PURPOSE:

The purpose of this report is for the Agency Board to consider a request from the Tucker Investment Group to modify the terms of a loan received under the Downtown Tenant Assistance Program for the former Newberry building located at 328-330 North San Fernando Boulevard. 

BACKGROUND:

The former Newberry building is located at 328-330 North San Fernando Boulevard in the Village District of the downtown.  The building is approximately 20,000 square feet including a 5,000 square foot mezzanine (Exhibit A).  The property, formerly owned by Shadrall Associates, remained vacant for over six years and was in need of major repairs.

Part of the Agency's comprehensive strategy to revitalize downtown emphasizes the importance of attracting quality tenants to fill existing vacancies.  The Downtown Tenant Assistance Program was developed to help meet this need and was approved by the Agency on September 24, 2002.  The Downtown Tenant Assistance Program provides forgivable market rate loans as financial incentives to attract quality retail tenants to locate in the downtown.  This loan program is made available to retail tenants interested in locating downtown or property owners interested in attracting retail tenants to the downtown area. 

On December 17, 2002, the Agency Board approved a proposal from the Tucker Investment Group for $675,000 ($45 psf) in financial assistance for building and tenant improvements under the Downtown Tenant Assistance Program to help attract Urban Outfitters, a national retailer.   The Tucker Investment Group subsequently purchased the former Newberry building and entered in to a 10-year lease agreement with Urban Outfitters to occupy about 15,000 square feet of the building (about 11,000 square feet on the ground floor and 4,000 square feet in the mezzanine).  Approximately 5,000 square feet of the building (4,000 square feet on the ground floor and 1,000 square feet in the mezzanine) remains vacant and is in need of improvements.  This portion of the building is subdivided from the Urban Outfitters space with a separate entrance.  The Tucker Investment Group is currently in negotiations with a retail tenant to lease this vacant space.

Commercial Rehabilitation Agreement

Under the loan program, the Tucker Investment Group entered into a Commercial Rehabilitation Agreement with the Burbank Redevelopment Agency which included the following repayment provisions:

• Principal and interest payments for the Downtown Tenant Assistance Program loan are forgiven for each year the approved tenant remains in operation during the 10-year term.

• For every year the approved tenant or replacement tenant no longer occupies the building during the 10-year period, the owner is required to repay 1/10^th of the original principal amount plus accrued interest.

• Upon completion of the improvements, the Tucker Investment Group will be permitted to sell, transfer, or assign the property, as long as either the note is paid in full or the Tucker Investment Group and subsequent purchaser execute an assignment and assumption of the Agreement satisfactory to the Agency. 

• Annual participation payments due to the Agency would be equal to 55% of percentage rents paid by Urban Outfitters to the owners for annual sales in excess of $4 million (Urban Outfitters to pay the owner a percentage rent of 7% of gross sales if annual sales exceed $3 million and 8% if sales exceed $4 million).

• Tucker Investment Group cannot place a mortgage on the property in excess of the $3.02 million primary loan ahead of the Agency�s loan of $675,000.

Urban Outfitters

Urban Outfitters has been very successful since officially opening its doors in September 2003. In addition, according to the Burbank store manager, Urban Outfitters is very excited about the unique design of the Burbank store and plans to utilize it as a prototype for ongoing Urban Outfitters stores.  Furthermore, Urban Outfitters� presence is helping to generate excitement and further revitalization efforts in the downtown.

ANALYSIS:

Since entering into a 10-year lease with Urban Outfitters in 2002, the Tucker Investment Group has been trying to attract a quality retail tenant to fill the remaining 5,000 square foot portion of the building (the new tenant is also subject to approval by Urban Outfitters).  To that end, the Tucker Investment Group is currently in lease negotiations with Active Ride Shop, a trendy retailer that is currently the largest surf, snow and skate dealer in Southern California.  In addition, Active Ride Shop has submitted a Letter of Intent to the owners (Exhibit B).  Active Ride Shop specializes in selling snowboards, surfboards, skates and related �cutting edge fashion�.  The company is family-owned and debt free with sales volumes in excess of $45 million per year. Annual sales volumes for a Burbank store location are projected to exceed $3 million.  Active Ride Shop has been in business since 1988 and recently opened their 8^th store. Current locations in California include Rancho Cucamonga, San Dimas, Chino, Norco, Irvine, Escondido, Temecula, and Brea.  They also plan to open a new store in Riverside in 2004, along with plans to have 20-25 stores in operation by the end of 2006.

The execution of a ten-year lease with Active Ride Shop is subject to the owners making basic improvements to the space and providing a contribution towards tenant improvements.  The base building improvements proposed by the Tucker Investment Group are estimated to range between $100,000 to $120,000 in costs.  Proposed improvements would include a new storefront, standard building shell improvements, a new HVAC system and two restrooms.  These improvements are projected to be completed within 30 to 40 days following the issuance of a building permit.  In addition to the base building improvement costs of $120,000, the Tucker Investment Group proposes to contribute approximately $120,000 towards tenant improvements. Active Ride Shop also proposes to contribute approximately $300,000 in private funds towards tenant improvements. Furthermore, the Tucker Investment Group indicates it will cost approximately $80,000 in commissions to consummate a lease with Active Ride Shop.  In summary, the Tucker Investment Group anticipates incurring the following project costs:

Base Building Improvements                 $120,000

Tenant Improvements                             $120,000

Commissions                                          $  80,000

Total                                                         $320,000

Once the base building improvements are completed, Active Ride Shop anticipates completing the tenant improvement work within 35 days after the owner completes base building improvements.  This would result in the completion of proposed base building and tenant improvements within 60 to 75 days following the issuance of a building permit.

Originally Proposed Loan Modification

As mentioned earlier, under the terms of the loan Agreement with the Agency, the Tucker Investment Group cannot place a mortgage on the property in excess of the $3.02 million primary loan ahead of the Agency�s loan of $675,000. This provision precludes the owner from refinancing their primary loan in an amount larger than the $3.02 million limitation.  In order to finance the improvement costs necessary to consummate a lease with Active Ride Shop and proceed with base building and tenant improvement work, the Tucker Investment Group originally proposed modifying the terms of the Loan Agreement to refinance their primary loan (Exhibit C).  The proposal included the following terms:

• The Redevelopment Agency to remove its loan as an encumbrance from the property.

• Tucker Investment Group will pay the Agency $100,000.

• Tucker Investment Group commits to paying a minimum of an additional $100,000 for tenant improvement work in a space controlled by the Tucker Investment Group.

Keyser Marston Associates Loan Structure Analysis

The abovementioned proposal was submitted to Keyser Marston Associates for review and analysis (Exhibit D).  Keyser Marston Associates concluded that the proposal, as submitted by the Tucker Investment Group, is inconsistent with the program goals.  However, in order to help address the property owners� refinancing needs, the following loan structure was suggested:

• Tucker Investment Group to provide an up front payment of $100,000 as a partial payment under the Agency�s note and the note�s outstanding balance would be reduced by $100,000.

• Agency to allow a refinancing of the project up to 80% loan-to-value ($4.8 million) and subordinate its loan to that amount (according to the Tucker Investment Group the property value is currently estimated at $6 million, assuming the improvements are completed for the Active Ride Shop).

• Agency to credit any future note payments arising from the percentage rents against the $100,000 received from Tucker Investment Group.

• Agency to require the Tucker Investment Group to reserve $100,000 from the refinance proceeds for tenant improvements for the unleased portion of the building (approximately 5,000 square feet) at 328-330 N. San Fernando Boulevard.  Agency staff input would be required regarding how these funds would be reserved and utilized.

• Tucker Investment Group to provide current information regarding Urban Outfitters sales volumes and confirmation that the lease with Urban Outfitters remains in affect as originally described to the Agency.

Keyser Marston Associates Loan-to-Value Analysis

Keyser Marston Associates also estimated the impact that proposed modifications to the property owners� primary loan ($3.02 million) would have on the security of the Agency�s loan ($675,000). The Keyser Marston Associates analysis compared the loan-to-value ratio under the current primary loan with the proposed modification to the primary loan over the 10-year loan term (Exhibit E).

Currently, the value of the combined maximum primary loan and the Agency loan results in a loan-to-value ratio of 62% ($3.02 million plus $675,000 divided by $6 million) with $2.3 million in value in excess of the combined maximum primary and Agency loans. The loan-to-value ratio increases to 51% by time the Agency�s loan ends.  Under this scenario, if Urban Outfitters moves before the end of the ten year term and the owners don�t repay the Agency�s loan balance, there would be more than adequate loan security to pay off the Agency note. 

Under the abovementioned loan structure discussed by Keyser Marston Associates, the loan-to-value is approximately 90% ($4.8 million plus $575,000 divided by $6 million) with $625,000 in value in excess of the combined maximum primary and Agency loans.  The loan-to-value ratio increases to 81% by the time the Agency�s loan ends.  Under this scenario, if Urban Outfitters moves before the end of the 10-year term and the owners don�t repay the Agency�s loan, there would be enough loan security to pay off the Agency note.  However, there would be less loan security when compared to the current loan structure. 

Keyser Marston Associates concluded that based on the proposal submitted by the Tucker Investment Group, the Agency would receive an unanticipated up front payment of $100,000 as a partial payment under the Agency�s loan and a reduction in the amount of loan security (in the event that Urban Outfitters moves before the end of the ten year term and the owners don�t repay the Agency�s loan).  This analysis assumes that the Agency loan is not accelerated by payments from percentage rents which would increase the estimated loan security and loan-to-value ratio. There is also an assumption that the reported current property value does not change over the term of the loan. 

Alternative Loan Proposal

Following staff review of the proposed loan modifications, a series of discussions took place among staff, Keyser Marston Associates and the Tucker Investment Group to consider various alternative options that would result in the Agency receipt of additional funds in excess of the $100,000 proposed as an up front cash repayment to reduce the Agency�s loan.  These options included reducing the maximum refinance limit of the primary loan and increasing the amount of the up front cash repayment on the Agency�s loan.  After negotiation and further consideration, the Tucker Investment Group proposes the following:

• Pay the Agency a one-time up-front cash payment of $300,000 as a discounted prepayment of the outstanding loan balance.  

• Reserve $320,000 (as previously outlined) in refinancing proceeds for base building and tenant improvement costs and commissions to consummate a lease with Active Ride Shop for the remaining vacant portion of the building.  Agency staff input is required regarding how these funds will be reserved and utilized.

In response, Keyser Marston Associates compared the alternative proposal to pay the Agency a one-time cash payment of $300,000 to retire the Agency�s loan with the share of percentage rents the Agency could receive (assuming Urban Outfitters will remain in operation during the 10-year period) and how the percentage rents would affect the Agency�s loan balance (Exhibit F).  The results are summarized below:

Table I: Payment of Note

Present Value of Note Payments at 7% interest is $90,606.

As shown above, Table 1 projects the share of percentage rents the Agency would receive assuming the reported 2004 sales from Urban Outfitters are annualized, increase 6% in 2005, 5% in 2006 and 3% thereafter.  Based on this approach, Keyser Marston Associates concludes the following:

• If the percentage rents are realized, the Agency�s note would be �repaid� by the eighth year of operation (2011) through a combination of the operation credit (the forgiven portion of the loan) and percentage rents.  The note payments, including percentage rents, have a present value of approximately $90,000. 

• By the fifth year (2008), the outstanding note balance is estimated to be less than $300,000 which is the amount the Tucker Investment Group has proposed to pay to eliminate the Agency�s note today.  This is $210,000 more than the value of the projected percentage rents. 

• The $300,000 proposed to be paid by the Tucker Investment Group also exceeds the amount the Agency would receive in payment of the then outstanding note, if Urban Outfitters were to leave after 2007. 

• If Urban Outfitters were to leave between 2004 and 2007, the $300,000 proposed to be paid by the Tucker Investment would be less than the remaining note balance. 

• If Urban Outfitters remains in operation at least until 2008, the proposed $300,000 payment exceeds the amount the Agency would receive in the payment of its note.  Based on Urban Outfitters current success and past track record, there is nothing to suggest that they would not stay in operation through 2008 and until the end of the 10-year lease term.

CONCLUSION:

Staff believes that the alternative proposal suggested by the Tucker Investment Group would provide the Agency with an unanticipated lump sum cash payment of $300,000 to pay off the Agency�s loan.  Under the current loan structure, the Agency�s loan would be forgiven for each year that Urban Outfitters remains in operation during the 10-year term. Furthermore, the only actual cash repayment to the Agency would potentially come from excess percentage rents. The note payments, including percentage rents, have a present value of approximately $90,000, which is about $210,000 less than the $300,000 loan repayment currently proposed by the Tucker Investment Group.   

This option would also address the property owners� desire to raise capital to improve the remaining portion of 328-330 N. San Fernando Boulevard in order to consummate a 10-year lease with Active Ride Shop without a need for further Agency assistance.  Staff recommends that Agency require the Tucker Investment Group to reserve about $320,000 in refinancing proceeds for building and tenant improvement costs and commissions if the Active Ride Shop lease is consummated.  Agency staff input would be required regarding how these funds would be reserved and utilized. Active Ride Shop projects annual retail sales volumes in excess of $3 million which would result in $30,000 in annual sales tax revenue generation for the City�s general fund.

As stated earlier, Urban Outfitters has been very successful since officially opening its doors in September 2003 and the Tucker Investment Group has indicated that their lease remains in affect as originally described to the Agency (Exhibit G).  Urban Outfitters has proven that they would act as a catalyst to help draw other quality retailers to the downtown and they have been instrumental in the attraction of Active Ride Shop. 

FISCAL IMPACT:

The Agency will receive an unanticipated $300,000 as an up-front cash payment to  payoff the Agency�s loan under the Downtown Tenant Assistance Program.

RECOMMENDATION:

It is recommended that the Agency Board adopt a resolution approving the following: 1) an amendment to the terms of the Commercial Rehabilitation Loan Agreement to accept $300,000 as full payment of the Agency�s loan; 2) a cancellation of Promissory Note;  3) a reconveyance of the Agency�s loan under the Downtown Tenant Assistance Program; and 4) a requirement that the Tucker Investment Group reserve approximately $320,000 in loan proceeds for building and tenant improvement costs and commissions to consummate a 10-year lease with Active Ride Shop.  It is also recommended that the City Attorney be authorized to make modifications to the necessary documents in accordance with the terms described herewith and that Agency Executive Director be authorized to execute the necessary documents.

EXHIBITS:

Exhibit A          Property Profile

Exhibit B          Active Ride Offer Letter & Company Background

Exhibit C          Tucker Investment Group Proposal Letter dated March 10, 2004

Exhibit D          Keyser Marston Associates Loan Structure Analysis

Exhibit E           Keyser Marston Associates Loan-To-Value Analysis

Exhibit F           Keyser Marston Associates Proposed Note Repayment Analysis

Exhibit G          Tucker Investment Group Letter dated May 20, 2004