coen Posted November 14, 2006 Report Share Posted November 14, 2006 Proceedings of the Board Ad Hoc Committee on Building Ownership District No. 2, Yellowstone County High School District No. 2, Yellowstone County November 9, 2006 The meeting of the Board Ad Hoc Committee on Building Ownership was held in the Lincoln Center on Thursday, November 9, 2006. Present were Trustees Sandra Mossman, Joel Guthals, Malcolm Goodrich; Superintendent Jack Copps, Rich Whitney, Dave Williams, Thomas Harper and Jeff Weldon. Guest attending was Glen Rickett of SPC Realty Partners. Ms. Mossman called the meeting to order at 12:00. Discussion of Possible Lease Arrangement Mr. Rickett introduced himself and explained that his company is involved in the resale and development of land and investment real estate. He represents the State Board of Investments on select real estate transactions. He discussed the advantages and disadvantages of an outright sale of the Grand Avenue property versus a lease of the ground, because the structure will need to be torn down. He explained that the decision to sell or lease is basically an investment decision. The reason to sell would be to get a lump sum but the lease could provide a good return, re-investment interest risk versus lump sum. It should be structured on an unsubordinated ground lease. Someone who develops that property would make improvements to the property which would add value to the lease. An unsubordinated ground lease on commercial ground in Billings is pretty safe. The District would own the property. He explained that it is possible in the future to sell the lease. Potentially having the lease in place could increase the value of the property. The land in itself is a non income producing asset. It is entirely possible that the leasehold interest in the property could be worth more than the cash value of the property because of the improvements that are going on and depending on the number of variables. The value of the leasehold interest is directly linked to interest rates. If interest rates go up, then the value of the leasehold goes down and it works the other way too. The lease should be structured to adjust periodically to take into account inflation. Land is a somewhat small component of the overall cost of the whole development. A leasehold can provide high leverage because it is a 100 percent leverage transaction, 100 percent financing. It can provide the developer a means to be able to leverage his way into the project and increase investment returns. At the same time the banks are comfortable with it because even though they aren’t taking a security interest in the real estate, they do have a security interest in the improvements of the real estate, including the leases. We would not have liquidity. If we sell we have lost an option. If we lease we can derive some income and still have the asset and have the ability to adjust what we want to do in the marketplace. Superintendent Copps stated that there may be as many as 600 more students next year and there is no way to accommodate that many more students in our existing facilities. If there is a need for an additional facility, we could use the $1.9 million to buy down the cost, plus the Guaranteed Tax Base (GTB), it would be an elementary property that would be about $2.6 to $2.7 million which would probably be saleable in the community. It is basically a credit issue. Joel Guthals asked about restrictions on the use of funds if we sell or lease. Jeff Weldon stated that the restriction is into what fund you have to put the proceeds. If you sell the property outright you have to deposit it into the Debt Service Fund, so the restrictions on the Debt Service Fund expenditures are there per law; Building Funds; General Funds which there is very little restriction on; or other appropriate funds at the discretion of the trustees. Other appropriate fund is defined in statute. On a lease there are fewer restrictions, and the proceeds from a lease of school property can be deposited into any fund which the trustees consider appropriate, in this case an elementary fund. It is very broad discretion. Lease payments are a little more flexible. We could use the payment stream from the lease to collateralize the loan but would not get the GTB. Mr. Goodrich stated that we might be able to get more for the land by providing 100 percent financing. Mr. Rickett stated that it is common to structure the lease with a rental provision, base rent plus additional rent as a percentage of gross sales. He stated that it might be helpful to look at the proposal to see the basis on which the offer was made. Get a copy of the lease from Walgreen’s. We would be able to partition out the returns on real estate, that is, the land apart from building. He suggests that if the School District would entertain a lease that they respond to the guy making the proposal on the basis that he is going to build a building on it, that it is going to produce so much income, and that plans and specifications would have to be approved by the District as would a lease of the building and land, and that an appraisal be made of the entire project, that is the whole building including the land, and that as part of the appraisal, the scope would include a separate opinion on the leased fee. That way the School District will get the benefit of the improvements that will be made on the property and the cash flow that will be made by the developers. If you sell it, make it subject to an appraisal that would be made taking into account the improvements that would be made on the property. The value of the property is, to a large degree, dependent upon its use. The appraisal that we have is just basically on the bare ground. The committee thanked Mr. Rickett for his time and the very informative discussion and information. Mr. Guthals asked about the public finance issues involved with building a new school facility. The GTB or facility reimbursement payment implies general obligation bonds. It would have to be considered bonded debt which means that you have a Debt Service Fund set up. You run a mill levy and then that is essentially the way we qualify for that 48 percent of facility payment. We qualify for the maximum or 48 percent. A new facility costs $4 million, then you make application to the state and get 48 percent and pay down the bonds by that amount. The more that we finance through school bonds, the more we get from the state. Mr. Copps is concerned about having to borrow more money and the bonds passing. Mr. Goodrich suggests borrowing the $1.9 million to pay down the cost of the building and using the income stream to repay that. Maybe we could sell this to the public by saying that we are using this as income property. The only caveat is if the guy doesn’t want to lease the ground. In that case we need to take the $1.9 million. Jeff Weldon said that it was considered surplus before, a bid was put out and we did get one, the same person. We went through that process in early 2005. Dave Williams has talked to the developer and is in contact with him monthly via email. The location is very appealing to them. Mr. Guthals thinks the first step is to contact the prospective purchaser and determine whether he has an interest in a ground lease. Then we would know if that is worth pursuing any further with him. If not, then we have to decide whether we are going to take $1.9 million now or put the property on the market for lease or sale. Then the next step, if he is interested in a ground lease and it is the consensus of the Board and the Superintendent that we should be pursuing a ground lease, then it is a question of negotiating the terms of the lease and getting it drawn up which Jeff Weldon, Malcolm Goodrich and Joel Guthals have all done. Trustee Guthals reminded the committee that there is a credit risk involved. We become a creditor and we have to keep that in mind. Dave Williams and Jack Copps will pursue talking with the prospective buyer and return to this committee with a recommendation. Brief History of Board Charge and Future Process Sandy Mossman gave an overview of the history of the committee. The committee needs to proceed with the disposition of Grand Avenue then open back up to other issues. Need to prepare some sort of presentation to the Board in December. Joel Guthals questioned the purpose of the committee as far as to determine what, if anything, we could give to the High School District from the sale of Grand, whether it is $1.9 million or a share of the lease to help the High School District out? Jeff Weldon stated that you have to be very careful what money flows from what transaction to what fund. This is elementary property, the High School District legal entity really has no interest in the elementary property. The auditors will pick up on money not going to the right place. Jeff Weldon answered that the shortest answer is not from this particular transaction. The longer answer is looking back at the original scope of this committee which is try to figure out moving property between the districts, for whatever reason you are going to do that, we talked about use of real estate or time, contribution to building at the time they were built. If the issue has been resolved on property ownership by district then the money from the sale of the Crossroads property would have to go to the Elementary District. Mr. Guthals said that we have determined that there is a high school ownership interest in the middle schools and there is a monetary obligation of the Elementary District to the High School District. Ms. Mossman reminded the committee that Grand was used for many, many years by the High School District. We don’t want to do anything that would adversely affect either district. Mr. Weldon remembers that we finally resolved that the ownership was Even Steven and moved into the next question of use of the various parcels of property, and whether or not because of use money needed to flow between the two districts. To the extent that one district may owe another because of use, not because the real estate ownership somehow needed to be adjusted. The big query use was the Elementary District’s use of Riverside, Will James and Castle Rock. Are there other things that need to be calculated in, Crossroads, or others? Mr. Weldon suggested not try to have the High School District involved in this transaction because it complicates it now. The Chair stated that the committee needs to get this resolved now, then go back to other issues. The property that was purchased for a new high school is being leased as farm land. The latest discussion on that property is that it really wasn’t that bad of a purchase by the School District. It is now increasing in value dramatically because sewer and water are going to be there by next year. Mr. Goodrich asked if we should consider the sale or lease of that like we do on Crossroads to fund a project within the high school such as Senior? Legal Issues (Including Funds Allocation) Lease property has more flexibility than sale proceeds to put into any funds. Malcolm Goodrich moved to instruct the administration to actively pursue a ground lease possibility with the prospective purchaser and, if that appears acceptable, to bring that back to the committee to develop the ground lease and make a recommendation to the Board. The motion passed. Current State of Grand Avenue Elementary School Property (Boundaries, Utilities, Insurance, Etc.) Rich Whitney stated that the Fire Department notified him that we have to keep the heat on to keep the fire alarms operational, so there are expenses being incurred. Expenses are related to temperature. Joel Guthals would like to pursue other fire alarms where the heat would not have to be turned on. Expenses will be perhaps $10,000 total annually, including heat, insurance, security, etc. Thomas Harper was concerned that when the school was closed, one of the assumptions was that it would be totally dark when it was empty. The Police Department uses the building to continue to train their dogs. Malcolm Goodrich suggested a trade off with the SRO. Group Study/Analysis of the Appraisal Dave Williams shared that the appraised value of Grand surprised the appraiser. Income approach was not used because it is vacant. The appraisal was based on the ground. Discussion of Offer to Purchase Jack Copps explained the offer to purchase on 2.75 acres or 93,000 square feet. The offer was available to us until May 1, 2006 so that has expired. We are assuming at this point that it’s still available to us. The group has offered to extend that offer until “we are ready.” We will be prepared to give some guidance and a recommendation to the Board in December. Another meeting of this committee will be convened when further information is available. There being no further business, the meeting adjourned at 1:35 p.m. Sandra Mossman, Chair Nancy Coe, Recorder Link to comment Share on other sites More sharing options...
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