HomeMy WebLinkAbout07/16/1996, 3 - PERFORMING ARTS CENTER SUPPLEMENTAL FUNDING -7
council. M.NNe/&_
j ac Enda 12Epoin Ite. m6er
CITY O F SAN LUIS O B 1 S P 0
FROM: Bill Statler, Director of Finance
Jeff Jorgensen, City Attorney
SUBJECT: PERFORMING ARTS CENTER SUPPLEMENTAL.FUNDING
CAO RECOMMENDATION
■ Adopt a resolution granting approval for the Cal Poly Foundation to obtain a tax-exempt
loan on behalf of the City for acquisition of equipment for the performing arts center.
■ Approve a property reversion agreement with the Cal Poly Foundation transferring the
City's ownership interest in the performing arts center equipment at the end of the loan
period to the Performing Arts Center Commission.
■ Appropriate$296,000 as the City's one-sixth contribution towards the estimated remaining
cost of$1,780,000 for completing the performing arts center.
DISCUSSION
At their June 4 meeting, the Council authorized City staff to work with our other key partners
in the performing arts center project (Foundation for the Performing Arts Center, Cal Poly, Cal
Poly Foundation, and the Performing Arts Center Commission) in finalizing a "conduit" loan
agreement with Heritage Oaks Bank in the amount of $1.0 million that would provide
supplemental funding for completing the performing arts center. The parameters in negotiating
this loan included:
■ While it was unlikely that absolute assurance could be provided that the City would not
be obligated for loan repayment, the reimbursement agreement with the Commission
should be structured in such a way that the City's risk would be reduced to a reasonable,
acceptable level.
■ The terms of the repayment agreement should not increase the City's existing exposure
for funding 50% of any operating deficits.
Even under the most successful of circumstances, there would still be two key problems with this
funding concept:
■ Regardless of the repayment assurances received, the City would be obligated for the
repayment of the loan.
■ There would still be a significant funding shortfall, ranging from $300,000 to $800,000
depending on the nature and amount of a contribution from JBL for audio equipment.
Council Agenda Report - Performing Arts Center Supplemental Funding
Page 2
During the extensive discussions with our partners that followed the June 4 meeting, the
following funding approach emerged, which is reflected in the staffs recommendation to the
Council at this time:
■ Rather than being made to the City, the loan from Heritage Oaks Bank will be made to
the Cal Poly Foundation. While this requires the adoption of an "on behalf of resolution
by the City to ensure that the interest on the loan is exempt from federal and state income
taxes (which is the basis for the interest rate of 5.5% offered by Heritage Oaks Bank), the
City will not have any liability for the repayment of this loan.
■ Consistent with our current commitment to fund one-sixth of the cost of the performing
arts center, the City will directly contribute $296,000 of the $1.78 millon required to
complete the performing arts center. Provided in Exhibit 1 is a summary schedule
outlining the items remaining to be completed and their estimated cost. It should be
noted that the remaining cost for completion is generally consistent with the previous
estimate of $1.398 million with one exception: previous estimates assumed that JBL
would contribute $1.0 million towards the cost of the audio equipment. While still a
significant donation, the finalized contribution will be closer to $500,000.
There are four distinct advantages of this funding arrangement over the one previously
envisioned: .
■ First and foremost, the City will not be obligated in any way - directly or indirectly - for
the repayment of the $1.0 million loan from the Heritage Oaks Banks: this will be the
sole responsibility of the Cal Poly Foundation.
■ Based on the structure of the loan repayment agreement between the Cal Poly Foundation
and the Commission, the City's exposure to funding potential operating deficits is not
increased. The sole revenue pledge by the Commission to the Cal Poly Foundation in
servicing the loan is a ticket surcharge, currently proposed at $1.25 per ticket. Based on
a conservative estimate of 94,800 ticket sales annually, this will be sufficient to fund
annual debt service payments for the first four years of the loan. After that time, if the
note remains unpaid, modest increases in the surcharge would be required.
■ Project completion is fully funded. Under current cost estimates, the previous funding
approach would have left $780,000 in unfunded equipment needs.
■ The City's cash contribution to bring the other funding components into play is consistent
with our long-standing financing commitment to this project (one-sixth share).
CONCURRENCES
■ City's bond counsel. The financing documents were prepared by the Cal Poly
Foundation's bond counsel (John Francis); however, to assure that the City's interest in
this loan were fully protected, the City's bond counsel (Jones Hall Hill & White) has
reviewed the loan structure. As reflected in Exhibit 2, the City's bond counsel concurs
J_J_
Council Agenda Report - Performing Arts Center Supplemental Funding
Page 3
that there is no liability to the City resulting from the loan between the Cal Poly
Foundation and Heritage Oaks Bank.
■ Project partners. The City's partners in this project also concur with this funding strategy:
both the Cal Poly Foundation and the Performing Arts Center Commission approved
appropriate loan documents and repayment agreements on July 11, 1996.
FISCAL IMPACT
It is recommended that the City's supplemental - and final - cash contribution to the construction
of this project in the amount of $296,000 be funded from the 1996 lease revenue bonds
contingency account ($264,000) and the General Fund unreserved balance ($32,000) as follows:
■ Bond contingency. As part of the 1996 bond program, a 5% contingency account was
established from the bond proceeds in the amount of$285,000. Of this amount, $70,000
has been allocated to site improvements at the South Higuera/Marsh street property which
was acquired by the City through this bond sale, leaving a balance of $215,000 in the
contingency account. Additionally, we experienced about $49,000 in savings from the
cost of issuing these bonds, primarily due to the fact that they were sold on the strength
of their "A" rating rather than requiring the purchase of bond insurance. This increases
the amount available from the 1996 bond program to fund this contribution to $264,000.
■ General fund balance. If the remaining bond proceeds are used in funding this
contribution, then the remaining amount to be funded is only $32,000. This is an
appropriate one-time use of General Fund balance, and will not result in a significant
adverse impact on the City's financial condition.
ATTACHMENTS
■ Resolution granting approval for the Cal Poly Foundation to obtain a tax-exempt loan on
behalf of the City for acquisition of equipment for the performing arts center.
■ Property reversion agreement with the Cal Poly Foundation transferring the City's
ownership interest in the performing arts center equipment at the end of the loan period
to the Performing Arts Center Commission.
EXHIBITS
1. Summary of equipment and costs needed to complete the performing arts center
2. Opinion letter from the City's bond counsel
ON FILE IN THE COUNCIL OFFICE
Loan documents and repayment agreements KPACSUPPICAR
3'3
RESOLUTION NO. (1996 Series)
A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO
GRANTING APPROVAL FOR THE CAL POLY FOUNDATION TO OBTAIN A
TAX-EXEMPT LOAN ON BEHALF OF THE CITY FOR ACQUISITION
OF EQUIPMENT FOR THE PERFORMING ARTS CENTER
WHEREAS, the California Polytechnic State University Foundation ("Corporation") is
organized under the Non-Profit Public Benefit Corporation Law of the State of California and
the articles of incorporation of the Corporation provide that it is not:organized for profit; and
WHEREAS,the Corporation is an auxiliary organization of the California State University
and is authorized to act pursuant to California Education Code Section 89900, et seq.; and
WHEREAS, the California Polytechnic State University has formally requested that said
Corporation serve as the borrower of a qualified tax-exempt debt financing; and
WHEREAS, the articles of incorporation of the Corporation provide that corporate income
will not inure to the benefit of any private person; and
WHEREAS, the Corporation desires to borrow funds on behalf of the City of San Luis
Obispo to purchase and install certain tangible personal property to further its corporate purposes;
and
WHEREAS, the City of San Luis Obispo has determined that it is desirable to assist in
the acquisition and financing of said property from the proceeds of said loan;
NOW, THEREFORE, BE TT RESOLVED BY THE COUNCIL OF THE CITY OF SAN
LUIS OBISPO AS FOLLOWS:
Section 1. The City Council hereby approves the purposes and activities of the
Corporation relating to said Loan, the use of which is more specifically set forth in the attached
Exhibit "A", which is incorporated herein as though fully set forth.
Section 2. The Loan assumed by the Corporation in an aggregate principal amount not
to exceed one million dollars ($1,000,000.00) and the proposed form of the debt instruments to
be used by the Corporation solely on behalf of the City, as presented to the City and on file with
the City Clerk, is hereby approved, provided that this resolution shall not constitute or authorize
an obligation of the City of San Luis Obispo, or any Council member, officer or employee of the
City, and no lending or pledging of the credit of the City is intended or authorized by this
resolution; and in no event shall the City be obligated in any way for the repayment of any
principal, interest or any other obligation related to or arising from the loan transaction.
Section 3. The City hereby agrees, without demand or further obligation on behalf of
the City, to accept unencumbered fee title to the financed property upon retirement of said loan
debt.
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Section 4. The property to be financed by said loan is hereby determined to have a
substantial connection with the City of San Luis Obispo through the City's participation in the
development and operation of the performing arts center facility, in which the debt-financed
property shall be located and utilized.
Upoh motion of seconded by and on
the following roll call vote:
Ayes:
Noes:
Absent:
the foregoing resolution was adopted this day of 1996.
Mayor Allen K. Settle
ATTEST:
City Clerk
APPROVED AS TO FORM:
y or y
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USE OF LOAN PROCEEDS Exhibit A
The following summarizes the use of the proceeds from the $1.0 million loan by the California
Polytechnic State University(Cal Poly) Foundation for equipment and furnishings for the
performing arts center located on the Cal Poly campus:
Total Share from
Estimated Cost Loan Proceeds
Group II equipment supplement 60,000 60,000
Audio equipment and installation 700,000 700,000
Acoustical clouds 600,000 191,000
Handrails on the third floor balcony 40,000 40,000
Lobby speaker system 12,000 9,000
TOTAL $1,000,000
HTACLNUSE
PROPERTY REVERSION AGREEMENT
THIS PROPERTY REVERSION AGREEMENT is entered into on this
day of July, 1996, by and between the CALIFORNIA POLYTECHNIC
STATE UNIVERSITY FOUNDATION ("FOUNDATION" ) , a California, public
benefit nonprofit corporation, and the CITY OF SAN LUIS OBISPO
("CITY" ) , a municipal corporation chartered under California
law.
EXPLANATORY STATEMENTS
A. The FOUNDATION desires to borrow one million dollars on a
qualified tax-exempt basis on behalf of the CITY for certain
tangible personal property and improvements relating to the
Performing Arts Center ("Project Property") , located on the
campus of the California Polytechnic State University.
B. Under terms of the authority granted to the FOUNDATION
through CITY Resolution No.Scxxxx, title to said debt-financed
Project Property shall vest with the CITY when the Loan debt is
retired.
C. The CITY desires, at such time as it acquires title to said
Project Property free of any encumbrances, to convey title
thereto to the Central Coast Performing Arts Center Commission, a
separate nonprofit corporation, established to manage the
Performing Arts Center facility, as consideration for the
obligation incurred by said Commission to the FOUNDATION, under a
Debt Service Agreement by and between the Commission and
FOUNDATION, to provide the revenue required by the FOUNDATION to
fully service the Loan debt used to acquire said Project
Property.
Now, therefore, the parties hereto mutually agree to the
following terms and conditions :
TERMS AND CONDITIONS
1 , Project Property. The term "Project Property" includes any
and all equipment or tangible personal property acquired and/or
installed using proceeds of a qualified tax-exempt loan obtained
by the FOUNDATION on behalf of the CITY for the Performing Arts
J7
i
Center, located on the campus of the California Polytechnic State
University.
2 , Property Conveyance. Consistent with the participation of
the CITY in the development and operation of the Performing Arts
Center facility, through the Central Coast Performing Arts Center
Commission, a separate nonprofit corporation established to
coordinate management of the Center, the CITY agrees to convey
said Project Property to the Commission for the total sum of One
Dollar ($1 . 00) , at such time as title to said Project Property
vests with the CITY pursuant to terms of the loan qualification
authorization expressed in Resolution No.xxxxx, ' adopted by the
City Council on July.5dc,71996 .
3 . Non-obligation of the City. It is expressly understood by
the parties to this Agreement that the CITY has no financial
obligation to the FOUNDATION or any other party for the debt
financed by the FOUNDATION using the tax-exempt qualification
authority granted by the CITY.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
CITY OF SAN LUIS OBISPO CALIFORNIA POLYTECHNIC STATE
UNIVERSITY FOUNDATION
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William C.Statler
Director of Finance
City of San Luis Obispo
990 Palm Street
P.O. Box 8100, 93403-8100
Re: Proposed Tax-Exempt Loan to Cal Poly Foundation
Dear Bill:
At your request,we have reviewed various documentation submitted to us in connection
with the proposed loan of $1,000,000 (the "Loan") to the California Polytechnic State
University Foundation (the "Foundation") by Heritage Oaks Bank (the 'Bank"). Such
documentation has included the drafts of the Resolution of the. City Council, the Property
Reversion Agreement between the Foundation and the City, the Debt Service Agreement
between the Foundation and the Central Coast Performing Arts Center Commission, and the
Business Loan Agreement between the Foundation and the Bank and the related Promissory
Note. In addition, we have had numerous telephone conversations with representatives of the
Foundation, including special legal counsel to the Foundation, Mr. John W. Francis, who has
been engaged to prepare various documentation relating to the Loan and to render an opinion
as to the tax-exempt character of interest on the Loan.
The scope of our engagement has been to act as counsel to the City, for the sole purpose
of ensuring that the City does not assume any financial liability or obligations in connection
with the Loan. In particular, we have not undertaken to review independently the validity of
the Loan or the tax-exemption of interest on the Loan.
As you and have discussed, the financing has been structured to comply with I.R.S.
Revenue Ruling 63-20 and related rulings. Under this type of financing,the Foundation acts as
the direct borrower, and the debt is deemed by the I.R.S. to be issued "on behalf of" the City.
Notwithstanding this characterization .for federal tax purposes, none of the Loan documents
purports to obligate the City to repay the Loan in any way, and in fact the City is not a party
to any Loan documentation other than the Property Reversion Agreement,which confines itself
strictly to the disposition of the property once the Loan has been repaid. In order to clarify this
situation,we have suggested that Elle Bank execute a provision which acknowledges and agrees
that the City does not incur any liability or obligation of any nature by virtue of the Loan. 1
JUL. 11 ' 96 (THU) 16:57 COXVUNICATION No :55 PAGE. 2 cf
07/11/96 16:59 N0.877 P03
William C. Statler
July 11, 1996
page 2
have been informed by representatives of the Foundation that this provision is acceptable to the
Bank.
Based on the foregoing, we are in a position to advise you that the City will not incur.
any financial liability or obligations to the Bank to pay debt service on the Loan, and that.
adequate legal protections will be implemented to ensure that City does not incur any other
'form own ciallia liability or obligations to the Elank In connection w1tTi Me Loan.
Please let me know if we can be of further help to you in this matter.
VPesurs,Cd ams
JUL. 11 ' 96 (THU) 16:57 COMMUNICATION Ne :55 PAGE. 3
J
MEL,iNG AGENDA
MEMORANDUM DATE 7" 6-9 REM
July 8, 1996
TO: City Council
FROM: John Dunn, City Administrative Office
SUBJECT: PERFORMING ARTS CENTER SUPPLEMENTAL FUNDING
Negotiations regarding the terms of the City's funding assistance in completing the performing
arts center are still underway with our key partners in this project: the Foundation for the
Performing Arts (FPAC), Cal Poly, the Cal Poly Foundation, and the Performing Arts Center
Commission. As such, while we anticipate a positive outcome to these negotiations for
consideration by the Council at the July 16 meeting, the agenda report detailing the final terms
and the staffs recommendation will not be available until Friday, July 12.
MEETING GENDA
CAL DATE ITEM #�.
POLY.
C AIJ!'ORNIA PiRYTE,:HNIC " .ATE L N;l'E`;iITP
JF THE 1' WIDEN-
July 5, 1996 COUNCIL ❑ CDDDIR
I
CAO W'IN DIR
VACAO ❑ FIRE CHIEF
VegTORNEY ❑ PW DIR
Mr. Warren A. Sinsheimer, Chair [1 ,,
p/CLERIUORIG ❑ POLICE CHF
The Central Coast Performing Arts Center Commission 3MGMTTEAM ❑ REC DIR
1010 Peach Street READ FILE ❑ UTIL DIR
San Luis Obispo, CA 93401 ❑ PERS DIR
Dear Warren:
We have reached a critical juncture in our efforts to structure the funding needed to assure the official
opening of the Performing Arts Center, set for September 29, 1996. The three partners have agreed to
ask the Cal Poly Foundation and the City of San Luis Obispo to work together to execute a loan of one
million dollars offered under tax-exempt financing provisions by Heritage Oaks Bank. This loan, along
with other sources of funding from the partners,will close the gap of$2,297,000 needed to finish
construction and to purchase and install the necessary equipment.
The University will request the Cal Poly Foundation to obtain the one million dollar tax-exempt loan
from Heritage Oaks Bank and provide the funds to finish the Performing Arts Center. The City will be
asked to provide its status as a governmental entity to qualify the loan on a tax-exempt basis, but the City
will nal be a party to the loan, and it will=be lending funds, pledging credit, serving as guarantor or be
otherwise obligated under this transaction.
The Cal Poly Foundation will guarantee the loan repayment provided a source of funds sufficient to pay
interest and retire the principal over a ten-year period is established through a ticket surcharge on all
Performing Arts Center ticketed events. This surcharge must begin as soon as practical, but no later than
October 1 of 1997.
Please develop a policy and ticket surcharge schedule that best suits the financial requirements of the
loan and the programming needs of the Performing Arts Center. Al Amaral, Executive Director of the
Cal Poly Foundation,will work with you to help develop acceptable financial estimates and.payment
provisions to secure the loan. Thank you very much for your help in this matter.
Sincerely,
A�'
Warren J. Baker
President
cc: A. Amaral *�-
CCPAC Board Members �CE'iVF.LOOP
.lUl A 2, lvyo
CITY COUNCIL
9AN I ' S OBISPO,CA
'I'lu CA RNIA I,%:F I NICF.K I:
MEMQRANDU.M MEETING... AGENDA,.: :
DATE
July 16, 1966 =
TO: City Council
FROM: John Dunn, City:Administrative.Officer_ (::D-
Prepared-By:
::D-Prepared-By: Bill Statler, Director of Finance
SUBJECT: SUPPLEMENTAL FINANCIAL INFORMATION
ON THE PERFORMING ARTS CENTER
At their•. Jinie 4,.19.96 when the Council authorized staff to.begin negotiations with our partners
on'Ahe"$1.O ,million -loan from Heritage. Oaks Bank; AheCouncil, also:requested financial
information 'on the Foundation for the Performing Arts;Center. (FPAC) and the Performing Arts
Center Commission.
This information is available and has been reviewed by the staff, but it was not included with
the July 16 agenda packet. This information has subsequently been provided to.Mayor.Settle and
Council Members Smith and Williams, and is on•file'.in.the Council Office.
The following is brief overview of this information and what it means:
Audited Financial Statements for FPAC
We have been provided with audited financial statements for FRAC for the year ended December
31, 1995. Their audit firm is the same as the City's, Glenn Burdette Phillips & Bryson (GBPB),
so in addition to reviewing the financial statements, we also discussed FPAC's fiscal situation
with GBPB's senior staff. Based in our review of FPAC's financial statements and discussions
with GBPB, we have concluded the following:
■ Recognizing that the fundamental purpose of FPAC is give away all the money they raise,
they are in good financial shape. For 1995, they raised over $1.2 million, and at the end
of the year,"had $1.3 million in pledges outstanding.
® There are $650,000 in assets in the Endowment Fund. While this is not the $1.0 million
planned for at this point, it is still a significant a significant amount. It should be noted
that not all of this amount is in "liquid assets": $100,000 is from pledges and $450,000
is in property that is currently on the market. Nonetheless, FPAC is making significant
progress''in fully funding the Endowment Fund.
Commission Pro Forma
One of the key issues in front of is: if we build the center, can it be operated without deficits?
The short answer based on the ten year pro forma provided to us by the Commission is: yes. As
already budgeted, we will need to contribute $50,000 in 1996-97, and we can expect a request
for 1997-98 for $25,000, but after that, the center should be able to successfully operate without
any City subsidies. For the first year(1996-97), the pro forma has almost already been fully met,
and the year has not even started yet%+ Based-on,bookings 0o date, the cente,r'only`needst$7,300
more in rentals to meet its budget -..a'task that..should'riot-•be'difficult to achieve.
Ability of Ticket Surcharge to Support Debt.Service
The center should conservatively sell 95,000 tickets in 1996-97, and,this is'expected to grow by
at least 5%•annually for some time to come.' ''At�$1i:25i per/ticket„thist:will:generate:about
$125,000 annually, more thanenough:to cover the annual)debt sdvice!payments, which begin
at $55,000.
Summary
We!believe that,these financial statements and pro:form&reflect.favorably'ori the ability of the,
center to fund•its operations.withouf•:supplemental.supportfrom the .City: If you.have :any
questions concerning these materials;please.do not:hesitate to,contact.Bill Statlercat 781-7125..
ON FILE IN THE COUNCIL OFFICE
® ::: -jFPAC. audited financial statements ::-
® Commission operations pro forma for 1996-97Tthrough.2005-06,' ,_•,. :; ;: :. 1
® Ticket surcharge pro forma
H:PACFUND2.MEM 7
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