.er
TO: Mayor Richard C. Irvin
FROM: David Dibo, Executive Director
DATE: January 14, 2020
SUBJECT:
A resolution authorizing an investment of $200,000 by the City of Aurora in Stolp Island Social, the recently opened restaurant within the Paramount Arts Center. The restaurant is owned and managed by Amy Morton, (or entities s controlled by her) the successful and veteran entrepreneur with deep roots in the business, who currently owns and operates three a number of well received food and beverage venues in the Chicagoland market.
BACKGROUND:
A lynchpin of the redevelopment of the vacated Wabaunsee College building was attracting an experienced and well regarded restaurateur as the ground floor anchor tenant. Through the vision, perseverance and hard work of many, the historic renovation was completed and has become a model of creative public/private partnership. Amy Morton, daughter of the renowned founder of the steakhouses that bear the family name, is an innovative proprietor of three of her own food and beverage establishments all celebrated for their warmth, food quality and design coupled with a core social vision that seeks to enhance the communities in which she operates. Amy signed on and opened the already well reviewed restaurant in the last fall of 2019.
A comprehensive financing for the entire redevelopment was put in place that included a number of layers of financing including various public related investment in grants or loan programs. These included:
1) A Section 108 Federal Loan - $3,000,000
2) A Loan from Aurora Township/CDAP $ 500,000
3) A Grant/forgivable loan from CDBG $ 700,000
4) A Grant from Home Funds $ 600,000
5) A Grant from TIF #1 $ 500,000
6) A grant of $100,000 for restaurant from City $ 100,000
7) A grant from the Gaming Fund $ 150,000
TOTAL $5,550,000
The above calculation is not identical to that which was provided under Resolution 17-133, which is attached. That Resolution provided for funding for the entire project not counting interest of no more than $5,930,000 without further City Council approval. The addition of the $200,000 investment would bring the total invested funds to $5,750,000, but given the nature of the investment City Council approval is being requested.
Resolution 17-133 and the attached Redevelopment Agreement is a complicated document involving many parties and activities. It is important to differentiate the total loans of $3.5 million compared to the grants/forgivable loans of $2.05 million. The above previous loan of $3.5 mllion is intended to be paid back as follows:
• $3.0 million Section 108 Loan:
o $70,000 annual lease payment from ACCA/Community Builders
o $70,000 annual lease payment from Stolp Island Social(SIS)
o $50,000 from Community Builders
o $64,000 estimated Food and Beverage Revenues from SIS
Resolution 17-133 provides this calculation on a total basis over the life of the agreement as well.
• $500,000 Township Loan - paid from tax increment yet to be finalized in TIF #9.
Given the above, the public commitment in grants represents 5.0% of the project total of just over $40,000,000.
As part of this financing the Landlord (ACCA) provided about $802,000 of the tenant Improvement and soft costs needed to take a “white box” and turn it into the fine dining establishment that now prominently sits on Stolp Island. The remaining $400,000 is to be raised by third party investors who were provided a comprehensive investment package geared for accredited investors commonly referred to a PPM (Private Placement Memorandum). The City indicated that it would facilitate locating potential investors who were active in Aurora. The brochure lays out the complete foundation and concept of the restaurant including its players, design, menu, financial sources and uses and projections. Most importantly it shows a “waterfall” that demonstrates the priority of the distribution of net proceeds from the restaurant: in other words: who get what and when?
Given the timeframes that were committed to make the Arts Center come together as one completed mixed use project and the challenge of attracting the type of risk capital necessary to invest in a capital intensive, relatively low margin industry, it is not surprising that Amy Morton could only secure $100,000 of the $200,000 she needed “on her side” from third party investors in the tight timeframe required. Rather than delaying the project, she went ahead and committed the additional $100,000 from her own assets. She also went ahead and undertook the necessary construction and capital commitments to assure the restaurant’s timely opening with reliance that “the City’s investors” would materialize. Some of these invoices are outstanding pending Amy securing this final tranche of capital.
The third party financing of restaurants, especially in markets that need to be “re-proven” is a not an easy task. All three of the other new restaurants coming onto Stolp have received some form of assistance for the build -even with each having multiple successful other restaurants and outstanding track records.
Because the investment brochure showed a realistic and reasonable cash distribution that prioritized the return of this $400,000 risk capital before any other distribution, the proposal was reviewed favorably. The investment represents a strong opportunity for the City to assure the ongoing health of the restaurant while obtaining very reasonable assurances for the return of the COA investment and well as a return on this investment.
DISCUSSION:
The basic deal structure for the restaurant is straightforward and recognizes the need to reward the “risk capital” appropriately. The PPM indicates that all profits from the restaurant will go to third party investors after paying the operating expenses of the restaurant, its rent and its management fee. These are all direct and reasonable expenses. After these payments are made (as well as establishing any reserves that may be needed to assure viability in the slower periods or for repairs), all cash get distributed to the investors. These payments are scheduled to be made pari passu so all investors would receive back their investment, and an investment return at the same rate as the rest of the investment pool.
Without divulging proprietary information on behalf of Stolp Island Social, say that the restaurant does between $2,000,000 and $3,000,000 in revenues and profits vary between about 10% and 15%. Taking a midpoint by assuming a revenue of $2,500,000 and a return in the 12% range, indicates distributable cash of about $300,000. If this occurs than COA along with the other investors would be paid back their investment within the first 18 months or conservatively two years Even if results were lower, say $2,000,000 in revenue and a 7% margin, then payback would still be in about 3 years.
In addition to the return of the COA investment, as an investor, the City stand to earn profits, based on the previously discussed “waterfall”, even as the remaining participants are receiving back their investment, COA would be receiving 10% of profits. It is reasonable to assume that within a couple of years, COA’s investment would have been fully amortized and the City will still be receiving about $30,000 a year for as long as the restaurant is operating.
Amy has indicated that she and “her” investors would be willing to allow 100% of all distributable profits go to amortizing the COA investment if COA would forgo future profits. Would like Council to opine of this alternative,
Funding for this $200,000 would be provided through the ongoing line of credit established with Fifth Third and Old Second banks. Given the payback schedule, outlined above, these funds would have a similar payback schedule as to those loaned for Terminal and Keystone with expected payback periods of two years or less. Given the City’s future revenue stream discussed above, there is no interest assessed in the transaction, as our return on investment is clearly higher than that in the Terminal and Keystone transactions.
IMPACT STATEMENT:
Granting approval will assure the short and longer term viability of Stolp Island Social. It is hard to quantify what it has already meant for the City to have a restaurant of this caliber take the leap into the downtown. The City’s standing behind what was a good faith understanding will continue to grow the City’s reputation, not only as an excellent place to do business and one where creative yet economically sound decisions are the norm, but one where we are flexible enough to adjust in real time when the market indicates that it is necessary to do so.
RECOMMENDATIONS:
Staff recommends the approval of this resolution.
ATTACHMENTS:
Property Research Sheet
Finding of Facts
Planning Council Report
Land Use Petition
Other file items
cc: Alderman O’Connor, Chairman
Alderman Bugg, Vice Chairperson
Alderman Carl Franco
Alderman Scheketa Hart-Burns
Alderman Emmanuel Llamas
CITY OF AURORA, ILLINOIS
RESOLUTION NO. _________
DATE OF PASSAGE ________________
title
A Resolution authorizing a Redevelopment Agreement with Stolp Island Social Restaurant at 5 E. Galena Blvd providing $200,000 for capital build out of the restaurant.
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
NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Aurora, Illinois, SEE ATTACHED DRAFT RESOLUTION.