Memorandum

City of Lawrence

City Manager’s Office

 

TO:

David L. Corliss, City Manager

 

FROM:

Diane Stoddard, Assistant City Manager

Roger Zalneraitis, Economic Development Coordinator/Planner

 

CC:

Cynthia Boecker, Assistant City Manager

 

Date:

 

November 16, 2009

RE:

Response to McClure E-mail and Questions about 4950 Research Parkway

 

On Monday, November 16, you and Roger received an e-mail from Professor McClure regarding questions on the proposed financing for and price of the property at 4950 Research Parkway. This memorandum will respond to the issues and questions posed in that e-mail.    

 

Financing:

 

Regarding the financing for this proposed transaction, there are alternative financing mechanisms that either do not involve the City and County or minimize taxpayer risk.  However, all of these alternative options would have one common factor- they all would result in increased interest costs.  The interest rate on this proposed transaction is a key sensitive factor.  Even with the anticipated 5.5% rate on the general obligation-backed economic development bonds, the transaction requires a modest annual interest subsidy from the City and the County. 

 

Other financing alternatives may include a private bank loan (LDCBA gets a loan from a bank), a pure revenue bond structure similar to an industrial revenue bond (lease revenue would be only source of possible repayment and LDCBA alone would be responsible for repayment) or a revenue bond issue with an annual appropriation requirement by the City/County (lease revenue would be the only source of repayment, but the City/County must budget an annual appropriation in the event that lease revenue does not meet annual bond payment).  The first two alternatives would have the highest interest rate compared to the other alternative. The last alternative would have a lower interest rate than the first two options, but would still be higher than the proposed general obligation-backed economic development bonds.   A revenue bond issuance does not appear appropriate because the only advantage to a revenue bond is that there would be no City or County taxing authority backing the revenue bond issuance, however, since neither the City nor the County would allow a default on a revenue bond issued by a government-backed agency such as LDCBA, this “advantage” does not exist and a revenue bond issuance only serves to drive the cost of borrowing higher.

 

Ultimately, if the elected officials wish to proceed with the project due to the potential economic development benefits set forth by LDCBA, the financing mechanism decision is a policy decision, appropriately weighing the risk to taxpayers versus the interest rate cost.  Staff believes that the proposed financing mechanism minimizes the interest costs, making the project viable, and offers security for the City and County in the form of a building asset.

 

Price of the Building: 

 

The City has consulted with a number of parties, including LDCBA, the University of Kansas, and realtors regarding the pricing and occupancy of this building.  First, for pricing we looked at both newly constructed GMP facilities as well as GMP facilities available for sale on the open market.  A sample of the facilities was made available for the Tuesday, November 10th City Commission meeting (here: http://www.ci.lawrence.ks.us/web_based_agendas/2009/11-10-09/11-10-09h/grubb_ellis_information.pdf , pages 4-9 and page 18).  We also reviewed construction prices locally, such as the Incubator that is being built on West Campus, the National Institute of Animal Health and Food Safety being built in Olathe, and the renovation and expansion of the University of Kansas Medical Research Center in Fairway.  These three facilities saw construction and renovation prices ranging from $260 to $300 per square foot of space.  Prices of other wet lab and GMP facilities—even in resale—are typically $250 per square foot or higher.  As such, the purchase price of $132 per square foot (or $166 per square foot if capital improvements are included) represents a significant discount from typical market sales prices for these facilities.

 

For occupancy, it is of course true that any projection is just that, a projection.  The occupancy rate that we are projecting over the entire 25 year period of the bond averages 82% (the 89% occupancy rate excludes the first four years of operation).  Occupancy rates at West Lawrence Labs since it came under ownership in 2003 of New Oread averaged about 85% (this was also in the data referenced above).  We believe that given the renovation to the utilities and the occupancy history, the projected occupancy rate of 82% is appropriate.