HomeMy WebLinkAboutStaff Report 2891
City of Palo Alto (ID # 2891)
Finance Committee Staff Report
Report Type: Action ItemsMeeting Date: 6/19/2012
June 19, 2012 Page 1 of 5
(ID # 2891)
Summary Title: PA History Museum Business Plan for Roth Building
Title: Palo Alto History Museum's Business Plan for a Roth Building Lease
From: City Manager
Lead Department: Administrative Services
Recommendation
After the Finance Committee’s (FC) review of Palo Alto History Museum’s (PAHM) business plan
for the Roth Building and the historic tax credit program, PAHM is requesting that the FC
recommend to the Council:
1. that the PAHM be given approval to pursue a historical tax credit with an investor
and that the lease be amended to facilitate this tax credit by extending the term to
50 years and by assigning the lease to a newly formed Limited Liability Company
(LLC)
2. that the lease also be amended to permit PAHM to sublease some of the space to
for-profit institutions
Executive Summary
At the Finance Committee’s (FC) request and as a condition of its lease option agreement on
the Roth Building, the PAHM has submitted its Business Plan. Staff has generated a series of
questions on the plan and PAHM has decided to respond to these at the FC meeting of June 5,
2012. Responses to these questions are necessary to evaluate the viability of the business plan
and to PAHM moving forward with leasing and rehabilitating the Roth Building. In addition,
there are outstanding issues surround the lease option agreement that require resolution in the
near future.
Background
Background information on the Roth Building since the City’s acquisition in April 2000 as well as
interaction with the Palo Alto History Museum is extensive and long standing. After an RFP for
use of the Roth Building was distributed, Council accepted PAHM’s proposal in April 2004.
Instead of presenting the history of dealings with PAMF here, staff has attached the last City
Manager Report to the Finance Committee (Attachment A). This contains pertinent
background information and a summary of the Federal Historic Tax Credit (FHTC) Program that
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PAHM proposes to use to partially fund capital improvements to the Roth Building. Questions
from staff on the FHTC and responses from PAHM in Attachment A are most helpful in
understanding this relatively complex program.
At the October 18, 2011 FC meeting, PAHM’s consultant was present to respond to the
Committee’s questions on the FHTC. Most of these focused on the legal and business
relationships involved in structuring the tax credit. For example, further information on the
Master Tenant structure and the relationship between PAHM and the investor was requested.
In particular, the Finance Committee wanted confirmation that the City’s vision for the Roth
Building would be maintained during the 50 year lease period, particularly in the event of a
default by the investor.
In addition, the FC queried representatives from PAHM on its business plan for the Roth
Building and requested information on the projected budgets for running and maintaining
operations at the Roth Building (Attachment B – Minutes from October meeting). PAHM
responded that it was developing a Business Plan and would deliver it to the FC before
expiration of its current option to lease.
Discussion
On April 4, 2012, City staff met with PAHM to review their preliminary business plan and to take
stock of all remaining information needs to fulfill the option requirements. After the meeting,
staff sent to PAHM a series of questions on their pro-forma that would be helpful in assessing
the viability of the business plan. Staff has selected the most pertinent questions for FC
consideration (below) and PAHM responded to questions in the attachments to the May 23
Business Plan (Attachment C) and will be available to answer questions at the June 5 FC
meeting.
Revenues and Sources of Income
1. Staff believes Council gave firm direction that occupants of the Roth Building were to be
non-profits, yet a for-profit entity is proposed as a tenant. This change in direction
needs justification and discussion with Council for their approval. Does this change have
any impact on the historical credit proposal and structure?
2. Does a 5% annual lease escalation conform to other office leases in the area? This
amount is higher than the average CPI of around 3% over the last decade.
3. What is the % contingency built into the $6.3 million project cost and when was project
cost last estimated?
4. On facility rental, does $40,000 reflect competition from other local facilities trying to
generate income?
5. What is the source of grants starting at $100,000? Are the increments shown in years
2+ realistic given challenges facing grant institutions?
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6. In general, what are the Museum’s back-up plans should some of the more key revenue
assumptions not materialize e.g. grants, donations, facility rentals?
7. We do not believe “in-kind” contributions should appear as a source of revenue. By
definition, these are donations of goods and services and not cash. What the Council
and institution investing in the operation for a tax credit will want to see is the
availability of revenue (cash flow) to cover expenses. At best, in kind donations offset
potential expenses.
Expenses
8. Please inform as to level of FTE for the Admin Assistant and Archivist. We assume
Executive Director will be full-time.
9. Please check benefit rate. While it may include all of the basics like social security,
Medicare, worker’s compensation, is there the possibility of additional, if minimal,
health care coverage, especially for the Executive Director?
General
10. If there is a requirement that revenues must equal a minimum of 75% to obtain
historical credit benefits, it appears that with an $11,000 shortfall in revenue this target
would not be met. It would appear there’s not much margin for error in meeting this
target. Is the Historical Museum confident this requirement can be met over time?
11. A Finance Committee member expressed a desire to have a firm, written commitment
for occupancy of the museum by a revenue generator e.g. Chamber of Commerce. Does
Museum intend to address this?
The information requested is important to understand the ability of PAHM to renovate the Roth
Building, meet the terms of an historical tax credit agreement, fulfill the lease agreement with
the City, and to provide services to its customers. In addition to the attached pro-forma, staff is
providing a letter and information from PAHM that it wanted the Finance Committee to have
(Attachment D). It is important to note that PAHM’s consultant on the tax credit will be present
on June 19 to answer questions in this important area of the financing. This will be the first tax
credit transaction in which the City has participated.
In addition to transmitting PAHM’s Business Plan, there are a number of outstanding issues
surrounding requirements in the option to lease. PAHM and City staff met on May 23 to discuss
these issues and they will be brought to Council’s attention if they cannot be resolved.
Conclusion and Recommendation
Since the October 2011 Finance Committee meeting, two different Council Members,
unfamiliar with the Historical Tax Credit Program, have joined the Committee. While
background material has been provided, it is likely that additional questions will be raised on
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June 19 on the tax credit program as well as on PAHM’s Business Plan. A consultant will be
present to answer questions on the tax credit. While the City has not participated in this type
of financing in the past, PAHM has made its consultant available to City staff and staff believes
this portion of the Business Plan is viable.
Staff recommends that the Finance Committee meeting receive PAMF responses to staff
questions on June 19. This will provide Committee members and staff information necessary to
assess the viability of PAHM’s Business Plan. The PAHM is asking that Council allow subleases
to for-profit institutions in contrast to Council’s original direction to sublease exclusively to non-
profits. At this time, it appears appropriate to extend the lease option for another six months
(through December 31, 2012) in case the FC has additional questions on the Business Plan or
requires additional information before a recommendation is sent to the full Council.
Resource Impact
A more thorough understanding of PAHM’s Business Plan will be available once questions
posed by staff and the Finance Committee are answered. Other, potential financial issues will
be addressed when other outstanding lease questions are brought to Council’s attention in the
future.
All costs associated with exploring the historical tax credit program are being paid by PAHM.
The City may incur, however, costs for outside experts (e.g., financial advisor and legal to advise
staff and to review documents should PAHM’s historical tax credit financing plan move forward.
Policy Implications
The PAHM is requesting an exception to previous Council policy that the Roth Building be used
solely to house non-profit entities. To generate the targeted revenue level needed for the tax
credit program, PAHM is proposing in its Business Plan renting to a for profit entity.
The City’s goal of preserving the historical Roth structure could be achieved by PAHM financing,
especially since the HTC program is, by design, meant for such purpose. Although the
ownership structure proposed by PAMF and its historical tax credit consultant preserves
ownership of the land through a long-term lease, it is possible that tenants could change should
PAHM not be able to fulfill its commitments. In this situation, it is the investor and not the City
that would determine the new tenant. The Finance Committee and Council should be aware of
this possible scenario.
Attachments:
Attachment A: ID# 2197 (PDF)
Attachment B: Excerpt minutes from October 18, 2011 (PDF)
Attachment C: PAHM Business Plan (PDF)
Attachment D: Letter from PAHM Dated May 18, 2012 (PDF)
June 19, 2012 Page 5 of 5
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Prepared By: Joe Saccio, Assistant Director of Administrative Services
Department Head: Lalo Perez, Chief Financial Officer
City Manager Approval: ____________________________________
James Keene, City Manager
City of Palo Alto (ID # 2197)
Finance Committee Staff Report
Report Type:Meeting Date: 10/18/2011
October 18, 2011 Page 1 of 10
(ID # 2197)
Summary Title: Historic Tax Credit Program Use for Roth Building
Title: Palo Alto Historic Musuem's Proposal to Use Federal Historic Tax Credit
Program for Adaptive Reuse of Roth Building
From:City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee review and provide input on the Historic Tax
Credit financing plan developed by the Palo Alto History Museum.
Background
In April 2000, the City Council approved the $1,957,000 purchase of the Roth Building and its
0.41 acre site for potential development as a “public facility or alternative use if a public facility
is not feasible,” in conjunction with the South of Forest Avenue Coordinated Area Plan (SOFA
CAP).
On May 20, 2002, Council approved a Request for Proposals (RFP) and directed staff to solicit
proposals for the lease of the Roth Building. The RFP specified that: preference be given to
non-profit groups located in or serving Palo Alto; that the property be improved and operated
at no cost to the city; and that public access to the Roth Building restrooms by users of the
neighboring park be provided. In response to the RFP, one proposal was received in November
2003. The Palo Alto History Museum (PAHM) proposed to restore, preserve and improve the
historic Roth Building for use as a museum. PAHM’s proposal was accepted by the Council in
April 2004, at which time staff sent the Museum a draft Option Agreement for its review.
In February 2006, staff received the Museum’s proposed changes to the draft option including a
request that the City contribute up to $300,000 to repair leaking and drainage problems at the
Roth building. On July 10, 2006, Council created a Capital Improvement Program (CIP) for Roth
Building maintenance in the amount of $415,000 to provide funding for interim measures to
prevent further deterioration of the building until the Museum takes over the site. On May 14,
2007, Council authorized the Mayor to execute the Option Agreement and approved a City
contribution of $150,000 for repair of the leaking and drainage problems. The Option
Agreement was executed on June 22, 2007 with a twenty-four month term.
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When the twenty four month period ended, the Museum requested additional extensions
which were granted by the City Manager through December 2011. The Museum cited
difficulties with fund raising due to the severe economic downturn and was in the process of
developing a new financing plan that is discussed in this report.
On April 12, 2010, Council approved the nomination of the Category 2 Roth Building to the
National Register of Historic Places and transmittal of letter of support to the State Historical
Resources Commission. The Roth Building was recently listed on the National Register of
Historic Places, joining several other listed Palo Alto structures such as the Norris House, the
University Avenue CalTrain station and the United States Post office on Hamilton Avenue.
On March 21, 2011, in compliance with conditions of the Option Agreement and the Palo Alto
Municipal Code (PAMC) Section 18, development plans for the Museum’s proposed project
were conditionally approved for Architectural Review, Minor Exceptions, and a Conditional Use
Permit (CUP). The proposed project includes the rehabilitation of the 19,182 square foot Roth
Building and a 1,462 square foot addition for use as a museum including gallery space, office
space for museum staff, and offices for future subtenants, a community meeting room, a gift
shop, café, restrooms, archive storage space, and mechanical/ utility spaces. Minimal exterior
modifications on the east side will accommodate a public restroom and a code-required second
stairway.
On March 29, 2011, final approval of the CUP for the project was appealed in accordance with
Title 18 of the Palo Alto Municipal Code. This appeal focused on parking concerns. A public
hearing on the appeal was held on June 8, 2011 before the Planning and Transportation
Commission (PTC), which recommended that Council deny the appeal. Subsequently, the
Council accepted the PTC recommendation and denied the appeal.
Discussion
To obtain additional financing for capital improvements to the Roth Building, the Palo Alto
History Museum (Museum) has solicited the services of Christine Fedukowski Consulting (CFC).
In describing its services CFC states that it,
“works with developers, governmental agencies, community redevelopment agencies,
and investors involved in redevelopment of urban and rural communities that focus on
urban infill projects, including new construction and adaptive reuse of historic
properties. CFC works with its clients to find financing solutions for these complex
projects. Guided by the client’s strategic vision, it manages the financing process from
beginning to end, to identify sources, structure the capital transaction, and close
financing that includes federal and state historic tax credits, new markets tax credits,
other state and local government incentives, as well as conventional financing”
CFC is proposing that the Museum participate in the Federal Historic Preservation Tax
Incentives program and utilize the Historic Tax Credit (HTC) to obtain additional funds to reuse
and rehabilitate the Roth Building.
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CFC, the Museum’s Board President, and staff from Administrative Services and the Attorney’s
Office have met on several occasions to understand the HTC, its requirements, and the legal
structures necessary to fulfill all obligations. This program is complex in that numerous federal
and IRS criteria must be followed carefully and in that several different “ownership” structures
could be utilized.
The fundamental principle of the HTC program is that it provides federal tax credits to
encourage the private rehabilitation of historic structures. Under the HTC an “Investor” (such as
a bank or corporation) invests funds in an historic building rehabilitation project in exchange for
a federal tax credit. The amount and timing of such an investment is dependent on an
investor’s need for a tax credit. Per CFC, HTCs have been utilized as part of an overall financing
program for historic rehabilitation of the Fox Tucson Theater in Tucson, Arizona; the Arctic Club
Hotel in Seattle, Washington; and Mayo Building in Tulsa, Oklahoma (see response to Question
9 below for HTC use in California).
There are an array of requirements to obtain the tax credits and investor financing. The
following represent a sampling of the most important provisions (a detailed “Program
Overview” and preliminary “Proposed Roth Building Rehabilitation” can be found in Attachment
A) follows:
·The HTC can only be used by a taxpayer that owns and rehabilitates a historic
building
·Qualified buildings must by “certified historic structures” (Roth Building qualifies)
·HTC is limited to 20 percent of “qualified rehabilitation expenditures”
·The IRS requires that the project include:
o substantial rehabilitation
o qualified rehabilitation expenditures
o building must be depreciable, so it must be income producing or used in
a business
o tax exempt entities cannot lease more than 50 percent of the rentable
area…
o “economic substance” on a pre-tax basis whereby project must
demonstrate over a projected holding period of 32 years a 3 percent
return on the investor equity investment. Project must have economic
purpose beyond tax benefit by generating profits
o HTC is generally claimed in year building is placed in service
o Claimer of HTC must retain ownership for the property for at least five
years after occupancy or tax credits are subject to recapture
o HTC can be recaptured or returned to federal government if the project is
sold before the end of the minimum 5 year holding period or if the
property ceases to be income-producing
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Based on the above, intricate criteria it appears that the Museum would have to work closely
with a consultant as well as its partners or investors to comply with federal regulations. In
addition, the Museum would need to secure the legal, financial and administrative expertise
necessary to fulfill federal requirements.
In addition to the challenge of complying with all federal regulations, CFC states that “a
recurring challenge in using the tax credits is identifying an entity that can use the credits and
forming a partnership that includes that entity.” Since non-profits such as the Museum cannot
make use of the HTC, it is necessary to partner with an entity that can. The typical partner is
one that makes an equity investment in the project in return for the tax credits. CFC refers to
this as “syndication” of the tax credit. This syndication has 2 basic structures that can be
developed into different ownership arrangements. These are the “Single-Entity” and “Master
Tenant Lease” structures. In both structures a limited liability company (LLC) must be formed.
CFC states that ‘in the Single Entity, the Project Sponsor is the managing member and the tax
credit investor is the Investor Member of the LLC that owns and operates the building. Each is
allocated, according to their percentage member interest, the tax credits, and other benefits
and obligations of the project, including: 1) profits and losses; 2) depreciation; and 3) cash
flow.”
In the Master Tenant Lease arrangement, the LLC that owns the building enters into a long-
term lease with a master tenant entity. The LLC landlord would own the property (via fee
simple title or long-term leasehold interest) and passes through the HTC to the Master Tenant
entity. CFC is recommending the Master Tenant entity structure.
For more detailed information on the substance of the HTC program, please see Attachment A.
In addition, CFC has provided the following WEB sites that describe the program:
National Park Service -Technical Preservation Services: Historic Preservation Tax
Incentives. http://www.nps.gov/history/hps/tps/tax/.
Within that site: Program Summary: Click on "About the Tax Incentives" -PDF format is
in the left hand column. For more Detailed IRS Matters: Click on "IRS Connection:"
http://www.nps.gov/history/hps/tps/tax/IRS.htm (in the left hand column)
California Office of Historic Preservation:
Mills Act Property Tax Abatement Program:http://ohp.parks.ca.gov/?page_id=21412.
Based on the multifaceted aspects of the HTC program and staff’s unfamiliarity with it, several
key questions were posed to CFC. It is important to note that this would be the first transaction
involving the HTC for the City. Also based on staff’s limited research this program appears to be
more widely used in privately-owned, rather than publicly-owned buildings. It appears that in
California, the publicly-owned scenarios involve redevelopment agencies. The questions and
responses follow:
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Question 1
Recognizing the potential for additional funding for the Museum to rehabilitate the Roth
building, City staff views the tax incentive model as outlined by CFC as extremely complex.
There are numerous and strict regulations that must be followed; partnerships to be
developed; and legal questions to be resolved.At a minimum, expert consultant and legal
advice will be required to guide the Museum through the historic tax credit process and to
demonstrate to the IRS that it is compliant with the terms of for obtaining the tax credit. It
appears that consultant expertise will be required on an ongoing basis and that the Museum
will incur an ongoing cost.
Response 1
CFC has been engaged by Palo Alto History Museum ("PAHM") and continues to work on the
required materials, anticipating submitting investor proposals once there is approval of this
concept from the city staff and Finance Committee of their willingness to consider this
structure. Also, the consultant expertise is required only through closing the transaction, to
negotiate and finalize the transaction and to help put in place accounting processes and
procedures to follow after construction completion. And, most of the consultant fee is earned
and payable, if and when the transaction closes, so no significant monies are owed unless an
HTC investment is obtained.
Please note also, that using the HTC benefits does not preclude seeking other alternative
financing options -whether grants or gifts (public and private). As a matter of fact, many
organizations use the HTC investment to leverage other monies.
Although complex, with the help of the consultant, as well as the investors themselves, many
smaller, non-profit organizations in California and across the country have done this. For
example, with respect to a small group being able to successfully complete an investor
syndication,CFC has worked with, two such groups -one, a small parish in Washington, D.C.
that did a $3 million rehabilitation of 2 townhouses for use as a senior center; and the second, a
small San Antonio nonprofit in San Antonio providing early childcare that did a $6 million
rehabilitation.
Question 2
Is the Museum prepared to take on the responsibilities described above and as discussed by the
consultant?
Response 2
Yes, the museum is prepared to do this, as evidenced by engaging the consultant and bringing
capacity to its board that includes a CPA.
Question 3
Does PAHM want to pursue the HTC program or, given its complexities, pursue alternative
financing options?
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Response 3
Yes, it has analyzed the options, and concluded it wants to pursue the HTC, and also will
continue to pursue all other alternative financing options. Furthermore, PAHM has structured
its consultant agreement so that no significant costs will be incurred prior to receipt of a term
sheet, which will detail the investment terms, from a bona-fide, third-party, established Historic
Tax Credit Investor.
Question 4:
From CFC’s materials, the federal HTC program’s goals are twofold: 1) to
rehabilitate an historic building and 2) to house an ongoing enterprise capable of generating an
annual return of 2% to 3% of the amount invested in the project.This return is payable from
cash flow at the end of the year.Also, CFC states that there is a “requirement that the tax
credit investor demonstrate that the Project has ‘economic substance’ or profit motive above
and beyond the tax credit….” Has the Museum and consultant performed the financial analysis
to demonstrate that the 2% to 3% rate of return is feasible and ongoing?
Response 4
That analysis is in process, and based on preliminary projections, the project should meet these
requirements --however, the assumptions and analysis will be revised based on the final
project construction budget and post-construction operating projections, such to include lease
agreements, event rental fees, admissions (suggested donation), building operating costs, etc.
Note also that this “profit motive” is typically determined using a projected holding period of at
least 30 to 50 years, with project cash flow increasing significantly in later years (years 25 and
on).
Finally, to put this concept of “profit motive” in context, it is helpful to understand that a key
purpose of the economic substance requirement of the Internal Revenue Code,is not
necessarily to limit this tax benefit to only highly profitable ventures, but rather to preclude so-
called "sham transactions," that became prevalent prior to the 1986 Tax Reform Act, and
purposely created money-losing ventures solely as tax shelters.
Question 5
Is PAHM prepared to take steps necessary to create and follow a business model that will meet
the profile of an enterprise as described in the consultant’s discussion of the tax credit
program?
Response 5
Yes, PAHM recognizes the need to retain the business skills on staff and board necessary for
this business model. And, to specifically address the “profit-motive” IRS requirement, prior to
closing the transaction, the tax credit investor will require an opinion from tax counsel and tax
accountant that the transaction complies with all rules and regulations.
Question 6
CFC has generated a number of potential ownership structures the Museum can use to
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facilitate the HTC financing.It is unclear to staff which model is optimal and which protects the
City’s ultimate ownership of the Roth property.It appears that either the Single Entity or
Master Tenant ownership structures will maintain a to-be-created “PAHM Rehab, LLC” as the
property owner, but the question remains as to who will own the property should there be a
recapture of the tax credit or if the LLC fails to meet the IRS requirements?
Response 6
The Master Tenant structure will be used. As to the second question, the transaction structure
contemplates that City of Palo Alto is fee simple owner and enters into a long-term lease (at
least 50 years) with the LLC, the Lessee. So, that leads to the question, “what happens if the
PAHM affiliate, that controls the LLC, fails to meet its obligations to the HTC investor”? In that
event, the HTC investor could seek to remove PAHM-affiliate as controlling member, which, if
successful, would result in the HTC investor taking control of the project. However, PAHM
would take steps to mitigate possible adverse effects even if such were to occur, by providing
language in the transaction documents to insure rights and remedies with respect to potential
removal of the PAHM-affiliate as general partner, such as:
1.The HTC investor would still be bound by the terms and conditions of the lease agreement, as
well as all city requirements with respect to zoning, parking, use, etc., that are imposed on all
property owners and users.
2.While the HTC investor would require that it have the right to take control, the conditions
under which such could happen would be specifically defined, and such right could be exercised
only if PAHM-affiliate (A) were grossly negligent;and (B) such negligence had a material
adverse affect on the HTC investor. In other words, simply failing to meet attendance goals, or
generate sufficient cash flow to pay the annual return, would likely not be sufficient grounds to
remove PAHM-affiliate.
3.Typically, the HTC investment is made by a financial institution's community development
corporation, which requires that such investments be made only for projects that provide
tangible community and public benefit and/or serve the public welfare. As such, for both
business and regulatory reasons, the HTC investor’s and City’s project goals are aligned: (a)
maintaining the structure in a manner consistent with the Secretary Standards of
Rehabilitation; (b) using the building to provide space for a museum, and supporting amenities
–or similar activity –that provides community benefit, including accessibility to low-to
moderate income persons; and (c) having an overall operating strategy that supports the City’s
economic development objectives.
Question 7
CFC estimates that an equity investment of $1.08 million from an outside institution is possible.
From prior information, it appears that $4.75 million in donations has been pledged.Together
these sources total $5.85 million.The project apparently needs $6.3 million so an additional
$0.45 million is yet to be identified. Staff’s understanding is that the Museum has been asked
to identify a complete financing plan before approaching Council.What is the Museum’s plan
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for raising the additional financing?
Response 7
Additional financing will come from philanthropic contributions from major gifts from
corporations, foundations, and/or individuals. A broad-based community campaign will be
launched shortly to target approximately $250,000.
Question 8
In the current economic environment, what is the likelihood of finding a bank or corporation
willing to invest in the project for the tax credit?
Response 8
Right now, there continues to be HTC investors active in the market. And, it is this upfront work
we are doing that takes the longest. Once there is an understanding with the city as to the
required structure, we would be able to obtain a detailed proposal from the investor before the
city had to move to the next step of its approval process.
Since a key piece of PAHM’s financing plan rests on a complicated, but viable tax credit
program, PAHM staff recommend that an option extension be approved and that the Finance
Committee and the full Council have additional time to review, raise questions,and provide
input on the funding plan.
Question 9
This tax credit program is geared toward incentivizing private sector investment in historic
renovation. Can you please identify three public sector projects in California where this funding
approach has been utilized?It would also be helpful to have a specific city staff
contact/reference.
Response 9
Please see the following California projects and contacts/references:
Fox Oakland Theater, rehabilitation of historic theater and adjacent new construction using
federal historic and new markets tax credits. The Oakland Redevelopment Agency (ORA) owns
the building and entered into a long-term lease with a non-profit sponsor. ORA also provided
bond financing for a significant part of the project.
Contact: Patrick Lane, Oakland Redevelopment Agency: 510-238-7362
pslane@oakland.net.com.
Ferry Building (and adjacent Piers 1, 3, 5). Rehabilitation of piers and buildings in San Francisco
using Federal historic tax credits.
Contact: Kathleen Diehep -415-274-0536 kathleen.diohep@sfport.com
October 18, 2011 Page 9 of 10
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REA Building, Sacramento. Rehabilitation using Federal Historic Tax Credits. The rehabilitation
was done through an Owner Participation Agreement with the redevelopment agency, which
also provided financing for the project.
Contact: Roberta Deering, Preservation Director, City of Sacramento: 916-808-8259
rdeering@cityofsacramento.org
Question 10
a) This transaction appears to be more complicated than even a city-sponsored bond
financing/COPs transaction or a private-sponsored “TEFRA” bond transaction.
b) In these types of transactions, the City typically engages bond counsel and a financial advisor
with significant expertise. Will these types of consultants be involved in preparing the
documentation or is tax counsel only used to issue an opinion letter?
c) Who will pay for legal counsel?
Response 10
a) There is complexity to the HTC transaction, especially when public and/or private non-profit
organizations are involved, but it is assured that as the transaction moves forward, with the
support of the investor and project sponsor tax counsel, the City will better understand and
become more comfortable with it. This is especially true since you are familiar with bond and
COP financing. CTC believes the City will find the HTC quite simple by comparison. Moreover,
there is no financial liability on the part of the city.
b) Since there is no bond or financing provided by the City, CTC does not expect such counsel or
advisors will be necessary for the City, unless the City decides to hire such expertise. As to the
transaction documents,the investor’s tax counsel will prepare almost all documentation,
except for the PAHM-affiliate entity documents and the lease agreement between the city and
PAHM. For your approval, investor or PAHM counsel will make revisions to the lease
agreement required to comply with IRC. The investor counsel will issue the opinion letter on
behalf of the investor. Also, if you would like to engage tax counsel with HTC expertise, we can
provide referrals.
c) There is no set procedure, everything is a negotiation. Our aim, however, would be to
provide as much counsel as possible to the City, so that the City or outside counsel are
reviewing rather than creating documentation. While I've seen costs for bond counsel at
around $100,000 for the City's specific HTC aspects of this transaction (if a city chooses to
engage outside counsel), CTC expects such cost to be minimal for Palo Alto since outside
counsel would be reviewing, rather than preparing documents. The City’s counsel would focus
primarily on the city's lease agreement and its consent to assignment.
Conclusion and Recommendation
As stated above, the HTC program is new to City staff, although the program has been used in
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other California jurisdictions and the CFC and the History Museum have been responsive to
staff questions. At this time, it appears prudent for the Finance Committee to become familiar
with the HTC program, ask questions, and request additional information where needed. Staff
would then return to the Finance Committee for its recommendation on whether or not to
move the History Museum’s financing proposal on to the full Council.
Resource Impact
All costs associated with CFC are being paid by PAHM. In its current financing proposal, there
are no requests for financing from the City. The City may incur, however, costs for outside
experts (e.g., financial advisor and legal to advise staff and to review documents should PAHM’s
historical tax credit financing plan move forward.
Policy Implications
The City’s goal of preserving the historical Roth structure would be achieved by PHM financing,
especially since the HTC program is, by design, meant for such purpose. Although the
ownership structure proposed by CFC preserves ownership of the land through a long-term
lease, it is possible that tenants could change should PHM not be able to fulfill its
commitments. In this situation, it is the investor and not the City that would determine the
new tenant. The Finance Committee and Council should discuss this possible scenario.
Attachments:
·Attachment A: Public Private Partnership, The City of Palo Alto and Palo Alto History
Museum, Tax Incentives for Adaptive Reuse….(PDF)
Prepared By:Joe Saccio, Assistant Director of Administrative Services
Department Head:Lalo Perez, Director
City Manager Approval: James Keene, City Manager
10 18 2011 Finance 1
FINANCE COMMITTEE
Special Meeting
October 18, 2011
Chairperson Scharff called the meeting to order at 5:10 p.m. in the Council Conference
Room, 250 Hamilton Avenue, Palo Alto, California.
Present: Scharff (Chair), Schmid, Shepherd, Yeh (arrived at 6:43 p.m.)
Absent:
Oral Communications
None
Agenda Items
1. Palo Alto Historic Museum’s Proposal to Use Federal Historic Tax Credit Program for
Adaptive Reuse of Roth Building
Assistant Director of Administrative Services, Joe Saccio gave a brief introduction to
familiarize the Finance Committee with the Federal Historic Tax Credit Program which
the museum was proposing to receive partial funding to restore the Roth Building. He
expressed that City Staff had met with Museum Executive Board Members and a
consultant with Christine Fedukowski Consulting (CFC) to achieve a better
understanding of the program.
Christine Fedukowski, Consultant for CFC, announced her role was to bring tax credit
equity to the project and structure a financial package for the City. She noted although
the program was new to Palo Alto it was established in 1976 and reformed in 1986 to
correlate with the tax reforms. She noted prior to requesting a formal approval, her
firm would provide specific investors, terms, and structure. She stated the Council
would have seen a number of reiterations of the documentation. In order to take
advantage of the tax credit program the entity, the Palo Alto History Museum, would
need to be made into a Limited Liability Company (LLC), because to participate in the
10 18 2011 Finance 2
program they needed to be a taxpaying entity. The tax credit amount was equal to the
20 percent of the qualified costs which were costs associated with the building,
landscaping and new construction would not be qualified costs. The property owner
could claim the tax credit, they were required to own the property prior to the start of
the construction and for 5 years. She explained if the taxpayer claimed a credit but
the tax liability was less than the tax credit they could carry the credit forward for up
to 20 years and it could be carried back for one year.
Council Member Shepherd said the tax laws with the Internal Revenue Service (IRS)
were currently in flux and asked where the information was. She asked where the
responsibility towards the new LLC would be in the event things shift again as they had
previously.
Ms. Fedukowski said there were 1,037 federal tax credits and tax deductions on the
books and there were no indications of the Historic Tax Credit presently.
Council Member Shepherd asked what would happen if the laws changed.
Ms. Fedukowski said if the laws were to change the responsibility would be on the
investor. Within the document there was a section explaining, in the event there was a
recapture of some kind and the tax credit was not available because of a change in the
law, the firm would seek to put the burden on the shoulders of the investors.
Council Member Shepherd asked whether that information would be a part of the LLC
agreement.
Ms. Fedukowski confirmed it would be.
Council Member Shepherd said with respect to the rehabilitation costs, the
conversation was restricted to the building and not the land acquisition.
Ms. Fedukowski stated yes.
Chair Scharff said the Palo Alto Historic Museum was leasing the building for a term of
40 years so therefore they would be receiving the tax credit, not the City of Palo Alto.
Ms. Fedukowski agreed.
Chair Scharff asked how the City had an interest.
Ms. Fedukowski clarified the City had a role as the landlord.
10 18 2011 Finance 3
Chair Scharff asked for clarification that the Master Leasing Agreement required a
minimum of 50 years.
Ms. Fedukowski confirmed that 50 years was a typical minimum. She said for federal
income tax purposes the owner of the property needed to be deemed the taxpayer. It
had been generally agreed that a lessee who held a long-term lease holding interest
would be deemed to have ownership for federal income tax purposes. She noted there
was a threshold of a 50 year lease so if the lease was only 40 years there would be a
change and the federal government would be looking for a 50 year lease. She
mentioned the investors and the firm would be having discussions regarding who the
project sponsor was going to be, their capacity to build the museum, the ability to
complete the project on time and budget, who was on the project teams, and on a
global basis what were the community benefits.
Council Member Shepherd understood the Chamber of Commerce was planning on
becoming a tenant and asked whether they would then become a tenant of the LLC.
Ms. Fedukowski said they would.
Chair Scharff asked if the firm would be returning to the Council to inform them
whether or not the Palo Alto History Museum met the investor criteria.
Ms. Fedukowski said she could.
Chair Scharff asked for an understanding as to why the firm took over the project.
Ms. Fedukowski said because with all of the work the Palo Alto History Museum Staff
and Board Members had accomplishment to date the next step was for assistance with
financing. This was where the tax credit program came in. They needed the firms’
expertise. It was the influence the museum had in Palo Alto, the overall business plan
they had put together, and the funds they had already earned that made it an easy
decision for the firm to participate. They had also taken their plight through the
National Parks Service requirement to get the property listed on the Register which
was a huge step. They put together an eight member team on the construction side
with Vance Brown as the general contractor who was a highly recommended expert in
Historic Preservation. The firm was currently working to refine the operations and the
business plan.
Council Member Shepherd asked for clarification on an example; the cost of renovation
was $10 million and the History Museum had $6 million with a need for $4 million. That
amount came in and the outside investor received 20 percent of the $4 million as a tax
credit.
10 18 2011 Finance 4
Ms. Fedukowski corrected the statement saying if the project was $10 million the
investor would receive a tax credit on $2 million as the aggregate.
Council Member Shepherd said the investor received a tax credit on the project as a
whole even though their portion of it was $4 million.
Ms. Fedukowski said it was a significant dollar amount which was about 20 percent of
the total construction amount excluding acquisition.
Council Member Shepherd said it was approximately a $10 million investment based on
the City’s investment and the renovation costs.
Ms. Fedukowski explored the basic partnership structure of the LLC; the property seller
was at the top, the property was sold into an LLC, the managing member the investor
member, and then the tenants that leased from the LLC. The investor member would
be looking to contribute the historic tax credit equity, to receive the tax credits, and in
addition they would receive a return of two to three percent annually. At the
beginning of the partnership there would be an option that would provide each partner,
the developer and the investor, to buyout their interests at a specified period.
Chair Scharff asked for clarification regarding the investor’s right to buyout the non-
profit.
Ms. Fedukowski said the investor had the right to put its interest to the non-profit. The
investor had the right to force the non-profit to buy them out, not the other way
around.
Chair Scharff asked under what terms that would occur.
Ms. Fedukowski explained it was a negotiated price, in a typical real estate deal which
was anywhere between five to fifteen percent of the equity invested; for a non-profit
deal it could range from $5,000 to $10,000.
Chair Scharff confirmed the buyout could occur after the first five years.
Ms. Fedukowski said one of the requirements of the tax credit was the taxpayer must
own the property for five years. She noted the museum would have the right to buyout
the investor at the five year timeframe. If for some reason the investor did not
exercise their option after the five year term, the museum had the same buyout rights.
Council Member Shepherd said there would be two investors, the History Museum and
10 18 2011 Finance 5
a for-profit industry.
Ms. Fedukowski confirmed yes, that would be the structure.
Council Member Shepherd said in the agreement the two investors would own 99.99
percent of the LLC.
Ms. Fedukowski clarified the manager, which would be the museum affiliate, would
own .01 percent interest.
Council Member Shepherd said the History Museum would be a .01 percent interest
holder and the investor would come up with all of the cash.
Ms. Fedukowski said no, the investor’s cash would be equal to the 20 percent of the
tax credit allowance.
Council Member Shepherd asked how the manager member integrated their
fundraising dollars into the rehabilitation. If the managing member raised ample funds
and the property was in the tax credit arena for the required five year term, could they
then not convert back to a non-profit and out of the LLC.
Ms. Fedukowski said that was correct.
Council Member Shepherd said the tax credit was just for five years.
Ms. Fedukowski agreed and noted there was to be an option agreement so that each
partner had a mechanism to cause the investor to exit the partnership.
Council Member Shepherd confirmed that would occur only after the five year term had
extended.
Ms. Fedukowski said that was correct, the usual time was five years and two months
by the time of completion.
Council Member Shepherd said the for-profit entity would leave the project and invest
in another project elsewhere.
Ms. Fedukowski said the institutions had well established programs through their
Community Development Corporations and had regulatory obligations to make
investments in those types of private/public partnerships.
Council Member Shepherd asked how the investments were captured.
10 18 2011 Finance 6
Ms. Fedukowski said through the Community Revitalization Act. She discussed the
single entity ownership. She hoped to show how the tax credit investor and the project
sponsor, the City of Palo Alto and the Palo Alto History Museum, came together in the
newly formed Roth Building Rehabilitation LLC. The City as one of the project sponsors
was the landlord, while the Palo Alto History Museum as the other project sponsor was
the property owner or lessee who was responsible for fundraising. The funds collected
through the contributions would likely make a loan or an equity project contribution.
Between the landlord and the property owner was the property manager which was the
Palo Alto History Museum as the sole owner of the 5013C was the sole member of the
manager LLC.
Chair Scharff asked for clarification on following the money. When the LLC was formed,
he asked how would the Palo Alto History Museum get its equity contributions into the
LLC so the work could be completed.
Ms. Fedukowski said the Palo Alto History Museum would make an equity contribution
into the Rehabilitation LLC.
Chair Scharff asked how they held an equity contribution of .01 percent and yet were
able to make a contribution of $4.5 million while the star venture equity made a
contribution of $2 million, and one person received 99.99 percent and the other .01
percent.
Ms. Fedukowski understood it was a difficult scenario to consider but this project was
not typical for an LLC.
Chair Scharff asked if the IRS was satisfied with the situation of the manner in which
the LLC was set-up.
Ms. Fedukowski said yes.
Council Member Shepherd asked if this type of LLC was specifically spelled out in the
IRS code.
Ms. Fedukowski said no, but in a partnership interest it was an allocation of various
economic benefits.
Council Member Shepherd said if a donor made a contribution of $1 million to the
History Museum, the donor received a tax deduction, while the museum took the funds
to create a loan to the manager LLC.
10 18 2011 Finance 7
Ms. Fedukowski clarified there would probably be an equity contribution involved.
Council Member Shepherd said an equity contribution of .01 percent in a taxable
contribution meant they would receive deductions based on their sizable equity
contribution.
Ms. Fedukowski said as in any property statement there were revenue and operating
expenses and income. If it appeared as though there would be cash flow, there would
be other fees such as an administration fee or developer fee and those would be
distributed to the other partner to pay them for their obligation.
Council Member Shepherd asked if the obligation was to manage the property.
Ms. Fedukowski said that was correct. She said with this specific project the cash flow
would not be much to speak of.
Council Member Shepherd stated her confusion on how she could make a taxable
exempt donation that transitioned itself into an LLC.
Ms. Fedukowski said the donor’s charitable contribution was tax exempt and was going
to a non-profit organization for the purpose of rehabilitation.
Council Member Shepherd agreed but the non-profit transitioned their $5 million into
the manager LLC as an equity investment. That money would be used and mingled
with other funds.
Ms. Fedukowski said that was correct. She said this type of LLC had been practice with
both large and small groups and it was done under a corporate charter, in this case the
Palo Alto History Museum. They could not take the funds and enter into a joint
ventures partnership to develop retail outlets; the money needed to follow its purpose.
Chair Scharff asked the relevance of the Chamber of Commerce.
Ms. Fedukowski said their role would be as a tenant.
Council Member Shepherd said the History Museum itself would be a renter or would
have a lease with the City.
Ms. Fedukowski said that was correct.
Chair Scharff asked if there were real numbers for the Finance Committee to review.
10 18 2011 Finance 8
Ms. Fedukowski said there were not real numbers available yet.
Council Member Shepherd inquired as to the single entity method where there was a
need for a two to three percent return.
Ms. Fedukowski clarified the return was on the equity investment.
Council Member Schmid asked what the scenario would be if the investor and the non-
profit went bankrupt after only two years. He asked what the City’s liability would be in
that circumstance.
Ms. Fedukowski said in any lease there was a built-in clause with details on default or
bankruptcy. The landlord had the right to terminate.
Council Member Schmid asked what would occur if the non-profit closed down, the
investor went into bankruptcy, and the investor held 99.99 percent of controlling
interest in the property while the City held the 50 year lease and was the responsible
party. He asked if the bankruptcy court decide the fate of the property.
Ms. Fedukowski stated she was uncertain of the proper answer for that specific
scenario although said she would research and return with a response. She said if the
investor had the interest in an entity that held the ownership lease, the terms and
conditions of that lease recited that if the tenants went into default the lease holder or
in this case, the City had the right to terminate the lease.
Council Member Schmid asked if the ownership of the property resided with the
investor.
Ms. Fedukowski said the ownership resided with the City.
Council Member Schmid corrected the lease was held by the City and that held a
financial interest which the bankruptcy court was interested in.
Chair Scharff said the lease was of value and it would be assigned to someone else
which would not impact the City because they then would be receiving rent from that
other entity.
Council Member Schmid asked if the ownership of the lease had the ability to control
who resided with the investor, the one who held 99.99 percent of the controlling
interest.
Steve Staiger, Historian, Palo Alto Historical Association clarified if the non-profit was
unable to fulfill their obligation, the City had two interests, 1) they were the ultimate
10 18 2011 Finance 9
landlord and 2) they controlled how the building was used.
Council Member Schmid said there was a financial interest; the non-profit was required
to make a three percent payment per year with a buyout clause written for a later
period. There was no monetary connection to the timeline. He wanted to know if there
was a value placed on the property interest if the City would be financially responsible
to the investor if the non-profit defaulted.
Mr. Staiger said the building had a Use-Permit which determined the type of use that
could occur within the structure. If the investor attempted to alter the use of the
building the City would not allow it and therefore would not be financially responsible
for the investor.
Council Member Schmid asked what the City’s ultimate financial responsibility or
liability for loss was if things went wrong.
Senior Assistant City Attorney, Cara Silver noted that was a concern that had been
explored at the Staff level and it was still being reviewed; although, they felt the City
would be able to build-in certain protections within the lease agreement.
Chair Scharff asked for clarification on which lease agreement.
Ms. Silver clarified between the landlord, the City of Palo Alto and the LLC, which was
the tenant of record on the property. The protections built-in to the lease agreement
would state that the property was required to be used for the 50 years or the term of
the lease as a history museum so in the event the Roth Building non-profit entity lost
control or if a for-profit investor went bankrupt or was bought out of the partnership
their interest would be assigned. Staff felt the protections set forth in the lease
agreement would be suitable to protect the City’s interest.
Council Member Schmid said it would be helpful from a risk point of view to have a
financial prospectus for the history museum and what type of budget they had.
Ms. Fedukowski said pending approval of the matter providing that information would
be the next step. In order to get to a point where all of the numbers and the tax credit
information were in a complete package the firm needed to identify the Finance
Committee and Council’s overall willingness to pursue the project.
Council Member Schmid acknowledged most of the risk with these types of projects
was done with non-profit entities with uncertain cash-flow. He said all of the examples
given were with for-profit entities such as restaurants and caterers.
10 18 2011 Finance 10
Ms. Fedukowski said if an investor participated in the program they recognized the
entity was a non-profit and explained part of the process might be there needed to be
a sum of the equity set aside as a reserve. She noted if there was a partnership and
the revenues were such that were not able to achieve the two to three percent, that in
and of itself would not be a reason for the investor to seek control of the partnership
unless there was gross neglect on the part of the museum.
Council Member Schmid asked if going out of business would be considered gross
negligence.
Ms. Fedukowski conceded that would not be considered negligent.
Council Member Shepherd asked if the firm was looking at partners with corporate
social responsibility dollars where a company had set aside certain pieces of their
corporate status to show they were benefactoring a position in human resource
projects. She said the tax credit was not recognized and yet the corporate entities
contributing through donations were still seeking a two to three percent return on the
cash-flow. She asked if there was a way for the City to be a part of the manager LLC
scenario in order to recapture the lease and re-manage the project in the event there
was a default.
Ms. Fedukowski said even in the manager LLC the sole member would need to make
the election to have the revenues to be treated as taxable but the expenses
depreciation should more than off-set any revenue.
Council Member Shepherd asked for a scenario in selling the Roth Building.
Ms. Fedukowski noted it was ultimately a business decision.
Chair Scharff said he did not see a strong risk to the City as long as the lease was well
drawn. If the history museum did not provide their obligations, the City terminated
their lease and the building belonged to the City again.
Ms. Fedukowski clarified if the tenant defaulted, the City could terminate.
Ms. Silver agreed and added the risk appeared to be during the five year period
because after that the investor had received their tax credit and the history museum
would have the ability to buyout the investor.
Chair Scharff asked if Staff could draft a lease agreement encompassing all suspected
risks to the City.
10 18 2011 Finance 11
Ms. Silver believed so and was going to review the bankruptcy risk mentioned
previously.
Council Member Shepherd said if the City did not notify the bankruptcy court correctly
then typically there were no rights extended for the year.
Council Member Schmid asked for clarification that the funds being expended by the
investor were not considered donations because they were expecting a 36 percent cash
return which placed the City somewhat in the business world so Council could not
assume a well written lease could pull the City out. In the report provided to the
Committee the IRS rules cited it was required the project include a depreciable
building, was income producing, sustained ownership over a period of at least five
years, and supply a regular return on the investment.
Chair Scharff said those were requirements for the museum not the City.
Council Member Schmid said the IRS would only accept the tax credit program if the
project entering into the program was a profit venture on the property.
Ms. Fedukowski said the key concept was depreciable property, property used in a
trade or rental not a personal property and in this incident it would be rental property.
With respect to the return, the IRS were referring to economic self stems which were
really for taxpayer protection to avoid what were called fraud transactions. She noted
the two to three percent was calculated over a projected period of 32 years.
Chair Scharff asked for clarification on the two to three percent return, asking if there
was a certain regulation.
Ms. Fedukowski clarified whether it was a two or three percent return was a negotiated
amount.
Chair Scharff said the IRS did not have a guideline; it was typically what was
negotiated between the parties.
Ms. Fedukowski said that was correct and the typical market was two to three percent.
Chair Scharff was aware the history museum had a Use Permit and asked if the firm
was familiar with the document and what it allowed them to do. He was aware the
museum had plans to lease portions of the building to other tenants and he asked if
that was within their purview.
Ms. Silver said there was office use contemplated by the Use Permit although she did
10 18 2011 Finance 12
not believe there was currently a Café allowed.
Chair Scharff recommended reviewing the terms of the Use Permit during the
renegotiation of the lease. He felt the risk to the City was minimal, but was unclear
about the viability of the deal. He said the history museum in itself would not be
adding additional funding so in order for them to be able to make the lease payment it
came down to the other tenants.
Ms. Fedukowski said that was correct.
Chair Scharff stated he would be supportive of the project; however, there were
concerns with the amount of time the City legal team and Staff was spending without a
business plan or budget in place.
Council Member Shepherd said her perspective was the investments were in the leases
themselves not whether the History Museum collected donations or were able to raise
revenues based on events. It was the fact that they had three leases with cash flowing
to the project at two to three percent; that was the business plan.
Chair Scharff asked Ms. Fedukowski what their next steps were.
Ms. Fedukowski said they would be looking deeper into the City risks and the
bankruptcy concept. She explained there would be some importance to the revenues
collected by the museum which would also include the donations.
Council Member Shepherd said at the end of the five years the museum could
transition the LLC out since the history museum did not need the depreciation. She
asked how the City was being reimbursed for the Staff’s time.
City Manager, James Keene clarified the City would not be reimbursed for the Staff
time because the information being collected was considered part of the Palo Alto
process.
Council Member Shepherd stated her concern for the amount of Staff time being spent
on the project that had not been approved as of yet when there were other projects of
high level importance being pushed aside.
Director of Administrative Services, Lalo Perez noted there had been more time
invested on the project thus far since it was an unfamiliar process. He realized the
importance of the museum to the community so it was felt due diligence was necessary
at the $30,000 level to see what the requirements were but he understood at this point
he and his Staff needed to focus on the detail of investors, financial plan, and other
10 18 2011 Finance 13
processes. According to Ms. Fedukowski before she could move forward they needed to
receive a sense of approval from the governing body.
Council Member Shepherd asked how this project rose to the priority level with so
many other projects not getting the attention they deserved.
Mr. Perez said the nexus was the lease options and how to get to the next step to get
the museum to the long-term lease without realizing the time constraint it would
entail.
Council Member Shepherd felt there needed to be a clear prioritization list and she
recommended it go through the Policy & Services Committee. She said the City
resources were thin and there were losses in the process of budgetary cutbacks.
Mr. Keene said he understood the prior investment of Staff time it had taken to reach
where the project was being brought to the Finance Committee but with that being
said, it had reached the point where there needed to be a decision on whether or not
to move forward with it.
Council Member Shepherd asked if there should be a dollar value placed on the Staff
time being spent from this point forward so the community understood the issues were
brought before the Council and Committees and a value was placed on them.
Chair Scharff shared the concern over Staff time being spent and the concern was
raised when there were discussions of the City paying for outside experts at a premium
cost. If the museum had come before the Committee with the three tenant leases in
hand his comfort level would have been higher.
Council Member Schmid said as you look around the City and see City owned property
on long-term leases for the community good; Avenidas, the Art Center, elder people’s
homes, Little League fields and they came from a point in time when the City made a
commitment to turn property over to a non-profit. The museum was the first in a long
time and he felt it was central to the life of the community and worthwhile that Staff
did what was necessary to ensure success but he agreed there needed to be a business
plan in place to verify viability.
Chair Scharff asked what was needed from the Committee to move the project
forward.
Mr. Perez said Staff could return to the Finance Committee once they received the
business plan and had time to review it.
10 18 2011 Finance 14
Ms. Fedukowski said the Committee had provided the requested information needed to
move forward and build a viable business plan.
MOTION: Council Member Schmid moved, seconded by Chair Scharff that the Finance
Committee 1) Accept the Historic Tax Credit Financing Plan 2) Encourage the History
Museum to return to the Finance Committee with a Business Plan as soon as possible,
and 3) direct Staff to be sensitive to the amount of time spent on the Item.
Mr. Keene understood and appreciated the Council’s sensitivity to Staff’s capacity. He
informed the Finance Committee Staff did not have the resources to take actions that
would be of benefit. The driving force was the building of tremendous City asset that
had fallen on hard times and was in disrepair.
Chair Scharff requested to see signed Letters of Intent (LOI) from the intended tenants
of the building when Staff returned with the Item.
INCORPORATION INTO THE MOTION WITH THE CONSENT OF THE MAKER AND
SECONDER: Track Staff Time Spent on the Item and Present Finance Committee with
a Report of Staffing Costs to the City.
MOTION PASSED: 2-1 Shepherd no, Yeh abstain
'Progrlllll ......... .
Admission Fees
Mernberships ! §p(lciill.t;~~.6.ts ........... .
· Spea~(lr§eries,()ther . ..,
Camps, Classes, Other .
Sub·Total'
; Leasing,Mg! F~es; Sales .' j
.. Fa9i1i!x.R(lf)!.a1
. Board Room
· 6iiic:e$p~~~Xnon~pr()fiil.· i 1000 i
(lffice Space (for·profit) 'T'i3i6; :9afe§p?ge ..... ····· ..... .... . .. ;2~01
Book Store 'Archive Manaqement
· Sub·Totall
: b()n?lion~:f6~i\ljduai~ ..... . ... i'
;Grants
0
25,025"
.2,50Q:
3,500'
$31,025,
40,000.
.10,9Qo'
30,000
79,266[
§,QQOj
5,000:
27,666'
$196200'
i
PALO ALTO HISTORY MUSEUM
5-YEAR OPERATING PROFORMA: 2013 -2018
M 12
0' 0
31,795: ~3,385:
2,750 3,025 3,328 3,660
3,850, 4,235 4,659' 5,124
$34,600 $37,255: $39,782, $42,169
42,000 44,100, 46,305' 48,620 .
10,500' 11,025 11,576 12,155 ~1,~6Q 33,075 34,729' 36,465
83,160' il7,318' 91,684 96,268
6,666, 7,960; 7,500; 8,666
.. fQoQ' .~,QQO 9,000 j,006;
27,000' 27,000; 27,000: 27,000' ;
$207 160, $217518 $227794; $237508, : :
. ,
3$,990;50,000: '60,QOO! 65,000'
· Endowment Income
i
125,000 145,000, 160,000: 170,0. 6.0.'
'10 O~~~2~5~,6~bO~!~iil'~"~2~t,@00~-6~ Ii ~~ .. ~35~0~6~61' ~~'ii *+""';~f'<""~""'L,
!Benefits @
; ProfessfonalFees
· A~~2~nt(jrit~1,~gal .......... '
IT, Web Design, Book Store
• Administrative Tel(lp~ori~jll1t~rnet
Organiz(jtion§lIO!Jes.
, Postage~Supplies
Ins -0&0
Sub·TotaL
· Travef and Entertainmeflt
Sub·Total
~<lrkeiin9 .
PR.Il\dvertising ................. .
• Postage, Printing, Design
Sub·TotaL
Utilities
i:iectric, water, gas,etal ........ . .' ...... .. Sub·Totai:
Collection/Exhibits
28%'
IO,oQO; 20,000:
27,600:
117,000:
1,500~
2,000,
3,500'
2,SOO .. 306:
4,5001
.3,Q90 ;
750'
11,050:
5:000; t,OO() ,
12,000:
1~,O()():
.. 2,QQoi
6,009)
5,006;
31,000'
30,000
30,000 :
72,100
20,600:
27,810
120,510:
J,5Z§
2,000'
3,575'
... '2,625
500
4.725
3.!.1(i0;
1,000
12,000'
5:09Q;
7,350
12,350:
18,540
2,066 26,o6b.,
5,250:
45,850)
33,000
33,000
:
.. 74,2.§3i 21,218;
28,6441
124,125;
34,755
.. .. 1,§!i4:
2,000;
3,654'
,
2,756:
600:
4,961'
3,307
1,000:
12,624 .
5,500;
7,71'(
13,217:
19,467
?,1?? ?7.0QO,
5,512.
54,101 :
3~,300.
36,300'
35,797
.V36 2,000
3,736:
2,894
600:
5,209
3,473
{soD
13,676;
6,60.0;
8,103;
14,103)
39,930
39,930
1,829 ;i,oilO:
3,823,
3,639;
. 600
5,470
3,646
1,500'
14,255
6,000
8,508'
14,508,
21,462 .
'2,251'
49:000,
43,923
43,923
10,090 10,000 10,000'
20,000
Cllrator.Col1.sultant 10,000 10,000
20,000 • 20,000 • Exhibit.-.Consultant 20,000 20,000
10% increases
2,500 2,625 2,756:
32,500; 32,625 32,756:
,.!.·ln~s~u~ra;!!.n!Cec:,:e ___ --:::-;--;;:--:--c';-_-;-__ ""'~;-;-__ 2~~ __ 2~:,-_--:",2~,829::;4 ... , __ ~3""0,,,3:;c9~ ____ 5% incre.ases
Sub·Totar: 32,894 33,039
SURPLU§; $118,108 $163,241, $185,180
s
FF
GG
HH
II
PALO ALTO HISTORY MUSEUM PROJECT
Five Year Proforma KEY
A Consistent with Lease Agreement
B Survey of local area museums and historical associations
This calculation demonstrates 500 at an average membership of $50 each.
C Anticipated but, conservatively, not included in budget
D Nearby Woman's Club speaker series, as example
E Survey of local area museums
F The Museum performed survey of other area facilities for both rates and
availability. There is a scarcity of available venues in the area, and,
additionally, the Museum offers unique possibilities.
G The Museum performed survey of other area facilities for both rates and
availability.
H Non-profit office. Dedicated second floor office space (800 sq ft) is supplemented
by shared use of second floor board room, staff break room and staff shower
plus ground floor open office (200 sq ft). Rate is calculated at $2.50 sq ft.
Commercial office realtors indicate inflation rate is low, but demand is high.
3% -5% inflation range is typical.
For-profit office. Dedicated second floor office space is supplemented by shared
use of board room, staff break room and staff shower. Rate is calculated at $5.00
sq. ft.
Commercial office realtors indicate inflation rate is low, but demand in high.
3% -5% inflation range is typical.
Comment: The intention of including only non-profits in leased space is
well meaning. However, non-profits cannot typically pay market rents. The
Museum renting to another non-profit (at $2.50 -$3 sq. ft.) means one non-profit
is subsidizing another non-profit. Higher rental income from for-profit tenants
($5 -6 sq. ft.) makes our project viable for ITC investors.
J Calculated at minimal income based on interviews with local museum cafe
operators
K Calculated at minimal income based on survey of local area museums
L Established and ongoing
M Responses from local museums
N The Museum has successfully received grants, including one for $250,000 in the
fall without having a facility. We believe, based on other museums' experience,
that a functioning museum will help draw more attention and more grant monies
to support our exhibits and programs.
o Year two: $250,000 endowment @ 4% return
Year three: $500,000 endowment @5% return
Year four: $540,000 endowment @ 5% return
Year five: $700,000 endowment @ 5% return
P Full time position. Wage & Benefit Survey of No. California Non-Profit
Organizations and local survey
Q Part time.
PALO ALTO HISTORY MUSEUM PROJECT
R Part time. This has been a steady source of revenue for over 20 years
S 28% based on Wage & Benefit Survey of No. California Non-Profit Organizations
and includes a minimal benefit package
T Based on current and researched future needs
U Based on local research
V Based on current and anticipated need
W Current and anticipated
X Current and researched rates
Y Current and anticipated
Z Minimal allowance
AA Estimated based on materials anticipated
BB Estimates from local service providers
CC Estimates from local service providers
DD Estimates from local service providers
EE Estimates from local providers
FF City of Palo Alto -estimated rate based on approved plans
GG Professional consultant responses based on antiCipated need
HH Professional conSUltant responses based on anticipated need
II Estimates from local service providers
PALO ALTO HISTO Y MUSEUM
HONORARY CHAIRS
DEAN CLARK
HEWLETT LEE
WILLIAM E. ROTH
PROJECT DIRECTOR
KAREN HOLMAN
BOARD OF DIRECTORS
STEVE STAIGER
President
GAIL WOOLLEY
Vice President
DIANA WAHLER
Treasurer
BARIJARA WALLACE
Secretary
SUSAN BEALL
NANCY BJORK
GLORIA BROWN
BETH BUNNENBERG
DEANNA DICKMAN
GARY FAZZINO
MARGARET FEUER
NANCY HUBER
DOUG KREITZ
SHULAMITH RUBINFIEN
TOM WYMAN
BOARD OF ADVISORS
JIM BAER
GWEN BARRY
MARILYN BAURlEDEL
BERN BEECHAM
FAITH BELL
GREG & JULIE BROWN
LOREN BROWN
DAVID BUBENIK
CAROLYN CADDES
WANDA CAVANAUGH
MARGARET CHAI MALONEY
CAROLYN LOUGEE CHAPPELL
VICKY CHING
MALCOLM CLARK
ANNE CRIBBS
ANDY DOTY
SID ESPINOSA
MEGAN SWEZEY FOGARTY
HILLARY FREEMAN
CRYSTAL GAMAGE
DR. JIM GIBBONS
GEORGIE GLEIM
BOB GRIMM
BIRTHARVEY
ANDY HERTZFELD
LAURA JONES
JEANNE D. KENNEDY
DUDLEY KENWORTHY
HaN. LIZ KNISS
PHILLIP LEE, M.D.
MILLIE MARlO
JOYCE MCCWRE
PEGGY McKEE
JIM MITCHELL
PHYLLIS MUNSEY
BEv NELSON
ENID PEARSON
NANCY & STEVE PLAYER
EMILY RENZEL
DICK ROSENBAUM
MICHAEL SANTULLO
HON. 10E SIMITIAN
SUSAN' SWEENEY
LEONARD WARE
SAM & KIM WEBSTER
ROBERTA YEE
CONNIE YOUNG Yu
May 18, 2012
To Members of the Palo Alto Finance Committee,
In the process of creating the Palo Alto History Museum, one of the funding mechanisms
identified was the Historic Investment Tax Credit Although the process to obtain this
benefit is complex, it is worthwhile because the benefit is so large. The Museum hired
Chris Fedukowski, an experienced tax credit consultant, to execute this process. The
Museum Board hopes the following will answer any questions that the Finance
Committee might have as we seek your support for this program.
With any start-up, such as the Museum, it takes considerable effort and time to lay the
groundwork for later success. Once we were granted the Option to Lease in June 2007,
the following steps were taken:
• Work began on researching the Roth Building's history and archi tecture so it migh t be
determined eligibile for the National Register, which in turn would make the project
eligible for Investment Tax Credits. We presented an extensive set of documents and
photographic evidence that determined eligibility and the Roth Building is now listed on
the National Register of Historic Places;
• Planning began with the project architect to develop a restoration plan appropriate for
a museum in a National Register Building;
• A professional Investment Tax Credit advisor was brought on to help navigate the
necessary steps, including developing a 5-year budget as part of a package to secure an
investor;
• Architectural plans were completed, submitted to the City, and have received final
approvals from all City departments.
While the Museum Board has been very conservative in including only $850,000 in our
capital gifts estimate, the Investment Tax Credit is may be as much as $l.2M (20% of
qualified capital improvements) for the restoration of the Roth Building for use as our
local history museum.
Although the process may seem complex, the Museum is paving the way for the City to
potentially use its new understanding of Historical Investment Tax Credits to facilitate
the rehabilitation of the Downtown Post Office or Lucie Stern Community Center and
thus provide the opportunity for millions of dollars of infrastructure funding.
The Museum Board respectfully seeks your support for the Investment Tax Credit
program. It's conservative. It's significant. It can bring money to this and other City
projects.
Respectfully submitted,
PO Box 676 PALO ALTO, CALIFORNIA 94302
650.322.3°89 MUSEUM@PAHISTORYMUSEUM.ORG
Palo Alto History Museum
c/o Steve Staiger
300 Homer Ave.
Palo Alto, CA 94301
Dear Mr. Staiger,
I have prepared the following in response to your request for an estimate of the
potential lease rates for office suites that may be made available at 300 Homer
Avenue Palo Alto, the future location of the Palo Alto History Museum.
Two suites are being considered.
Suite B3
Ii Location: Floor 2 at the Homer/Bryant corner of the building
II Configuration: Five private spaces
.. Window line: Two spaces without windows, one with two small high on wall
windows, and one with one high and one typical height window
.. Entrance: Within the museum staff suite
.. Other: Shared use of break room and conference room
.. Size: Approximately 8805f
Suite B1
.. Location: Floor 2 at Channing/Waverley corner of building
.. Configuration: Open floor plan
Ii Window line: Good windows on both exterior walls
.. Entrance: Off floor 2 lobby
.. Other: Private balcony and shared use of break room and conference room
.. Size: Approximately 1320sf
Potential tenants are as follows:
Ii Suite B3: Non-profit or for-profit business entity
.. Suite B1: For-profit business entity
Non-Profit:
In addition to Suite B3 the non-profit would lease an additional approximately 200sf
on the first floor for interfacing with the public. The space would be well suited for
a non-profit needing space to meet with the public and private space for its staff. It
is estimated that the triple net market value would be in the $5.00/sfto $S.50/sf per
month range. (Under a triple net lease all operating expenses born by the landlord
are passed through to the tenant ona pro rata basis in the form of additional rent).
The total monthly rent would be about $5,400 to $6,000.
For-profit entity:
Suite B3 has identity issues for a private entity. It has a weak entry and is located in
museum not an office building. This and the poor parking would render the rate in
the $4.50/sfto $S.OO/sfrange or $4,000 to $4,400 per month.
Suite B1 would have greater appeal due to the stronger entrance and window line.
In addition, many office users prefer the open landscape configuration. The
estimated value of the spaces is $5.00/sfto $5.50/sf or $6,600 or $7,300 per month.
These are rather rough estimates in today's dollars. As the project progresses, I
would be pleased to update and refine these estimates.
Sincerely,
Steve Pierce
Owner-Broker
... <1""!"''''' 'P .. _.:.~ ",'~i ,t~" I
1", __ .1. THE ROTH BUILDING
PAL.O AL. TO HfZSTORY MUSEUM + OJ
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PALO ALTO HISTORY MUSEUM PROJECT
Historic Preservation Investment Tax Credit Program Described
The Federal Historic Preservation Tax Incentives Program began in 1976 as a
way to encourage private investment in America's downtowns at a time when they
were suffering. Strip mall development was diverting business away from core
business districts. Recognizing that downtowns commonly were comprised of historic
buildings, a plan was developed to incentivize the restoration of the business core.
The program was later expanded to allow broader community investment.
One of the federal government's most successful and cost-effective community
revitalization programs, the Preservation Tax Incentives reward private investment in
rehabilitating historic properties such as offices, rental housing, and retail stores.
Abandoned or under-used schools, warehouses, factories, churches, retail stores,
apartments, hotels, houses, and offices in many cities have been restored to life in a
manner that retains their historic character.
The Federal Historic Preservation Tax Incentives program encourages private sector
investment in the rehabilitation and re-use of historic buildings. Each year, approximately
1000 projects qualify for the Credits, leveraging nearly $4 billion annually in private
investment in the rehabilitation of historic buildings across the country. A local example
of a project that utilized tax credits is 520 Ramona Street, former site of Chantilly
Restaurant.
The Tax Credit is calculated at 20% of the project's qualified preservation costs.
6,
Museum
flltr iger
BASE the new homE; H
new design
analys1s sho\'lis
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;1 '21){jj,~J i~nEaSUr\~
PALO ALTO HOUSING
725 Alma Street· Palo Alto, CA 94501 • (650) 321-9709 • Fax (650) 321·4341
November to, 2011
Mr. Steve Staiger
Palo Alto History Museum
P,O. Box 676
Palo Alto, CA 94302
Re: Letter of Intent to Lease Parking Spaces at 2501270 Homer, Palo Alto to History
Museum/Chamber of Commerce ~.
Dear Mr. Staiger
This Letter ofIntent signifies Palo Alto Housing Corporation's (PAHC) interest in leasing up to
12 parking spaces to the History Museum/Chamber of Commerce. The parking spaces are
located in the underground garage at 2501270 Homer in Palo Alto and are currently assigned as
guest parking for Oak Court Apartments. At this time, Oak Court is sufficiently parked for both
its residents and guests. Hence, we are pleased to be able to share our space with the exciting
museum.
As discussed during preliminary meetings with staff at Palo Alto Housing Corporation (PARC)
and the History Museum, these parking spaces will be leased in the fall of20]2 with the
completion of construction of the History Museum. Parking spaces will be leased for employees
of the History Museum and Chanlber of Commerce at a rate consistent with that charged by the
City of Palo Alto lots. Specifics of the rental agreement, including the indemnification
agreement & insurance requirements, etc, will be finalized prior 10 commencement of the rental
period.
Thank you for your interest in leasing these parking spaces and we look forward to working with
your agency. Should you have any questions or concerns, please contacts do not hesitate to
contact us.
Sincerely,
PALO ALTO HOUSING CORPORATION
~ Candice R. Gonzalez
Executive Director