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Council PKT 10-28-2003 SpecialAGENDA FEDERAL WAY CITY COUNCIL Special Meeting Mt Baker Conference Room/2ua Floor - City Hall October 28, 2003 - 6:00 p.m. (www. ci.federal-way, wa. us) CALL MEETING TO ORDER II. ECONOMIC DEVELOPMENT/CITY CENTER REDEVELOPMENT STRATEGIES III. ADJOURNMENT CITY OF FEDERAL WAY MEMORANDUM Date: To: Via: From: Subject: October 24, 2003 City Councilmembers ~ t'- ~ David H. Mosel/e.-~City Manag~.~ v Patrick Dohe~~y Director, Community Development Services City Center ~tIeVeloffrnent Strategies BACKGROUND: The Federal Way Comprehensive Plan lays out the following over-arching principals for the Federal Way City Center: Create an identifiable downtown that is the social and economic focus of the City; · Strengthen the City as a whole by providing for long-term growth in employment and housing; · Promote housing opportunities close to employment; · Support development of an extensive regional transportation system; · Reduce dependency on automobiles; · Consume less land with urban development; · Maximize the benefit of public investment in infrastructure and services; · Reduce costs of and time required for permitting; · Provide a central gathering place for the community; and · Improve the quality of urban design for all developments. Contrasting with these principals, however, the current state of the Federal Way City Center is dominated by one-story retail and service shopping center and strip centers with expanses of surface parking lots. A few significant exceptions to this pattern should be mentioned, especially as they represent the denser, more multi-use type of development contemplated in the Comprehensive Plan: the Courtyard by Marriott hotel; the Federal Way Center office building; the La Quinta Inn; and the John L. Scott office building. Nevertheless, the majority of the City Center is developed in a manner more consistent with suburban shopping areas, with even the most recent developments reinforcing this pattern. Therefore, notwithstanding the adoption of a Comprehensive Plan and accompanying. land use regulations that would promote denser, more multi-use development, the City Council has recognized that more regulatory and/or financial incentives may be necessary to accomplish these objectives and has demonstrated its interest in stepping up efforts to foster this type of development. · Continued investment in the City Center ROW improvements has occurred. Memo to FEDRAC City Center Redevelopment Strategies Page 2 of 7 · The City Council has adopted Building Code provisions that allow five stories of wood-frame construction over concrete to accommodate the most recent mixed- use development types. · Earlier this year the City Council adopted a 1 O-year property tax exemption for residential developments in the City Center. · The City is currently in the process of carrying out a SEPA Planned Action to encourage and accommodate City Center development. · Substantial progress in improving the permitting system has been made, and the triggers for ROW improvement associated with property redevelopment have been adjusted so as not to encumber smaller remodeling projects. In addition, over approximately the past year City Council has expressed interest in exploring even more proactive strategies for fostering desired City Center redevelopment. On October 15, 2002 City Council directed staff to continue to study potential ways the City could financially participate in right-of-way (ROW) improvements and/or public parking facilities in the City Center as incentives to desired redevelopment. Since that time FEDRAC members have continued to discuss these strategies, although funding discussions were somewhat clouded by the status of the impending City Hall and community center/pool decisions. Once the decisions regarding both of those issues were resolved, staff began exploring these issues and their associated financing strategies this past Spring and continued through the Summer, reintroducing the topic to FEDRAC at its September meeting. As a preface to some preliminary recommendations for continued work on these issues, staff has been asked to provide a brief description of other nearby cities' redevelopment efforts. CITY CENTER REDEVELOPMENT STRATEGIES FROM OTHER CITIES To help illustrate the possibilities with respect to City Center redevelopment strategies, here are brief summaries of the redevelopment efforts of five local cities: Kent Kent Station is a $130 million, 530,000 square-foot retail, education, entertainment and residential project, slated to create a community's focal point and identity, set for groundbreaking in 2004, with a 2005 opening. The project is located adjacent to Sound Transit's Sounder Commuter Rail Station and parking garage, Kent's existing downtown and the King County Regional Justice Center. This project will be developed by Langly Properties and Tarragon Development on 19.9 acres of property that the City purchased in 2001. The City has contributed financially in the following ways: Memo to FEDRAC City Center Redevelopment Strategies Page 3 of 7 · $4 million contribution to Sound Transit's parking facility for the Sounder train station to ensure that a parking structure - not parking lot - be built. · $14 million to purchase the 19.9-acre site. · Approximately $2 million in right-of-way and infrastructure improvemems, which leveraged additional State and federal gram monies. Kent accessed up to $10 million from King County through its Community Developmem Interim Loan (aka "float loan") funds to help purchase the property initially. These funds needed to be paid back within 30 months, which was just completed this past Summer. An RFP was issued and the above-cited developers were awarded the project, based on their experience, expertise and ability to perform. The developers will be buying back the property in phases at current market appraised value(s). It is likely that Kent will not recoup the emirety of its purchase price due to the slump in commercial property values since they purchased the property, the public components of the project that will benefit the city and residems, and the specific program tied to the site that affects the free-market appraisal of the property. Burien Burien Town Square is the mixed-use redevelopment of a 1 O-acre site in downtown Buden, slated for new civic facilities, retail space, housing, offices, hotel uses, parking - all bordering a major public square/open space. Burien already owned a 1.5-acre portion of this site where its existing City Hall is sited. Approximately 6.5 acres adjacent to City Hall (containing an abandoned Gottschalk's department store and other buildings) was purchased by the City for approximately $5.1 million. The City has issued a letter of iment to purchase the remaining 2-acre parcel, although as the developers are soon to be selected for this project, it is likely the City will simply step aside and let the developers purchase this remaining piece. The City has budgeted at total of $9 million from its CIP budget (funded largely by real estate excise tax revenues) and $1 from its Parks budget for the property acquisitions and other improvements/contributions, although current estimates are that the total City expenditure will be substantially less than that total amount. The City expects to break even or make a profit in turning over the project to the selected developers, as well as anticipates a substantial increase in property tax and sales tax revenues over the next ten years. Burien issued an RFP and garnered several respondents, just recently having chosen Los Angeles developer Urban Partners LLC as the winning firm. Urban Partners is working with the City of Pasadena and the LA Metro Transit Authority on a $100 million mixed- use and transit project in that city, as well as developing mixed-use projects in LA's Koreatown and the suburban community of Oxnard. Memo to FEDRAC CiO; Center Redevelopment Strategies Page 4 o£ 7 Tukwila Tukwila Village is a 12-acre mixed-use development along the east side of International Boulevard (Highway 99) between S. 140th and 144th Streets. The $50 to 100 million project would contain office, retail and residential buildings in a "village square" format - with a public plaza, ground-floor storefronts, and office and residential space above. The City had two principal objectives with this project: 1) to reinvigorate a "blighted" stretch of International Boulevard (crime; drugs, disinvestments, etc.), and 2) to create a city center for a city that has no "Main Street" and no community focal point. The City employed the recently updated Community Renewal Act provisions to designate a community renewal area and project, thus freeing itself for less constrained use of public funds. One of the difficulties associated with this site was its multiple property ownerships. The City created a redevelopment plan, updated its Comprehensive Plan, created design guidelines and issued and RFP. The winning respondent to their RFP was the Sabey Corporation. The City bought the properties without using condenmation (and therefore may have paid slightly higher prices), for a total of approximately $9 million. In addition, the City will contribute approximately $2 million for frontage improvements along the subject portion of International Boulevard. The City used general fund revenues and has issued bonds against those revenues. The City anticipates that it will sell the property at a minor discount from its total acquisition price - again because outright purchase o fall properties (to avoid condemnations) may have led to somewhat inflated purchase prices. Lynnwood Private-sector and public-sector interests have united to create a new City Center Plan at a cost of over $500,000, split evenly between the sectors. The plan is targeting greater densities and heights of commercial and residential development, as well as civic uses and open space, to try to create a "Downtown Lynnwood." Alderwood Mall, at the edge of the "downtown," is making a $50 million, 400,000-square-foot expansion with more retail shops, restaurants, a cinema complex and three parking structures. No City money is involved. A $32 million, 60,000-square-foot convention center is being planned and is due to open in 2005. It is financed by the South Snohomish County Public Facilities District, funded with lodging tax revenues and a portion of the sales tax revenues that is credited back by the State for such projecB (not available in King County). University Place This City is pursuing redevelopment of an 8-acre parcel as a mixed use Town Center consisting of 300-500 housing units (condos, townhouse, leased units) and 325,000 square feet of "lifestyle" type retail (i.e., U-Village with housing on top). The retail will be located above a 1778-stall parking garage and the housing will be located above the retail. Memo to FEDRAC City Center Redevelopment Strategies Page 5 of 7 The City obtained a line of credit (currently 2% interest rate) with the Bank of America. The line of credit is for 3 years with a possible extension if needed. In the Spring of 2003, the City spent $8.6 million to purchase 8 acres of land within their Town Center Zone. The City also entered into an agreement to purchase 4 acres owned by the library for $4 million and to move the existing library to a smaller site within the project area. The City has spent an additional $500k in various consulting fees, for a total expenditure of $13.1 million. Before purchasing the.land, the City invested approximately $200k of the $500k in research activities, such as hiring an architectural firm to establish new design guidelines, a planning consultant to deal with zoning issues, retail and housing consultants to conduct market studies, and an economist to work out the project finances. The City sent out requests for qualifications earlier this month. The City received responses from three qualified developers and will select its preferred developer in November, with a final development agreement to be executed next Spring. The City expects that cleating of the site will begin next April and construction to be completed in 2006. The City views its primary contribution to be the consolidation of the land and the removal of the tenants. The City expects full cost recovery with respect to the land purchases (i.e., $13.1 million) and expects that the developer will pay for construction of the garage. Remaining items, such as road and sidewalk construction, on-street parking, and other infrastructure improvements remain subject to negotiation. The City views the likelihood of construction beginning next year as extremely good in significant part due to the rapid progression of the project (There has not been a lot of time for the market to change from the time City began land purchases to time when final development agreement is signed -- RFQ out 2 months after land purchases completed; preferred developer selected 1 month after RFQ due; final developer agreement signed 5 months later.) The City expects that the site, which currently yields approximately $45,000 per year in combined property and sales tax revenues, will yield up to $1.2 million per year in tax revenues once the project is completed. POTENTIAL CITY CENTER REDEVELOPMENT STRATEGIES FOR FEDERAL WAY Pursuant to previous FEDRAC and City Council direction, three general strategies will be discussed further below: Memo to FEDRAC City Center Redevelopment Strategies Page 6 of 7 · City participation in project-related ROW improvements, · City participation in parking facilities, and · City purchase of City Center land. As a reminder, in previous FEDRAC discussions it was noted that two readily identifiable barriers to more intensive redevelopment of City Center property are potentially costly grid-street ROW improvements and/or the provision of costly structured parking necessary to meet the needs of denser development. Key to the City's participation in such improvements has been the desire to keep such participation associated with public improvements. With ROW improvements, this is naturally easy to maintain, but with parking facilities, it will be imperative to maintain clarity with any prospective private-sector partners that City participation must be restricted to parking facilities (or portions thereof) that can be accessible to the general public, as well as serve a site's commercial or other uses, or which can be bought back by the private interest for use as private parking facilities. CITY PARTICIPATION IN PROJECT-RELATED ROW IMPROVEMENTS The City's Comprehensive Plan lays out several important additional rights-of-way ("grid streets"), or continuation of such grid streets, that major redevelopment projects would be required to provide land for and/or improve. At current estimates, private development of grid streets would cost approximately $1500/lineal foot for a private developer who dedicates the required land for improvement. For a typical 500-foot segment of grid street that would yield a cost of approximately $750,000.00, with two-thirds of that cost ($500,000) required of a developer/owner of property adjacent on one side. In order to help soften the brunt of this additional redevelopment cost for desired development types, one of the concepts under consideration is for the City to partner with developers of selected projects to share the burden of these ROW improvement costs. As with the other strategies to be discUssed in more detail below, the most likely mechanism for entering into such partnerships would be to use the RFP approach. An RFP could be formulated that would advertise the availability of City funds to partner with private developers to share the costs of ROW improvements. Multiple projects could be possible, depending on the nmnber of respondents, level of partnership financing needed, types of proposed projects, etc. A more detailed discussion of the RFP approach will be presented below. Financing options related to this strategy and others will be discussed later in this memo. PARKING FACILITIES We have repeatedly heard from property owners and developers that denser development of our City Center will require the inclusion of parking structures that would both free up Memo to FEDRAC City Center Redevelopment Strategies Page 7 of 7 land currently in use as surface parking to allow for more buildings, as well as simply accommodate the parking needs of greater development densities on the existing sites. While there may be less costly solutions for structures containing relatively small amounts of parking (daylight basements that fit into a site's slope, portions of parking within the foundation of a taller building, small areas where buildings can cantilever out over parking areas, etc.), most sizable parking structures (200 spaces or greater) average approximately $15,000/space for above-ground structures and $20-25,000/space for below-ground structures. Assuming that for the most part only above-grade parking structures would be built, here are some potential approximate costs of various sizes of parking facilities: 200 spaces $ 3,000,000 300 spaces $ 4,500,000 500 spaces $ 6,000,000 750 spaces $11,250,000 1000 spaces $15,000,000 It must be recognized, however, that freeing up land currently encumbered by surface parking brings more income-producing land to the property owner/developer, which helps to defray the differential cost of the parking structure. It is hoped that eventually, as a newly developed project is fully occupied and generates increasing revenue, the additional income would actually outweigh the increased construction costs for a parking structure. However, that additional income may not be realized during the initial financing period, leaving a financial gap at that time that under conventional circumstances would not warrant construction of a parking structure. This situation illustrates again the notion of a financial gap that the City could help to fill in order to realize desired redevelopment. This gap could also be a temporal gap that future projected revenues would likely fill, but that conventional financing may not account for, in which case City participation could be viewed as "bridging" the gap rather than filling it. As with the ROW improvement option discussed above, financing options will be discussed more fully below. PURCHASE OF CITY CENTER LAND As seen in the several examples cited earlier, a common practice on the part of cities throughout our region and around the nation is to buy strategic properties for resale to developers of desired redevelopment proposals, usually after response to a Request for Proposals (RFP). Memo to FEDRAC City Center Redevelopment Strategies Page 8 of 7 Advantages The principal advantage to this approach is that it can place the city in the driver's seat with respect to attracting the specific type(s) of redevelopment it desires. By controlling the property, the city can predetermine the high-priority uses for that site and market the site accordingly. Whether the objectives be to increase tax base, reduce crime, provide more in-city housing, spur economic activity, etc., the city's control of the property makes the city a decisive force within the market dynamics of its local economy, not simply a bystander. In addition, by owning or otherwise controlling key properties, the city can be directly involved in discussions and negotiations about potential Project occupants, such as retailers, service providers, housing developers, etc., to the extent it desires to do so, in order to ensure fulfillment of its objectives. In that way, a city can achieve compliance with its objectives through means other than simply regulation; for example, negotiating more sensitive design solutions with such traditionally tough clients as national retailers who often have cookie-cutter site and building plans. Disadvantages The principal disadvantage with this approach is that the city takes on the risk of owning and selling property, not just private market developers. It is imperative, therefore, that the city have a strong understanding of the real estate market, the housing market, and the retail/service market, etc., before purchasing such properties. With a strong understanding of these markets and clear up-side potential to the investment, the risk can be substantially minimized and the advantages can clearly outweigh the remaining minimal risks. Another disadvantage is that, with properties currently occupied, the city has to take on the role of commercial landlord - at least temporarily - which some cities are not comfortable with. In many instances it's easier for the city to vacate remaining tenant spaces or buildings to minimize this factor. Land Values in Federal Way City Center The cost of land in a commercial environment is the result of a complicated appraisal of a particular property's market performance (sales per square foot, rental rates), comparable properties' sales prices, a site's location, etc. However, discussions with property owners and developers in the City Center, as well as a review of recent property sales and King County Assessor's Office valuation data, yielded the following generalized observations about land values in Federal Way's City Center: Vacant land: Land w/vacant bldgs Land w/occupied bldgs - average tenants Land w/occupied bldgs - above-average tenants $8-10/sq. ft. $15-20/sq. ft. $25-30/sq. fi. $30-35/sq. ft. Memo to FEDRAC City Center Redevelopment Strategies Page 9 of 7 Illustrative potential purchase prices for City Center land would be: Vacant land 25,000 sq. ft. 50,000 sq. ft. Land w/vacant bldgs 150,000 sq. ft. 300,000 sq. ft. Land w/occupied bldgs - average tenants 150,000 sq. ft. 300,000 sq. ft. Land w/occupied bldgs - above-average tenants 150,000 sq. ft. 300,000 sq. ft. $200,000-250,000 $400,000-500,000 $2,250,000-3,000,000 $4,500,000-6,000,000 $3,750,000-4,500,000 $7,500,000-9,000,000 $4,500,000-5,250,000 $9,000,000-10,500,000 PARTNERSHIP METHODS "Responsive" Approach One approach for partnering with private-sector developers would be for the City Council to develop criteria defining desirable City Center redevelopment projects, identify and/or designate potential funding sources and strategies, and establish policies and procedures that would allow the City to respond quickly and strategically to opportunities for public- private partnership that might arise from the private sector. A private developer who approaches the City with redevelopment ideas could be informed of the City's policies with regard to City Center redevelopment and potential financial partnership to achieve these goals. If such a developer proposed a specific partnership concept (ROW improvements or parking facilities), the City could then set into motion a pre-approved procedure for consideration of such a proposal in a timely fashion. RFP Approach On the more proactive side, the City could develop an RFP that would be published in trade journals and sent to developers along the West Coast (or beyond), indicating the City's willingness and ability to partner with private-sector developers for desired City Center redevelopment schemes. The notion of floating an RFP to invite prospective developers works generally the same for the three redevelopment strategies discussed above. The City offers up either financial contribution or City Center land as the incentive, describes its desired redevelopment typology, develops predetermined evaluation criteria, and advertises the RFP to the widest audience feasible. Memo to FEDRAC City Center Redevelopment Strategies Page 10 of 7 Regarding potential RFP criteria, the following are some initial ideas around which specific criteria could be developed: · Description of desired development (mixed-use, multi-story, "village" or "life style center" site and building design, storefronts, efficient use of land, potential for public uses, etc.), · Location and scope of project and its ability to induce additional, spin-off development, · Track record with similar development, · Financial impact analysis (estimated property and sales tax increments), · Job creation, · Financial "gap" analysis, including development costs, projected revenue, disclosure of developer's desired capitalization rate, internal rate of return (based on other portfolio projects), etc. (to determine financially necessary level of contribution) POTENTIAL FUNDING OPTIONS Funding Sources The following are potential sources of funding that could be considered to finance the redevelopment strategies discussed above: The 1/2% utility tax dedicated to the Public Safety facility bond is projected to generate $600-625,000 a year. That is $180-200,000 in excess of the current debt service on the bond, which will be fully retired in 2012. The total revenue could be used to float a bond valued at approximately $6 million, while the debt repayment could be structured so as to use the above-cited "excess" revenue to make interest payments on the new bond note, reverting to a more complete amortization schedule after the Public Safety facility bond is retired in 2012 and the full revenue stream is available. With the move of the City Hall into the Paragon Building, the current City Hall would be available for sale or for rent. This could potentially generate lump sum proceeds or potential net rental income, which in either case would have a net present value of approximately $3 million - either in cash proceeds or a bondable rental income stream. Especially with regard to ROW improvements and/or partnerships with private developers on ROW improvements, the City Council could begin earmarking a portion of yearly carry-forward funds to create a growing pool of funds for future ROW improvements. Given the length of time necessary to accumulate sufficient funds for more than small improvement projects, perhaps this source of funding could be used to supplement other funding sources and/or to be combined with other sources to create a revolving pool of funds (see below). Memo to FEDRAC City Center Redevelopment Strategies Page 11 of 7 King County currently has $7 million available in Community Development Interim Loan (aka "float loan") funds available for property acquisition or project development for redevelopment projects that create additional jobs. Requirements for use of these funds are as follows: The HUD-imposed requirement for the use of these funds is that the redevelopment projects to be generated create 1 new job for every $35,000 of funds loaned, with a minimum of 51% of the jobs occupied by persons from low- to moderate-income households. Examples of the levels of job growth associated with loan amounts are: $2.5 million loan $5 million loan $8 million loan 71 jobs 143 jobs 228 jobs The low- to moderate-income job-creation reqUirement would likely be readily achievable within the Federal Way City Center, where the majority of new jobs would likely be within the retail and service sectors -jobs typically well within the low- to moderate-income parameters. HUD requires reporting on such projects until such time as the approximate number of jobs created reaches the estimate associated with the loan amount. · Traditionally the funds have been available at 2% less than the lending rate regularly available to municipalities. Given that current lending rates are at approximately only 2%, it is no longer possible to achieve that 2 percentage- point discount, so the County has stated that it will negotiate with municipalities for a mutually agreeable interest rate. · The City would have to issue a letter of credit against'the loaned amount at a typical rate of.75 point (or percent) of the loan amount. (For example: a $5 million loan would require a letter of credit fee of $37,500.) · Lastly, these funds must be repaid by the municipality within 30 months of disbursal. The timeline for approval of a loan application is approximately three to four months, which includes County Council review and approval and HUD oversight. The County has indicated that this source of funding is particularly well suited to property acquisition projects by local municipalities. Lastly, especially for short-term use of funds, such as in association with a quick purchase and "flip" of property through an RFP process, the City could simply borrow funds. The current lending rate to the City is approximately 2%. Therefore, a $5 million loan for one year would result in interest payments of $100,000. Memo to FEDRAC City Center Redevelopment Strategies Page 12 of 7 Revolving Funding Pool As mentioned previously in this memo and discussed previously in FEDRAC meetings, one notion that should be considered would be to create a revolving pool of City Center redevelopment funds to finance these redevelopment strategies. This may be particularly appropriate for the ROW improvement and parking facility partnership strategies, although is not precluded from the property-acquisition strategy as well. Three general sources of funding are apparent as generators of such a revolving fund: As mentioned earlier, any one of the partnership strategies discussed above could be structured so as to require full to partial repayment of the City funds over time. This determination may not be able to be made until detailed financial analysis of a specific development's pro forma is conducted and case-specific City Council participation decisions are made. One thing to keep in mind is that this approach could reduce the level of perceived incentive to private developers. A variation on this option is to consider repayment requirements in the context of the required financial "gap" analysis in analyzing developers' responses to the RFP. Greater f'mancial gaps for desired development may require greater City contributions (which may eliminate the possibility of pay-back), while smaller gaps may be more amenable for an amortized repayment. 2. The City could earmark property and sales tax revenue increments from project sites to help replenish the redevelopment fund. As mentioned above, a portion of yearly carry-forward funds could be allocated to this fund, especially for such Capital improvements as ROW improvements and/or parking facilities. SUMMARY OF BENEFITS In addition to achieving greater compliance with the City Center vision embodied in the Comprehensive Plan, several important benefits could result from City participation in public-private partnerships within the City Center, including the following: Increased sales and property tax revenues. Regarding property taxes, it should be noted that, although increases in overall property tax revenues, of course, are capped by State law, increased property tax revenue from City Center properties would help to shift the burden away from the residential property sector and towards the commercial property sector. 2. Increased jobs for Federal Way residents and the economic multiplier effects that arise from those jobs. 3. Increased housing opportunities within City Center and the economic multiplier effects that arise from those residents. Memo to FEDRAC City Center Redevelopment Strategies Page 13 of 7 Additional development and redevelopment that is induced by large redevelopment projects and a revitalizing City Center, as well as enhanced image and profile of Federal Way within region as new investments and development projects occur. 5. Greater financial and development return on massive public investment in City Center infrastructure to date. 6. Achievement of Comprehensive Plan goals and Growth Management mandates. NEXT STEPS Staff will continue to explore and develop selected strategies and methods discussed above, potential land acquisition sites, etc., and report back to FEDRAC, again in study session and/or executive session, Pursuant to City Council direction at the October 28, 2003 study session. Attached you will find a matrix worksheet that you may find helpful in summarizing your thoughts, comments or questions regarding each of the strategies and related methods discussed in this memo. Similarly, the worksheet may help you focus in on combinations of strategies-methods you are particularly interested in pursuing further or, conversely, would prefer to pursue no further. CITY CENTER REDEVELOPMENT STRATEGIES AND METHODS COMMENT WORKSHEET RESPONSIVE RFP APPROACH UTILITY TAX CITY HALL PORTION OF COUNTY FLOAT BORROW MONEY APPROACH BOND PROCEEDS OR YEARLY CARRY- LOAN REVENUE FORWARD STRATEGY ROW IMPROVEMENTS PARKING FACILITIES LAND ACQUISITION