Title
Adoption of Resolution Authorizing the City to Enter into a Loan Agreement with JP Morgan Chase Bank N.A. to Refund Prior Lease Revenue Bond Obligations Related to Alameda Point in an Amount Not-to-Exceed $7,200,000 and Authorizing City Officers (as Identified Herein) to Execute the Loan Agreement and Related Documents to Take Any Other Necessary Action to Effectuate the Loan. (Finance 10024054)
Body
To: Honorable Mayor and Members of the City Council
From: Jennifer Ott, City Manager
EXECUTIVE SUMMARY
This Resolution authorizes the direct placement of the outstanding Alameda Public Financing Authority Variable Rate Demand Revenue Bonds, 2003 Series A and Series B Bonds (Alameda Point Improvement Project).
BACKGROUND
In February 1999, faced with the challenge of financing the gap between lease revenues and maintenance, operating and capital needs for Alameda Point, the City of Alameda (City) retained consultants to review the Business Plan for Alameda Point and recommend a viable financing strategy that would not adversely impact the City’s General Fund or other special funds of the City.
Based on information available at that time, it was determined that a financing plan for Alameda Point redevelopment needed to include debt financing in the early years to ensure an efficient redevelopment of the property. Accordingly, the proposed financing plan contemplated for Alameda Point included a reduction in operating costs, deferral of capital projects and the issuance of debt.
City Council approved the financing plan as proposed and authorized the issuance of revenue bonds secured by the leases of the various facilities at Alameda Point.
The City thereafter issued the 1999 Alameda Point Revenue Bonds in the amount of $10 million for the purpose of generating funds to fund certain infrastructure improvements at Alameda Point. The 1999 revenue bonds were issued as variable rate bonds for a period of only twelve years (the term of the leases).
Because of the short term of the 1999 bonds, in 2003, the City, through the Alameda Public Financing Authority (the Authority), refinanced the outstanding debt (just over $9 million) and issued an additional $4,360,000 of new debt for the purpose of providing funds to finance a portion of the costs of the acquisition, construction, installation and equipping of various public capital improvements to Alameda Point. Accordingly, in December 2003, the Authority issued $9,080,000 Alameda Public Financing Authority Variable Rate Demand Revenue Bonds, 2003 Series A (Alameda Point Improvement Project) (the “Series A Bonds”), and $4,360,000 Alameda Public Financing Authority Taxable Variable Rate Demand Revenue Bonds, 2003 Series B (Alameda Point Improvement Project) (the Series B Bonds) in December 2003.
In order to provide for the repayment of the Series A and Series B Bonds, the Authority pledged certain revenues, substantially derived from rentals paid to Alameda Reuse and Redevelopment Authority (ARRA) for certain land, buildings, fixtures and equipment at Alameda Point leased by ARRA to certain tenants. The rents were assigned by ARRA to the Authority; the rents were calculated to be sufficient to enable the Authority to pay the principal and interest on the Bonds.
With the dissolution of redevelopment agencies, the City has assumed the obligations of ARRA. The City has been providing the rents from the leases to the Authority to make the Bond payments.
The Bonds, which have a final payment date in Fiscal Year (FY) 2033-34, were issued by the Authority pursuant to that certain Indenture of Trust, dated as of December 1, 2003 (as amended and supplemented, the Indenture), between the Authority and Wells Fargo Bank, N.A. (Wells Fargo). Principal and interest on the Bonds are supported by an irrevocable direct-pay letter of credit (the Letter of Credit) issued by Wells Fargo. The Letter of Credit, however, did not extend through the life of the Bonds and needed to be renewed several times, most recently in 2021 that extended the Letter of Credit to October 18, 2024.
Wells Fargo has notified the City that it will not renew the Letter of Credit which will expire on October 18, 2024 (the Expiration Date). If the Letter of Credit is not replaced thirty (30) days prior to the Expiration Date, the Series A and Series B Bonds will be automatically subject to what is called a mandatory tender pursuant to the terms of the Indenture, will be owned by Wells Fargo and will be payable at a substantially higher interest rate (12%) than the current variable rate of approximately 3.2% for the Series A and 5.4% for the Series B. Although the City’s General Fund is not at risk to make these Bond payments and the lease payments should be sufficient to pay this higher interest rate, there would be less money available to the City from the leases to continue constructing improvements at Alameda Point, if the Bond payments were higher.
It is important to note that historically the variable rate has been as low as 1.55 to 2.5% due to the record low interest rates of the past decade. However, with the increase in interest rates over the past year, the Bonds’ interest rates have dramatically increased, and the interest payment for the variable bonds is calculated on a weekly basis. The Bonds currently carry a maximum interest rate of 12%. Additionally, it costs approximately $93,000 a year to manage the variable rate bonds with the Letter of Credit and the interest costs were approximately $289,000 annually.
DISCUSSION
Staff has determined that rather than renew the Letter of Credit with another bank, it would be more cost effective to restructure the debt using a placement transaction where the City would directly place the Bonds with a bank. Staff contacted the City’s new depository bank, JP Morgan Chase Bank, J.A. (JPMC) and it has agreed to act as a direct placement purchaser of the Bonds with very favorable terms. In-lieu of the Bonds paying interest on a variable rate basis, which under the Indenture requires a Letter of Credit and is subject to interest rate fluctuations, the new Bonds will be calculated on a fixed-rate interest basis with known annual debt service, relieving the City to obtain a Letter of Credit every three years, a process which incurs considerable additional expense. The Letter of Interest (LOI) from JPMC (Exhibit 1) offers a fixed rate of 3.73% for the Series A bonds and 4.83% for the Series B taxable bonds resulting in an approximate interest payment of $217,751 annually. Another favorable consideration is that the Bonds maturity will not be extended past their current last payment date in FY 2033-34. Additionally, in order to obtain the best and lowest interest rate, a term in the agreement requires the City to obtain approval from JPMC to issue any future parity debt secured by this revenue stream. Finally, under terms of the agreement, the City will act as the Trustee which reduces additional costs associated with housing the funds with a third-party Trustee. Although the combined not to exceed interest rate found on the attached Resolution is higher than the fixed rate described above, this is simply to provide a cushion in case interest rates dramatically shift prior to close of the Agreement. As was the City’s experience with the Aquatic Center debt, staff and the Financing team do not foresee final placement at those higher interest rates.
ALTERNATIVES
• Adopt the resolution as recommended by staff
• Do not adopt the resolution, which will require the interest rates on the Bonds to substantially increase.
FINANCIAL IMPACT
The cost of the combined debt service payments for refunding the 2003 Series A and B Bonds is expected to be approximately $920,000 per year for the next nine and a half years. The total principal paid over that time is estimated to be $7,026,000 and the total interest paid is estimated to be $1,461,000.
If City Council does not adopt the resolution, the Series A and B Bonds will be automatically subject to a mandatory tender pursuant to the terms of the Indenture, will be owned by Wells Fargo and will be payable at a substantially higher interest rate than the current variable rate. The annual interest cost of the Bonds will increase from approximately $289,000 to $829,000.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This action is in conformance with the Alameda Municipal Code and all policy documents including the City Strategic Plan Priority to Practice Fiscally Responsible, Equitable and Inclusive Governance.
This action is subject to the Levine Act.
ENVIRONMENTAL REVIEW
This activity is not a project and is exempt from the California Environmental Quality Act (CEQA) pursuant to section 15378(b)(4) of the CEQA guidelines, because it involves governmental fiscal activities which do not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment.
CLIMATE IMPACT
There are no identifiable climate impacts or climate action opportunities associated with the subject of this report.
RECOMMENDATION
Adopt a Resolution authorizing the City to enter into a Loan Agreement with JP Morgan Chase Bank N.A.to refund prior obligations to refund prior lease revenue bond obligations related to Alameda Point in an amount not-to-exceed $7,200,000 and authorizing City Officers (as Identified Herein) to execute the Loan Agreement and related documents to take any other necessary action to effectuate the loan.
Respectfully submitted,
Margaret L. O’Brien, Finance Director
Exhibits:
1. Letter of Interest, JMPC
2. Loan Agreement