PURPOSE:

The purpose of this report is for the Redevelopment Agency Board to consider proposed revisions to the Commercial Rehabilitation Loan Agreement with Palliser Furniture, Ltd. on behalf of an EQ3 furniture store at 308 North San Fernando Boulevard.

BACKGROUND:

The former Book City building is located at 308 North San Fernando Boulevard in the Village District of Downtown and has been vacant for over 18 months. The building is approximately 8,725 square feet and is owned by Palm Avenue Associates. It is located in the Burbank Center Commercial, Retail and Professional Zone (BCC-1), which is entirely confined to the Village District.  Ground floor retail and entertainment uses are required along San Fernando Boulevard from Magnolia Boulevard to Olive Avenue.

On November 8, 2004, staff received a proposal from Maynard Retail Company, Inc., as a franchisee of EQ3 Franchise Holdings (EQ3), requesting financial assistance for building and tenant improvements under the Downtown Tenant Assistance Program. Maynard Retail Company, Inc. was in negotiations with Palm Avenue Associates (owner/landlord) to lease the former Book City building (through its parent company Palliser Furniture, Ltd.), to open an EQ3 furniture and home accessories store.  EQ3 markets itself as a modern, trendsetting furniture and home accessories retailer which combines international design with quality service and affordable value. Palliser Furniture, Ltd., EQ3�s parent company, is one of Canada�s largest furniture manufacturers with over 50 years of manufacturing wholesale experience.

On April 26, 2005, the Redevelopment Agency Board approved a forgivable loan for $257,800 with Palliser Furniture, Ltd. (on behalf of EQ3) for building and tenant improvements under the Downtown Tenant Assistance Program.  Under the terms of the loan agreement, Palliser Furniture, Ltd. is the borrowing entity and guarantor for the Agency�s loan. The term of the loan is ten years at a fixed interest rate of the then prevailing prime rate plus two percentage points as of the date the loan agreement was approved (about 8%). Scheduled annual principal and interest payments are forgiven during the time the approved tenant is in place.  For every year that the retail tenant, or an approved replacement tenant, no longer occupies the building during the ten year period, 1/10^th of the remaining loan balance plus accrued interest shall be repaid.   However, Palliser is required to pay the Agency 3% of its annual sales that exceed $3 million in order to both amortize the outstanding debt sooner than the 10-year period and to assure that the Agency shares in exceptionally strong sales volumes.  These funds would be used to reduce the principal loan amount received under the Downtown Tenant Assistance Program.  The projected date to complete the improvements and open the EQ3 store was August 31, 2005.

ANALYSIS:

Since the Agency�s loan was approved, Chris Maynard, of Maynard Retail Company, Inc, as a franchisee of EQ3 Holdings (EQ3), has accepted a position with another company in Toronto, Canada.  In addition, Palliser Furniture, Ltd. has made a corporate decision to expand future EQ3 stores purely as a franchise network, without Palliser as a corporate partner.  As a result, Palliser has asked Mr. Doug Smith to open and operate the EQ3 store in Burbank as a franchisee (without Palliser as a corporate partner) and to assume the operation of the EQ3 store in Torrance, California, which was formerly operated by Chris Maynard.

Mr. Doug Smith has over 20 years of retail experience and has worked closely with Chris Maynard at both IKEA and EQ3 during this period.   His company, Canuck Holdings, LLC is the current franchisee of the EQ3 concept with two additional new EQ3 stores opening in Tempe, Arizona in Spring 2006 and in Albuquerque, New Mexico in Fall 2006.  Canuck Holdings is comprised of two partners, Doug Smith and Jim McGovern. The new EQ3 store in Burbank would be operated by a new California-based limited liability company, currently being formed, that would own and operate the franchise. Mr. McGovern would provide the working capital and would act as guarantor for various leases and loans as required. 

Additionally, Mr. McGovern is the principal and CEO of Tralee Investments, Inc., based in Toronto, Canada and would provide both a corporate and personal guarantee for the Agency�s loan under the Downtown Tenant Assistance Program.  Keyser Marston Associates, the Redevelopment Agency�s financial consultant, has reviewed the 2004 financial information for Tralee Investments and a personal financial statement from Mr. McGovern and has determined that both financial documents reflect assets in excess of $20 million, which demonstrates more than sufficient financial resources to guarantee the Agency�s loan of $257,800 (Exhibit A). 

In order to help facilitate this proposed transition, Palliser Furniture, Ltd. has agreed to remain as the borrowing entity and guarantor for the Agency�s loan until the building and tenant improvements are completed and the EQ3 store is open for business, subject to receiving Agency approval of a future assignment of the loan agreement to Canuck Holdings (or its subsidiary) and substitution of a new guarantor to Tralee Investments.  Additionally, staff was informed that the lease with Palm Avenue Associates is ready for execution pending Agency approval of these future actions.  Once the lease agreement is executed with the property owners, the Agency�s repayment and participation notes (as part of the loan agreement) would be executed. Furthermore, the estimated timeline to complete the building and tenant improvements will be extended from August 31, 2005 to October 31, 2005.

In order for the Agency Board to approve the future loan assignment and substitution of the guarantor, staff recommends that certain conditions precedent to the assignment be met including 1) completion of the improvements and release of construction covenants (pursuant to the agreement); 2) final review and approval of updated financials prior to loan disbursement; 3) verification that no substantial changes have occurred with the proposed new guarantor; and 4) verification that no default has occurred under the agreement.  Staff requests authorization for these future actions to be administratively approved by the Agency Executive Director (or designee).  All other provisions of the Agency�s loan agreement including the loan terms, repayment and participation payments, design review, prevailing wages and fund disbursement would remain unchanged.

FISCAL IMPACT:

There is no fiscal impact since the $257,800 loan under the Downtown Tenant Assistance Program has been previously approved and budgeted from tax increment funds.

RECOMMENDATION:

It is recommended that the Agency Board adopt a resolution approving: 1) a future assignment of the loan agreement with Palliser Furniture, Ltd. to Canuck Holdings, LLC (or its subsidiary); and 2) a future substitution of the guarantor to Tralee Investments.

EXHIBITS:

Exhibit A    Keyser Marston Associates Analysis

EQ3staffreport6-21-05