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HomeMy WebLinkAbout10-18-2016 Item 18 San Luis Ranch Development - Economic Analysis Meeting Date: 10/18/2016 FROM: Derek Johnson, Assistant City Manager SUBJECT: SAN LUIS RANCH DEVELOPMENT- ECONOMIC ANALYSIS RECOMMENDATION Authorize the City Manager to execute a contract with Economic Planning Systems (EPS) to assist the City with the financial analysis and related tasks for a proposed development agreement for the San Luis Ranch Project. DISCUSSION Background On April 1, 2014, the City Council unanimously took four actions related to the proposed San Luis Ranch Project. These actions included 1) Authorizing an application for General Plan and associated entitlements, 2) Approving a Memorandum of Understanding that outlined the process for processing related entitlements, 3) Authorizing staff to initiate discussions with the applicant for a Development Agreement, and 4) Authorizing a Request for Proposal to prepare an Environmental Impact Report (EIR) for the project. The purpose of this item is to obtain approval for a contract with Economic Planning Systems (EPS) to provide technical support to negotiate a Development Agreement for the San Luis Ranch Project. In addition to financial analysis, EPS will provide general management for the effort including coordinating the drafting of a term sheet and related development agreement with the support of outside legal counsel. Staff will provide oversight and guidance throughout the negotiation process. One of the primary reasons for obtaining outside consultant support is that the San Luis Ranch Project is a significant land use decision involving complex financial issues for the City. Anticipated actions include an annexation agreement, tax exchange agreement, specific plan with related public facilities financing plan, and the potential to create both a Communities Financing District (CFD) and/or an Enhanced Infrastructure Financing District (EIFD). The combination and relationship of these agreements, plans, and land based financing mechanisms requires significant expertise. Scope of Work EPS’s scope of work is broken down into eight distinct tasks as shown in Attachment A. The scope of work was crafted in a manner to address the broad range of financial analyses that will be required to appropriately evaluate the financing tools and strategies to construct public facilities for a project of this size. Additionally, fiscal analysis includes quantifying both public and private benefits related to any development agreement to ensuring that there are public benefits. 18 Packet Pg. 203 It is recommended that the City secure these services from EPS. EPS was selected through a competitive RFP process in 2013 to lead an effort to evaluate the current development impact fee programs in the City, and identify options for future land-based financing. As a follow up task, they have been advising the Community Development Department and City Council during the past year on the variety of financing tools, and have developed a policy framework to approach a comprehensive update of the City’s AB 1600 Fee Program. As directed by the City Council, these policies will be incorporated into the 2017-2019 Financial Plan. EPS’s experience and direct knowledge of the City’s development impact fee program and their selection through a competitive process is aligned with Section 3.24.0701 which provides that specialized consultants, like EPS can be approved by the City Council. The cost for the EPS’s current work for public financing advisory services is $50,000 and the proposed work on the San Luis Ranch Project is $60,770. This contract is being brought to the City Council because the combined contract amounts exceed the City Manager’s purchasing authority of $100,000 for consultant services. CONCURRENCES The Public Works and Community Development Departments concur with the recommendations in this report. ENVIRONMENTAL REVIEW Development Agreements fall within the definition of a “project” under the California Environmental Quality Act (CEQA). A draft EIR for the San Luis Ranch Project is scheduled for release in mid-November and ultimately will need to address any impacts associated with a Development Agreement. While every effort will be made to ensure that the development agreement is addressed in the EIR, should an agreement address issues not analyzed in an EIR, additional environmental review will be required in order to meet CEQA requirements. FISCAL IMPACT The proposed work is not to exceed $60,770, plus time and materials for attendance at meetings in San Luis Obispo. Actual work on the development agreement will be on a time and material basis. It is anticipated that most of the work can be done remotely and should meetings be required, they will also be billed on a time and materials basis. As previously noted, the scope of work does not include technical support for outside counsel for the drafting to of the Development Agreement. As shown in the proposal, this amount shall be 1 3.24.070 Authority to hire consultants. C. Selection from an approved list of on-call consultants that is established by a formal request for qualifications (RFQ) process. The council shall approve the RFQ, and the purchasing authority is authorized to execute agreements with selected consultants. The finance director is authorized to execute and amend purchase orders for individual consultant services contracts in an amount not to exceed the authorized project budget. On-call consultant lists shall be renewed at least every five years by a new RFQ process. (Ord. 1618 § 1 (Exh. A (part)), 2015: Ord. 954 § 2 (part), 1983: prior code § 2950.7) 18 Packet Pg. 204 determined prior to initiating this task. The City’s adopted fee schedule provides that costs for processing a development agreement are on a time and materials basis, plus the City’s mark up of 30% for administrative overhead, which allows the City to recover its costs for processing the application. If this agreement is approved, the City shall enter into a reimbursement agreement with the project applicant so that all costs to process the development agreement are covered per the City’s cost recovery policies. ALTERNATIVES 1. The City Council could modify the scope of work. This is not recommended as the identified tasks were developed to address the broad range of issues by task that will need to be addressed to draft both a term sheet and development agreement to ensure that clear public benefits are realized in exchange for the private benefits granted under any agreements. 2. The City Council could reject the item and not approve any contract. This is not recommended as third party expertise is needed to help evaluate the financing of public improvements and the exchange of benefits related to any development agreement. The applicant team has its own financial experts advising them on the funding elem ents of the project. Attachments: a - San Luis Ranch Development Agreement Advisory Services 18 Packet Pg. 205 Work Program San Luis Ranch Development Agreement September 29, 2016 1 Draft Work Program San Luis Ranch Development Agreement Advisory Services Project Understanding The City of San Luis Obispo is preparing a Development Agreement for the San Luis Ranch Project as part of its Entitlement Process. This Development Agreement, as part of the overall project implementation framework, will “vest” the entitlement for a spec ified period of time and make other commitments to further the project, all as consideration for “extraordinary community benefits” offered by the Developer. These extraordinary benefits are defined as items that cannot be obtained through exercise of the City’s land use regulating authority, including through the implementation of measures required to mitigate environmental impacts as identified per the requirements of the California Environmental Quality Act. The San Luis Ranch is a complex project involving a new Specific Plan, annexation of territory to the City, and the construction of substantial “backbone” infrastructure and off-site infrastructure needed to assure adequate levels of municipal service to the residents and businesses that will ultimately locate there. EPS will provide technical support to the City as it prepares, negotiates, and considers adoption of the San Luis Ranch Development Agreement. Work Tasks Task 1 – Project Initiation and Management Preparation of the Development Agreement will be an integral part of the San Luis Ranch Entitlement Process. EPS will be a part of the City’s team, assisting in project coordination, technical analyses, document drafting, liaison with the Developer’s team and other public agencies. At the outset, EPS will assist the City in establishing its team effort, including the roles and responsibilities of individual City staff members, specifying needed technical analyses, collaborating with special counsel and other City consultants, and developing the project schedule and key milestones. On an ongoing basis, EPS will participate in periodic City team meetings and coordinate efforts necessary to complete technical efforts and meet deadlines. Task 2 – Project Document Review and Assessment The Development Agreement will make reference to and integrate the full range of Project Entitlement Documents including the Specific Plan, the EIR, formation of land based financing options such as an EIFD or CFD or other related mechanisms, the Public Facilities Financing Plan and the Annexation Application. In collaboration with City Staff, EPS will identify and obtain copies of all relevant Entitlement Documents and related technical studies, etc. Task 2 also will include technical peer review of any Developer-generated technical studies including fiscal analysis, financial analysis, and the Public Facilities Financing Plan. Task 3 – Development Agreement Policy and Procedure Framework The San Luis Ranch Development Agreement will make reference to and encompass a range of policy matters having to do with adopted City infrastructure financing policies, definition and valuation of community benefits, and key Development Agreement terms such as assignment, duration, and financial considerations. As a part of this task EPS will assist the City in identifying these policy matters and, to the extent deemed necessary, obtaining related City Council 18.a Packet Pg. 206 Attachment: a - San Luis Ranch Development Agreement Advisory Services (1487 : San Luis Ranch-Financial Services) Work Program San Luis Ranch Development Agreement September 29, 2016 2 guidance. Such policy directives will be a key input to the drafting of the Development Agreement Term Sheet. Task 4 – Development Feasibility Analysis A key input to the preparation of a Development Agreement is gaining an understanding of the subject project’s financial feasibility. Such financial feasibility is typically determined through preparation of a pro forma financial feasibility model. This financial information is necessary to forecast the project’s public financing capacity (through development impact fees and exactions, special taxes, and any tax increment financing that may be considered). Such analysis also enables the City to determine the value of the vested entitlement and other commitments offered by the City and ability of the Project to provide extraordinary community benefits. EPS will review any pro forma financial analysis provided by the Developer for the San Luis Ranch Project. If needed, EPS will help prepare a financial analysis. It will be important for there to be effective communication and coordination between the City and the Developer regarding key economic and financial data and assumptions as a part of this effort. As some of the financial information may be proprietary, EPS may need to sign a “non- disclosure agreement” with the Developer to obtain sensitive information that may be revealed as part of reviewing financial information. Any proprietary information exchanged between the Developer and EPS shall be direct and shall not include the City. In these circumstances, EPS shall provide a qualitative written assessment of the fiscal and financial capabilities of the project. Task 5 – Community Benefits Assessment Extraordinary public benefits of a development project are specific public improvements that could not be required by the City following normal City Code requirements (which must adhere to the rational nexus test) or through CEQA required mitigations. Positive effects of the project including community development objectives, or providing social, economic and/or fiscal benefits, while a precondition for the City’s willingness to enter into a development agreement, are not included in this definition. Items that are included as extraordinary community benefits are as follows: Special Site Improvements The developer can commit to constructing or installing improvements that confer public benefit on or adjacent to the project site. Public Improvements or Contributions Exceeding Code or EIR Mitigation Requirements The developer can commit to constructing or funding improvements that exceed the City- determined requirements. Advancing Improvements Otherwise to Be Built at a Later Time The developer may agree to build a public improvement well in advance of when it might be required. For example, an intersection that may not be required to mitigate project-induced congestion until five years in the future could be built in advance, assuring that the improvement is constructed and conferring congestion reduction immediately. EPS will assist City staff and the Developer team with identifying and valuing extraordinary community benefits offered by the Developer. 18.a Packet Pg. 207 Attachment: a - San Luis Ranch Development Agreement Advisory Services (1487 : San Luis Ranch-Financial Services) Work Program San Luis Ranch Development Agreement September 29, 2016 3 Task 6 – Public Financing Framework and Implementation It is expected that a key aspect of the Development Agreement will involve the City committing to establish public financing districts for the purpose of financing public infrastructure and facilities. These districts and mechanisms may include area-specific impact fees and exactions, a Mello Roos Community Facilities District, fee credit and reimbursement agreements, and an Enhanced Infrastructure Financing District. EPS, in collaboration with City staff, the Developer team, and other City consultants will assist in determining the purpose and capacity of these districts and also specifying implementing actions required in each case. A key aspect of this effort will be coordination and support of the City’s efforts to negotiate the terms of an Enhanced Infrastructure Financing District with San Luis Obispo County. Task 7 – Term Sheet Preparation The research, policy development, liaison, and technical efforts described in Tasks 1 through 6 will all be focused upon preparation of a Development Agreement Term Sheet. This Term Sheet is envisioned as a comprehensive description of all the key terms for the San Luis Ranch Development Agreement. EPS will participate in the effort to draft the Term Sheet, in collaboration with City staff and special counsel. This effort may include preparation of summaries of technical analyses that support individual Development Agreement terms. Task 8 – Development Agreement Drafting and Negotiation Support It is assumed that preparation of the Term Sheet will involve an ongoing discussion and negotiation with the Developer. EPS will support City staff efforts as part of these negotiations, providing the results of technical analyses, experience with negotiation of other development agreements, and any additional analysis as may be requested. Following negotiation and approval of the Term Sheet, EPS will assist the City staff with drafting of the Development Agreement in collaboration with special counsel, drawing on experience with drafting other development agreements. Schedule EPS is prepared to commit significant staff resources to help the maintain the schedule. The current budget estimate anticipates a 3-month work schedule. However, given the uncertain nature of the tasks, and the interdependence of these and other external tasks, the schedule is subject to change. Budget The estimated budget for the preceding analysis, assuming an approximate 3-month work period, is not to exceed $60,770, plus time and materials for meeting preparation and attendance, without prior authorization, as shown on Table 1. EPS charges for its services on a direct-cost (standard hourly billing rates and direct expenses) not-to-exceed basis; therefore, the Client is billed only for the work completed up to the total authorized budget amount. EPS will monitor the balance of each task budget over time, and when the budget for a particular task is approaching 75 percent complete, EPS will work with the Client to identify whether the remaining budget is adequate or whether a budget extension is needed. To the extent that additional issues arise during the course of the analysis, or additional work is required, EPS will work with the 18.a Packet Pg. 208 Attachment: a - San Luis Ranch Development Agreement Advisory Services (1487 : San Luis Ranch-Financial Services) Work Program San Luis Ranch Development Agreement September 29, 2016 4 Client to amend the budget, as appropriate. Invoices are submitted monthly and are payable upon receipt. Table 1 Proposed Budget Estimate Task/Staff Cost Direct Total Description Kieser Kanat Peltzer Subtotal Costs Cost Senior Principal Executive Vice President Associate Production Task 1 – Project Initiation and Management 4 12 0 0 $3,900 $0 $3,900 Task 2 – Project Document Review and Assessment 16 20 0 0 $9,300 $0 $9,300 Task 3 – Development Agreement Policy and Procedure Framework 8 2 0 0 $2,850 $500 $3,350 Task 4 – Development Feasibility Analysis 16 24 16 2 $12,380 $500 $12,880 Task 5 – Community Benefits Assessment 8 6 6 2 $4,680 $500 $5,180 Task 6 – Public Financing Framework and Implementation 24 16 40 2 $15,980 $500 $16,480 Task 7 – Term Sheet Preparation 24 8 0 2 $9,180 $500 $9,680 Task 8 – Development Agreement Drafting and Negotiation Support Total Hours 100 88 62 8 Billing Rates [1]$300 $225 $125 $90 Total Project Costs $60,770 [1] Billing rates shown are applicable during 2016 and are subject to annual increases. EPS Staff to be determined 18.a Packet Pg. 209 Attachment: a - San Luis Ranch Development Agreement Advisory Services (1487 : San Luis Ranch-Financial Services) Page intentionally left blank.