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TO: Mayor Richard C. Irvin
FROM: Martin S. Lyons, Chief Financial Officer/City Treasurer
DATE: May 6, 2019
SUBJECT:
Approval of a resolution authorizing Lines of Credit (LOC) with Old Second Bank and Fifth Third Bank for a not to exceed amount of $10.0 million at each institution.
PURPOSE:
The City of Aurora has approved multiple development agreements, all of which involve the grant or loan of funds totaling $8.8 million. The issuance of an LOC provides for a low interest rate and flexible funding vehicle for these agreements over the next two to four years. The City anticipates further developments to occur over the next year both in the downtown and throughout the City, and therefore having LOCs at two institutions for the above requested amounts will allow for developments to proceed efficiently. These LOCs will not be accessed without approval by the City Council on a project by project basis.
BACKGROUND:
In February 2019 the City approved three development projects that total $5.8 million in grants and short-term bridge loans, and in 2018 the City approved Phase I of the Old Copley Renovation for a not to exceed grant amount of $3.0 million (August 28, 2018). Financing these actions can occur from either available funds or from debt. These transactions will also be eventually accounted and budgeted for in multiple funds, some of which will not be created until the relevant Tax Increment Finance (TIF) District is create. Below is a listing of these activities:
1) UEP (Urban Equity Partners) Keystone Building - $1.706 million bridge loan, $1.425 million grant to be provided in three milestones - TIF #9 Stolp Island
2) UEP Terminal Building - $1.195 million bridge loan, $600,000 grant to be provided in three milestones - Proposed TIF #10 Galena/Broadway.
3) 80 S. River LLC, 80 S. River building - $850,000 grant - Proposed TIF #11 Benton River St.
4) Fox Valley Developers LLC, Old Copley Hospital Renovation Phase I - $3.0 million grant - Proposed TIF #13
Budget Amendments will be forthcoming to establish TIF #9 as approved and if approved TIFs #10 - #13.
Because TIF #9 has already been formed and because the approved Redevelopment Agreement for UEP/Keystone has been approved, work has already begun and per the agreement the City has disbursed the $1.706 million grant from available funds through a transfer from the Golf Fund to TIF #9 Fund. This transaction can be amended and funding can be replaced with the above LOC funding based on the final approval of the City Council. This will be discussed further below.
DISCUSSION:
The City has used LOCs to fund projects in the past and such debt financing is a standard option for private sector financing. The use of LOCs have the following major benefits:
1) Low administrative and underwriting costs
2) Interest is paid only on the outstanding LOC balance and not on the full amount of the bond issue as would be the case if General Obligation or Revenue Bonds were issued.
3) Local Banking institutions can partner with the City as opposed to a competitive bond issue that draws national institutions (for the best long term interest rates).
4) Normally interest rates are lower for LOCs than 20 year bonds, however presently, due to the flat to near inverted yield curve, our long term bond rates would be very competitive with an LOC rate.
This report provides quotations from three local institutions (four quotes were sought) for LOCs. These quotes center around several major factors:
1) The effective interest rate paid on outstanding balances
2) Any fees associated with issuance/administration
3) The City guarantee behind the line of credit
4) The duration/term of the line of credit
5) The structure of the interest rate
Attachment A provides a summary of the interest costs which vary from $34,900 to $39,900 for every $1.0 million borrowed per year. This is an estimate as the London Inter-bank Offered Rate (LIBOR) is an adjustable borrowing rate which is currently at 2.49%. As noted above, by using an LOC instead of issuing long-term bonds the City saves substantially by only paying interest on the outstand LOC drawn. Presently the Council has approved $8.8 million, which on an annual basis would cost, $307,120 in interest. However, since we will not draw all of these funds immediately, the total interest cost will be less.
Utilization of LOC funds is not the only source of funding for the execution of the above itemized agreements. The City Council can also choose to use funds currently in reserve at the City. The sale of the City golf course in 2018 is an example of funds that could be used for this purpose ($2.0 million is not currently designated in the 2019 budget). The use of one-time revenue sources for one-time expenses is in accordance with good financial practice and would reduce total interest costs for these agreements by as much as $70,000.
As noted above, current development agreements are comprised of $2.9 million in short term bridge loans and $5.9 million in grants. I recommend the $2.0 million in land sale proceeds in the Golf Fund, previously discussed as a tax rebate, be used to fund the grant category of these agreements, saving $70,000 in interest costs per year.
During the 2020 Budget process the City will be reviewing the long-term disposition of these development agreement commitments as well as several other pending agreements. This evaluation will be dependent on the progress of the developments and decisions on whether to pay down the LOCs out of current revenues or from the refinancing of this debt into a longer term bond that can then be paid down more easily from current revenue sources. Because of the nature of these development agreements, the accounting and finance disclosures of each deal do not always fall within annual budget calendars and therefore mid-year review and approvals are necessary. Under separate cover the City Council will also be reviewing 2019 budget amendments for these agreements. However, since TIFs #10, #11, and #13 are not created yet, such an amendment will be considered after the TIF approval later this fiscal year.
This same budget amendment later in 2019 will address the potential interest costs listed in Attachment A. Interest costs are recommended to be paid from the Gaming Fund which has sufficient funds for interest accrued in 2019. The 2020 budget will include interest rate estimates for each fund involved in the LOCs.
As is recommended below, I recommend only opening LOCs with Old Second Bank and Fifth Third Bank as they have the most competitive rates and have no deposit requirement. However, I also feel the proposal from Aurora Bank and Trust/Wintrust is a competitive proposal, and given the City's future development activities, may be considered by the City at a future date/council meeting to maintain our partnership presence with local institutions and to diversify our LOC debt for a broader community reinvestment presence.
IMPACT STATEMENT:
Approval of this resolution will allow the City's Economic Development team execute the development agreements provided in this correspondence and to continue redevelopment activities with a potential short term funding source being identified for future agreements. All future uses of the LOCs beyond the already approved $8.8 million will require City Council approval before any funds are distributed.
RECOMMENDATIONS:
Approval of the attached resolution authorizing the execution of Lines of Credit with Old Second Bank and Fifth Third Bank, for a not to exceed amount of $10.0 million per institution and approval to access $6.8 million of these LOCs. Staff further recommends the use of $2.0 million from the sale of land proceeds in the Golf Fund to fund the remaining commitment amount of the redevelopment.
cc: Finance Committee
Chairman Robert J. O'Connor
Alderman Theodoros C. Mesiacos
Alderman Edward J. Bugg
CITY OF AURORA, ILLINOIS
RESOLUTION NO. _________
DATE OF PASSAGE ________________
title
A Resolution authorizing Lines of Credit (LOC) with Old Second Bank and Fifth Third Bank for a not to exceed amount of $10.0 million at each institution. This resolution will authorize the use of $6.8 million of the approved LOCs for currently approved Redevelopment Agreement Funding and authorize the use of $2.0 million in land sale proceeds from the Golf Fund.
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, The City of Aurora has entered into redevelopment agreements (RDA) with 1) UEP (Urban Equity Partners) Keystone Building - $1.706 million bridge loan, $1.425 million grant to be provided in three milestones - TIF #9 Stolp Island.
2) UEP Terminal Building - $1.195 million bridge loan, $600,000 grant to be provided in three milestones - Proposed TIF #10 Galena/Broadway.
3) 80 S. River LLC, 80 S. River building - $850,000 grant - Proposed TIF #11 Benton River St.
4) Fox Valley Developers LLC, Old Copley Hospital Renovation Phase I - $3.0 million grant - Proposed TIF #13
For a total grant and short term loan commitment of $8.8 million
WHEREAS, These development projects are critical to the future redevelopment of the Downtown and the Old Copley Hospital site, and
WHEREAS, Sufficient funds are not available from current City resources to fund all of these commitments, and
WHEREAS, The City has acquired competitive proposals from local lending institutions for the provision of Lines of Credit;
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Aurora, Illinois, as follows: That the City of Aurora enter into agreements with Old Second Bank of Aurora to provide Lines of Credit of up to $10.0 million per institution. These Lines of Credit may be renewed by the City Council on an annual basis.
Access to these Lines of Credit beyond the level established in this resolution of $6.8 million will require City Council approval.
That the City of Aurora shall use $2.0 million from the sale of land proceeds in the Golf Fund to provide the remaining funded needed to meet the $8.8 million commitment of the above redevelopment agreements.