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TO: Mayor Richard C. Irvin/ and City Council
FROM: David Dibo Executive Director, Division of Economic Development
DATE: September 12, 2024
SUBJECT:
A Resolution authorizing a third amendment to and restatement of the approved redevelopment agreement (R21-204) with DAC Developments LLC regarding the development of 100 North Broadway
PURPOSE:
The DAC Development group is requesting to update the existing RDA (approved by City Council on September 29, 2021) in order to change certain milestones within the agreement to maintain an up-to-date timeline in the RDA, and to address increased costs associated with the project
BACKGROUND:
In September 2021 City Council approved a Redevelopment Agreement with DAC Developments LLC. The RDA included Exhibit H which outlined a schedule outlining key steps in the construction process and associated dates.
In July 2022 City Council approved a 1st Amendment to the RDA to update the schedule outlined in the original RDA.
In December 2022 City Council approved a 2nd Amendment to the RDA to update certain milestones within the agreement and to adjust the project budget to reflect COVID 19 induced inflationary impacts on construction costs.
DAC has broken ground on the development and has begun work on the site and foundation construction. This work has uncovered substantial remediation issues not revealed in the prior review of the property. This remediation centered both on the need to remove contaminated soils from the site as well as removal of structures such as foundations as deep as 20 feet below grade.
DISCUSSION:
At the time of the 2nd Amendment which increased the project budget from $68,000,000 to $84,000,000.00, DAC did not make a request for additional City contributions to the project opting instead to test the altered lending environment. In fact, lenders severely tightened their requirements. Specifically loan amounts as a percentage of costs reduced along with higher lending costs. In addition to high interest rates that were projected to reduce but stayed high, construction costs remained what appears is their higher new normal. Despite the continued strong demand for apartments, many planned projects both in the Chicagoland area and in the country were abandoned or put on hold for an indeterminate duration. This together with unforeseen site work created the request from DAC for additional participation by the city.
The summary table below shows the sources of funding for the project based on the original RDA and on the current proposed project budget.
*Original RDA bifurcated city commitment between a forgivable loan ($963,000) and a grant ($5,877,500). The total increased city participation of $12,590,500 is now classified as a forgivable loan.
The specific changes in funding above are an increase in the City’s commitment of $5,750,000.00 to cover inflationary increases of $1,690,000 million and foundation/remediation increases discovered during initial construction of $4,060,000 million. Please note that DAC has increased their Equity Contribution by $2,875,420 and has increased the loan amount by $9,576,285.00 for a total increased commitment of $12,451,705.00.
Compared to the original agreement 3.5 years ago, DAC's total risk capital (guaranteed debt plus equity) is now $74,135,326 or 85% of total costs. This is $12,451,703 greater than the original RDA and represents DAC's increased investment.
The City's cash investment of $12,590,500 is just under 15% of total costs.
Note that the senior loan actually reduced over $6,000,000 from its original amount requiring DAC to obtain much higher cost secondary financing to make up this difference and make up a portion of increased costs.
While the increase in costs is never welcome news, there are justifications for these increases. According to ENR, an index used by our Public Works Department, construction costs since 2021 have increased by 17%. Other private sector indices show much larger increases at 25% or higher and these measures will vary based on the exact type of construction costs included in the index. While total project costs show an increase of 26%, the new costs for soil remediation and foundation changes should be removed from that comparison, lowering the increase to 22%. As such, the increase in project costs is in line with market realities and are not surprising. The table below summarizes the total costs comparing the original to the most recent costs.
|
USES |
May-21 |
Sep-24 |
Difference |
|
*Land |
$1,963,000 |
$1,800,000 |
($163,000) |
|
Hard Costs |
$51,389,994 |
$63,750,000 |
$12,350,006 |
|
Soft Costs |
$15,078,626 |
$21,173,826 |
$6,095,200 |
|
|
|
|
|
|
Total |
$68,431,620 |
$86,723,826 |
$18,292,206 |
* Land price stayed the same, financing costs included in September 2024 soft costs
The increase in costs due to environmental/site issues is comparable to the redevelopment of the Old Copley Hospital. That project anticipated a nearly $10 million cost to tear down and remediate the facility, with no redevelopment. Instead, the City invested $12.5 million to create a new community living and health facility that is a tremendous asset to the neighborhood and the City.
The increase in contributions by the city and the original contributions are reclassified as forgivable loans instead of grants. This classification has been used in most of the City’s recent development agreements.
While these loans will be forgiven at the completion of the project, the City has also included a recovery mechanism for the city's additional $1,690,000 exclusive of the previously discussed unforeseen environmental/foundation issues. The City's recovery mechanism works in three ways:
1) First, if actual costs are below budget, the City will share these costs saving 50-50 up to when the City receives its $1,690,000.
2) If the Developer completes the project and later sells the development for a return on investment of greater than 30% (as defined in the Pro Forma and RDA) then the City and Developer will share in the excess return based on the ratio of Developer Equity ($13,323,326) to the City additional contribution ($1,690,000) until the City receives $1,690,000, at which time the Developer keeps any further excess return.
3) If the Developer does not sell the development and if the annual rate of return exceeds 22.5% in any given year, then the City and Developer share in this excess return until the City receives $1,690,000.
Funding for this project is recommended to be taken from the City's Gaming Tax Fund in the amount of $4.75 million, and $1.0 million from General Operating Revenues. Reimbursements described above will be deposited back to the Gaming Tax Fund first, and General Operating Funds second
IMPACT STATEMENT:
The approval of this amendment and resolution will provide approximately 400 new residents in the downtown area and will be the first new major residential structure in the downtown in over half of a century. The City estimates over 375 total construction jobs as a part of this development. This development is a key component to the redevelopment of both sides of the Fox River directly north of the downtown
RECOMMENDATIONS:
That the resolution be adopted.
ATTACHMENTS:
cc: Alderman Carl Franco, Chairperson
Alderman Edward J. Bugg, Vice Chairperson
Alderman Ron Woerman
Alderwoman Shweta Baid
Alderman Brandon Tolliver
CITY OF AURORA, ILLINOIS
RESOLUTION NO. _________
DATE OF PASSAGE ________________
title
A Resolution Approving a Third Amended and Restated Redevelopment Agreement Between the City of Aurora, an Illinois municipal corporation, and DAC Development, LLC.
body
WHEREAS, the City of Aurora has a population of more than 25,000 persons and is, therefore, a home rule unit under subsection (a) of Section 6 of Article VII of the Illinois Constitution of 1970; and
WHEREAS, subject to said Section, a home rule unit may exercise any power and perform any function pertaining to its government and affairs for the protection of the public health, safety, morals, and welfare; and
WHEREAS,Exhibit H of the Redevelopment Agreement outlined various required milestones for the progression of the development; and
WHEREAS, on July 26, 2022 City Council approved a First Amendment to the Redevelopment Agreement (R22-227) with DAC Developments LLC updating certain milestones; and
WHEREAS, on December 20, 2022 City Council approved a Second Amendment to the Redevelopment Agreement (R22-408) with DAC Developments LLC updating certain milestones within the agreement and to adjust the project budget to reflect COVID 19 induced inflationary impacts on construction costs; and
WHEREAS, the City and DAC Developments LLC seek to amend for a third time the RDA to extend and update the milestones required pursuant to the Redevelopment Agreement; and to increase the City’s commitment in the amount of $5,750,000.00 of which $4,060,000 is for environmental remediation; for a total city participation of $12,590,500 to be classified as forgivable loan;
NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Aurora, Illinois, NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Aurora, Illinois , as follows: that a third amendment to and restatement of the approved redevelopment agreement attached to this Resolution as Exhibit A shall be and hereby is approved; providing for City’s financial assistance in the amount of $5,750,000.00 of which $4,750,000 will be funded from the Gaming Tax Fund and $1,000,000.00 will be funded from the General Fund, and further
BE IT RESOLVED, that the Mayor is authorized to execute this third amendment to and restatement of the approved redevelopment agreement or any document that substantially and materially conforms to the provisions set forth in this amendment on behalf of the City.