Memorandum
City of Lawrence
City Manager’s Office
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TO: |
David L. Corliss, City Manager
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FROM: |
Diane Stoddard, Assistant City Manager
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CC: |
Cynthia Boecker, Assistant City Manager
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Date:
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January 7, 2010 |
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RE: |
Option to Purchase Provision in Lease with Lawrence-Douglas County Bioscience Authority (LDCBA) for the West Lawrence Labs Building |
At its meeting on January 5, 2010, the City Commission considered a lease with the LDCBA for the operation and maintenance of the West Lawrence Labs Building.
At the meeting, I believe my explanation of the option to purchase provision in the lease was confusing and I want to make sure that the City Commission is comfortable with the option to purchase provision.
The latest version of the lease, which was authorized for execution by the City Commission on January 5 and approved by the County Commission on January 6, is attached. This lease includes the option to purchase provision shown below. This provision was based upon the desire to make the City and County “whole” regarding any future option to purchase from the LDCBA. The provision would require the LDCBA to pay the purchase price/legal fees of $2.375 million, plus $600,000 in improvement costs, plus any outstanding expenses accrued by the City or County, plus any interest on outstanding bonds, plus other expenses related to the bond issuance, MINUS the principal portion of the lease payments accrued by LDCBA. This provision would then enable the City and County to retire any outstanding debt and pay all fees related to the transaction at the time that LDCBA wished to exercise the option to purchase. It would not, however, include any subsidized interest that the City and County may incur. As a reminder, the subsidized interest is the difference between the LDCBA interest rate, set at 50 basis points (0.5%) over the City’s average annual investment for idle funds from the previous year to a maximum of 4%, and the actual interest rate on the bonds.
For example, let’s assume that LDCBA wishes to exercise an option to purchase in 2020. The following projection utilizes the provisions in the option to purchase section, based upon today’s assumptions of interest rate, etc. Per the terms of the option to purchase, LDCBA would pay approximately $2.41 million to the City to purchase the building. This would consist of the purchase price of the building ($2.375 million, item A in the purchase option) plus the bonds for improvements to the building ($600,000, item B in the purchase option), less all principal payments made to-date (item F in the purchase option, estimated to be $695,000). In addition, there would still be interest owed on the bonds through September of 2021. While the bonds can be redeemed in 2020, the redemption still requires interest payments for one more year. We estimate that these interest payments would be about $130,000 (this interest owed is item D in the purchase option). If there were any expenses incurred by the City and County (item C in the purchase option) those would also be included, as would any expenses related to the redemption of the bonds (Item E in the purchase option) would also be paid by LDCBA. In the $2.41 million closing price, above, we assume that there are no additional expenses incurred by the City and County, and no expenses related to redeeming the bonds.
Section 3.6. Option to Purchase the Leased Premises. LDCBA shall have, and is hereby granted, the option to purchase the Leased Premises at any time, prior to the expiration of the Lease Term, and so long as the LDCBA is not in default under this Lease and/or the City and the County have not entered into a contract for sale of the Leased Premises to a third party, upon payment in full of all Bonds then outstanding or provision for their payment having been made pursuant to the Ordinance and Resolution of the City authorizing the issuance of such Bonds. To exercise such option the LDCBA shall give written notice to the City and to the County, and shall specify therein the date of closing such purchase, which date shall be not less than 30 nor more than 180 days from the date such notice is mailed. The purchase price payable by the LDCBA in the event of its exercise of the option granted in this Section shall be the sum of the following:
(a) $2,375,000.00, which amount equals the price that the City and County paid to acquire the Leased Premises including related legal fees and financing costs; plus
(b) $600,000.00 (or actual costs, if different), which amount equals the cost the City and the County pay for the Leasehold Improvements described in Section 4.1 hereof; plus
(c) an amount of money equal to the “Expenses” (as that term is defined in the Cooperation Agreement) that are (i) capital expenses paid by the City and the County with respect to the Leased Premises and (ii) payments by the City and the County of interest on the Bonds that are attributable to underpayment of Basic Rent by the LDCBA, and that are shown on the ledger kept by the City pursuant to the Cooperation Agreement, so long as such amounts have not been previously reimbursed by LDCBA; plus
(d) an amount of money which will be sufficient to pay the interest (but not the principal) to accrue on all the then outstanding Bonds on the earliest redemption date next succeeding the closing date; plus
(e) an amount of money equal to reasonable fees and expenses of the City and the County accrued and to accrue with respect to the Bonds until redemption of the Bonds and accrued or to accrue with respect to the Leased Premises until the closing date of such purchase by the LDCBA; less
(f) the sum of all of the Principal Portion of Basic Rent previously paid by LDCBA pursuant to this lease.