Item #01
Date: August 24, 2022
To: Mayor and City Council
From: Dan Flores, Community Development Director
Jim Schaad, City Manager
Subject: Exclusive Right to Negotiate (ERN) Agreement
Recommendation:
Pass a Motion to 1) review and approve the reimbursement form and ERN Agreement with Engstrom Properties, Inc. and 2) enter into the ERN Agreement with Engstrom Properties, Inc. for the City Owned Property on B Street located between 12th and 14th Streets.
Rationale for Recommendation:
After an extensive Request for Qualifications (RFQ) and Request for Proposals (RFP) process, whereby the City Council reviewed multiple proposals, The City Council invited Engstrom Properties to enter into an Exclusive Right to Negotiate (ERN) agreement as well as a Reimbursement Agreement that authorizes 60 days in which the city agrees not to sell or negotiate the B-Street properties with any other party. During this term the city will negotiate exclusively with Engstrom Properties the terms of a Development Agreement as well as a Purchase and Sale Agreement. Included with the ERN agreement is a Reimbursement Agreement requiring Engstrom properties to reimburse the city of Marysville for any consulting or legal expenditures incurred during the negotiating period.
Engstrom Properties proposal includes the development of a brand name hotel; a grocery store; a restaurant; and an event center. During the negotiating period, Engstrom Properties, will provide to the city a preliminary plan that includes; a refined proposed conceptual development program; a financing proposal that spells out the timing, price, terms and conditions for the proposed acquisition of the property; A land use entitlement plan which includes an analysis of required discretionary and ministerial permits and environmental reviews required for the entire project and; a milestone schedule which will include dates for the execution of the purchase and sale agreement and development agreement; close of escrow; obtaining land use entitlements; financing commitments for the development, and commencement and completion dates of construction of the proposed project.
Background:
In 2006 the City Council authorized issuance of a $4.975 million taxable Certificates of Participation to raise money to buy the 3.7-acre property on B Street between 12th and 14th streets. In addition to the purchase price of the property, the 2006 certificates funded 3 years of capitalized interest as well as the removal/ relocation of certain existing structures located on the parcel. Certificates of Participation are debt instruments similar to bonds. At the time the property was purchased by the city, the expectation was that a commercial developer would buy or lease the cleaned-up property, along with an adjoining Item #01
1.3-acre parcel from the city at fair market value. It was hoped that the new landowner would then develop some 440,000 square feet of commercial and retail space there and begin to generate local tax revenue to the city to help pay the annual COP installments until the obligation was paid off. Soon after, however, the economy stalled and went into prolonged recession, and no buyer could be found for the property. At that point the city faced the prospect of having to make large annual payments from the existing general fund revenue sources, without any new tax revenues coming from that parcel. Worse yet, the recession was now dragging the city’s overall revenues down below what they had been previous to the economic downturn. In response to that, the City Council decided in the Fall of 2011 to issue $7 million in new COPs to redeem the original 2006 issue of COP’s plus capitalize approximately 2 1/2 years of annual interest payments for the new COP going forward plus fund a $500,000 reserve fund and pay several other smaller costs. Using the capitalized interest, the first two installments were paid. However effective October of 2014 the general fund was obligated to start making the payments from any allowable revenue source. Payments have continued to be made on the obligation. In 2019 the city completed the requirements to declare the property surplus and go through the surplus land act process.
This allowed the city to be able to sell the property for other projects rather than limiting to the development of affordable housing only. In 2021 the City Council elected to actively sell the property to a developer who would develop a project that would create maximum tax revenue to the city as well as pay down a large portion of the remaining debt on the property. The City Council selected the real estate firm of Marcus & Millichap to represent the city in the sales process. Marcus &Millichap were able to attract multiple interested developers who were invited to submit Requests for Qualifications to the city. The most qualified firms were then selected to receive Requests for Proposals as a second step in the process.
Requests for Proposals were reviewed and eventually one developer’s proposal remained for the final selection and the invitation for the Exclusive Right to Negotiate , this developer is Engstrom Properties. although the goal of the ERN process is to reach a development agreement as well as a purchase and sale agreement, should the city and the developer not be able to reach agreement during the term of the ERN the city would have the opportunity to reopen the RFP process.
Discussion & Analysis:
Entering into an ERN with Engstrom Properties authorizes a period of time during which the city of Marysville agrees not to sell or negotiate with another party. The developer and the city of Marysville will negotiate the terms of the disposition and development agreement. The Disposition and Development Agreement will be legally binding contract between a developer and the City of Marysville that will specify the terms for transfer of the property and the terms for development of the property . A disposition and development agreement will specify various elements of the disposition and development process including phasing, taxing or tax sharing, lease amounts or sales price, critical infrastructure responsibilities, timing for entitlements and conditions precedent to the property transfer. A disposition and development agreement will have a right of reentry or a “clawback” provision that allows the city to take back the property in the event that the milestones in the DDA a are not met. The entitlement process includes securing city approvals such as design review, use permits, subdivision approval and associated environmental document approval. The final phase is the construction phase. The construction phase will include preparation of the construction documents and securing permits for construction documents and permits after construction. Permits will take several months from preparation to plan check to building permit issuance. Actual construction can usually take anywhere between 8 to 12 months or more depending on the project.
Upon approval of the ERN, Brant Bordsen, City Attorney will negotiate the terms in the ERN with Engstrom Properties. Brant will be the direct contact from the City of Marysville and Mark Engstrom will be the direct contact from Engstrom Properties.
Item #01
Fiscal Analysis:
The Developer will be reimbursing costs up to $30,000. The estimated costs associated with the ERN process will include planning consultants ($5,000 estimate) and both City and outside Legal Counsel ($25,000 estimate).
Attachments:
1) Exclusive Right to Negotiate(ERN)
2) Reimbursement Agreement