HomeMy WebLinkAbout2012-03-21 PACKET 08.B.REQUEST OF CITY COUNCIL ACTION COUNCIL AGENDA
MEETING ITEM #
DATE 3/21/2012
PREPARED BY Administration Ryan Schroeder
ORIGINATING DEPARTMENT DEPARTMENT HEAD
COUNCIL ACTION REQUEST
1. Consider approving the transfer of operation for 7516 80th Street to the EDA for $400,000
in consideration with inclusion of an exit strategy outcome of return of any future profit
residuals to the City Building Replacement Fund, with the transfer effective on or around
November 1, 2012. 2. Consider approval of the nominal rental approach to operation of the
Business Accelerator. 3. Consider approval of the Tapestry Management Contract for building
management and brokerage.
STAFF RECOMMENDATION
1. Approve the transfer. 2. Approve the nominal rental approach. 3. Approve the building
management and brokerage contract.
SUPPORTING DOCUMENTS
® MEMO /LETTER: Memo from Ryan Schroeder.
❑ RESOLUTION:
❑ ORDINANCE:
❑ ENGINEERING RECOMMENDATION:
❑ LEGAL RECOMMENDATION:
® OTHER: Attachments.
ADMINISTRATORS COMMENTS
'jn i
Administrator Date
COUNCIL ACTION TAKEN: ❑ APPROVED ❑ DENIED ❑ OTHER
Document2
City of
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To: Cottage Grove City Council
From: Ryan R. Schroeder, City Administrator
Danette Parr, Economic Development Director
Date: March 15, 2012
Subject: Cottage Grove Business Accelerator, 7516 80 Street South, Cottage Grove
The City of Cottage Grove has been in the business of business expansion and job creation for
most of its history. Most recently this has been exemplified by creation of the business park
development effort which began in 1997 along with creation of the Gateway Redevelopment
(commercial) District as a joint venture with the EDA on March 28, 2001. Since that time the
City has developed or redeveloped almost 2 million square feet of commercial and industrial
space; almost $100 million in market value, while facilitating the creation of over 1,000 jobs.
Almost all of that activity involved working with second and third stage "going concerns" in
growing their businesses to the next level.
From time to time the EDA and Council have pondered how best to assist early stage
companies in achieving a foothold in the Cottage Grove market. This is a much more difficult
task as, frankly, the numbers just do not work. These early stage companies often are
undercapitalized, do not have solid long term banking relationships, and cannot afford to buy
or lease a presence in a market rate space. The City currently has a seldom available
opportunity to positively address a portion of the early stage need; that being affordable office
and quasi office space within the property at 7516 80th Street South (current City Hall).
The City of Cottage Grove awarded bids for the construction of the new City Hall facility on
September 21, 2011. Once the timeline was known for relocation of personnel from the 7516
building the City began the task of identifying an encores use for this property located at the
periphery of the Gateway District. As fully vetted through the space needs and design
development process for the new City Hall at 12800 Ravine Parkway the current facility has
been well maintained and has the potential for reuse. The issue of relocation of City staff from
the 7516 building was one of overcrowding and functional obsolescence and not one of
systems or structural deficiencies.
In June 2011 the Economic Development Authority Board (EDA) began reviewing the proposal
to convert 7516 to a Business Incubator /Business Accelerator. The EDA created a team led
by Board member Paul Poncin to research metro area incubator facilities, to meet with
operators of these facilities, and to attempt to determine capital outlay needs of the current
building necessitated in the repositioning of the building within the marketplace.
In July EDA representatives began meeting with operators of business incubators within the
Twin Cities. Ultimately proposals to provide for management of a City facility were brought to
the EDA in November at which time the EDA directed negotiations with Tapestry Management.
A draft contract was provided in December; a contract approval was gained in January at
which time the EDA also directed an appraisal on the property at 7516. This appraisal was
received on March 5, 2012. At the EDA meeting of March 13, 2012 the Board approved a
transfer of the property to the EDA for $400,000 in consideration. The Board also approved a
project Proforma with a target $6 /square foot average gross rent. It is requested that Council
ratify both of these actions plus the prior management contract approval by the EDA with
Tapestry Management.
What is a Business Accelerator?
There are many different types of Business Accelerators (sometimes referred to as Business
Incubators) in existence. According to the National Business Incubation Association (NBIA),
there are more than 1,400 business incubators in North America, each providing a variety of
economic, technical, and other support resources for entrepreneurs. As Council is aware,
starting a new business or expanding an existing business can be challenging. The point of a
Business Accelerator is to provide a supportive environment that fosters success with things
such as business coaching, marketing assistance, networking activities, rents below market
rate, possible links to investors /strategic partner linkages, synergy between participants,
technology, and general office needs. The hope is that supporting these businesses will help
ensure their success. Ultimately, the guiding principle is that the business will prosper and
grow to the point where they will need to relocate to accommodate that growth. Having already
established a relationship with the business through the Business Accelerator, the City is at an
advantage in encouraging the growing business to remain in the City and fill a vacant
space /site within an existing market rate office or business park location. In return, the City is
rewarded with growing businesses that provide increased job growth, a diverse tax base, and
an opportunity to further promote economic development in the Cottage Grove market area.
Would a Business Accelerator support the economic development goals of the City?
The Business Accelerator would support many of the City's economic development goals
through the following short and long term objectives:
Short Term Objectives
• To repurpose the 7516 building
• To provide space for start -up companies or future expanding companies that may not
qualify for traditional rental space.
• To provide a place where new or expanding businesses can receive supportive services
that encourage their chances of success shorter term than otherwise probable
• To provide an opportunity to create public and private partnerships
• To offer an alternative location for current Cottage Grove home occupations that have
grown beyond the home occupation classification and may no longer be in compliance
with zoning regulations or compatible in a residential setting.
Long Term Objectives
• To provide an opportunity for the City to foster relationships with the businesses located
within the accelerator, which increases the likelihood that they will remain in the Cottage
Grove market and expand into the business park or a market rate office space within
the community
• To create an opportunity to spur even more public and private partnerships
• To provide a place where new or expanding businesses can receive supportive services
that encourage their chances of success long term
• To foster an image of innovation to others outside the community and attract farther
reaching economic development
The mission of the City's EDA is to work with its partners to encourage business and industry,
and the creation of quality jobs in the City of Cottage Grove using all tools and methods that
are appropriate. The Business Accelerator is one of the methods that should be considered
due to the fact that it closely aligns with elements of 2012 EDA Work Plan and the following
2007 -2012 EDA Goals:
• Attract new industries to bring an enhanced tax base, quality jobs and new capital into
the region. Work toward completing build out of the business (sic) park;
• Successfully become one of the first communities mentioned as a choice business
location; one that enthusiastically supports economic development as essential to
improving quality of life; one that provides ease of process and has the technology
needed for the upcoming business needs;
• Influence local, regional, and state issues critical to business site location decisions and
overall business climate.
Who would be responsible for the daily functions of the Business Accelerator?
Three management companies were considered for the important role of managing the
Business Accelerator. After meeting with the three companies and reviewing proposals,
Tapestry Management, LLC was the recommended management company. In addition to
Tapestry Management, LLC the City's Economic Development Team would provide support as
needed and maintain contact with Accelerator participants on an ongoing basis.
As part of further evaluating the Business Accelerator, the EDA considered alternative
approaches to this proposed venture. Staff has evaluated these options and it appears that
there are basically three options. Each option takes a different approach and is explained
below:
Option One: Market Approach
Within the enclosed summary appraisal Report (BRKW March 5, 2012) is included an
assumption of revenues of $185,278 with net rents at $8 for upper level, $7 for lower level and
$4.50/$6.50 for storage /garage and quasi office spaces. Common Area maintenance charges
(CAMS) would be in addition to these net rents. Staff has presented that CAMS for 2013 and
2014 would likely be $92,201 and $149,367 respectively. Those charges translate to $3.39 and
$5.49 /square foot upon the assumption of 27,216 square foot leased space (basically a single
entity lease). The result is a net rent on average of $10.20 /SF in 2013 and $12.30/SF for 2014.
Gross rents among the market comps provided average $19.13 including CAMS of $8.33 on
average. BRKW adjudged that the 7516 building could not command market rents due to its
level of finish at below market levels. BRKW adjudged gross rents for the 7516 building at
$15.14/SF in order to make an income approach judgment of property value. Upon the
assumptions of this revenue stream minus expenses as provided by the City BRKW is
adjudging that the market value of this property is $1.3 million.
The EDA has not been pursuing operation of this building from a market approach. The
thought process has been that operating this building from a market approach would compete
directly with privately held office and quasi office facilities already within the marketplace.
Further, such an approach would not be responsive to the desire to provide an affordable
business accelerator format. This approach, therefore was discarded by the EDA.
Option Two: Discounted Market Approach
Within the summary appraisal is a project proforma (revised) that suggests project
revenues /expenditures at gross lease rates including CAMS somewhat discounted from the
pure market approach. Rents within this approach were selected to provide a level of rent
discount and at the same time provide the opportunity to break even by 2015. The staff
assumption also included that not every square foot of the building was leasable. We also
assumed that there would be a lease up period at 35% leased in 2013, 55% leased for 2014,
75% leased for 2015 with 95% leased at 2016 and beyond. Resulting leased space, total
revenue and gross rent per square foot (including CAMS) is as follows:
Essentially, the Discounted Market Approach for 2014 results in a gross rent of $9.19/SF
average which is about a 25% discount from market. This is the approach that the EDA had
been initially pursuing.
Option Three: Nominal Approach
The City has the opportunity to consider a third approach toward providing below market rents
for the Business Accelerator Tenant. There is a provision within state law that if the public
entity charges nominal rents for use of the public property the tax classification of the property
is handled differently than is the case in the above two approaches. If the rents are sufficient to
cover operating expenses but do not attempt to cover debt service or to provide a profit
opportunity the property is not subject to property taxes for a period up to eight years.
Operation of the Business Accelerator under a nominal approach would allow the opportunity
for the proforma expenses to be reduced by $51,000 in 2014, $53,550 in 2015 and $56,228 in
2016.
Under the nominal approach we would be provided the opportunity to cover administration and
marketing, communications, utilities, maintenance and operations, insurance, management
fees and lease commissions within the gross rents (essentially the CAM charges). Under this
approach, and assuming the same lease up rate as in the second approach the resulting gross
rent/square foot is proposed as follows (assuming a slightly accelerated lease up projection
given the more favorable rent):
:T Vital
# ei+ert ie , ,
Ave
f3entlSF
...
2013
7,518 SF
$ 61,572
$ 8.19
2014
11,814 SF
$108,570
$ 9.19
2015
16,110 SF
$164,160
$10.19
2016
20,406 SF
$207,936
$10.19
Essentially, the Discounted Market Approach for 2014 results in a gross rent of $9.19/SF
average which is about a 25% discount from market. This is the approach that the EDA had
been initially pursuing.
Option Three: Nominal Approach
The City has the opportunity to consider a third approach toward providing below market rents
for the Business Accelerator Tenant. There is a provision within state law that if the public
entity charges nominal rents for use of the public property the tax classification of the property
is handled differently than is the case in the above two approaches. If the rents are sufficient to
cover operating expenses but do not attempt to cover debt service or to provide a profit
opportunity the property is not subject to property taxes for a period up to eight years.
Operation of the Business Accelerator under a nominal approach would allow the opportunity
for the proforma expenses to be reduced by $51,000 in 2014, $53,550 in 2015 and $56,228 in
2016.
Under the nominal approach we would be provided the opportunity to cover administration and
marketing, communications, utilities, maintenance and operations, insurance, management
fees and lease commissions within the gross rents (essentially the CAM charges). Under this
approach, and assuming the same lease up rate as in the second approach the resulting gross
rent/square foot is proposed as follows (assuming a slightly accelerated lease up projection
given the more favorable rent):
2013
11,814 SF
$ 70,884
$6.00 /SF
($21,317)
2014
16,110 SF
$ 96,660
$6.00 /SF
($1,707
2015
20,406 SF
$122,436
$6.00 /SF
$17,236
2016
21,480 SF
$128,880
$6.00 /SF
$17,602
Net:
$11,814
Note: in this scenario our revenues would be projected to exceed nominal expenses in the
fourth year which would either result in a rent reduction or an ability to cover additional
operating expenses.
Rents in all three options are projected as average rents. In the case of the option three
(nominal rents) we would have the opportunity to lease space above the nominal rent similar to
what presently occurs at the YSB building. Tenant spaces leased above nominal rents would
be subjected to a property tax bill. It is estimated that for these spaces the tax bill would be
within the $2 to $3 /square foot range. These leased spaces would have to be incidental to the
primary character of the building.
In sum we have the following for gross rent options:
Option One: Market Rent averages $15.14 /square foot (w/$19.13 market comp)
Option Two: Discounted market rates: $8.19 /square foot trending up to $10.19
Option Three: Nominal rent rates: $6 /square foot
The EDA approved the nominal approach (option three) as most directly responding to the
EDA mission and the vision for the Business Accelerator. EDA direction has been to convert
the 7516 building to one which provides an opportunity to grow businesses within the
community while breaking even within a reasonable period of time. Both options two and three
provide for a projected break even in 2015. Option three, however, has the added advantage
of providing a facility with lower rents for the end user than are projected within option two.
These lower rents would, furthermore, reinforce that the building is not intended to compete
directly for the same tenants that would typically be candidates for privately held office and
quasi -office space within the market. It should be noted, however, that even as we make this
statement there is the potential of direct competition although it would be our intent to limit
such to incidental situations.
Project Ownership Options
Private Sector Ownership:
We have not pursued this option to any great extent, however, one of the firms expressing a
management contract interest had also expressed a desire for a purchase option. The most
significant downside of this option is that the profit motive inherent in this model necessarily
begets that either rents would need to increase significantly or that the City or other third party
would need to subsidize the operation. Further, with this option under an Accelerator model
there would not be an expectation that the City would have a future opportunity to liquidate the
asset with a market return.
City Ownership:
7516 80th Street is currently owned by the City's General Fund and could certainly continue as
such. However, from an operational accounting and auditing position, the business purpose of
this proposal suggests a transfer of ownership to the EDA (a component unit of the City). Such
a transfer would allow for a cleaner transaction trail and a more transparent picture of
revenues and expenditures as a separate operation of the EDA. If kept as a division in the
General fund, segregation of the revenue stream and matching the appropriate expenditures
could be less apparent on the monthly and annual financial reports.
EDA Ownership:
It is recommended by staff and the EDA that the City Council transfer ownership to the EDA for
the reasons noted above. If Council is in agreement with this recommendation, there remains
the question of financial consideration that would transfer in the process. The options include:
1. A grant of the property to the EDA without any financial consideration. This option does
not provide the opportunity to consider if a consideration transfer offers any advantages
or disadvantages to the City operation.
2. The City could require the EDA to provide consideration commensurate with the Income
Approach to market value pursuant to the BRKW appraisal. This approach would
disregard the fact that the EDA is not making market use of the property (which means
the Income approach value is not supported in the consideration demand). Such an
exchange would need to disregard the normal marketing expense and holding costs
discount that an arm's length purchaser of the property would demand for a vacant
building of this type.
3. The City could accept the present value of the 2017 stabilized value within the BRKW
appraisal ($195,000). This approach would need to disregard the value of removable
fixtures (ff &e) and the value of the land. We are presently estimating that removable
fixtures have about a $200,000 value.
4. The City could view the transfer as a land acquisition. In reviewing this option the
County Assessor's office agreed that a land value of $4 /square foot would not be
unexpected. As a land banked property in an arm's length transaction the purchaser
would view the building demolition costs as a consideration in the transaction meaning
that a $400,000 acquisition cost might reasonably be anticipated (land value of
$451,000 with a deduct of $50,000 for land clearance).
Given that the proposal is to convert 7516 to a project that can only cover CAMS (not debt
service or acquisition expense) and given that BRKW adjudged that option to result in a
nominal present value of $195,000 (plus fixtures) and given that we estimate the fixtures to
have a value of $200,000 resulting in a total value of $400,000 and given that this value is
similar to that which would be anticipated as a cleared land value we are recommending any
consideration exchange be at $400,000 (see exit strategy). (Note: the project proforma
assumes additional capital investment/infusion into the project for additional tenant
improvements).
A Business Accelerator must be viewed in a different context then is often utilized in a
traditional business model. It is an economic development tool that may not readily show
success in initial years of inception. In addition, when success is apparent, it may not be
possible to calculate it in the same way. For instance, how do you calculate /quantify a
reputation as being a business friendly City and a premiere destination for businesses to locate
in the future?
The approach needs to be longer term and with an understanding that some determinants of
success don't reveal themselves until much further in the future when a business has
"graduated" from the Business Accelerator and has fully established itself. For that reason, the
City should look at this proposal as a three to five year commitment (minimally). After three to
five years the Business Accelerator should be fully evaluated to determine if it remains
supportive of the City's goals. Ultimately, if it's determined that this venture is no longer
supportive of the City's goals and that the building should instead be sold to a private party, it
will likely be more profitable. In three to five years the economy is forecasted to have improved
and the building would likely be occupied, thus making it more desirable for a future building
owner. However, if the venture is successful, it could also be an opportunity to expand the
enterprise. If approved, the City will want to establish benchmarks and determining factors that
can be used in evaluating the success level of the Business Accelerator at the determined
future time. That benchmarking could include lease up rate /vacancy rate, operating position,
quality of tenancy, graduation of tenancy to other opportunities within the Cottage Grove
market.
Occupancy and Outcomes:
1. 50 employees at $20 /hour average wage with projection of $2.1 million in annual payroll
at full occupancy
2. Goal is to graduate Accelerator Businesses to private space as a long term job creator;
goal is a three year graduation but this is not a lease requirement
3. Renter is early stage without an expectation that tenants have sufficient liquidity to
qualify for market rents and leases in privately held buildings within the marketplace.
4. Operating expenses of the building are the responsibility of the EDA and will be part of
the gross rents. Capital expenses are funded by the EDA and /or third party funds
5. First priority tenant is early stage job creator in clean industries /services as allowed for
within the zoning of the property; technology fields and firms providing service to these
fields are first target market; expectations of future job growth will be evaluated
Exit Strategy
1. Remarketing Options:
The EDA had opined that if the Business Accelerator is not successful within a
reasonable time period the EDA needs to have the opportunity to recover its
investment. The most straight forward of these would be to place the facility on the
market in an attempt to recover whatever level of investment would have been made at
that point in time. An unknown at this point would be the condition of the building and
the level of occupancy. It could be the case that a portion of the building would be
leased (at nominal rates). Any leases in place that were not easily termed would result
in a deleterious effect on pricing.
2. Redevelopment Options:
A second option would be to raze the building (with Council approval) for a
redevelopment opportunity. In this circumstance the EDA would also have an
opportunity to attempt investment recovery although absent project revenues such as
TIF recovery of the total investment may actually be less likely if land values continue
where they appear to be at present.
3. Transfer ownership to a third party incubator operator:
This option would be similar to the Genesis business model that the EDA had rejected
as a preferred model at present.
Proposed: It was proposed by the EDA that any remarketing of the property or conversion of
the asset to cash result in reimbursement to the EDA to the extent of their investment.
Residuals beyond investment coverage would be returned to the City Building Replacement
Fund.
Council Action
1. Approve transfer of operation for 7516 to the EDA for $400,000 in consideration with
inclusion of an exit strategy outcome of return of any future profit residuals to the City
Building Replacement Fund. Transfer would be effective on or about November 1, 2012.
2. Approval of the nominal rental approach to operation of the Business Accelerator
3. Approval of the Tapestry Management, building management and brokerage contract
Attachments
1. Agreement with Property Management
2. Market Proforma
3. Nominal Proforma
4. Appraisal
MANAGEMENT AGREEMENT
THIS AGREEMENT made as of this 21st day of March, 2012, is by and between The
City of Cottage Grove Economic Development Authority, a municipal corporation, hereinafter
referred to as "Owner" and Tapestry Management LLC ( "Tapestry"), a Minnesota Limited
Liability Company, hereinafter referred to as "Manager."
WHEREAS, Owner owns real property located at 7516 80 Street South, Cottage Grove,
MN 55016, and which property and improvements will hereinafter be referred to as the
"Building;" and
WHEREAS, Owner and Manager are desirous of entering into an agreement whereby
Manager will manage the day -to -day affairs of the Building on behalf of the Owner;
NOW THEREFORE, in consideration of the mutual covenants, promises and conditions
hereinafter set forth, it is agreed as follows:
ARTICLE 1. Exclusive Agency
Owner hereby appoints Manager as the sole and exclusive Manager of Building
under the terms and conditions hereof and Manager hereby accepts such appointment.
ARTICLE 2. Term
The term of this Agreement shall commence as of March 21, 2012 and shall
continue until December 31, 2013.
ARTICLE 3. Termination
This Agreement can be terminated by either party with or without cause upon
ninety (90) days' written notice during the initial term or any renewal thereof. Upon termination,
Owner shall remain bound by the obligations of all contracts for services, supplies, and
396532v2 CA14 CT1554
alterations, which Manager has entered into in connection with the performance of its obligations
hereunder.
ARTICLE 4. Management of Building
A. Obligation of Manager Manager shall manage the Building in an efficient
and business -like manner having due regard for the age and physical condition of the
Building. Manager, through its employees and independent contractors, shall supply
complete operational services for the Building. Manager shall begin selection of
personnel and subcontractors immediately upon execution of this Agreement.
B. Budget Manager shall submit to Owner an operating budget for the
Building no later than June 1, of each year during the term hereof. Such budget shall be
for the next calendar year. The budget, with such changes as may be agreed upon by
Owner and Manager, shall be approved in writing by Owner prior to commencement of
the calendar year to which it pertains. Manager recognizes the unique nature of certain
restricted funds of Owner. Manager will work with Owner or Owner's designated
consultant to develop the budget for the operation of the property. Owner is responsible
for the compliance of all disbursements of restricted funds.
C. Repairs Manager shall, in the name of and at the expense of Owner,
make or cause to be made such ordinary repairs and alterations as Manager may deem
advisable or necessary from time to time. However, not more than one thousand dollars
($1,000.00) shall be expended for any one item of repair or alteration without Owner's
prior written approval except emergency repairs if, in the opinion of Manager, such
repairs are necessary to protect the Building from damage or to maintain services to
tenants as called for in the leases. For non - emergency repairs that exceed $1,000
Manager shall obtain three (3) competitive bids for Owner's consideration, unless need
for bids is waived by Owner.
396532v2 CAH CT155 -4 2
D. Service Contracts Manager shall, in the name of and at the expense of
Owner, contract for those utilities and other Building operation and maintenance services
Manager shall deem advisable; provided however, that no service contract shall be for a
term exceeding one year without the prior written approval of Owner. Manager shall, at
Owner's expense, purchase and keep the Building famished with all necessary day -to -day
supplies. All expenses shall be charged to Owner at net cost and Owner shall be credited
with all rebates, refunds, allowances, and discounts allowed to Manager.
E. Expenditures All expenditures authorized by this Agreement shall be
considered operating expenses to be paid from Owner's funds received by Manager. In
the event disbursement shall be in excess of the rents collected, Owner agrees to pay such
excess promptly on demand, provided the expenditures are within the approved budget.
F. Monthly Statements Manager shall render to Owner a statement of
receipts and disbursements for the preceding month by the twentieth (20th) day of each
month. The statement of receipts and disbursements will include monthly financial
reports for Building operations. 'Manager shall, after deducting its compensation and any
other sums due it from Owner, hold or expend such sums as Owner may direct in writing
and shall remit the balance to Owner.
G. Collection and Segregation of Funds Manager shall collect the rent and
other income from tenants of the Building. All funds received by Manager for or on
behalf of Owner, less any sums properly deducted by Manager pursuant to any of the
provisions of this Agreement, shall be deposited in such bank as may be designated from
time to time and shall be placed in a special account maintained by Manager for the
deposit of funds of Owner. The funds shall not be mingled with the funds of Manager.
Manager is not responsible for any loss to Owner as a result of misconduct or insolvency
of the bank so selected by Owner.
396532J2 CAH CT155 -4 3
H. Bonding Employees All employees of Manager who handle or are
responsible for Owner's funds shall be bonded by a fidelity bond in an adequate amount,
not equaling less than $500,000.
I. Payment of MonthlyExpenses Manager shall pay interest or
amortization on tax assessments, premiums on insurance or reserves for such items in
accordance with the approved budget or as designated in writing by Owner.
J. Special Services At the request of Owner, Manager will perform the
following special services for Owner as follows:
(i) Supervise capital expenditures for tenant and building
improvements for a fee equal to five percent (5 %) of the
construction cost for each project. ;
(ii) Provide special accounting services, beyond those described in this
agreement. ; and
(iii) Act as property consultant.
If such special services are provided, additional fees shall be payable in an amount agreed
upon between the parties in advance.
K. Legal Proceedings Manager shall, at Owner's request and expense,
engage legal counsel approved by Owner and cause such legal proceedings to be
instituted as may be necessary to enforce payment of rent or to dispossess tenants.
Manager shall have the authority to compromise disputes with tenants involving set -offs
or damage claims so long as the amount involved does not exceed one (1) month's rent
payable by such tenant, or $5,000, whichever amount is less.
L. Enforcement Manager agrees to use its best efforts to enforce the
provisions of the various leases in effect between Owner and its tenants.
396532v2 CAH CT155-4 4
M. Marketing Duties. Manager's normal duties will include prospect tours of
the property, assistance in qualifying prospects, and lease negotiations. Manager's duties
include the development and implementation of a marketing plan for the property, with
approval of the owner.
ARTICLE 5. Management Fee, Leasing Fee and Reimbursement
As compensation for management of the Building, Owner shall pay Manager a
fee equal to 4% of property revenues per month, based on an $8 per square foot average rent rate
for all leased space. As compensation for leasing of the Building, Owner shall pay Manager a
fee equal to 6% of the gross rent for the term of the lease, based on an $8 per square foot average
rent rate for all leased space. The Owner must approve lease terms and duration prior to tenant
signing the lease agreement. For month to month leases, the fee shall be one month's rent.
Commissions are payable upon execution of the lease.
Owner agrees to reimburse Manager for all out -of- pocket expenses that relate
directly to Manager's obligations under this Agreement, including reimbursement for all payroll
expenses as provided in the approved budget. Owner agrees that all amounts due Manager for
fees and services provided under this Agreement shall be made via Automated Clearing House
(ACH), or similar electronic, transfer.
ARTICLE 6. Employees of Manager
All persons employed in the operation of the Building shall be employees of
Manager or an entity controlled by Manager and not employees of Owner. Manager shall make
disbursements and deposits for all compensation and other amounts payable with respect to
persons who are employed in the operation of the Building, including but not limited to,
unemployment insurance, social security, worker's compensation, and other charges imposed by
a governmental authority or provided for in any union agreement. Manager shall maintain
complete payroll records. All payroll costs, including but not limited to those enumerated
39653242 CAH CT155 -4 5
herein, are operating expenses to be reimbursed to Manager from Owner's funds received from
Manager. Manager agrees, however, that the following employees or contractors of Manager
shall be paid by Manager from its fees and their wages, salaries, and other expenses shall not be
reimbursable to Manager from the Owner: regional property manager, corporate office
accounting and secretary, all manager's corporate office overhead, all accounting expenses
(excluding outside audits), a maintenance engineering supervisor, if any.
ARTICLE 7. Indemnification and Insurance
A. Indemnity Owner agrees to indemnify and hold Manager harmless from
any and all claims or causes of action for injuries or death to persons or damage to
personal property by reasons of any causes whatsoever in or about the Building which
arise out of or are in any way connected with Manager's duties under this Agreement, and
while acting as Manager, except that Owner shall have no obligation to indemnify
Manager if Manager's actions or inactions constitute willful misconduct or gross
negligence.
Owner also agrees to indemnify and hold Manager harmless from and against any
liability in cases where claims are asserted against the Manager by third parties,
specifically including the attorney's fees incurred by Agent for its own counsel, arising
out of or in connection with any claim asserted against Manager arising out of the
performance of Manager's duties hereunder, except that Owner shall have no obligation
to indemnify Manager if Manager's actions or inactions constitute willful misconduct or
gross negligence.
B. Insurance Owner agrees to carry public liability, elevator liability, and
contractual liability (specifically insuring the indemnity provisions as set forth in
Paragraph A above), steam boiler (if applicable) and such other insurance as the parties
agree to be necessary or desirable for the protection of the interests of Owner and
396532v2 CAH CT155 -4
Manager. In each such policy of insurance, Owner agrees to designate Manager as a
named insured. The insurance carrier shall be reasonably acceptable to Manager and the
amount of insurance coverage in each such policy shall be in an amount reasonably
acceptable to Manager. A certificate of each policy issued by carrier shall be delivered
promptly to Manager by Owner. All policies shall provide for ten (10) day's written
notice to Manager prior to cancellation.
C. Waiver of Subrogation Owner shall procure an appropriate clause or
endorsement on each of its property damage insurance policies, including but not limited
to, fire and extended coverage, water damage, boiler and machinery insurance, sprinkler
leakage coverage on the Building and personal property, fixtures or equipment therein,
whereby the insurer waives subrogation or consents to waiver of recovery against
Manager. To the extent covered by such insurance, Owner hereby agrees that it will not
make any claims against or seek to recover from Manager for any loss from damage to
property caused by Manager.
ARTICLE 8. Assignment and Amendment
All terms and conditions of this Agreement shall be binding upon the parties
hereto and their respective successors and assigns. This Agreement shall not be modified or
amended except by written agreement of the parties.
ARTICLE 9. Notices
Any notice or demand, which under the terms of this Agreement or under any
statute, must or may be given or made by the parties hereto, shall be in writing and may be given
or made by personal delivery or mailing the same by registered mail, addressed to the other party
at the address herein below designated. Either party, however, may designate in writing such
new or other address to which such notice or demand shall thereafter be so given, made, or
mailed. Any notice given hereunder by mail shall be deemed delivered when deposited in a
396532v2 CAR CT155 -4 7
United States general or branch post office, enclosed in a registered, prepaid wrapper addressed
as herein provided:
If to Owner:
If to Manager:
ARTICLE 10. Miscellaneous
City of Cottage Grove Economic Development Authority
7516 80 Street South
Cottage Grove, MN 55016
Tapestry Management, LLC
2001 Killebrew Drive Suite 308
Bloomington, MN 55425 -1864
A. Bankruptcy and Insolvency In the event a Petition in Bankruptcy is filed
by or against either Owner or Manager, or in the event that either shall make an
assignment for the benefit of creditors or take advantage of any solvency act, either party
hereto may immediately terminate this Agreement by written notice. Remedies set forth
hereinabove shall be in addition to and shall not exclude any other remedy available
under applicable law to the parties.
B. Independent Contractors It is expressly understood and agreed that
Manager will act as an independent contractor in performance of this Agreement. No
provision hereunder shall be intended to create a partnership or joint venture with respect
to the Building or otherwise.
C. Suit or Action If suit or action is instituted in connection with any
controversy arising out of this Agreement, the prevailing parties shall be entitled to
recover, in addition to costs, such sum as the Court may judge reasonable as attorney's
fee in such suit or action and on any appeal from any judgment or decree entered therein.
39653242 CAA CTI55 -4 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate
as of the day and year first written above.
OWNER
Dated:
f.
MANAGER
Dated:
Tapestry Management, LLC
I:
Its: President
396532J2 CAH CT155 -4
(M Cottage Grove Business Accelerator
Square Footage Rentable
Bldg (net rentable space) 15,000 15,000 15,000 15,000 15,000
Garage 6,480 6,480 6,480 6,480 6,480
Total
3.00%
21,480
21,480
21,480
21,480
21,480
% Leased
Real Estate Taxes
3.00%
35.00%
55.00%
75.00%
95.00%
Gross Rent
PSF
$9
$10
$11
$12
$12
$5,250
garage
$3
$4
$5
$6
$6
Revenues: Building
$4,343
$4,050
$52,500
$90,750
$135,000
$171,000
Garage
$3,694
$583
$9,072
$17,820
$29,160
$36,936
Total
$33,923
$4,633
$61,572
$108,570
$164,160
$207,936
Expenses:
$1.58
$2.92
$5.59
$6.05
$6.46
Armin & Marketing
3.00%
$15,700
$16,171
$16,656
$17,156
$17,670
Communications
3.00%
$6,000
$6,180
$6,365
$6,556
$6,753
Utilities: Gas /Elec
100%
$6,200
$6,324
$6,450
$6,579
$6,711
W/S
Maintenance & Operations
3.00%
$4,560
$22,800
$23,484
$24,189
$24,914
Real Estate Taxes
5.00%
$0
$0
$51,000
$53,550
$56,228
Insurance
5.00%
$1,000
$5,000
$5,250
$5,513
$5,788
Management Fees
4.00%
$185
$2,463
$4,343
$6,566
$8,317
Lease Commissions
6.00%
$278
$3,694
$6,514
$9,850
$12,476
Total Expense
$33,923
$62,632
$120,063
$129,959
$138,858
psf
$1.58
$2.92
$5.59
$6.05
$6.46
Net Income (Loss) From Operations
Painting /Renovations /Reserves
($29,873) ($10,132) ($29,313) $5,041 $32,142
$20,000 $10,000 $0 $0 $0
Net Income (Loss) ($49 ($20,132) ($29 „313) $5,041 ':$32,142':
Grant Funds
$200,000 $0 $0 $0 $0
Total After GrantFunds $150,227 $129,994 '.5100,681':. $105,723 $137,865
Total
3.00%
21,480
21,480
21,480
21,480
21,480
% Leased
0.00%
3.00%
55.00%
75.00%
95.00%
100.00%
Gross Rent
PSF
$6
$6
$6
$6
$6
Management Fees
garage
$6
$6
$6
$6
$6
Revenues: Building
6.00%
$2,700
$49,500
$67,500
$85,500
$90,000
Garage
$1,166
$21,384
$29,160
$36,936
$38,880
Total
psf
$3,866
$70,884
$96,660
$122,436
$128,880
Expenses:
Admin & Marketing
3.00%
$15,700
$16,171
$16,656
$17,156
$17,670
Communications
3.00%
$6,000
$6,180
$6,365
$6,556
$6,753
Utilities: Gas /Elec
2.00%
$6,200
$6,324
$6,450
$6,579
$6,711
W/S
Maintenance & Operations
3.00%
$4,560
$22,800
$23,484
$24,189
$24,914
Real Estate Taxes
0.00%
$0
$0
$0
$0
$0
Insurance
5.00%
$1,000
$5,000
$5,250
$5,513
$5,788
Management Fees
4.00%
$206
$3,780
$5,155
$6,530
$6,874
Lease Commissions
6.00%
$309
$5,671
$7,733
$9,795
$10,310
Total Expense
$33,976
$65,926
$71,094
$76,317
$79,021
psf
$1.58
$3.07
$3.31
$3.55
$3.68
Net Income (Loss) From Operations ($31,276) ($16,426) ($3,594) $9,183 $10,979
Painting /Renovations /Reserves $20,000 $10,000 $0 $0 $0
Net Income ($51,276) ($26,426) ($3,594):. $9,183 $10,979`:
Grant Funds $200,000 $0 $0 $0 $0
Total After Grant Funds $148,724 $122,298 :`..$118,704:.: $127.,887 $133,866 .
A SUMMARY APPRAISAL REPORT
(BRKW File No. 6808)
OF
COTTAGE GROVE CITY HALL FACILITY
7516 80 STREET SOUTH
COTTAGE GROVE, MINNESOTA 55016
FEE OWNER; CITY OF COTTAGE GROVE
DATE OF VALUATION; FEBRUARY 16, 2012
FOR
RYAN SCHROEDER
CITY ADMINISTRATOR
CITY OF COTTAGE GROVE
7516 80 STREET SOUTH
COTTAGE GROVE, MINNESOTA 55016
m
PAUL L GLEASON
AND
WILLIAM E. PETERSEN
Analysis of Sales
The subject property is a government office building with a parking garage. The
property is appraised as though vacant in its "as is" condition. The comparable sales,
considered the best available for analysis, reflect a mix of office and public buildings.
Included is an office building with a parking garage. Three of the four sales were
vacant buildings.
The most common unit of comparison in the analysis of building sales is the price paid
per square foot ($ /SF) of gross building area (GBA). The subject gross building area
is 27,216 SF. Prior to adjustments, the comparable sale prices range from $32.78/SF
to $58.04/SF GBA.
Items for which adjustments are considered in the analysis include: property rights
conveyed, financing, conditions of sale, market conditions /time, location appeal, age
and condition at sale, construction quality and appeal, building size, land area, and
special features. If a comparable is superior to the subject for a factor under analysis,
the comparable receives a downward adjustment. If the comparable is inferior to the
subject for the factor under analysis, the comparable is adjusted upward.
Property Rights Conveyed: Property rights appraised reflect fee simple interest.
Sale I was purchased for partial owner occupancy in an office building with the rest
of the property under lease. Sales 2, 3 and 4 were all vacant buildings at sale. No
adjustments are indicated.
Financing: No adjustments are made for atypical financing affecting the purchase
price.
Sale Conditions: Sale 2 was purchased from the City of Minneapolis by an entity that
intended to lease part of the building to a charter school. The seller would not allow
the buyer to lease part of the building to a particular charter school due to unwanted
competition. An alternate charter school was found as a tenant. However, the buyer
estimated the present value of the rent loss due to sale conditions at approximately
$510,000. The rent loss equates to approximately 30% of the actual purchase price.
Sale 2 is adjusted upward 30% for sale conditions adversely affecting the purchase
price.
Market Conditions /Time: The date of valuation is February 16, 2012. The
comparable sales transpired between April 30, 2010 and April 25, 2011. Adjustments
are indicated to reflect adverse economic conditions which have resulted in declining
property values. For the analysis, the sales are adjusted from their sale date to the
date of valuation based on an annual 10% decline in property values through the first
half of 2010, followed by a 5% annual rate decline for the second half of 2010. No
adjustment is made from the beginning of 2011 to the valuation date.
BRI£W APPRAISALS, INC. PAGE 60
Location: The adjustment for location appeal considers accessibility from major
arterial roads and highways, traffic exposure and visibility, quality and style of
surrounding development, access to commercial services, and general area demand and
appeal.
The subject property is located in an area that is mostly residential and office,
including medical activities. 80` Street provides good traffic exposure with 17,500
vehicles per day.
Sale 1 in Roseville is at the border between residential and commercial activities with
19,400 vehicles per day on the fronting street. The property is more centrally Located
with respect to the urban core, in a market where there are more potential users. A
downward adjustment is made for location.
Sale 2 in Minneapolis has an interior location with minimal traffic exposure, offset
somewhat by the density of the surrounding residential housing. The Minneapolis
market has been active in the purchase and /or leasing of school buildings.
Sale 3 in Minnetonka is in a stronger overall office market area, fronting Shady Oak
Road which carries over 20,000 vehicles per day. A downward adjustment is made for
superior location.
Sale 4 is at a signalized intersection on Pilot Knob Road with good access to nearby I-
494. The average daily traffic volume on Pilot Knob Road is 18,000 vehicles. It is
noted that the Dakota County office market struggles with high vacancy, more so than
in other submarkets. Overall, no adjustment is made for location.
Age /Condition: The subject property was originally built in 1968, with additions and
upgrades done in later years including remodeling in 1994. The overall condition of
the property is generally average. The roofs are in good shape and present no leakage
problems. The appraisers are not aware of any significant items of deferred
maintenance that require immediate attention.
The overall condition of each comparable at time of sale, based on information
provided by sources familiar with the properties, relative to the subject is considered.
Adjustments are made as applicable.
Quality /Appeal: The subject property has Class C construction with concrete walls
and a brick and block exterior. The quality of the interior finish is low average to j
average, being somewhat typical of a governmental or public building. The property
has no fire safety sprinkler or elevator service between floor levels.
Sale 1 is an office with Class C construction. The building is generally average
quality and no adjustment is made.
Sale 2 is Class C construction, described as good quality by informed sources, having
a fire safety sprinkler system and elevator service between levels. A downward
adjustment is made.
BRKW APPRAISALS, INC. PAGE 61
Sale 3 is an average quality office building with no significant special features. No =�
adjustment is made.
Sale 4 is an average quality building, but does have an elevator for access between its
two floors.
Building Size: Typically, as building size increases, the price per square foot tends to
decrease. The analyzed subject building area is 27,216 SF. The comparables range in
size from 24,407 SF to 51,864 SF and are adjusted accordingly.
i
Land Area: The subject site contains 112,820 SF and the gross building area is 1
27,216 SF, indicating a land area to building area ratio of 4.15 to 1. However, the
parking garage does not require off- street parking elsewhere on the lot. Excluding the
parking garage area, the land to building area ratio is 5.30 to I. No street parking is
provided. A ratio of 5.30 to I is used in the analysis. '
Sale I has a parking garage on the lower level. Excluding the garage area, the
adjusted land to building ratio is 3.65 to 1. The other comparables range from 2.46 to
6.93. It is noted that the lowest ratio is for a building that has street parking. The
low ratio is somewhat misleading given that street parking boosts the number of
spaces available for operation. Sale 3 is adjusted downward for its higher ratio of
6.93 and the other sales are adjusted upward.
Garage Space: Consideration is given to the amount of garage space in the
comparables versus that in the subject. Approximately 22% of the subject building
area is unfinished garage space which is above grade. Garage space is less expensive
to build and rents for less than office space. Sale 1 is adjusted upward for having 50%
garage space in a walkout basement level. The other sales are adjusted downward for
having no unfinished garage space.
Basement vs. Above Grade Office: The lower level of Structure C contains 6,840 SF
which equates to about 25% of the total building area. Lower level office with few
windows is less desirable than above grade office space. All of the comparables have
their office or finished space above grade. Each comparable is adjusted downward for
a superior situation.
On the next page is a grid which summarizes the preceding adjustments.
BRXW APPRAISALS, INC. PAGE 62
B ildine Sales Ad'ustment Grid
Safe 1
Sale 2
Sale 3
Sate 4
$58.04
$32.78
$50.90
�
l x49.17
1111
Sale Price ($ /SF)
Property Rights
x 1.00
x 1.00
x 1.00
x 1.00
$58.04
$32.78
$50.90
$49.17
Financing
x 1100
x 1.00
x 1.00
x 1.00
$58.04
$32,78
$50.90
$49.17
Sale Conditions
x 1.00
x 1.30
x 1.00
x 1.00
$58.04 '
$4161
$50.90
$49.17
Market Conditions
x 0.96
x 0.97
x 1.00
x 1.00
$5532
$41.33
$50.90
$49.17
Adjusted Price
Location
-10%
10%
-10
0%
Age/Condition
-20
10%
25%
0
Quality /Appeal
0%
-10
0%
-5%
Building Size
0
10
0
0%
Land Area
15%
15%
-10%
10%
Garage Space
20%
-10%
-10%
-10
Basement vs. Above Grade
-5%
-5%
-5%
-5%
0%
-10%
Net Adjustment
20
-10
Indicated Value For Subject
$55.72
$49.60
$45.S1
$44.25
After adjustments, the comparables provide an indicated value range for the subject
from $44.25/SF to $55.72/SF, averaging $48.85/SF. Sales 2, 3 and 4 were vacant
buildings, similar to the "as is" subject valuation, averaging $46.55/SF. In our
opinion, a credible market value for the subject property is as follows:
27,216 SF GSA @ $48.00 /SF = $1,306,368, rounded to $1,305,004
Direct Sales Comparison Approach Value Indication (As Is): $1,305,000
BRKW APPRAISALS, INC. PAGE 63
INCOME APPROACH — AS IS
The Income Approach involves an analysis of the property in terms of its ability to
produce an income stream. A net operating income is derived after deducting annual
operating expenses and vacancy allowance from the gross income that can be
generated by the property, prior to debt service payment. This net income is then
capitalized at a rate commensurate with the relative certainty of its continuance and
the risk involved in ownership.
The Income Approach is frequently emphasized in the appraisal of income producing
properties. It assumes that the present value of an income stream is the present value
of the property which produced the income under competent management. The simple
premise for the Income Approach to value is expressed in the following formula:
Value = Income /Rate
The anticipated future benefits (income and /or reversion value) from an income
producing property are discounted to a present worth figure through the capitalization
process. There are several methodologies available to the appraiser in developing the
overall capitalization rate. One highly reliable method is the direct capitalization
technique which involves extraction of an overall capitalization rate directly from
market data. An overall rate is derived from recent sales transactions of properties
generally similar to the subject. The overall capitalization rate for each comparable
can be derived simply by dividing the net operating income by the sale price, at cash
equivalent terms. Truly similar properties should produce a pattern of overall cap
rates that fall within a relatively narrow range.
When there is insufficient market data from which to estimate an overall capitalization
rate, other approaches may be used, which employ different concepts. The Mortgage -
Equity technique is a capitalization analysis procedure which calculates an overall
capitalization rate based on typical mortgage terms and the equity requirements of an
investor. The Discounted Cash Flow analysis is a reliable technique in analyzing
properties projected to have varying income streams over a specified period of years.
The income streams and property reversion value are then discounted to a present
worth indication by use of an appropriate discount rate in the DCF analysis.
T he basic procedures of the Income Approach can be summarized irr the followine four
steps.
1. Estimate gross potential income at market or contract rent.
2. Deduct for vacancy and credit loss allowance.
3. Deduct expenses: fixed expenses (taxes and insurance), variable
operating expenses,. and replacement reserves.
4. Capitalize net income by an appropriate technique.
BRKW APPRAISALS, INC. PAGE 64
As Is Valuation
The "as is" valuation of the existing city hall facility reflects a vacant building. The
property is not under lease. The property has a mix of office and industrial -type space
and is designed basically for single - tenant use. For a single- tenant building, the gross
building area is essentially the same as the net rentable area, which includes all
common areas such as lobbies, hallways and restroom's. The subject gross building
area is 27.216 SF.
Market Rent Survey
A survey of quoted rates for office and industrial space having similarity to the space
in the subject facility was made for the purpose of estimating a market rent for the
property. Shown on the following pages are representative rent comparables from the
survey and a map showing the locations of the comparables relative to the subject.
BRKW APPRAISALS, INC. PAGE 65
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Subject Rentable Area
The subject property as a single - tenant facility has a total rentable area of 27,216 SF,
the same as the total gross building area.
Structure A 4,096 SF
Structure B 933 SF
Structure C -Upper 6,840 SF
11,869 SF
Structure C -Lower 6,840 SF
Structure D 8.507 SF
Total Rentable Area 27,216 SF
The better quality office space in the subject is the 11,869 SF in Structures A, B and
C- Upper. Structure C -Lower has lesser quality office due to relatively few windows,
narrow halls, more areas with painted block, areas with minimal finish and so forth.
Structure D contains the parking garage and auxiliary rooms along the east side of the
garage.
Market Rental Analysis
Rentals 1, 2, 3 and 4 are office buildings in Cottage Grove with quoted rates for
available space ranging from $8.00 /SF to $12.00 /SF net rentable. The $8.00 /SF
offering is across Hemingway Avenue from the existing city hall. It is noted that the
space offered in these buildings ranges from 1,251 SF to 5,829 SF. The Cottage Grove
office market is oriented to small space users. Typically, small spaces tend to lease at
higher rates per square foot than large spaces. At 27,216 SF, the subject is a
relatively large single- tenant facility.
Rental 5 in Woodbury quotes space at $12.00/SF net. The available space is smaller
than the subject building and its location is considered superior. Rental 6 in Mendota
Heights quotes a large space of 21,000 SF at $10.00 /SF net. This property, built in
1970, has a good location within the St, Paul suburban market with convenient access
to the interstate system and the airport. The subject property is not likely to achieve a
higher market net rent than the large block of space in Rental 6. It is noted that often
the effective rate ends up being less than the quoted rate.
In our opinion, a net rent of $8.00 /SF net for the space in Structures A, B and C -Upper
is reasonable. The market rent for the lower level in Structure C is estimated at
$7.00 /SF net.
The parking garage in Structure D is similar to basic warehouse or industrial space.
Warehouse and industrial space in the subject market area is typically quoted at about
$5.00 /SF net, There are two storage rooms next to the subject parking garage with
their only access coming directly from the garage. Combining these two rooms with
the parking garage results in a total net rentable area of 6,425 SF. For this area, the
market rent is estimated at $4.50 /SF.
BRKW APPRAISALS, INC, PAGE 72
Reported Operating Expenses
The appraisers have been provided some expense information from the City of Cottage
Grove relating to the operation of the subject property. The following information
was provided;
Gas /Electricity: Reportedly, the annual expense for the gas and electricity is
approximately $35,000. This reflects the current building at full occupancy.
Water /Sewer: The City of Cottage Grove is not billed for this usage. If it was billed,
the annual expense for water /sewer /storm sewer /street light would be about $5,000
according to the city administrator.
Janitorial: The annual janitorial expense is about $23,000 per the city administrator.
Stabilized Expense Analysis
Recoverable Ex1jenses
The property is appraised "as is" as a single- tenant facility. Under this scenario, the
tenant is responsible for paying the taxes and operating expenses, either directly or
reimbursing them to,the landlord. The market rent for the facility is estimated on a
net basis. This indicates that the tenant pays the taxes and operating expenses in
addition to the base or net rent. The rentable area is considered to be the entire gross
building area or 27,216 square feet. The stabilized expenses are based, in part, on
reported expenses in other office buildings similar in size to the subject building.
Real Estate Taxes: The property is currently tax exempt. If operated by an investor,
there would be taxes just like any other office building. Taxes are estimated based on
a review of other office buildings in Cottage Grove and Washington County.
Insurance: The annual expense for fire and extended coverage is estimated at
approximately $5,500, equating to about $0.20 /SF.
Utilities: Electricity and gas are usually paid directly by the tenant. The water /sewer
is included in the CAM.
Management: This expense is typically passed on to tenants in a CAM charge.
Management fees are negotiable and can vary from company to company. For the
valuation, the management fee is estimated based on 5% of the potential annual base
income.
BRKW APPRAISALS, INC. PAGE 74
Repairs /Maintenance: This expense category varies from year to year. The annual
allocation is made at $0.65 /SF.
Grounds /Snow /Trash: This expense can vary greatly due to the weather. The
allocation is made at $0.75/SF rentable.
Janitorial: The facility is relatively large and the common areas are extensive. A
professional service would likely be used for cleaning. The annual janitorial expense
for the subject is about $23,000 according to the city administrator,
Non - Recoverable Expenses
Structural Reserves: A structural reserve fund for the periodic replacement of
capital items is a cost to the owner and not reimbursed by the tenant. The allocation
for the property is approximately $0.20 /SF.
Vacant Space Utilities: Since the tenant pays directly for gas /electricity, the owner
is responsible for paying the utilities on the vacant space. A vacant building has less
utilities expenses than an occupied building. For the analysis, the expense to the
owner for vacant space is estimated as follows:
27,216 SF x I5% = 4,082 SF @ $0.50 /SF = $2,041, rounded to $2,000
BRKw APPRAISALS, INC. PAGE 75
A quasi - office section is in Structure D along the east side of the garage providing
restrooms, lockers and finished space. This area comprises approximately 2,082 SF
of Structure D, For this area, a market rent is estimated at $6.50 /SF net.
Potential Base Rental Income
The potential annual base or net rental income for the entire facility using the market
rents in the preceding analysis is summarized as follows:
Structure A
Structure B
Structure C -Upper
Structure C -Lower
Structure D- Parking /Storage
Structure D- Quasi - Office
Total Rentable Area
4,096 SF @ $8.00 /SF =
$32,768
933 SF @ $8.00 /SF =
$ 7,464
6,840 SF @ $8.00 /SF =
$54,720
6,840 SF @ $7.00 /SF =
$47,880
6,425 SF @ $4.50 /SF =
$28,913
2,082 SF @ $6.50 /SF =
$13,533
27,216 SF
$185,278
The potential base annual rent equates to about $6.81 /SF net for the entire facility. It
is noted that the above analysis assumes that the facility is rented all at one time to
one tenant.
Vacancy and Credit Loss
A prudent investor would allocate a loss in revenue against the potential annual
income for vacancy and credit loss. As discussed earlier in the Market Overview, the
metro office market has struggled and still struggles with relatively high vacancy. In
Class B and C buildings, the overall vacancy in the Twin Cities is reportedly well over
20 %. The subject is a relatively large single- tenant building in a market area that has
mostly small users.
In our opinion, an investor would consider a stabilized rate of 15% reasonable for a
valuation of the subject property.
BRKW APPRAISALS, INC. PAGE 73
Capitalization Rate Analysis
The appropriate capitalization rate for the subject property, as stabilized, is derived by
using the mortgage - equity technique and a market - extracted capitalization rate
analysis.
Mort gage-Equity Ana (Akerson Forma The mortgage- equity technique
(Akerson Format) incorporates typical mortgage financing terms, investor's equity
yield expectations, and projected property appreciation /depreciation over a specified
investment holding term. This methodology assumes that a buyer /investor will secure
the most favorable form of financing available in the market for the subject property
type. Presented below are the assumptions and calculations to develop an overall
capitalization rate by the mortgage- equity technique.
Assumn Aons:
0.0930 =
Interest Rate
7.00%
Amortization (years)
20
Loan to Value Ratio
70%
Equity Yield Rate
14.00%
Mortgage Constant
0.0930
Holding Term (years)
10
Sinking Fund Factor
0.0517
Capital Gain/Loss
0%
% Mortgage Paid Off ( 10 years)
33.23%
Mortgage (Debt) Portion
0.7000 X
0.0930 =
0.0651
Equity Portion
0.3000 X
0.1400 =
0.0420
Less Equity Build -Up
0.7000 X
0.3323 X 0.0517 —
(0.0115)
0.0956
Property Appreciation/Depreciation
0.0000 X
0.0517 =
0.0000
0.0956
Rounded to:
Mortgage - Equity Cap Rate Conclusion
0.0960
BRKw APPRAISALS, INC. PAGE 76
Market- Extracted C apitalization Rate Analvsis The following are capitalization rates
extracted from several representative sales of office properties in the Twin Cities:
Market Capitalization Rates - Office Properties
GL
Xear
CashEgmv.
Net
Cap
#
Location
(SF)
Suilt
Sate Date
Sale Price
1 g
Rate
Income
Westwood III Business Center
51,901
2006
12/15110
$3,500,004
$350,000
10.009
1
6251 Bury Drive
Eden Prairie
Northwoods Office Building
2
3900Northwoods Drive
73,442
1986
08/23/10
$9,170,000
$953,700
10.40%
Shoreview
3
11914th Street NW
118,988
2008
06/30/10
$17,900,000
$1,743,500
9.74
New Brighton
12600WhitewaterDrive
88,219
1997
04/26/11
$9,550,000
$824,165
8.63%
4
Minnetonka
Sale 1 is a business center, 64% office and 36% warehouse, which was 90% occupied
at sale. The buyer reported that the sale was based on a cap rate of 10 %, with no
specific income and expense information divulged.
Sale 2 was 98% occupied at purchase. This is a good quality four -story multi- tenant
office building. The property has been institutionally owned its entire life.
Sale 3 is an office building which was purchased by a Canadian REIT. At sale, the
building was 100% occupied. This is a newer good quality building with two tenants.
The broker verified the cap rate for the transaction at 9.74°%.
Sale 4 is a Class A office building which was 100% leased at time of sale. The cap
rate is based on the actual income for the trailing 12 months ending December 31,
2010. This is a significantly better investment property than the subject.
Reported cap rates have been scarce for office building investment transactions in the
Twin Cities. There have been relatively few sales as compared to earlier years. Based
on a review of available market - extracted capitalization rates, a reasonable cap rate
for the subject valuation is as follows:
Market- Extracted Capitalization Rate Conclusion: At or near 10%
BRKW APPRAISALS, INC. PAGE 77
PwC Survey: According to the PwC Real Estate Investor Survey Fourth Quarter
2011, issued by PricewaterhouseCoopers, reported cap rates for investments in
noninstitutional grade suburban office buildings on a nationwide basis range from
7.68% to 10.43 %. The subject property would be near the upper end of this range.
Capitalization Rate - Summary and Conclusion
The subject property is a relatively large office building in a market with mostly small
office users. In our opinion, given the risk from an investment perspective, a credible
overall capitalization rate for completing the Income Approach analysis, assuming the
subject is in a stabilized situation, is as follows:
Capitalization Rate Conclusion: 10.00%
A stabilized net operating income statement incorporating the subject property profile
of rental income, vacancy /credit loss and operating expenses is on the next page. The
annual net operating income in the statement is capitalized to an indication of market
value.
BRKW APPRAISALS, INC. PAGE 78
STABILIZED OPERATING STATEMENT
Gross Potential Annual Base Rental Income (page 73) $185,278
Recoverable Expenses $145,264
Total Potential Gross $330,542
Less Vacancy & Collection Loss @ 15% ($49,581)
Effective Gross Income $280,961
Less Expenses
Recoverable Expenses
$/SF
Amount
Real Estate Taxes
$2.00
$54,400
Insurance
0.20
5,500
Utilities (Water /Sewer)
0.18
5,000
Utilities (Gas/Electricity)
0.00
Tenant -paid
Repairs/Maintenance
0.65
17,700
Grounds /Snow/Trash
0.75
20,400
Janitorial
0.85
23,000
Administrative /Security/Misc.
0.37
10,000
Management Fee
0.34
9,264
Total Recoverable
$5.34
$145,264
Non - Recoverable Expenses
Utilities on Vacant Space
0.07
2,000
Replacement Reserves
0.20
5,443
Total Non - Recoverable
$0.27
$7,443
Total Expenses
$5.61
($152,707)
Net Operating Income
$128,254
Capitalized at 1.0.00%
$128,254
/ 10.00% _
$1,282,540
rounded to:
Indicated Value by Income Approach (As Stabilized - Pee Simple) $1,285,000
Rentable area = 27,216 SF
BRKW APPRAISALS, INC. PAGE 79
RECONCILIATION — AS IS
The applicable approaches indicate the following market values for the "as is" subject
property:
Cost Approach Not Applicable
Direct Sales Comparison Approach $1,305,000
Income Approach $1,2$5,000
The Cost Approach is most useful in the appraisal of new construction. It becomes
more difficult to ascertain losses in market value due to various forms of depreciation
and obsolescence, particularly economic obsolescence, as a building ages from new.
With respect to the subject, a potential buyer /investor would likely place little or no
emphasis on a value indication from the Cost Approach. Therefore, the approach was
not processed.
The Direct Sales Comparison Approach to value is founded on the principle of
substitution, in that a prudent buyer will pay no more for a property than for an
equally desirable substitute. An informed buyer seeks the best available property at
the lowest price possible. A concerted effort was made to research sales of buildings
having the highest degree of similarity to the subject facility. The subject is rather
atypical in its design, complicating the sales research and analysis. After appropriate
adjustments, the comparable sales which were chosen for the valuation analysis are
considered to provide a credible value indication for the subject property. The
comparable sales were purchased for owner - occupancy rather than investment
purposes.
The Income Approach value indication is based on a thorough analysis of the
property's potential to generate a net income after analyzing its contract rents, market
rents for vacant space, operating expenses, and capitalization rates. A potential buyer
could base a purchase decision on the income producing aspects of the property, and
this approach has some merit. It is more likely, in our opinion, that an owner user
would buy the subject property rather than an investor intending to lease it for the
rental income.
In our opinion, the market value of the fee simple interest in the subject property, as
is, as of February 16, 2012, is as follows:
ONE MILLION THREE HUNDRED THOUSAND DOLLARS
($1,300,000)
BRKW APPRAISALS, INC. PACE 80
VALUATION OF THE LEASED FEE — BUSINESS ACCELERATOR
The City of Cottage Grove may reposition the existing city hall facility for commercial
purposes once the new city hall building is completed in the fall of 2012. One option
is to sell the property "as is" on the open market. A second option is to sell it to the
Cottage Grove Economic Development Authority (EDA) for use as a business
accelerator.
In June 2011, the Economic Development Authority (EDA) began reviewing what
opportunities were available to make use of the building as a business accelerator or
business incubator. The EDA determined that creating a business accelerator meets its
mission. It is the intention of the EDA to use the existing city hall facility as a
business incubator where early stage companies and start -up businesses can grow.
Under such a scenario, the existing city hall would become a multi - tenant facility with
numerous tenants occupying relatively small work areas.
The entrepreneurs in the business accelerator would pay below - market rents. The City
of Cottage Grove has requested a valuation of the leased fee interest in the proposed
business accelerator, reflecting what a typical investor would pay for the facility with
it being leased at specified below - market rent levels. The below - market rent levels
are assumed to be in perpetuity.
The proposed business accelerator is anticipated to begin operations approximately
November 1, 2012, should the existing city hall facility be sold to the EDA.
DIRECT SALES COMPARISON APPROACH
This approach is not used in the valuation of the leased fee since there are no
available recent sales of properties similar to what is being proposed.
INCOME APPROACH
The Income Approach is the only reliable method of developing an opinion of the
leased fee value based on the proposed characteristics of the business accelerator.
Proforma
On the next page is a proforma which was developed by the EDA and provided by the
City of Cottage Grove, indicating the forecast lease -up of the proposed business
accelerator. The proforma forecasts the property to cash flow in 2015 and have 95%
occupancy of the available space by the end of 2016.
BRKW APPRAISALS, INC. PAGE 81
Indicated Stabilized Value
The annual Net Income (Loss) From Operations at the end of 2016 in the revised
proforma is $40,430 at 95% occupancy. The property is stabilized by the end of 2016.
The estimated net income for Year 2017 can be capitalized to an indicated value for
the property going forward, at stabilized occupancy but also at below market rents in
perpetuity.
The net income at the end of 2016 is after incurring an expense of $ 10,260 for leasing.
This expense is not considered a typical annual expense going into 2017 with the
property at 95% occupancy, and thus this expense item for the period after 2016 is
removed. It is noted that no reserves are allocated for the final years of the proforma.
From an investment perspective, replacement reserves should be factored into the
stabilized valuation beyond 2016. Reserves are estimated at $0.20 /SF for the total
gross building area of 27,216 SF or approximately $5,443. A net operating income for
Year 2017 is estimated as follows:
$40,430 Net Income at end of 2016
$10,260 Adjusted for 2016 leasing fees no longer needed
($5,443) Replacement Reserves
$45,247 NOI
The foregoing assumes that the gross rents in 2017 keep pace with any increases in the
annual operating expenses.
In our opinion, a reversion capitalization rate of 10% is appropriate for capitalizing
the foregoing net operating income to an indication of value, given the reduced risk
associated with a building at presumably stabilized occupancy.
$45,247 NOI / 0.10 capitalization rate = $452,470 Indicated Market Value in 2017
Present Value of the 2017 Stabilized Value
The stabilized value is the value of the property at the end of 2017. This reflects a
period of approximately 5.17 years from the assumed beginning of operations on
November 1, 2012. The value of the property is discounted to arrive at the present
worth as of November 1, 2012. An appropriate discount rate is 11 %. The present
worth factor for 5.17 years discounted at 11% is .5826.
Stabilized Value $452,470 x .5826 = $263,609 Present Valve
BRKw APPRAISALS, INC. PAGE 85
Present Value of Annual Net Income (Loss)
The annual Net Income (Loss) figures in the proforma for years 2012 through 2016 are
discounted to a present value in the following exhibit. The figures are discounted to
November 1, 2012. Year 2012 reflects only two months of operation.
Present Value of Annual Net Income (Loss) in PIoforma
Year
2012 2013
2014
2015
2016
Net Income (Loss)
($31,1.52) ($40,629)
($40,797)
$5,410
$40,430
Discounted @ 11%
0.9816 0.8844
0.7967
0.7178
0.6466
Present Value
($30,579) ($35
($32,503)
$3,883
$26,142
Total Present Value
($65,989
Summary of Leased Fee 'Value
The value of the leased fee is the sum of the present value of the annual Net Income
(Loss) in the proforma plus the present value of the indicated stabilized value in 2017.
Present Value of Forecast Net Income (Loss) ($68,989)
Present Value of Stabilized Value in 2017 . $263,609
Value of Leased Fee $194,620
Rounded $195,000
Leased Fee Value as of November 1, 2012:
ONE HUNDRED NINETY -FIVE TIIOUSANTD DOLLARS
($195,000)
BRKW APPRAISALS, INC. PAGE 86
RESOLUTION NO. 2012 - [Resolution Number]
Approval of Cottage Grove Business Accelerator
Whereas, on September 21, 2011 bids were awarded by the Cottage Grove City
Council for a new Public Safety and City Hall facility at 12800 Ravine Parkway; and
Whereas, upon completion of the new facility the City has the opportunity to consider
repurposing the existing City Hall at 7516 80th Street; and
Whereas, since June 2011 the Cottage Grove Economic Development Authority has
been reviewing the opportunities and advantages of converting the 7516 building to a
Business Accelerator upon vacation of the building; and
Whereas, on March 13, 2012 the EDA Board approved an operating scenario for
consideration by the City Council to provide this Business Accelerator to the
Minneapolis -St. Paul marketplace; and
Whereas, the Accelerator is projected to provide the opportunity for 50 jobs with an
estimated annual payroll of $2.1 million; is projected to provide a business location for
early stage companies from throughout the region facilitating growth and success of
those companies; is projected to provide the opportunity to graduate Accelerator
businesses to privately held tenancy and ownership; and is projected to provide first
priority tenancy options for high value, job creating, venture capital eligible business
enterprise;
NOW THEREFORE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF
COTTAGE GROVE THAT:
1. Transfer of 7516 80th Street to the Economic Development Authority is hereby
approved as provided within the March 12, 2012 staff report to the City Council
2. Nominal operating approach is hereby approved
3. Property management and brokerage services with Tapestry Management is
hereby approved
Passed this 21st day of March 2012.
Myron Bailey, Mayor
Attest:
Caron M. Stransky, City Clerk