Committee Meeting Memos

19061

Prepared by the North Dakota Legislative Council staff for Representative Dalrymple
June 1999

REQUEST FOR BUDGET SECTION APPROVAL OF THE SALE OF THE CORPORATE CENTER IN GRAND FORKS - BACKGROUND INFORMATION

Section 5 of 1999 Senate Bill No. 2188 provides that the Corporate Center in Grand Forks may not be voluntarily sold without the prior approval of the Budget Section. A copy of Senate Bill No. 2188 has been attached as Appendix A. The agenda for the June 9, 1999, meeting of the Budget Section includes time for the committee to consider approval of the future sale of the Corporate Center. This memorandum provides background information relating to the Corporate Center and its proposed future sale.

DESCRIPTION OF CORPORATE CENTER

The Corporate Center consists of two buildings located at 401 and 402 DeMers Avenue in Grand Forks. The two buildings, which will be connected by a skywalk, will consist of approximately 69,000 square feet. Construction began in March 1998 and is anticipated to be completed by September 1, 1999. The city of Grand Forks owns the Corporate Center, but is not anticipated to occupy space in either building. Construction and related costs are approximately $15.2 million, as follows:

Architectural and engineering fees	$1,077,880
Construction costs	13,934,955
Bond issue costs	142,643
Total project costs	$15,155,478

The project funding is from the following sources:

Federal community development block grant	$5,250,000
Federal Department of Commerce - Economic Development Agency grant	3,500,000
First National Bank - Payment for improvements	742,536
Bond proceeds	5,662,942
Total project funding	$15,155,478

PROPOSED SALE

The city has negotiated lease agreements with three tenants for occupancy of the building located at 401 DeMers Avenue. The three tenants are Brady, Martz & Associates, P.C.; Camrud, Maddock, Olson, & Larson, Ltd.; and First National Realty Corporation. The lease agreements provide the following:

Tenant	Leased Area - Including Common Area	Base Lease Rate	Additional Rent
Brady, Martz & Associates, P.C.	22,844 square feet	$13,801.58 per month for 96 months $14,220.39 per month for 60 months	$951.83 per month for heating system improvements $906.63 per month for "fit up" costs incurred in making the space ready for occupancy
Camrud, Maddock, Olson, & Larson, Ltd.	10,942 square feet	$6,610.79 per month for 96 months $6,811.40 per month for 60 months	$455.92 per month for heating system improvements $1,875.96 per month for "fit up" costs incurred in making the space ready for occupancy
First National Realty Corporation	27,966 square feet	$19,115.88 per month for 96 months $19,695.18 per month for 60 months	$1,165.25 for heating system improvements

The city is proposing to enter into purchase agreements with the three tenants. Three separate identical purchase agreements have been issued to the three tenants. A copy of the agreement sent to Brady, Martz & Associates, P.C., is attached as Appendix B. The purchase agreement includes the following provisions:

The purchase option may not be exercised unless the lease has been in effect for at least 21 but not more than 23 years. (The initial term of the leases is 13 years, with two 5-year optional renewal periods.)
The city's initial equity in 401 DeMers Avenue is listed as $5,392,625. In the event the purchase option is exercised, the purchase price will be the fair market value, less the following amounts:
- The city's initial equity plus interest at the rate of 2.5 percent per year (based on 2.5 percent interest per year, the value of the city's initial equity will increase to approximately $9.5 million after 23 years).
- One-half of the difference between the fair market value and the amount of the city's equity plus interest, as calculated above.
The purchase option is granted to each tenant for their respective leased space.

The city of Grand Forks, Office of Urban Development, has indicated that the terms of the leases and the optional purchase agreements were arrived at through negotiations with the three tenants. The Office of Urban Development indicated that the negotiations took place at a time of uncertainty in the city's central business district due to the effects of the 1997 flood, and the terms were arrived at to encourage the three tenants to remain in the central business district rather than relocate their offices to another part of town.

The city will maintain a bond reserve account until retirement of the bonds (estimated at 18 years) and will also maintain a "capital reserve for replacement account." The Office of Urban Development has indicated that the city anticipates a minimal cash flow from leasing the building, and consequently, the bond reserve and capital reserve for replacement accounts will be funded at least partially from city economic development (sales tax) funds, rather than building revenues. The Office of Urban Development has indicated that in the event of sale of the building, the city will retain ownership of the balances of these accounts. No estimate was available as to the possible balances of these accounts at the time of the proposed sale.

The Office of Urban Development has provided the following information on estimated cash flows for the Corporate Center:

	Annual Net Cash Flow (After Debt Service and Operating/Maintenance Costs) - Based on Revenue From Pending or Negotiated Leases^1,2	Annual Net Cash Flow (After Debt Service and Operating/Maintenance Costs) - Based on Full Occupancy²
Years 1-8	$37,240	$115,394
Years 9-13	$53,732	$134,383
Years 14-18	$70,668	$153,919
Years 19-23	$21,683	$107,638
¹ Leases have been negotiated with the three main tenants listed previously in this memorandum. The city is currently negotiating with the Bremer Corporation for occupancy of the first floor of the 402 DeMers building. Leases to those four tenants would encompass approximately 87 percent of the rentable square footage in the two buildings. ² Bond payments are estimated to be between $575,000 and $580,000 per year for 18 years. For years 19-23, this amount has been deducted from the Corporate Center revenues to arrive at the net cash flow amounts shown. For years 19-23, unless the purchase options are exercised, the amounts that were previously paid to retire the revenue bonds issued for the building's construction will be paid to the water development trust fund pursuant to Section 5 of 1999 Senate Bill No. 2188.

ATTACH:2