conducted which may satisfy this requirement, but this has not been shared with the City. To date, the Developer has not provided to DCDP this market study. "Ina “leter of interest” a bank expresses interest in working with a developer. A bank's “letter of commitment” isan official ‘commitment to provide an amount of funding to a project and can be relied upon by third partes.Document #2005 10555 Page 2 Guarantees: One condition was the receipt of guarantees of completion, acceptable to the City, from the project developer, jointly and severally by Pauline Van der Haer, Ralph Bawtenheimer and Dorian Development. This is important because it demonstrates the Developer's personal commitment to the project, as well as providing security for the City’s funds. This is also a requirement of LaSalle Bank. To date, DCDP does not have any guarantees. Insurance: One condition was the receipt of Builder's Risk, Casualty and Liability Insurance, naming the City as an additional insured, and acceptable to the City’s Department of Law. This is important because it protects the City’s financial interest in the site. LaSalle Bank also requires this coverage. To date, the Developer has not provided proof of insurance to DCDP. Plans, Specifications And Cost Estimates: One condition was the receipt of complete plans, specifications and updated cost estimates, acceptable to the City. The Developer submitted plans and cost estimates to DCDP that were subsequently reviewed by a contract architect. There was insufficient detail submitted to adequately determine the quality of the finish of the units and accurately determine the estimated cost of the rehab of the units. This is important because it demonstrates what the final project will consist of, and is relevant to determining whether the cost estimate is legitimate. LaSalle Bank has also expressed that they will require current plans and cost estimates. To date, the Developer has not provided to DCDP the updated and acceptable plans, specifications and cost estimates. Environmental and Soil Tests, Engineering and Consultant Reports: One condition was the receipt of copies of any and all environmental, soil tests, and other similar engineering and consultant reports, indicating that no conditions exist that could cause an adverse impact on the complete implementation of the project. This is important because it demonstrates the physical and financial feasibility of the project. This project site is very old and could very well have environmental and/or engineering issues. To date, the Developer has not provided to DCDP any environmental, soil tests, or other engineering and consultant reports. Schedule: One condition was the receipt a schedule, acceptable to the City, which establishes an estimated timetable for completion of the project and public improvements. This is important because the City needs to know when the project will begin and end. It is also relevant to establish whether financing is in place for the length of the project. A market study would provide information such as the expected absorption rate of the condominium units that would ald in the estimation of the time required for sale of all the units, the property holding costs and more accurate projection of total project costs. To date, the Developer has not provided to DCDP a current and updated project schedule, Historic Confirmation: One condition was the receipt of correspondance from the Ohio State Historic Preservation Office confirming final historic review and approval, including any conditions. This is important because the site has national historical designation and it cannot be renovated without prior approval. CDBG regulations also prohibit the expenditure of CDBG funds absent historic review and approval. To date, the Developer has only provided evidence of partial approval from the Ohio State Historic Preservation Office. A second letter from the Ohio State Historic Preservation Office only provided approval to replace the roofs, gutters and perform interior demolition on the buildings.Document #2005 10555 Page 3 The Developer now wants to renegotiate the City’s participation. The Developer's new request would result in a waiver of each of the previously mentioned conditions. COMPLETE REVISION OF THE CITY'S FINANCING STRUCTURE In August 2005, less than 60 days after City Council approved the funding for Inwood Village, the Developer asked the City to completely modify the City's funding structure. The request included the City providing total funding ($1,500,000) to Phase | of the project. The request proposes the following use of the $1,500,000: ‘$795,000 for pre-construction stabilization; $55,000 to pay delinquent real estate taxes; and $650,000 in the completion of the units. This request was reviewed by DCDP and the request was denied. Additional information was submitted for consideration by the Developer, which was again analyzed by DCDP staff, and the request to restructure the city financing was again denied. The Developer once again submitted more information for DCDP for review, which was analyzed and again the decision by DCDP was to deny the Tequest to restructure the city’s financing. The reasons for the request to be denied are as follows: * Delinquent Real Estate Taxes: The payment of delinquent real estate taxes is not an eligible activity for CDBG funds. In a meeting on October 7, 2005, a representative from Eagle Realty stated that unless at least a Portion of the delinquent taxes was paid not later than January 2006, the property would face foreclosure; and there needed to be a written commitment that City funds would be available for this Purpose not later than October 31, 2005. This meeting was attended by City Officials, the DCDP Director and staff, the Developer and consultants to the Developer, and the Eagle Realty representative. © Pre-Construction Stabilization: Because this project is a market rate project, “addressing sium and blight” is the CDBG eligible activity. As such, CDBG funds used in stabilization and/or rehabilitation can only be used to address building code violations. In the previously mentioned negotiations, the Developer did not request funding for stabilization. In August 2005, for the first time the Developer requested that the City immediately provide to the project ‘$850,000 to stabilize the structures in anticipation of the onset of inclement weather and to accelerate interior demolition of the buildings. ‘+ Evidence of Project Financing: There is currently insufficient evidence that the project will be successfully completed. Given that status, an advance of City funds puts those dollars at significant risk. ‘That is the reason that the final negotiated agreement includes the conditions of the receipt of specific items that move the project status from speculative to viable. * Total Funding To Phase 1: DCDP has not been presented with evidence of adequate funding to complete Phase 1. The City’s funding structure was premised on the determination that the project Needed a larger subsidy for the units in the first phase than in subsequent phases. ‘The City’s funding is structured to be provided to the project on a pro-rata basis with the bank's funds and in phases. This is a common structure in private financing, and is strongly recommended by the U.S. Department of Housing and Urban Development (HUD) in the use of CDBG funds. This structure Puts the City’s funds at a proportionate risk level with other project funding.