2002-03-14 LOCPag2-,
MEMORANDUM
TO: ALBERTVILLE CITY COUNCIL; LINDA GOEB, CITY
ADMINISTRATOR
FROM: MIKE COURI, CITY ATTORNEY
SUBJECT: LETTER OF CREDIT FOR DARKENWALD COMMERCIAL
PROPERTY MUNICIPAL IMPROVEMENTS
DATE: MARCH 14, 2002
John Darkenwald is preparing his documentation necessary to close the
purchase of some of the Roden's property and to plat and record the three -lot
subdivision in the Darkenwald Commercial Development. At Tuesday's staff
meeting, John raised the issue of whether he would need to post a letter of credit to
secure the repayment of the special assessments that the City will levy on his
development from the installation of sewers, water, street, curb and gutter. We
intend on special assessing his property for 100% of the cost of his portion of the
improvements, plus some of the costs of the turn lanes. All of the special
assessments will be pledged toward the bond that the City will issue to pay for the
installation of the municipal improvements.
The City's experience with special assessment projects for new
development is fairly limited. In past years, the Council's policy on this has
evolved. About eight years ago, the City Council determined that if it did a
special assessment project for new residential development, the Developer would
have to put up a letter of credit equal to 100% of the cost of the project to secure
the payment of the special assessments (this would be used, for example, if there
was a downturn in the economy and the Developer became delinquent on paying
taxes and special assessments, the City would simply draw on the letter of credit to
meet the bond payments that were supposed to be paid with the special assessment
revenue). In order to put the City in a position where it could more easily be rated
by bond/credit agencies, this policy was later changed such that the City would not
do a special assessment project for residential projects (and therefore would issue
less debt), but could construct such a project for commercial or industrial
development. I do not recall any discussion one way or the other related to letters
of credit for special assessment projects on commercial or industrial properties.
Mr. Darkenwald and Welcome Furniture (the proposed purchaser of one of
the lots in Darkenwald's Commercial Development) will close on the sale of one
of the lots at the same time the plat is recorded. Under the proposed financing of
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the Welcome Furniture lot, Darkenwald will be responsible for the payment of the
special assessments from the proceeds of the sale to Welcome. Mr. Darkenwald
has indicated that rather than put the money in an escrow (which Welcome would
require), he will prepay his assessments immediately after the closing. The
amount of the prepayment is expected to be about 1/3 of the entire assessments to
be levied against Darkenwald's Commercial Development.
If we were to issue a 10-year bond for this project, the prepayment would
pay at least the first three years of Darkenwald's portion of the bond. This would
put the City in a fairly secure position, and constitutes substantial security for at
least three years that the City will be able to make the Darkenwald's portion of the
bond payment during these years. It appears likely that, having sold one lot
already to Welcome Furniture, Darkenwald should be able to sell the other two
lots over that three year period. We can expect that as he sells each lot, the special
assessments will be paid at closing, and will likely be entirely paid within three to
five years. In addition, given the success of the Outlet Mall immediately to the
east and the strong demand for commercial property in Albertville, the risk of
buildable commercial lots such as those in the Darkenwald Commercial
Development having delinquent special assessments appears to be very remote.
In light of this security, and in order to promote commercial development
in the City, I would recommend that in this instance the City not require a letter of
credit from Mr. Darkenwald to secure the special assessments, provided Mr.
Darkenwald and Welcome assure the City in writing that the prepayment of the
Welcome special assessments will be paid at the closing of the Welcome property.
Although the Developer's Agreement for this plat will not come to the City
until mid -April, Mr. Darkenwald needs to know whether he will need a letter of
credit so that it can be lined up in time for a closing by mid -April, shortly after the
City accepts bids on the City/Darkenwald municipal improvement project.
Cc: Pete Carlson
John Darkenwald
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