SUBJECT/RECOMMENDATION:
Title
Provide staff direction regarding Gotham's redevelopment of the old City Hall site.
Body
SUMMARY:
On November 9, 2022, Clearwater voters approved the sale of the vacant site of the former Harborview Center, along with the sale of the old City Hall site, to Gotham Property Acquisitions and The DeNunzio Group (the Buyers). Pursuant to the City’s purchase-sale agreements (PSA’s) with the Buyers, the Buyers began their due diligence after the referendum concluded. Due diligence is a common feature in commercial real estate transactions. It provides a window of opportunity for a buyer to assess environmental and topographic features relating to the land, and to continue their economic market analysis relating to the buyer’s intended use.
The results of due diligence on the former Harborview Center have proven mostly satisfactory. When the former Harborview Center was demolished in 2017, the City decided at that time to leave the concrete foundations intact. Those foundations will likely need to be removed prior to the Buyers’ construction of the new hotel, and the Buyers are asking the City to cover this cost. In all other respects, the hotel and retail planned for the former Harborview site are moving forward as scheduled. The Buyers intend to meet the May 1, 2023 submittal deadline for site plan reviews occurring in June 2023.
As to the old City Hall site, the Buyers claim to have identified a financial gap of approximately $80 million in a project contemplating 525 units. To elaborate, the Buyers indicate that they projected a 5.53% untrended yield-on-cost (YOC) in July 2022, based on construction of 600 apartment units. Through due diligence, the Buyers now conclude that constructing even 525 apartment units will produce an untrended YOC of only 4.24%. According to the Buyers, the project must attain an untrended YOC of approximately 6.00%, or very close to it, in order to remain financeable in light of today's investor expectations. Details regarding Gotham’s revised projections, along with their explanation, are attached to this agenda item, along with portions of the original pro forma.
Gotham has indicated that the following terms, if acceptable to Council, would be one way to fill the gap:
• Reduce the density of the project from 500-600 apartment units in a twin tower configuration to 400 apartment units in a single tower
• Modify the parking arrangement to retain underground parking for a majority of spaces, while allowing a substantial minority to be constructed above-grade. The current agreement requires nearly all parking to be constructed underground, while allowing "minimal surface parking."
• Authorize zero interest seller financing whereby the City, instead of receiving our $15.4 million at closing (end of 2024), would convey the real estate and retain a full-price mortgage in favor of the City. No payments would be made until 2033, at which time full payment of the principal will be owed. The City will be required to subordinate its remedies to those of “senior lenders.”
Ø Alternatively, the purchase price could be reduced to $7.6 million (which was the 2021 appraised value based on apartments, rather than condos) along with a 5-year delay in payment, also at zero interest.
• The above modifications reduce the funding gap to $4 million. One way to fill the remaining gap is to delete the pedestrian bridge from the project. The bridge is currently budgeted at $4 million, with costs divided 50/50 between the City and the Buyers. After deleting the bridge, the City would instead identify an appropriate $2 million to support the project in other ways.
• The updated concept plan may require additional time to close. The current agreement requires the Buyers to close by the end of 2024, and authorizes them to extend the closing by 90 days if they submit a non-refundable extension fee of $200,000 to the City. An amended agreement would create an additional window not to exceed 120 days, with extension costs TBD.
Gotham has indicated they will be unable to finance the old City Hall site without each of these modifications or financially equivalent modifications. In return for accepting the amendments described above, Gotham has expressed willingness to do the following:
• Improve the parking ratio from the 1:1 required by Code to at least 1.1:1
• Ensure that any above-ground parking is limited to two levels above ground. In addition, no parking will be visible from Osceola Ave.
• Creation of a deadline (90 days to 120 days) by which the Buyers must apply for site plan approval. If the Buyers fail to submit a complete package within the new deadline, the City at its option may terminate the development agreement and PSA.
• Gotham will defend and indemnify the City against any legal liability up to $500,000
The City Attorney is seeking direction from the Council regarding the City's position.
Option #1: Direct staff to begin the process of amending the development agreement and PSA to align with the new terms above. A public hearing will be scheduled before the Community Development Board (CDB) and a second public hearing will be held in front of the City Council before a vote is taken.
Option #2: Decline the proposal and decline to offer a financial equivalent, in which case Gotham will most likely withdraw from developing the old City Hall site.
Option #3: Extend the due diligence period through August 31 and pay an external financial expert to evaluate Gotham's proposal and recommend a course of action. This option also provides city staff with sufficient time to fully evaluate the proposed revisions and consider alternatives that have not yet been considered.