HomeMy WebLinkAboutV.B - Panache Real Estate Option
HEDRA Memorandum
To: HEDRA Commissioners
From: Rusty Fifield, Economic Development Coordinator
Date: October 4, 2019
Subject: Real Estate Option Agreement
Rungoli LLC (Panache)
Action Requested
There are three alternative actions:
1. Take no action and the purchase option expires on October 31. Panache may seek a new
option agreement when ready to purchase the property.
2. HEDRA sets (or agrees to set) a reduced price for the property and directs Staff to
negotiate a Purchase and Development Agreement.
3. Direct staff to prepare and execute a new extension to the Option Agreement. This course
of action requires some additional details. What is the new expiration date for the
Agreement? Why is the option being extended (What needs to happen prior to the new
expiration date)?
In addition to selecting a course of action, HEDRA should identify the additional information
needed to make a determination on acceptance of a lower price for the property.
Panache may also exercise the option before October 31. In this case, Staff would negotiate a
Purchase and Development Agreement for HEDRA consideration.
These alternatives are discussed in greater detail later in this memo.
Background
Discussions with Ameeta Jaiswal (Panache) about building a cidery and related facilities began
more than three years ago. Initial discussions led to a proposal to purchase the property
designated as “Block 1” (Outlots A&B of Riverside Addition) from HEDRA submitted in
November 2016. In June 2017, Panache submitted a proposal to buy property in the Business
Park for an orchard and warehouse. These proposals were discussed by the Planning Committee
of the City Council in December 2017. Panache submitted a Letter of Intent to purchase Block 1
in October 2018. These steps led to the option to purchase property that is the subject of the
matter before HEDRA.
Panache Purchase Option
October 4, 2019
Page 2
In December 2018, HEDRA authorized a Real Estate Option Agreement with Rungoli, LLC
(Panache’s Property Company) to purchase the two parcels north of Artspace commonly
referred to as “Block 1”. The Agreement gave Panache the right to purchase the property on or
before June 1, 2019 at a price to be negotiated. On May 14, 2019, HEDRA voted to extend the
option to purchase to October 31, 2019. As part of the extension, several terms were added to the
Agreement:
1. The purchase price was set at $470,700.
2. HEDRA may consider a lower purchase price if Panache is able to demonstrate financial;
feasibility and the need for the lower price.
3. To demonstrate need, Panache was required to provide the following information by
September 30, 2019:
a. Sources and uses of funds for the Project. Sources will include debt (with terms)
and equity (with source of equity). Uses must detail land, design, construction,
FFE and startup costs. Developer must also include documentation for estimated
costs.
b. Bank commitment. Letter from bank giving preliminary loan commitment.
c. Project Proforma. The proforma must include projected operating revenues and
expenditures for the years 2020 through 2029. The assumptions used in
estimating operating revenues must be included.
All of these items were submitted and received prior to September 30. The submittals are
attached to this memo. Attachment A contains the sources and uses of funds. Attachment B
contains a financing commitment letter from Associated Bank. Attachment C contains 1-year
operating projections with explanatory notes. Following review of this information, Panache was
asked to respond to the following set of questions and request for additional information:
1. The letter from Associated Bank needs some clarification. The letter refers to property at
101 4th Street E. That is the address of City Hall. The parcels do not have a street address
so the correct reference is Outlots A and B of Riverfront Addition, Hastings, MN. Rather
than “To Whom This May Concern” the letter should be addressed to the Hastings
Economic Development and Redevelopment Authority. The letter is signed by a
“Relationship Manager”. That does not seem like a person to empowered to make a loan
commitment for the Bank. It would be helpful to clarify or to have the letter signed by an
appropriate officer of the bank.
2. Please provide more details on the cash and grants element of the sources and uses. This
is a significant amount of the overall funding and needs to represent more than “other
funds”. What are the sources of grants and other loans? How much owner equity will be
contributed?
3. Please provide any documentation the ability of the project to receive a SBA loan.
4. Please provide material supporting the estimated cost of the project, in particular, the
cost of building the facility.
5. In your proforma, what is the source of the $750,000 beginning balance? What is the use
of the $373,102 expense for capital investment. Neither of these amounts appear to tie
out to Sources and Uses.
6. How will the projected operating loss in Year 2 be covered? Does this also apply to Year 3
if revenues do not achieve the significant increase shown in the proforma?
Panache Purchase Option
October 4, 2019
Page 3
7. Finally, we need to know how you want to proceed. Do you want to exercise the option
and negotiate a purchase and development agreement? If not, the option to purchase
expires on October 31. HEDRA would need to take action to establish a different
outcome.
Ameeta Jaiwal is travelling outside of the U.S. until October 7. She will provide written
responses when she returns. I will forward any information I receive prior to the meeting.
Panache continues to seek financial assistance in the form of a reduced land price even though
the information provided does not show this assistance. The need to provide information to
demonstrate the need for a reduced price is clearly stated in the Extension. Panache plans to
bring information regarding this request to the meeting.
It should be noted that we will be conducting environmental remediation on these parcels
during the first half of 2020. The property is also included in a downtown property utilization
study that is the subject of a grant request from the Dakota County CDA. The study will help us
to clearly identify the constraints on site development and integration with the riverfront. Both
of these projects will help guide the price and use of this land.
Given this information, Staff has identified the following alternatives for next steps:
1. Panache decides to exercise the option to purchase the property at the stated price. The
Option Agreement spells out what happens in this case.
2. HEDRA decides to sell the property at a reduced price. Panache may come to the meeting
with a price to propose. The Board could also direct staff to negotiate the price with Panache
and bring a recommendation to HEDRA. While the information provided is a significant
improvement over past submittals, I cannot determine the financial feasibility of the project
or the need for HEDRA assistance based on information we have received. Too many key
assumptions cannot be verified. It does not seem likely that this information will become
available in the near term. The pending environmental cleanup work on the site also
complicates setting a price. Finding a quantifiable basis for a reduced land price in the near
term will be a challenge.
3. HEDRA agrees to a second extension of the Agreement. In taking this approach, HEDRA
should identify specific tasks to accomplish that would enable us to set a reduced price for
the land. To take this action, the Board should have a belief that at the end of the extension
(a) Panache will be prepared to buy the property and (b) HEDRA will have the information
needed to consider a reduced price.
4. No action is taken and the option expires. Panache would be able to solidify its plans and get
back before HEDRA at a future date. It would make sense to wait until the results of the site
cleanup work are known,
Unless Panache decides to purchase the property (#1 above), HEDRA will need to provide
guidance. Even if the option expires, Panache will want to know what additional information
HEDRA requires to sell the land at a reduced price. The developer has the burden of proposing a
lower price and justifying the need for the lower price. HEDRA needs clear and credible
Panache Purchase Option
October 4, 2019
Page 4
information to evaluate the merits of the request. The information submitted is a start, but
needs to be expanded. Among the items needed to consider a reduced price are the following:
Are the project costs reasonable? We do not have any supplemental information that
explains the validity of the numbers. The submitted summary of sources and uses contains a
“Facility Build” cost of $1,500,000. What is the source of this estimate? What are the
characteristics of the building (size, materials, internal components)? Does this amount
include site improvements? Does it include any contingency? “Licenses, Permits and Fees”
are shown at $4,000. Permit fees paid by Spiral Brewery totaled $32,600. This illustrates
the need to know what lies behind the numbers.
The sources of funds need additional detail. The commitment of SBA funding is important.
It represents 30% of total sources and is a contingency of the bank loan. The $731,803 of
other sources needs to be itemized. How much owner equity is contributed? What are the
sources of the other loans and grants? The submitted sources match the uses. How would
additional project costs be financed?
The sources and uses of funds flow into the proforma (operating projections). The proforma
allows us to see the factors that create profit and loss over time and the effects of changing
the land price. Without getting into the nuts and bolts of Panache’s business plan, several
items in the submitted projections need further explanation. (1) The projections start with a
beginning balance of $750,000, but the uses of funds only contain $375,000 in Working
Capital. Where does the additional $375,000 come from? (2) What funds cover the projected
Year 2 loss? (3) Profitability in Year 3 and thereafter is based on a projected 229% increase
in Gross Sales over Year 2. It is important to understand what is needed for this to happen
and what happens if it does not.
Board members are encouraged to review the submittal and identify or information needed to
make a decision.
Financial Impacts
The $1,000 option payment made by Panache will be refunded if option expires.
Additional Staff time and legal expense based on next steps.
The established sale price for the property is $470,700. A reduction in the sale price reduces the
sale proceeds received by HEDRA.
Attachments
A. Bank loan commitment letter
B. Sources and uses of funds
C. 10-year operating proforma
D. Initial Real Estate Option Agreement
E. Extension to Real Estate Option Agreement
Proposal for City of Hastings
Sources Amnt Uses Amnt
Bank/Loans (50% of project*)1,189,344$ Purchase Land 470,700$
SBA 504 (35% of project*)832,541$ Facility Build 1,500,000$
3rd Party Loan -$ Cidery Equip & Mechanicals 225,000$
Grants -$ Tasting Room Furnishings 50,000$
Owner/Investor Cash and/or Grants
and Loans (15% of project + working
capital**)731,803$ Working Capital 375,000$
Legal fees 10,000$
Accounting and Professional Fees 95,000$
Licensing, Permits and Fees 4,000$
Advertising 5,000$
Sign 4,000$
Appraisal fees 2,500$
SBA 504 Fees (0.5%)4,163$
Bank closing costs (1%)8,325$
Total:2,753,688$ Total:2,753,688$
check 0$
*Project includes real estate, facility build, equipment, furnishings and startup costs. Does NOT include working capital.
**A portion of this line item can include 3rd party loans, grants, and other funding in addition to cash.
Proposal for City of Hastings
Panache Cidre
10-Yr Financial Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total
Projected Revenues Mar 20 - Feb 21 Mar 21 - Feb 22 Mar 22 - Feb 23 Mar 23 - Feb 24 Mar 24 - Feb 25 Mar 25 - Feb 26 Mar 26 - Feb 27 Mar 27 - Feb 28 Mar 28 - Feb 29 Mar 29 - Feb 30
Gross Sales (Cider & Food)-$ 197,757.00$ 651,606.00$ 737,715.80$ 848,373.40$ 975,629.41$ 1,073,192.35$ 1,153,681.78$ 1,240,207.91$ 1,333,223.50$ 8,211,387.15$
Other Income (Venue Rental & Merch)-$ 53,499.10$ 73,540.55$ 87,745.49$ 99,062.31$ 108,968.54$ 119,865.40$ 131,851.94$ 145,037.13$ 159,540.85$ 979,111.32$
Total Revenue -$ 251,256.10$ 725,146.55$ 825,461.29$ 947,435.71$ 1,084,597.95$ 1,193,057.75$ 1,285,533.72$ 1,385,245.04$ 1,492,764.35$ 9,190,498.47$ -$
Less: Cost of Goods Sold -$ (54,205.10)$ (171,432.32)$ (199,521.13)$ (229,449.30)$ (263,866.69)$ (303,446.70)$ (348,963.70)$ (401,308.25)$ (461,504.49)$ (2,433,697.68)$
Gross Margin -$ 197,051.00$ 553,714.23$ 625,940.16$ 717,986.42$ 820,731.26$ 889,611.05$ 936,570.02$ 983,936.79$ 1,031,259.86$ 6,756,800.79$
Gross Margin %0%78%76%76%76%76%75%73%71%69%76%
Operating Expenses
Salaries and Related Expenses -$ (152,172.00)$ (171,562.00)$ (171,562.00)$ (198,487.00)$ (218,335.70)$ (240,169.27)$ (264,186.20)$ (290,604.82)$ (319,665.30)$ (2,026,744.28)$
Marketing (1,500.00)$ (3,900.00)$ (4,320.00)$ (4,716.00)$ (5,211.60)$ (5,732.76)$ (6,306.04)$ (6,936.64)$ (7,630.30)$ (8,393.33)$ (54,646.67)$
Professional Services & Fees (1,900.00)$ (2,400.00)$ (2,400.00)$ (2,520.00)$ (2,718.00)$ (3,000.00)$ (3,000.00)$ (3,000.00)$ (3,000.00)$ (3,000.00)$ (26,938.00)$
Office Expenses (1,875.00)$ (4,500.00)$ (5,000.00)$ (5,000.00)$ (5,000.00)$ (5,000.00)$ (5,000.00)$ (5,000.00)$ (5,000.00)$ (5,000.00)$ (46,375.00)$
Business Expenses (25,450.00)$ (52,321.83)$ (67,784.78)$ (74,277.68)$ (81,411.13)$ (89,552.24)$ (98,507.46)$ (108,358.21)$ (119,194.03)$ (131,113.44)$ (847,970.79)$
Depreciation (25,000.00)$ (25,000.00)$ (25,000.00)$ (25,000.00)$ (25,000.00)$ (25,000.00)$ (25,000.00)$ (25,000.00)$ (25,000.00)$ (25,000.00)$
Interest Expenses and Principal Payments (171,851.00)$ (213,855.00)$ (216,108.00)$ (218,478.00)$ (220,971.00)$ (220,971.00)$ (220,971.00)$ (220,971.00)$ (220,971.00)$ (220,971.00)$ (2,146,118.00)$
Total Operating Expenses (227,576.00)$ (454,148.83)$ (492,174.78)$ (501,553.68)$ (538,798.73)$ (567,591.70)$ (598,953.77)$ (633,452.05)$ (671,400.15)$ (713,143.07)$ (5,148,792.75)$
Operating Expenses % 0% 181% 68% 61% 57% 52% 50% 49% 48% 48% 56%
Total Operating Expenses & COGS (227,576.00)$ (508,353.93)$ (663,607.10)$ (701,074.80)$ (768,248.02)$ (831,458.39)$ (902,400.47)$ (982,415.75)$ (1,072,708.41)$ (1,174,647.56)$ (7,582,490.43)$
Net Profit Margin (Loss)(227,576.00)$ (257,097.83)$ 61,539.45$ 124,386.49$ 179,187.69$ 253,139.56$ 290,657.28$ 303,117.97$ 312,536.64$ 318,116.79$ 1,608,008.04$
Net Profit Margin %0%-102%8%15%19%23%24%24%23%21%17%
Cash Flow Assumptions
Beginning Balance 750,000$ 175,322$ (32,476)$ 43,232$ 112,509$ 174,548$ 242,544$ 295,301$ 327,909$ 348,923$ N/A
Profit (Loss) from Operations (227,576.00)$ (257,097.83)$ 61,539.45$ 124,386.49$ 179,187.69$ 253,139.56$ 290,657.28$ 303,117.97$ 312,536.64$ 318,116.79$ N/A
Accounts Receivable 24,300.00$ 32,400.00$ 32,400.00$ 32,400.00$ 32,400.00$ 32,400.00$ 32,400.00$ 32,400.00$ 32,400.00$
Add Depreciation & Amortization 25,000.00$ 25,000.00$ 25,000.00$ 25,000.00$ 25,000.00$ 25,000.00$ 25,000.00$ 25,000.00$ 25,000.00$ 25,000.00$ N/A
Operating Cash Flows 547,424$ (32,476)$ 86,463$ 225,018$ 349,097$ 485,088$ 590,601$ 655,819$ 697,846$ 724,440$
Less Initial Capital Investment (372,102.22)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ N/A
Less Shareholder Distributions -$ -$ (36,746.95)$ (95,632.73)$ (148,366.13)$ (206,162.38)$ (251,005.54)$ (278,722.90)$ (296,584.52)$ (307,886.90)$ 1,621,108.05$
Less Charitable Giving -$ -$ (2,161.59)$ (5,625.45)$ (8,727.42)$ (12,127.20)$ (14,765.03)$ (16,395.46)$ (17,446.15)$ (18,110.99)$ 95,359.30$
Less Contingency Funds -$ -$ (4,323.17)$ (11,250.91)$ (17,454.84)$ (24,254.40)$ (29,530.06)$ (32,790.93)$ (34,892.30)$ (36,221.99)$ 190,718.59$
Ending Cash Balance 175,321.78$ (32,476.05)$ 43,231.70$ 112,509.09$ 174,548.39$ 242,543.98$ 295,300.63$ 327,909.30$ 348,922.97$ 362,219.88$ N/A