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HomeMy WebLinkAboutCity Council Committees - Economic Development Corporation - 08/03/1984 (3) CITY OF KENT i ECONOMIC DEVELOPMENT CORPORATION MEETING August 3, 1984 The regular meeting of the City of Kent Economic Development Corporation was called to order at 8:00 a.m. on Friday, August 3, by Chairman Leahy. Present: Councilmember Tim Leahy, Chairman of the Board Councilmember Tom Bailey, Board Member Michael Miller, Vice Chairman Leo Powers, Board Member Finance Director McCarthy, Treasurer City Administrator, Richard Cushing Steve DiJulio, General Counsel Bob Campbell , Roberts & Shefelman, Bond Counsel Deputy City Clerk Betty Gray, Acting Secretary (Councilmember Biteman was not in attendance at the meeting. ) BAILEY MOVED to approve the minutes of the meeting of June 1 , 1984. Miller seconded. Motion carried. DiJulio noted that a Cost Reimbursement Agreement for the H & H Company and Continental Mills, Inc. had been furnished by Roberts & Shefelman. He noted that the most critical paragraph for the Directors was Paragraph 3 which states as follows: "3. The Company will at all times indemnify and hold harmless and defend the Issuer, members of its Board of Directors, officers, agents and representatives, and the sponsoring municipality, members of its governing board or council , officers, agents and representatives, from and against any and all losses, costs, charges, expenses, judgments and liabilities (including reasonable attorneys' fees) of whatsoever nature incurred by them or while they are acting in good faith to carry out the transactions contemplated by this Agreement or any related instrument or document, and the financing documents supporting 40 the issuance of the bonds shall contain indemnification provisions acceptable to the Issuer and the Company." It was determined that this was a standard form of agreement and that a copy had been transmitted to H & H by Roberts & Shefelman for signature after approval by the Board. MILLER MOVED to approve the Cost Reimbursement Agreement for H & H Company & Continental Mills, Inc. , Bailey seconded. Motion carried. With regard to the same matter, DiJulio distributed a copy of a letter from Governor Spellman, with a copy to be filed for the record, determining the eligibility of H & H Company, and its lessee, Continental Mills, Inc. , for financing pursuant to Washington State's Industrial Revenue Bond (IRB) program. It was noted that a copy had been transmitted to H & H Company also. Leahy noted that the next item to be considered was the application from Northwest Aluminum Products. He introduced Mike Heutmaker, President of the Corporation. Heutmaker explained that the Corporation's existing facility is on South Central Avenue at the old Canyon Center site. He noted that the site consisted of approximately 7 acres, but, at the present time, Northwest Aluminum Products occupied only about 24,000 square feet with an additional 40,000 square feet being leased at the Plemmons Industrial Park site. He stated that the Corporation had applied for a Conditional Use Permit to build a 72,000 square foot manufacturing building on the site on South Central which would result in not only a consolidation move, but an expansion move as well . He added that the Company was looking at expanded product lines as well as expanded geographical territories for sales and that there was a good possibility that 30 to 50 jobs could be created by the new facility. Mike Miller noted that even though there would be a vacancy at the Plemmons Industrial Park, it would most likely be filled by another business which would create additional revenue and/or jobs. A copy of the inducement resolution proposed was distributed by DiJulio. -2- In response to questions from McCarthy, Heutmaker noted that the Corporation had built a manufacturing facility in Yakima in 1981 , which accounted for the increase shown on the balance sheet for that year. He also confirmed that the Corporation had purchased the assetsof the building in that same year. McCarthy referred to the Financial Statement of the Corporation and noted that while it appeared that they had been impacted by the housing problems during the past several years, it appeared that things were already more favorable this year. Heutmaker noted that this was in part due to more aggressive marketing as well . Referring to the bonds, McCarthy noted that they would be looking at approximately $400,000 of debt service if the bonds were issued and questioned whether the Corporation would have any problem in generating that. Heutmaker explained that cash expenditures were now due to operating costs, which included additional rent for the second site, as well as the additional supervision and transportation costs between the two plants. Bob Campbell of Roberts and Shefelman noted that the financing request was for an amount not to exceed $2,800,000. He questioned whether the company anticipated any sizeable capital expenditures in Kent within three years of the date the bonds will be issued. He went on to explain that the rule is that any expenditures that can be characterized as capital expenditures, normally equipment type expenditures, have to be included to determine whether the ten million dollar small issue exemption is met. He further noted that this included capital expenditures within the City of Kent for the three years before the bonds are issued and for the three years following. If the expenditures do exceed that amount, the bonds then become taxable. He clarified for Heutmaker that before the bonds are issued, the Corporation will be asked to give a projection for capital expenditures, again clarifying that it was only within the City of Kent and did not affect the Company's other operations. Heutmaker's estimation of any capital expenditures was a maximum of $100,000. It was determined that the plant in Yakima was acquired in early 1981 and would most likely be outside the time frame in question if it were considered a capital expenditure, since the bonds will probably not be issued until late 1984. There was no further discussion and BAILEY MOVED to adopt Resolution • No. 1984-7 for the issuance of Industrial Revenue Bonds to Northwest Aluminum Products. Powers seconded. Mike Miller noted that he and DiJulio had -3- discussed the possibility of ONB arranging for the financing. He, therefore, abstained from voting. The motion carried. DiJulio noted that the City Council had heard from the Washington Council on International Trade and a copy of their brochure had been distributed. They indicated in their brochure a great deal of willingness to make themselves available to groups and organizations to discuss their efforts to promote Washington as the Trade State. DiJulio also noted receipt of the Annual Report from the Governor's office from the Department of Commerce and Economic Development which is available in his office for anyone wishing to see it. He noted that it was essentially a compilation of all the industrial revenue bond financings that have taken place in the State during 1982 and 1983. It also sets forth the approximate time frames for the issuance of such bonds, ranging from one month to as long as eighteen months. DiJulio noted that Bob Campbell of Roberts & Shefelman was in attendance to review some of the provisions of the 1984 Federal Tax Legislation and its impact on Kent's EDC Board. Campbell stated that the Deficit Reduction Act was concerned primarily with Industrial Development Bonds and that it creates a number of procedural issues precedent to issuing tax-exempt IDBs. He noted that most of these were of little concern at this time because most would be taken care of during the normal course of satisfying other required procedures. He pointed out, however, that the real impact would be a rush to close bond issues before the end of the year, one being that some of the provisions of the Deficit Reduction Act don't apply until after the first of the year as well as with regard to those projects for which inducement resolutions had been passed prior to June 19. If they close by the end of the year, the whole Act does not apply to them either. Campbell pointed out that the big provisions of the Act were that they impose a ceiling (CAP) on a State by State basis for issuing Industrial Development Bonds and that ceiling is the greater of $150 times the State's population according to last census, or $200 million dollars. He indicated that the State of Washington would come in • with a ceiling for 1984 of about $600 million. Campbell noted that the Act allocates that amount among issuers unless the Governor or the Legislature -4- supersedes that allocation. He noted that it was anticipated that the • Governor would, by proclamation, very soon supersede the Act. As presently written, the Act splits the amount 50/50 between the State and its political subdivisions. It is anticipated that the Governor will reserve about $200 million for the State and allow the political subdivisions and other issuers in the State, such as the Economic Development Corporation of Kent, to issue their industrial development bonds on a first come, first served basis. Because of this, those projects which the corporation wished to finance would have to be submitted to the State to get a first chance at the funds. Referring to other features of the Act, Campbell noted that there is now what is called a world-wide $40 million limitation which applies to small issues like Northwest Aluminum Products. He noted that it was established by Congress to prevent large organizations like McDonalds or K-Mart going from jurisdiction to jurisdiction for small issues. He pointed out that the City would generally not be involved in this unless some large corporation were to build a plant or office building here, in which case it would be necessary to • count not only all of the other small issue exemptions of such a corporation but all of its exempt facilities financed anywhere in the world. Campbell indicated that this was just another type of due diligence check which the EDC would be required to make when talking to people who wish to apply with the corporation. He also referred to a provision concerning the borrower rebate, which the Federal government calls a rebate of the arbitrage profit. He noted that this meant that when an applicant gets the bond proceeds and invests them legitimately at an unrestricted arbitrage rate during construction and as part of reserve accounts, which are expressly permitted, the issuer has to rebate to the government the difference between the interest rate on the bonds, what they could have earned had they invested at the interest rate on the bonds, and what they did earn at the unrestricted rate. He noted that this was clearly a federal tax on investment earnings. In response to Miller's questions, Campbell noted that 90% of the amount was collected at 5 year intervals and the balance within something like 30 days of the end of the debt service payments. He referred to these various • restrictions but clarified that the ones the Corporation must be more concerned with now are the new limitations on the corporation's ability to issue industrial development bonds. -5- Campbell noted that it was ironic that the Federal Government was telling borrowers on the one hand to anticipate their investments earnings and reduce the size of their borrowing by those investment earnings to prevent over-issuance of bonds and on the other hand telling the borrower that they would take those investment earnings away. Cushing opined that this was more restrictive than the arbitrage rate. Campbell went on to further explain that one of the biggest problems created for the Council members and staff by this Act and that TEFRA (Tax Equality & Fiscal Responsibility Act) created is that the City may inadvertently issue industrial development bonds. He noted that in the past many issuers had issued what are characterized as industrial development bonds under Federal law. He noted that they were usually issued for an exempt facility or purpose such as a water facility, sewage disposal facility, dock or wharf. He noted that now, however, it was necessary to fulfill certain procedural requirements in order for an industrial development bond to be tax exempt even if it's issued for an exempt facility or part of a small issue. He referred to problems which might be encountered in such instances where there might be a water facility financed with revenue bonds and a contract exists to supply water to industrial or commercial users, which contracts aggregate more than 25% of the debt service on the bonds and the possibility then exists that such an issue would be a federal industrial development bond. Campbell referred to these as inadvertent IDBs and something which the City had to be aware of in regard to City of Kent traditional bond issues. ..not bond issues from the Kent Economic Development Corporation. Cushing asked for further explanation on this, expressing his concerns about the LIDs that were being done for development in the Valley or the possibility of some revenue bonds for water or sewer projects which might be construed to be IDBs and would then come under the new State CAP. He particularly referred to the problem that could be created for a growing community like Kent, where we have been doing about three LIDs a month. Campbell explained that there was a two part test, one being the use test. . .how the bond proceeds were being used, how the facility that is being financed by the bond proceeds is being used and if more than 25% of the bond proceeds are an outright loan or being used to acquire and construct the facility, or the output of which is used in the trade or business of a • non-exempt person. The other is called the security interest test and that is, what is the source of the funds to pay for the bonds and if more than 25% -6- of the debt service is paid under contracts or leases by non-exempt parties is using the facility in their trade or business, then the bonds are characterized as industrial development bonds. In the case of a water user where as much as 75% is sold to industrial users under a City's normal rate structure, not under a separate contract, then it does not constitute an industrial development bond. In response to McCarthy's question, Campbell noted that a contract with another Water District was with an exempt party. Bailey questioned what would happen if the City were to bring in a large processing plant which required a tremendous amount of water and the company was enticed to come to Kent by the use of an Industrial Revenue Bond Issue and whether this would count towards the total bonded use. Campbell explained that if new water revenue bonds were issued how they were characterized would depend on how the issue was structured. As an example, he noted that if the issue were simply for new capacity and was paid out of the aggregate rates earned, even though the new capacity was to accommodate the new industrial user, the bonds would not be payable solely by that particular user. However, if water revenue bonds were issued for the new capacity and the new industrial user was required to pay all the debt service on those bonds, then they would be Industrial Development Bonds. This would use up the CAP...the industrial user would have to satisfy all of the procedural requirements. He clarified that at this point it did not appear that the City's CAP was going to be consumed and financing could be continued as in the past. The main concern appeared to be with satisfying the procedural requirements should a bond issue become an inadvertent Industrial Development Bond rather than with consuming the CAP. Campbell noted that in 1985 and 1986 there could be problems because of inadvertent IDBs being included. Cushing raised questions about inadvertent IDBs dealing with street projects. He referred to a recent LID on S. 196th Street where there were basically two participating assessments, the Boeing Company and Uplands. In response to Campbell 's question, Cushing noted that the general public has the use of the street. Campbell then referred to the two part test..the use test and the security test. He clarified by noting that if the street is being used by the • general public on the same basis that the assessment payers are using it, it is not deemed to be used in the trade or industry of the people paying for it. He noted that the real concern comes when a road is built to an -7- industrial complex and even though it may be a public street, and the City retains the right to regulate and maintain it, the only users are going to be employees in the complex. Cushing responded by noting that this could apply to many streets in industrial areas, that the general public of Kent could use them since there would be a few key arterials, but many streets would be built through LIDs that the general public would hardly ever see. Bailey suggested that everything would potentially have to be a through street. Campbell noted that it might be possible to get an IRS ruling stating that those kinds of streets were not streets financed with industrial development bonds because they are available to the general public. DiJulio referred to the fact that the idea of parks in the area was not too far-fetched since all of the roads do lead to the river and there were parks on most areas of the river, as well as a scenic route. Bailey suggested that the City had answered that question during the Valley Studies when it was required that all development within 200 feet of the river had to provide access to the river. Campbell noted that his firm was putting on a seminar on Thursday, August 9, and invited those interested to attend since the new laws would be discussed. Bailey raised a further questions regarding the Governor's decision on a first come, first served basis for financing and whether this would eliminate the smaller communities. Campbell noted that it would be based on whomever got the requests in first and also noted that the Governor's proclamation was only good until the end of the next legislative session and at that time it would revert to federal allocation or the legislature would have to act. Miller questioned whether it was possible to just have a project submitted and approved by the State or whether the bonds had to actually be issued. Campbell responded by noting that the final proclamation had not been issued as yet but the original drafts indicated that it would be based on the date of the inducement resolution. He noted that there was also some discussion about making it the date of the bond sale since there could be vague inducements without any commitment and the vague inducements would consume part of the CAP that a legitimate person would not be allowed to use. He stated that it appeared that the Governor was now leaning more towards having it be the date the bonds are sold. He noted also that the inducement resolutions were mainly 0 to satisfy federal regulations but that it did not actually commit the -8- corporation to issue the bonds or commit the borrower at that point other than to enable him to finance all expenditures made after the inducement resolution from the tax exempt bonds. Campbell also responded to questions that it was necessary to have a specific project before the funds were requested from the State. He clarified this by pointing out that if the State commits to the project and a corporation does not issue the bonds, there were carry-forward provisions. As an example, he noted that if funds were requested in December of 1984 and the bonds were not issued until January of 1985, the portion of the 1984 CAP that was consumed would be carried forward into 1985 and would not count against the 1985 CAP. He did note that they would be competing with possible Irrigation Districts, PUDs, Ports for docks and airport facilities and the like. He pointed out the need for having real plans before any request was made. Cushing suggested that this could be an incentive for someone wanting industrial development bonds to go through a local economic development corporation such as Kent's/ where planning approval of the city and the corporation could take place at the same time. Campbell also noted that the Governor has the power to allocate the funds anyway he chooses. It was determined that legislators will be working on new legislation and Bailey suggested that the Association of Washington Cities should also be involved. In response to questions from members of the Board, DiJulio noted that a quick reading of the Annual report indicated that of about 50 corporations it was divided approximately equally between city and port development corporations. Powers suggested that port districts were all CAPS. ..stock and trade. Powers questioned whether there were hospital districts involved but Campbell noted they were not allowed to issue IDBs under State law so the only thing would be inadvertent IDBs. Miller then noted that Mr. Cushing had some ideas which he wished to discuss with the Board. Cushing then referred to the City's unfinished Economic Development Plan done by the Economic Development Council of Puget Sound. He noted that one of the issues that was left open in the report related to what kind of economic development would be in Kent's best interests. He referred to the fact that in recent years there has been a change in the type of industrial development occurring in the Valley, such as better quality is business parks and distribution centers, rather than just warehouses. He -9- stated that he had heard that Uplands was even considering the possibility of not constructing additional rail-oriented facilities and looking at the possibility of other high-tech uses. He also stated that the City would like to talk about whether convention design centers, hotels or motels should be included in Kent's future growth because of the industrial development here. Cushing stated that they were looking at developing a marketing or promotional strategy to determine what it was felt Kent should be emphasized as. ..the Convention Center City... a great place for high tech businesses. .. or basically warehouses. He explained that the idea had developed to possibly sponsoring a one day symposium where key people would be invited, not necessarily focusing on realtors but on the people who have built projects here or are in the business of analyzing the kind of development that has the best return on investment, mainly with a view to developing Kent's future scenarios or alternatives. Powers suggested that it might be possible to work with the Chamber on this. Bailey noted that he and Leahy were attempting to set up an appointment with an international firm developing this type of plan. He noted that they were attempting to determine if the company would, in fact, be interested in coming before the Council and staff and also give the City the opportunity of coming up with some introductory questions. Miller questioned who else would be involved in the symposium..some of the industrial developers? Powers noted that many of the firms presently located in Kent build machinery and equipment that is shipped all over the country. He questioned whether the City was interested in creating basic industry type jobs which bring new dollars into the community. He noted that many of the industries already here are unique in the United States. He also pointed out that there are high-tech businesses located here now, such as Flow Research and the Robbins Company. It was also suggested that retirees should be considered since they also would be bringing in new money and creating jobs as well . Cushing pointed out that he basically was interested in thinking of types of questions to ask, not resolving the issues, to structure the symposium. Powers suggested that they should be looking at a possible 50 year plan for the City. Bailey referred to the comments about retirees and noted that the City is presently undertaking an affordable housing study which would be directly impacted by whatever the City intends to go after. He noted that one -10- builder in Kent is already aware of the fact that there is a lack of quality housing in Kent that will attract the type of people who hopefully will be coming with the type of development being considered. He referred to a new housing project on Woodland Way where $200,000 homes would be built. It was also pointed out that hopefully the type of people who are attracted to Kent and are employed here will be participating heavily in the community. Bailey advised that care and caution should enter into the planning process. Cushing noted that it was his intent to put together some sort of an outline which could be discussed at the next meeting on September 7. He also indicated that it was not his intent to get into the issue of the impact on City services at the symposium because there were things which could be dealt with later. Powers stated that he would like to see the type of community where young people could locate and grow accordingly and put down roots in the community, maybe even using Kent as a base for retirement. Meeting was adjourned at 9:00 o'clock a.m. Betty Gray, Deputy City Clerk Acting Secretary 0019C-01C -11-