PURPOSE

The purpose of this memorandum is to provide information to the Redevelopment Agency Board to consider granting a second amendment to the Building Rehabilitation Agreement between Cinnabar, Inc. and the Redevelopment Agency of the City of Burbank.

BACKGROUND

On September 24, 1996, the Agency approved a $200,000 Building Rehabilitation Agreement with Cinnabar Inc., an entertainment construction company.  The agreement is a 10 year, 6% interest loan that was granted for the purpose of rehabilitating the property at 2940 North Hollywood Way.

Under the terms of the Agreement, the annual payment of $26,644.92 will be forgiven if local sales tax of at least $26,644.92 is achieved each year with additional requirements of continuous occupancy, the continuous employment of no less than 100 full-time employees, and a continuous leasing condition.  In the event that Cinnabar, Inc. fails to meet sales tax requirements and the sales tax generated is less than the annual payment, payment shall be calculated as the lesser of 1) the difference between the actual sales tax receipts paid to the state and the annual payment, or 2) the annual payment of $26,644.92.  For example, if sales tax generated for a particular year amounts to $20,000, Cinnabar would be required to pay the $6,644.92 difference.  In any given year, the largest payment that Cinnabar would have to reimburse would be the annual payment of $26,644.92.

For the first three years of the agreement, Cinnabar, Inc. exceeded its targets each year.  However, for Fiscal Year 1999-2000 Cinnabar, Inc. failed to meet the requirements of the Building Rehabilitation Agreement.  Local sales tax generated by Cinnabar, Inc. for this period amounted to $18,030, thereby missing the threshold by $8,614.92.  Due to special circumstances relating to the entertainment industry�s downturn caused by the 2000 Screen Actor�s Guild (SAG) commercial actor�s strike, Cinnabar, Inc. was adversely affected and the business requested flexibility on their obligation to make the payment.  At the Redevelopment Agency Board meeting of February 19, 2002, the Agency Board approved a 5-year, $1,998.60 annual payment plan, providing Cinnabar with an extended period of time to meet their $8,614.92 obligation.

For Fiscal Year 2000-01 period, Cinnabar met their obligations, the annual payment was forgiven, and the first payment of the 5-year payment plan of $1,998.60 was received.  However, for the year in question, Fiscal Year 2001-02, Cinnabar, Inc. failed to meet both the Continuous Employment condition and the Minimum Sales Tax condition[1].  They expressed to Agency staff that the nature of the Cinnabar, Inc. business had changed due to the significant effects of runaway production coupled with the current economic downturn.  They stated that the downsizing of the business would be required to ensure its continued existence and have requested a second amendment to the agreement. 

On July 3, 2003, Agency staff sent a letter explaining the terms of the agreement and the obligations under the agreement (Exhibit A).  The letter described the conditions necessary to forgive an annual payment, explained how these conditions were not met, and requested the annual payment of $26,644.92.  It further explained that if payment had not been received within thirty (30) days of the letter, a material breach of the terms of the agreement would render the outstanding principal balance of $120,326.64, fully due and payable, immediately. 

Also on July 3, 2003, a second letter was sent to initiate formal discussions of a second amendment to the Building Rehabilitation Agreement between Cinnabar, Inc. and the City of Burbank Redevelopment Agency (Exhibit B).  Cinnabar was asked to submit a formal proposal on how they intended to bring the Building Rehabilitation Note into some form of compliance.  Although uncertainties existed in Cinnabar�s immediate future, staff asked them to submit proposals for each of the various scenarios that may occur. 

On the date of the deadline, Agency staff received no proposal and no word was received on the matter until July 28, 2003, when Cinnabar staff explained that a proposal was forthcoming (Exhibit C).  The extent of their proposal included a possible monthly payment method to meet their $26,644.92 obligation from the Fiscal Year 2001-02, but included no substantive changes to the agreement.  However, staff has concluded that this proposal is not a viable option as it is only a short-term solution that may require further attention in the near future.

Given the state of the business and the company�s recent performance, in all likelihood, Cinnabar would continue having to pay the annual payments of $26,644.92 every year unless a substantial amendment is made to the agreement.  In addition, as the annual payment has not been received, Cinnabar, Inc. is now officially in default of the agreement and the principal balance of $120,326.64 is now due and payable.

The following is a chart outlining Cinnabar�s current obligations:

ANALYSIS

If an amendment to the agreement is approved, staff recommends including the existing conditions and requirements, in addition to the following terms:

• The use of the existing loan balance of $120,326.64, as the principal of a new 10-year, 3% interest loan.  This loan would yield annual payments of $13,942.56.

• The loan would be secured with a lien against the property, located at 2840 N. Hollywood Way.

• In order for an annual payment to be forgiven, the existing conditions for forgiveness will continue to apply, which include: The Continuous Employment condition of 100-full time employees, the Leasing condition, and the Minimum Sales Tax condition of $26,644.92.  Each condition must be met for the forgiveness of the annual payment of $13,942.56.

• In the event that Cinnabar, Inc. fails to meet sales tax requirements and the sales tax generated is less than the Minimum Sales Tax amount, but the other conditions of the agreement have been met, payment shall be calculated as the lesser of 1) the difference between the actual sales tax receipts paid to the state and the Minimum Sales Tax amount, or 2) the new annual payment of $13,942.56.

CONCLUSION

As conveyed by Cinnabar representatives, the operation of Cinnabar, Inc. is downsizing and as such, the business is having difficulty meeting their obligations to the Redevelopment Agency.  The terms for an amendment that are outlined in this report would essentially reduce their annual payments, but would maintain the existing conditions for the forgiveness of an annual payment.  The proposed amendment provides a vehicle for Cinnabar to meet their obligations to the Agency in the form of a low-interest rate loan that is roughly half of the existing annual payment.  However, if an amendment is not granted, the loan is now in a position where it needs to be called.  The proposed amendment would protect the interests of the Agency by maintaining the intentions of the original agreement and would promote the goals of the Agency by supporting a local business thereby enhancing economic development in the community.

FISCAL IMPACT

The proposed Resolution will have no fiscal impact to the Redevelopment Agency. 

RECOMMENDATION

Staff recommends that the Agency Board approve a resolution authorizing the execution of a second amendment to the Building Rehabilitation Agreement between Cinnabar, Inc. and the Redevelopment Agency of the City of Burbank.