COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING COMMITTEE ON FINANCE - - - Room 696, City Hall Philadelphia, Pennsylvania Tuesday, May 27, 2003 10:23 a.m. - - - BILL 030251 - An Ordinance amending Chapter 19-1800 of the Philadelphia Code... BILL 030335 - An Ordinance authorizing the Commissioner of Public Property of the City of Philadelphia... BILL 030373 - An ordinance constituting the Fifth Supplemental Ordinance to the Amended and Restated General Airport Revenue Bond Ordinance... BILL 030377 - An Ordinance authorizing the Commissioner of Public Property and Director of Commerce, on behalf of the City of Philadelphia, to exercise the City's option under a Lease Agreement to acquire all right, title and interest of the Philadelphia Parking Authority... BILL 030397 - An Ordinance authorizing the Commissioner of Public Property to enter into a series of transactions whereby the City of Philadelphia ("City") would: (a) sell to the Philadelphia Authority for Industrial Development ("PAID") a certain City-owned building located at 1901 Vine Street ("Free Library Building")... - - - PRESENT: COUNCILWOMAN JANNIE BLACKWELL, Chair COUNCILWOMAN MARIAN B. TASCO, Vice Chair COUNCILMAN DAVID COHEN COUNCILMAN FRANK DICICCO COUNCILMAN JAMES KENNEY COUNCILMAN MICHAEL A. NUTTER COUNCILMAN BRIAN O'NEILL COUNCILMAN ANGEL ORTIZ I N D E X BILL 030251 NANCY KAMMERDEINER, Revenue Commissioner .... BILL 030397 COREY KEMP, City Treasurer .................. 21 KEN SIPOS, Department of Public Property .... 23 RICHARD GROSS, BW Realty Associates ......... 25 ELLIOTT SHELKROT, Free Library .............. 30 JANICE DAVIS, Director of Finance ........... 39 HENRY SCHWARTZ, Law Department .............. 80 ANN MARIE WILLIAMS, Acorn .................. 102 BILL 030335 COREY KEMP, City Treasurer ................. 110 KEN SIPOS, Department of Public Property ... 112 BILLS 030373, 030377 COREY KEMP, City Treasurer ................. 120 KEN SIPOS, Department of Public Property ... 122 FRANCOIS DUTCHIE, Law Department............ 123 CHARLES ISDELL, Director of Aviation ....... 131 EDWARD ANASTASI, Deputy Director of Aviation 158 JOSEPH EGAN, Philadelphia Parking Authority.. 210 WILLIAM B. MOORE, Phila. Parking Authority .. 212 3 05/27/03 - FINANCE - BILL 030251
We'd like to begin our Finance hearing. There are several Bills on the Calendar today. We will start with Bill No. 5 030251, and we will ask the Clerk to read the title of the Bill. Let me note for the record that we have a quorum present. To my right is Vice Chair of the Committee, Councilwoman Tasco. Councilman Nutter is here. Councilman Kenney is here. And Councilman DiCicco is here. So we have a quorum and we will begin our hearing. We'll ask again for the Clerk to read the title of Bill No. 030251. This is a Bill that places a cap on certain tax increases as it relates to the School District.
Bill No. 030251, an Ordinance amending Chapter 19-1800 of the Philadelphia Code, entitled "School Tax Authorization," by adding a new Section 19-1801.1 providing for a cap on tax increases, under certain terms and conditions.
Thank you very much. We would ask the Revenue Commissioner, 4 05/27/03 - FINANCE - BILL 030251 Nancy Kammerdeiner, if she would come forward and begin her testimony. Good morning. Thank you very much.
Good morning. Did you get copies of my testimony? If not, I have some here.
Good morning, Councilwoman Blackwell and Members of the Committee on Finance. I'm Nancy Kammerdeiner, Revenue Commissioner, and I'm pleased to be with you today to present testimony regarding Bill No. 030251. 1 that would place a cap on tax increases. This amendment would apply to the School District portion of the real estate tax and would require that the increase in tax levied on real property would not be greater than 104 percent of the prior year's tax levy, provided that the property is owned by the same person as it was at the time of the tax levy the previous year. 5 05/27/03 - FINANCE - BILL 030251 Increases that result solely from the construction of new buildings or structures or to new improvements made to existing structures would not be covered by this cap. It is also to apply to any tax authorized by the Board of Education, regardless of whether authorized by Ordinance of City Council. If approved, this Ordinance would be effective on July 1st, 2003. This Bill would affect revenue for the School District. As a result, the maintenance of effort requirements of Act 46 must be considered. Under Act 46, the City is precluded from reducing its tax authorization to the District below the level of authorization granted at any time during the period of distress. As the City Solicitor stated in his memorandum to this Council on September 24th, 2002, when he addressed other real estate cap Bills, and I quote, "My understanding of Act 46 is not that the General Assembly wished to obligate the City to maintain the same precise level of tax support, but rather, the same level of tax effort. " The concern raised by the City Solicitor regarding a cap on the assessment would apply even more strongly for a cap on the tax levy itself. Note that Act 46 states in part, and again I quote, "All taxes authorized to be levied by a School District of the first class or for a School District of the first class by a city or county of the first class on the date of declaration of distress shall continue to be authorized and levied in accordance with this Act and shall be transmitted to the School District. " That's the end of the citation. Furthermore, the provisions of the Bill 23 are to apply to any tax levied by the Board of Education, even if they have not been authorized by City Council. 7 05/27/03 - FINANCE - BILL 030251 The Solicitor advised you in his September 24th memorandum that, and again I quote, "Council and City can control the methods of collection and enforcement of this tax, including the imposition of penalties and interest, but Council has no authority to control the rate or the assessment base upon which that rate is imposed, to the extent a tax is authorized directly by the General Assembly. " 14 That situation has not changed. And 15 this opinion would apply to Bill 030251, just as it 16 did to the Bills that led to the Solicitor's opinion 17 last fall. 18 You might say that the City should make 19 up any shortfall in funding for the School District 20 in order to eliminate the Act 46 issues. 96 million, if it had been in effect in Fiscal '03. Having the City make up a loss of this magnitude is not an 8 05/27/03 - FINANCE - BILL 030251 option. I remind you of all of the fiscal pressures facing the City in the FY '04 Budget and the Five-Year Plan that are awaiting your final approval. I will not enumerate them all here, but will just remind you that we have had to face unexpected fiscal challenges, including the impact of the fire fighters' award and the reductions in the State Budget that resulted in cuts over $85 million in direct financial support to Philadelphia. We are still seeking to have the State cuts restored, but if they are not, drastic changes will be needed in the budget and services in FY '04 and beyond. Other measures pending before the State Legislature could diminish the City's revenues without compensation and further threaten the City's ability to provide services.
All of this comes at a time when future revenues are curtailed, both by weak regional and national economies and by legislation that triggers further reductions in wage tax rates. Moreover, Act 46 does not allow the City to reduce its real estate tax effort, but make it up 9 05/27/03 - FINANCE - BILL 030251 to the District through alternative funding mechanisms. Act 46 requires that the City maintain its real estate tax effort for the School District, regardless of any additional funding the City may provide. I also remind you that the Tax Reform Commission has been hard at work reviewing City taxes and gathering information on all of the taxes, including real estate tax. To make yet other change in the tax structure before the Commission has had an opportunity to develop recommendations and to make their report will further constrain the options that they are able to consider and to report to you. I would be remiss if I did not also comment on the administrative difficulties we will face in implementing this Bill, if it is enacted. First, this measure affects only the School District portion of the real estate tax. This complicates the calculation of the tax bill and will make it difficult for taxpayers to understand the bills they are being asked to pay, even if State enabling legislation is approved that permits the implementation of Bill 020577 with a 4 percent cap on the City portion of the tax. And that's the Bill 10 05/27/03 - FINANCE - BILL 030251 that was approved by this Council and became law last fall, but is pending State enabling legislation. There are differences between the caps that would be imposed under that Bill and the Bill 7 before you today that would keep the calculations separate from properties with assessment increases that result from new construction or improvements. In addition, the relationship between the assessed value of a property and the tax levy for that property will diverge over time, especially in areas of the City where there are multiple years of assessment increases that are in excess of the 4 percent cap on the increase in the tax levy. This will make the basis for calculation of the tax difficult to explain in a way that taxpayers can understand and can then calculate themselves. For all of these reasons, we cannot support Bill 030251. This concludes my testimony, and I'll be happy to answer any questions.
Thank you very much. Councilman Nutter. 11 05/27/03 - FINANCE - BILL 030251
Thank you, Madam Chair. Ms. Kammerdeiner, good morning.
The Chair also notes that Councilman Ortiz is here. And Councilman O'Neill is here, who is a Member of this Committee and sponsor of this Bill. Councilman Nutter.
Thank you, Madam Chair. Commissioner, tell me, from your perspective, is there any difference between this Bill, 030251 -- and I believe Councilman O'Neill introduced a school tax cap Bill last year which -- can you hold on for one second, please? Commissioner, I'm sorry. Tell me from your standpoint, is there any difference between this Bill and a previous version of this Bill that, I believe, was introduced last year? This is in essence a 4 percent cap on the School District portion of the real estate tax; is that correct?
That's correct. 12 05/27/03 - FINANCE - BILL 030251 It's my understanding that the previous Bill that you referenced did not have the exclusion for properties or increases in assessment that were due to new construction and/or to improvements on a property, that it only had the clause about the same owner.
Not that I'm recalling off the top of my head. But I'd have to go back and really compare them directly to be sure.
What was your testimony at that time on that particular Bill?
I believe it was very similar to today's in that the School portion of the tax was a problem in terms of Act 46, and that there was difficulty there in terms of this being in violation of Act 46. I don't have that testimony with me. I was just checking to see if I did, but I don't have that with me today.
Well, the best I can figure, just about everything we do around here is some possible violation of Act 46. So I think for 13 05/27/03 - FINANCE - BILL 030397 consistency purposes, we'll probably go ahead and approve it.
And the testimony today references the Solicitor's opinion from September of '02, and that would have been the basis of my testimony at that time.
Now, I believe Councilman O'Neill also introduced a 4 percent cap on the City portion of the real estate tax last year; is that correct?
I'm not certain. That may have been one of the ones that came out unanimously. There were several votes that were unanimous or nearly so at that time.
It was 17-nothing. And do you remember what happened with that Bill?
The Mayor did not sign it, but he did not veto it so it became law without his signature, awaiting State enabling legislation. And it's in that same status today. 14 05/27/03 - FINANCE - BILL 030397
So you testified, though, in opposition to that Bill, but the Mayor allowed it to be law without his signature; is that correct?
Let's talk about Act 46. You quoted from the statute, although it's not the full statute here, you say that "The tax authorized by the city or county to be levied for the School District or dedicated to the School District shall be a" -- and then there's words that are missing -- "tax not less than the highest amount authorized by the city or county to be levied for the School District or dedicated to the School District during any of the three full preceding Fiscal Years." If we had the full text of the statute here, would that tell us that we can't lower our tax rates, or does that mean we cannot lower the tax effort, which I think is defined as the total amount of tax revenue? Which is it?
It's my understanding -- and I'm basing this on the Solicitor's opinion and some further conversation with one of the staff 15 05/27/03 - FINANCE - BILL 030397 in the Solicitor's office -- that we need to maintain the tax rate, and that's considered to be the tax effort. That if we changed either the assessment on which the tax was based or the way the tax would be levied, that that would be in violation of Act 46. The resulting dollar amount could be different because --
It could be more, it could be less, depending upon the --
So you're saying that if assessments went up by some astronomical amount -- and as we've engaged in this process, we know that we've not changed our tax rates since 1991. So assessments could go up by some astronomical amount, generating an equally incredible astronomical amount of real estate tax for both the City and the School District. And you're saying because of Act 46, even under that circumstance of sending even more money over to the District -- and I'm a big School District supporter -- the City would not be able to lower its tax rates, even if the lowering of the tax rate times 16 05/27/03 - FINANCE - BILL 030397 the total assessed value of the City real estate, would generate more money for the School District? You're saying that by Act 46, we still cannot lower our tax rates even if we send more money over to the District? Is that your testimony?
Yes, it is. I have not personally studied Act 46. I'm basing this on the Solicitor's opinion and my understanding of that. But that is my understanding of it, at this point, that we would have to go back to the State for an exception to Act 46 if we wanted to do something other than maintain the level of effort, which is understood at this point to be the level of tax rate using the same formula as we used during the three-year period prior to the Declaration of Distress.
Well, at a House Urban Affairs Committee hearing just a couple weeks ago attended by Councilman O'Neill, Councilman DiCicco, Councilman Rizzo and myself, there was an extensive amount of discussion about this issue of tax rates, total assessed value, and the interest by many of the members of the General Assembly in the concept at least that most other municipalities or 17 05/27/03 - FINANCE - BILL 030397 many others engage in, which is as you're assessed, the total amount of assessment goes up. There is some corresponding decrease in the amount of your tax rates so that you generate what you had anticipated that you would generate. Your testimony is that we would not be able to do that because of Act 46?
Yes. Unless the State Legislature gave us authority to do that. Because the cap on us as a result of Act 46 would come from the Legislature and, therefore, the Legislature would have to give us the authority to act otherwise.
Okay. Last question. What about any other funds that we send over? You indicated that the City could possibly make up some difference or send money over to the District. Or what about any grants that we give to the District; do they get captured by Act 46, as well?
Yes. If they were there before the Declaration of Distress, they need to be there after the Declaration of Distress, as I understand it. 18 05/27/03 - FINANCE - BILL 030397 My reference in the testimony to the City making up the shortfall here was intended to reference what I hear a number of other people indicating, that if we change money from one place to another, the City would have to pay for it. And according to what I was advised by the Solicitor's Office, Act 46 would not allow us to reduce the real estate tax effort and make it up through other funds that were transferred to the School District.
The reason I remember your testimony late last year wasn't the length and breadth of it, but the discussion -- and it may have come from the Law Department in the testimony -- that a 4 percent cap was the equivalent of a freeze. And we had a little fun with that.
Let me tell you, that Bill hit a tie vote at 8-8. It didn't have the 19 05/27/03 - FINANCE - BILL 030397 required 9. But I thought it had a major flaw, that it didn't specify whether the FY '03 collections due to BRT increases would be saved or held safe -- because they were very large -- over and above budget. And so the cries of the School District and others, that they would be decimated if a 4 percent cap was placed during FY '03 that might be retroactive would be a terrible thing. So the other change -- you recognized one. The other change is that this Bill makes it clear that the effective date, if State authorization followed, could be no sooner than July 1st, 2003.
I didn't stress that again, but in the initial testimony I indicated the effective date, which would, of course, be a later effective date than the prior Bill had.
Right. Which holds sacred this avalanche of assessment increase money that comes in. That's all I wanted to say. I realize that Act 46 is there. The State Legislature would have to deal with that, as well as the BRT legislation in Harrisburg. I think if they were willing to amend one, they would 20 05/27/03 - FINANCE - BILL 030397 obviously be willing to amend the other to accomplish their purpose. They haven't indicated that they're willing to do it yet, but we certainly have got a receptive year from them to try to help us with this problem. Thank you.
Are there further questions with regard to this Bill? (No response.)
Thank you very much, Commissioner. Next we're going to deal with the Bill 15 on libraries, Bill No. 030397. We'll ask the Clerk to read the title of the Bill.
Bill 030397, an Ordinance 18 authorizing the Commissioner of Public Property to enter into a series of transactions whereby the City of Philadelphia would: (a), sell to the Philadelphia Authority for Industrial Development a certain City-owned building located at 1901 Vine Street provided that PAID re-sells the Free Library Building to a certain third party or parties; (b) lease from PAID the Free Library Building upon 21 05/27/03 - FINANCE - BILL 030397 PAID's lease of the building to a certain third party or parties; (c) lease to PAID the land bounded by 19th Street, Vine Street, 20th Street and the former Wood Street, ("Free Library Land"), provided that PAID leases the Free Library Land to a certain third party or parties; and (d), lease from PAID the Free Library Land upon PAID's lease of the land from a certain third party or parties; all under certain terms and conditions.
Thank you very much. The first witness is Corey Kemp, our City Treasurer. Would you identify yourself and begin your testimony? Thank you.
Good morning, Chairwoman Blackwell and Members of the Committee on Finance. I am Corey Kemp, City Treasurer for the City of Philadelphia. With me is Ken Sipos from the Department of Public Property, and also here is Rick Gross to answer questions on this topic. I'm here to testify on behalf of Bill No. 030397. Council Bill 030397 will authorize the Commissioner of Public Property to sell to the Philadelphia Authority for Industrial Development, 22 05/27/03 - FINANCE - BILL 030397 PAID, the Free Library Building located at 1901 Vine Street, provided that PAID re-sells to a third party or parties for not less than $60 million. Council Bill 030397 will also authorize the Commissioner of Public Property to lease from PAID the Free Library Building upon PAID's lease of the building from a third party or parties. The City, through PAID, will pay an amount not to exceed $5,500,000 annually for the lease of the Free Library for the first years. 12 Finally, Council Bill 030397 authorizes 13 the Commissioner of Public Property to lease to PAID 14 for 65 years the land bounded by 19th Street, Vine 15 Street, 20th Street and the former Wood Street, 16 called the Free Library Land, provided that PAID 17 leases the Free Library to a third party or parties. 18 Passage of 030397 will give the City the 19 authorization to proceed with a sales lease-back 20 transaction of the Free Library Building. This transaction will result in approximately a $60 million cash payment to the City. The City contemplates using the money to fund programs which were mentioned in the Mayor's Budget Address, including $5 million for the Child Care Health and 23 05/27/03 - FINANCE - BILL 030397 Safety, $30 million for Free Library expansion, and $25 million for school-based facilities improvements. This concludes my testimony, and I'll be happy to answer any questions you have on this matter. I would also like to request a suspension of Rules for this Ordinance.
Thank you very much. We'd like to continue with our testimony and then ask questions.
Good morning, Chairwoman Blackwell and Members of the Committee on Finance. My name is Ken Sipos from the Department of Public Property. I'm testifying on behalf of Andres Perez, Jr., Commissioner of Public Property. I'm here to testify in support of Bill 18 No. 030397, an Ordinance authorizing the Commissioner of Public Property to enter into a series of transactions, whereby the City would sell to the Philadelphia Authority for Industrial Development a certain City-owned building located at 1901 Vine Street, Free Library Building, provided PAID re-sells the Free Library Building to a certain third party or parties; lease from PAID the Free 24 05/27/03 - FINANCE - BILL 030397 Library Building upon PAID's lease of the building from a third party or parties; lease to PAID the land bounded by 19th Street, Vine Street, 20th Street and the former Wood Street, Free Library Land, provided that PAID leases the Free Library Land to a certain third party or parties; lease from PAID the Free Library Land upon PAID's lease of the land from a certain third party or parties; all under certain terms and conditions. This Bill will enable the City, through PAID, to raise $60 million to expand and improve the library. The library building will revert to the City at end of the term. The City will own the land under the building. Department of Public Property supports the measure, and accordingly, I respectfully ask that City Council Committee on Finance approve Bill 19 No. 030397. I also ask that the Rules be suspended so the Ordinance may be passed upon the second reading at Council. Thank you. I'll be happy to answer any questions you may have.
Thank you very much. 25 05/27/03 - FINANCE - BILL 030397 I assume we're now ready for questions.
I'm certain that the Administration, along with BW Realty, discussed a preliminary valuation of the Free Library. How did we come up with the value of $60 million for our library? And how did we choose BW Realty in that regard?
Good morning, Madam Chairwoman. I'm Richard Gross. I'm the President of BW Realty Associates. I'm pleased to be here to answer your questions. With regard to the valuation, there was a preliminary assessment done by us with a local appraiser to determine both the size of the library, a per square foot valuation, and a comparable valuation for buildings similarly situated, both in Philadelphia and other cities. There is a range, of course, Madam Chairwoman, for any building, but we're comfortable that no less than $60,600,000 will be established as its valuation. This discussion between BW Realty and the City Finance Department has been going on for almost a year. When we approached them to suggest 05/27/03 - FINANCE - BILL 030397 that, at a time when additional taxes in debt may not be advisable, our method of financing municipal real estate may be interesting to the City. I believe the City Treasurer and the Director of Finance had an extensive opportunity to review the model with us and made a preliminary selection that this is what they wanted to use the model for. It has been under discussion for well over a year until today.
It's my understanding that the purchasers are investors comprised of lenders and individual equity investors. Will we ever know who the actual investors are when this transaction is completed? Could these investors sell their interests to third parties? If so, what protection does the City have from investors selling their interests two, three, four or five times over?
You will, of course, know who the investors are. The entire transaction will be transparent to the City, and you will have an opportunity to reasonably approve those investors. The debt investors will be institutions, large insurance companies is my expectation. The 27 05/27/03 - FINANCE - BILL 030397 equity investors will not be individuals, Madam Chairwoman. They will be, however, corporations interested in the tax advantages of ownership of real estate. Their identities will be known to the City prior to closing. It is true that, under certain circumstances, either the debt or the equity investors could transfer their interests, but that transfer would also be reasonably approved by the City, so you'd have an opportunity to see to whom they were transferring. However, I would not expect that the equity or debt investors would have much interest in transferring, because the transaction has a 20-year life, and the benefits are calculated over years. So I wouldn't expect it to be the 17 normal course that the investors would change in the 18 first 20 years. 19
Thank you. 20 I noticed on Exhibit A, which is the term sheet for the building lease, the language, "Rent is intended to be triple net." What does triple net mean?
Triple net means that it's net of all operating expenses, taxes and other 28 05/27/03 - FINANCE - BILL 030397 maintenance liabilities, that is to the extent that the City is currently maintaining the building, self-insuring it and it is not subject to taxes. The same will remain the case after the transaction. It is intended that the transaction be seamless to both the users of the library and to the City, so that no change in operation is forecast as a result of this. It's simply intended to be a seamless financing to the benefit of the City.
With respect to Exhibit B, which is the term sheet for ground lease, why is the lease at 65 years and not years? Is 14 the Administration intending to renew this 15 transaction? Can you explain the terms of the 16 ground lease? 17
The reason that the ground 18 lease is 65 years, Madam Chairwoman, is that the 19 owners -- the investors need to be seen for income 20 tax purposes as owners of this real estate. That is, the bricks and mortar will be owned by them, although at all times the City will retain ownership of the ground to protect the City's ultimate residual interest. Because there is a division between 29 05/27/03 - FINANCE - BILL 030397 ground ownership and building ownership, our tax advisors advise that a 65-year lease would be a comfortable term for the investors to receive tax opinions that they are the owners, subject to the ground lease, of the bricks and mortar containing the building. If it were a shorter period of time, it would be difficult to get the appropriate tax assurances and difficult to find investors at the inexpensive price. It is intended that after years, 12 given the way the ground lease works, that the 13 investors will surrender their interest in the 14 building and the residual term back to the City. 15 And although the City, I am certain, would intend to 16 renew the lease, if that were not the case the City 17 would have about $78 million in cash from the 18 investors in order to pay for the renewal. 19 So while I understand the City would in 20 all intents expect to renew the lease, the transaction is structured as though the investors would surrender on the 20th year.
Thank you. Questions? Councilman Nutter. 30 05/27/03 - FINANCE - BILL 030397
Thank you, Madam Chair. I'd like to start with a little bit of background information, which I'd actually like to get from the library. So I need a library person to come up.
Good morning. I'm Elliott Shelkrot. I'm President and Director of the Free Library.
Mr. Shelkrot, just give us a little bit of background information. The premises at 1901 Vine Street are generally known as what?
It was started in -- I believe it was 1919 is when they first broke ground.
I don't know the construction company. I know that the architect was 31 05/27/03 - FINANCE - BILL 030397 Lawrence Trumbauer (ph). I know that he and his firm were the designers of the building. But beyond that, I don't have the rest of that information.
It's my recollection that it was about $5 million at that time.
It was indeed. Let me just say for the record that I'm pulling that number from memory. I can get that exact number for you, if you'd like it.
No, not by a long shot. The Free Library was created initially in 1891. And even at that time, it was not the first library or the first free public library.
Well, we know that. 32 05/27/03 - FINANCE - BILL 030397 Part of the discussion here today is regarding the proposed expansion of the library. What's the total cost of that expansion project?
What we're talking about is a renovation of the existing building and expansion. The total cost will be between 100 and $120 million.
In a fund-raising project for the Central Library, just as was true when we used public and private money to renovate the branches, the first commitment that we need is from the City, as it's a City-owned building. And when we did the branch renovations, which are nearly complete now, the first commitment there was from the City for the renovations. And the reason for that is, is that donors, as well as the state and federal government, want to know that the City is fully behind it and committed financially to the renovation and expansion.
No, that isn't entirely 33 05/27/03 - FINANCE - BILL 030397 true. There have been pledges of over a million dollars and expenditures already, up to about a million dollars from private money that has been spent on it. So I think you can safely say that between commitments and expenditures, $2 million has been raised.
So you've raised $2 million so far on a 100 to $120 million project. Presently you have no commitment from the City or any other major funding source, whether it's another government or foundation?
That is correct. But please understand that in the discussions that we have had -- there are no commitments, but in the discussion that we have had, it has been made very clear that -- I mean, the question is always, well, what is the City's participation in this? So that in essence has prevented the conversation to go any further.
It can be a little stifling. What was the total amount of the branch renovations project? Was that a big change?
Yes, that was a big 34 05/27/03 - FINANCE - BILL 030397 change campaign.
There were 50 library branches and regional libraries that were renovated in that program. There are three that are now under construction because they required major construction efforts. The total cost of the 50 -- not the remaining three -- the total cost of the 50 was $65 million. The remaining three would bring the total up to over $70 million.
Twenty-five initially, and then an additional $6 million, so it was 31.
Of the 100 to $120 million for the renovation and expansion project, what is your expectation from the City? What were you hoping to raise? 35 05/27/03 - FINANCE - BILL 030397
Our expectation from the City would be this $30 million. The rest of the money would be from state and federal sources and a major campaign with the private sector, which will raise over $40 million, and perhaps considerably more than that.
How long do you expect the renovation and expansion project to take?
Renovation and expansion from initial ground-breaking to completion would be three-and-a-half-years.
Were there ever any discussions about other financing mechanisms that would allow the City to put $30 million into the renovation and expansion project?
As you know, the Finance Director is the entity that works on the financing of City projects. Initially, we're hoping it would come out of the City's Capital Budget, but that is not an option at this time, I have been told. This is the mechanism that the Finance Department 36 05/27/03 - FINANCE - BILL 030397 mentioned to us would work for this project. So I don't know if there are other financing options that the Finance Director has explored.
Now, which matters to you more, the $30 million or the financing mechanism that gets you the $30 million?
Without a doubt, from the Library's point of view, it's the $30 million so that we can then move on raising the other money so that we can get to the renovation and building program.
So other than theft or grand larceny, you'll take it any way you can get it, right?
Any legal way. So let me say that any legal way for this to happen would be fine with us.
Okay. Thank you. Those are all the library-related questions I have, Madam Chair. I naturally have some finance transaction questions, but there may be others who have questions. I just wanted to get a little background on the library side. I have other questions about the actual transaction. 37 05/27/03 - FINANCE - BILL 030397
Let me ask you a question. In the testimony it does say -- and I think Michael may have asked this question -- it says, $30 million for the Free Library expansion. Do you have a guarantee that you'll receive that money?
No, I don't have a guarantee, other than the commitment of the Mayor in his address to City Council in January.
Has there been any discussion with the Library Board about this $30 million?
There's been a great deal of discussion and pleasure that the $30 million would be obtained. We have on our own, through the Library Foundation's legal counsel, explored that process because it was a very new one to me and to members of the board, and we have been assured that this is an appropriate, to my understanding, mechanism that has been used in other cities and other locales for other projects. But it is a 38 05/27/03 - FINANCE - BILL 030397 process that the City would go through that would make this funding available.
Well, yes. We need the money so that we can go to others and say, this City is serious. This is a City facility and the City wants this to happen and the City is putting its own resources into making sure that this happens. And that's why the money is absolutely required. We are preparing to go into an architect selection process. We have the funding from one of the foundations to undertake that process. We also have funding to undertake what's called a feasibility study in fund-raising language, and that too is ready to go. We are completely stymied. We're dead in the water, so to speak, if we do not have this, because that's the first question that comes out of anybody's mouth when we go to talk to them about money for the Central Library renovation and expansion. That was also true with the branch renovation program. And until the City committed money to that, we couldn't go forward and raise any 39 05/27/03 - FINANCE - BILL 030397 of the money, let alone begin any project and design work.
How much money did we commit to the branch expansion?
Initially, it was 25. But it has gone up to about 31 now with the additional branch work that needed to be done.
Could this process be done through the City Capital Budget?
You will have to talk to the Finance Director about that. I have been told -- and from what I read in the paper -- that is not possible at this time.
Janice Davis, Director of Finance. The amount of capacity we have under our tax exempt borrowing was too limited to provide $30 million at one point to the Library, and that's why we chose the different mechanism.
What is our 40 05/27/03 - FINANCE - BILL 030397 borrowing capacity this year?
This year we're going to borrow several years at one point. But we're looking at a Capital Program that's $90 million, soon to decline to $70, and then $55, and then we eventually run out. We'll only be able to issue the amount that we retire in debt each year. I think our overall capacity may be at $200 million max.
Thank you. I'm sorry. The gentleman's name, is that Mr. Gross?
Were these the 41 05/27/03 - FINANCE - BILL 030397 documents that we had discussed at the briefing the other day which were not available, these exhibits?
I'd only mention to you for the record that in looking at the Bill, 397, there does not appear to be a place for these exhibits or any reference made directly to the exhibits, but you can worry about that later. On Exhibit A, the Chair raised the question earlier, you have a lease term which you refer to as an initial term of years. But then 15 you have these extension options to go for another 16 45, with a total term of 65. Who would decide to 17 extend this term beyond the 20 years? Who makes 18 that decision? 19
The existing tenant would 20 make the decision. I believe the City of Philadelphia, unless it delegates it to another entity, such as the Library Board. But it would be the tenant's option. And the ultimate tenant, under the way it was structured, is intended to be the City. 42 05/27/03 - FINANCE - BILL 030397
On Exhibit A, under permitted use, it reads "The Free Library Building may be used as a public library or for any other lawful purpose, including subleasing the Free Library to another entity." What does that mean? Is there a proposal to not have it function as a library?
None that I'm aware of. But in drafting the terms of this exhibit, the Law Department wanted to be sure that the City would have maximum flexibility to use the building, and that nothing in the financing would restrict it. This is that clause that allows the City such flexibility, as it has today.
Let me make sure that I'm understanding this correctly. For the rent, the initial term, it reads that "It's an amount not to exceed $5,500,000 per year to be paid in fixed quarterly installments. Rent is intended to be triple net, with the City paying all operating and capital expenses for the Free Library Building without set-off or reduction." What do you estimate to be the total operating and capital cost for the building over 43 05/27/03 - FINANCE - BILL 030397 that 20-year period, and then including the rent?
The rent will not change, Councilmember. So the $5,500,000, or whatever number less than that is finally fixed --
I was going to say, at the moment we don't know what that rent is going to be.
We don't know what that is. But if you assume it's no more than $5,500,000, that's all you're asked to authorize. Then that's the only money that will transfer from City hands to private hands.
The other expenses, which currently are -- whatever it costs to maintain and heat and chill the building will continue on the City's nickel. Whatever the City is currently paying or the Library Corporation is currently paying will continue unabated. The capital expenses have already been discussed. Those capital expenses would include whatever money will be spent to renovate the building in the course of the 20 years. None of that will affect the rent. None of that will be 44 05/27/03 - FINANCE - BILL 030397 paid for, except out of the $60 million, or the 30 that gets transferred. And the rent itself will not vary from year to year or quarter to quarter for 5 years. 6
In its simplest 7 terms, this is in essence a transaction where you 8 give us $60 million up front. We pay over the 9 20-year period, excluding the operating and capital 10 costs, for a total of upwards of $110 million; is 11 that correct? 12
On the second page, 14 am I understanding that under this transaction, at 15 least as this reads, "During the initial term, the 16 City will be obligated to pay any applicable real 17 estate taxes related to the Free Library Building," 18 what does that mean? 19
It is possible, as I 20 understand it, that there may be some real estate tax that the City itself is not able to discharge. The land will retain public ownership. The use of the building will retain public ownership characteristics. Under those circumstances, it is my understanding that it is not subject to real 45 05/27/03 - FINANCE - BILL 030397 estate tax in Philadelphia. But if it were, that expense would be the City's, and not the investor's.
Well, first you said that we were not obligated, then you said, if we were. Under what circumstances would the City in essence end up paying real estate taxes to itself?
Dream with us. What do you mean, it's hard to imagine?
It's hard to imagine because the City is the taxing authority, at least as I understand it.
So that the City could decide to move money from one pocket to another, I suppose.
That's not the question. The question is, why would we have to pay real estate taxes in the first place?
There shouldn't be a circumstance under which you do, but 20 years is a long time. The intention is to make it clear to you 46 05/27/03 - FINANCE - BILL 030397 that if real estate law changed in some way other than it is today, this is not a change that its risk borne by the investor. This change, which ought to be in the control of the City or the City Council --
The investors are the owners of the building, aren't they?
They're the owner of the building on a triple net basis. I believe I answered the Chairwoman's question. And one of the of the items that's triple net to the tenant in this instance is real tax. That's my understanding of a triple net definition.
Well, doesn't the owner of the property usually pay the real estate taxes?
In triple net situations, the owners do not pay. They pass it along to their tenants.
Councilman, there could possibly be a scenario under which we would incorporate, I guess, some non-public purpose in the building, if we were to sublease space to someone for a coffee shop or something, I don't know. Under that scenario, their would be real estate taxes due, 47 05/27/03 - FINANCE - BILL 030397 and then it would be the responsibility of the City. And this provision it the term sheet just opens it to the broadest. We're not intending to open a coffee shop in the Free Library at this point, but years is a long time. And, you know, we might 7 have to compete with Starbucks and Borders Book 8 Stores or something. 9
Well, I'm not a 10 coffee drinker, but people might find that 11 interesting. 12
Give a little Green 14 Tea or something, read a book. 15 Under that scenario, since we're now in 16 the realm of the completely esoteric, what's the 17 value of the building? How will the BRT value the 18 building for real estate tax purposes? I'd love to 19 be at that hearing. 20
Or whatever the final appraisal comes in at. Because the $60 million is 48 05/27/03 - FINANCE - BILL 030397 not the final appraisal.
Before we go to closing. That's what the value will be set on.
So it would be that number times .32 times .08234, and that would be the --
You're going to keep every possible caveat disclaimer you can in this hearing, aren't you?
No. What I'm trying to do is be sure that before you vote you understand fully what the transaction is.
That's a novel concept. On destruction or damage during the initial term, "The City will have an affirmative obligation to rebuild or repair the Free Library to a functionally equivalent condition, which would not be materially less than the fair market value of the 49 05/27/03 - FINANCE - BILL 030397 building prior to the damage or destruction." Notwithstanding this transaction, if something happens to the building, it's our responsibility to fix it. Is that what you're saying?
"Or, 2, pay the investor group a mutually agreeable termination fee calculated to retire the outstanding debt and pay the investor group its anticipated return during the initial term, had the damage or destruction not occurred." How much is that?
The loan would have been 45 percent advertised. The loan would probably be 50 or $45 million, so 65 percent of that left would be about $30 million, a little less. The investors would have received half of their cash return back, so about another 4 or $5 million would be necessary to them. And some may call for their lost profit 50 05/27/03 - FINANCE - BILL 030397 over the last years if the deal is being terminated early.
I would expect something at 7 about 35 or $40 million in the 10th year. 8
So let me understand 9 this. Something potentially tragic happens to our 10 Free Library Building, and at the end of the day we owe you $35 to $40 million, in addition to how to figure out how to fix the thing; is that what you're saying?
Not exactly. At the beginning, you have $60 million of the investors' money, with the obligation rent and repair of the building for years. 18
I think once they 19 transfer it to us, it's our money. 20
I assume that's correct. But you have the duty as a tenant to maintain the 51 05/27/03 - FINANCE - BILL 030397 building. You can discharge that duty by keeping the building maintained. Or you can decide that you want to change your mind and it isn't the deal you like anymore. But if you decide you want to change your mind, you already have the $60 million, so you've got to do something to make sure that they get the benefit of their bargain, because you've had the benefit of yours. It is intended to be mutually fair to both sides. Not one-sided at all, Councilman.
Well, the next paragraph is about insurance. "During the initial term, the City will have the right to self-insure against all liabilities associated with the Free Library Building." I guess one of the things I wondered here is, again, how do we insure a building that we don't own? How do we do that?
First of all, you're going to self-insure, as I understand it, because you do not go to the insurance markets to buy insurance on City property. But because you are the tenant of the property and the owner of the ground, my understanding from the Law Department is you will 52 05/27/03 - FINANCE - BILL 030397 continue to offer the self-insurance program that you have in place currently. It's almost like a sandwich. You remain in the ground. You have the tenancy, and in between, there's an equity owner. But because you have both the ground and the use, it is an insurable interest continued under your current program, as I understand it.
For your next presentation -- I won't do it -- but for your next presentation, under the circumstance, you may not want to use the sandwich analogy, because then we'd have to talk about what kind of sandwich it was and all that kind of stuff, and it's not going to help you.
On the last page, Miscellaneous. I'm just intrigued by this. "During the initial term, the City shall retain all additional revenue opportunities associated with the Free Library Building, including but not limited to, star tax credits, sponsorship, advertising revenue, naming rights." Are you familiar with or know of any 53 05/27/03 - FINANCE - BILL 030397 City plan to rename the Free Library building?