City of Alexandria, Virginia
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MEMORANDUM
DATE: OCTOBER 17, 2023
TO: THE HONORABLE MAYOR AND MEMBERS OF CITY COUNCIL
FROM: JAMES F. PARAJON, CITY MANAGER /s/
DOCKET TITLE:
TITLE
Consideration of Authorization to the City Manager to Enter into a Support Agreement in Connection with a Bond to be obtained by the Industrial Development Authority for Certain Economic Development Activities.
BODY
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ISSUE: Approval of a Support Agreement from the City in connection with a bond to be obtained by the Industrial Development Authority of the City of Alexandria (the “IDA”) for the purpose of financing a portion of the build out cost to relocate the headquarters of The Art League, Inc (the “Art League”) within the City of Alexandria. The support of this bond retains the Art League within the City and creates a path for the non-profit arts organization to support the activation of an arts designated space within the Old Town North Arts District.
RECOMMENDATION: That City Council:
1. Authorize the City Manager to execute a Support Agreement, in substantial conformance with the attachment to this memorandum (Attachment 1), in connection with a bond to be obtained by the IDA for the purpose of financing a portion of the build out cost to relocate and retain the Art League headquarters within the City of Alexandria;
2. Direct the City Manager to include for City Council consideration the FY 2024 amortization backstop amount in the Fall Supplemental Appropriation Ordinance, which will be presented to City Council in December 2023 for approval; and
3. Direct the City Manager to include for City Council consideration an appropriation equal to the amortization schedule as a part of annual budget and appropriation authorization process during the loan repayment period.
BACKGROUND: During the Old Town North planning process, the City and Community prioritized the “arts” in the 2017 Small Area Plan which allowed developers to receive a density bonus to their projects in exchange for creating “arts catalyst spaces.”
Over the course of the COVID-19 pandemic, businesses were disproportionately and negatively impacted throughout the City. This had the effect of creating a gap in available financing for new businesses to invest in the City of Alexandria and arts catalysts faced a roadblock trying to fund the necessary tenant improvements to build out their spaces for tenancy. The City and Alexandria Economic Development Partnership (“AEDP”) have been working with arts users and developers to help identify options for funding tenant improvements including loans and grant programs.
After agreeing to activate one of the arts spaces, the Art League, one of the arts catalysts faced an additional complicating factor - their larger headquarters location would soon be displaced due to redevelopment.
The Art League has identified a location in proximate but not within the Old Town North Arts District and a Special Use Permit (SUP) application to accommodate their use is docketed for City Council in September. Assisting the Art League to relocate to their new headquarters location would be the first step in a plan to activate the arts catalyst space at the Muse development within the Old Town Arts District.
DISCUSSION: As part of the City’s Economic Recovery efforts, staff explored tools not yet utilized or enabled at the federal, state, and local level that support new investment and growth. With a focus on the City’s goal to retain existing businesses including arts catalyst non-profits and jump start attraction of new businesses after the pandemic, staff has determined that the IDA could be further leveraged for such purposes. IDA is a seven-member board, appointed by City Council, to promote and facilitate economic and commercial development activities in the City. Since 1998, the IDA as a conduit bond issuer has assisted 90 nonprofit organizations with bond financing, issuing $1.5 billion in revenue bonds. Further, the City is authorized to make gifts, donations, and appropriations of money to the IDA for the purpose of promoting economic development, pursuant to Section 15.2-953 of the Code of Virginia.
In order to assist the Art League with its relocation, the Art League and IDA have created a plan of finance that involves a loan of $250,000 from the IDA, and a loan of $500,000 from the Freedom Bank of Virginia ("Bank") with the IDA receiving and managing the borrowed funds from the Bank (See Attachment 2 for term sheet). Proceeds from the Bank loan will fund approximately one half of the total cost of the improvements to the space. These funds would be provided to the Art League pending their achievement of specific performance milestones. The Art League will be responsible for paying IDA on a semiannual basis in order for IDA to service the Bank loan’s debt service payments over the amortization period. The Bank, AEDP, IDA, and City have received financial documents from the Art League including past financial statements and proforma for the proposed project. The parties concluded that the organization’s financial projections are reasonable enough to cover the debt service. Per the term sheet of the Bank loan, IDA shall maintain a deposit of $125,000 (25% of the original Bank loan amount) with the Bank during the life of the Bank loan. Additionally, the Bank has requested IDA for a City Support Agreement providing a non-binding backstop to the IDA in the event that the Art League is unable to cover its obligations associated with the loan repayment.
Under the Support Agreement, the City Council, subject to appropriations, would undertake to authorize payments to or for the credit of the Authority in amounts that, to the extent of any deficiencies in loan repayments from the Art League, will enable the IDA to pay scheduled debt service and other related amounts due to the lender. The IDA agrees to use any funds received by the Art League in excess of amounts owed to the Bank to reimburse the City for any payments. In addition, the IDA assigns to the City its collateral interest in the Art League’s leasehold interest in the project to the extent required to reimburse the City for any such payments.
Assisting the Art League to remain within the City of Alexandria achieves the following goals:
• Finding a headquarters location for the Art League is necessary for the organization to commit to activating the arts catalyst space at the Muse development, the first redevelopment project to take advantage of the arts bonus density program.
• Ensures that one of the two arts anchors identified in the Small Area Plan continues operating within the City of Alexandria.
City Council previously considered and approved this authorization on September 26, 2023. However, shortly after the meeting, bond counsel for the IDA discovered a problem with the notice required for the IDA’s approval of financing for the Art League. In order for the financing to be done on a lower-interest, tax-exempt basis, the IDA needed to re-advertise and re-vote. This technical, corrective measure was accomplished on October 18, 2023. Accordingly, City Council is requested to reauthorize action on this matter since, under applicable tax-exempt finance law, its approval must follow the corrected IDA approval.
FISCAL IMPACT: The support agreement is a non-binding undertaking of the City Council to consider certain appropriations during the loan repayment period to the Authority to the extent of any deficiencies in loan repayments from the Art League. Given the non-binding nature, there is no negative fiscal impact of authorizing the execution of the Support Agreement at this stage. Rejecting the supporting agreement can jeopardize retention of the Art League and associated positive fiscal impacts related to annual business tax revenues, sales tax revenues, tourism and job creation - the Art League has noted that each year it attracts more than 21,000 visitors, provides more than 11,000 class enrollments, engages 150 artist instructors and educators, and also employs 20+ staff. For the duration of the loan, the annual appropriation request averages approximately $60,000 with a maximum annual amount not more than $70,000. In the unlikely event that the Art League is unable to repay any of the debt service associated with the $500,000 bond, the current and future City Councils will need to consider total appropriation requests that would range approximately from $650,000 to $675,000 over a decade. It should be noted that these estimates are dependent on the interest rate at the time of closing currently anticipated in October 2023. The anticipated appropriation required based on the closing documents will be reflected in the Supplemental Appropriation Ordinance presented to City Council in December.
ATTACHMENTS:
1. Support Agreement
2. Term Sheet from Freedom Bank
3. Presentation
STAFF:
Joanna Anderson, City Attorney
David Lanier, Assistant City Attorney
Stephanie Landrum, President & CEO, Alexandria Economic Development Partnership
Christina Mindrup, Vice President, Real Estate, Alexandria Economic Development Partnership
Wynn Hunsaker, Project Manager, Alexandria Economic Development Partnership
Kendel Taylor, Interim Deputy City Manager
Julian Gonsalves, Assistant City Manager for Public-Private Partnerships