I do not. No one has discussed any with me. Certainly, my name is not going on it, nor is my company's name.
Well, I can you assure you of that. Where did that come from?
I don't have any idea if the City would over some time. But the Finance Director suggested that maybe a Starbucks or some other use might be there. This is intended to make sure that the City has maximum flexibility to utilize the building as it sees fit.
You're suggesting that -- what is it -- the Starbucks Free Library of Philadelphia?
I'm not making any such suggestion, Councilmember. I'm suggesting that 19 years is a long time. 20
What other transactions like this have you done? Give me some other locales and types of buildings.
The railroad station in Newark, New Jersey. Newark Penn Station found itself in a very similar circumstance several years 54 05/27/03 - FINANCE - BILL 030397 ago.
Just give me a list. I don't need to know the history.
The Newark Penn Station. The D.C. City Hall at 14th and Pennsylvania Avenue in Washington, D.C. The University of Hartford did dormitories with this mechanism. Those are three transactions that I have provided the City references with and which they have checked to conclude that we've concluded in this mechanism.
Well, since you mention the Washington situation, did you think about or has it been contemplated this type of transaction for our own City Hall here? It's got to be even more valuable than the Free Library. Why don't we sell City Hall?
I have discussed with Mr. Saidel his view, because he published a report that he thought the Washington transaction was a good model for Philadelphia's City Hall. There are some substantial issues associated with this City Hall that weren't in Washington, having to do with the use and the like, and it's a much more immense piece of property to deal with. 55 05/27/03 - FINANCE - BILL 030397
Well, no disrespect to D.C., but it's probably just a nicer building.
It should be a nicer building. It certainly has every opportunity. The historic character is wonderful, as you know. But it does need work, as you also know. And it needs maintenance money.
Why not Independence Hall? I think we own that as well. Where does it end?
Well, it is my view that there are some municipal buildings that, in an environment where there's limited capital capacity, could profit very well by the use of a private mechanism like this, because it is the next less expensive mechanism. There are some buildings that it's not appropriate for. In discussing this with Ms. Davis in her office, they concluded that this was an appropriate use. They excluded some other uses in our discussion over the last year.
Mr. Kemp, let me ask you a question. We did a big financing not too long ago for the two sports facilities in the sports complex. Now, my recollection of that transaction 56 05/27/03 - FINANCE - BILL 030397 is we actually floated bonds, I think, upwards of 300-million-some-odd dollars. We have a debt service obligation. That was done through PAID; is that correct?
Why wouldn't we just borrow $60 million through PAID, put a debt service payment in our General Fund budget and raise the $60 million and be done with it?
The reason we didn't go that route is that we were not looking at tax exempt bonds. It would be taxable. This offers us an opportunity to do a rate that's less than the taxable rate, 120 basis points over our tax exempt rate because we would not have been doing tax exempt bonds.
Why don't we put that in some numerical terms? Why don't you give us the difference between the tax exempt transaction and the taxable transaction, what we're talking about in terms of debt service and the like?
Would you clarify, the bonds that we are floating are going to be taxable?
But they'll be at a rate that's 120 basis points over our tax exempt rate. The taxable rate is higher than that.
But I think the Councilman asked, why are we not floating non-taxable bonds? Are non-taxable bonds cheaper or what?
The taxable bonds are more expensive. And so we're doing taxables, but we're doing taxables at a rate that is less than the taxable borrowing rate. The reason we're not doing tax exempt bonds, is that, number one, the transaction, the likely spend down on this transaction is not going to occur in such a fashion that 85 percent of the bonds would be expended in two years, which is one 58 05/27/03 - FINANCE - BILL 030335 of the requirements you run up against the arbitrage rules.
With tax exempt borrowing, IRS regulations require that 85 percent of your bonds proceeds be expended within months of your 9 issuance. Because of the timing of this borrowing 10 in order to allow the Library to use it as a 11 catalyst for additional fund-raising, these bonds 12 would not have been technically expended within that 13 24-month period. 14 The other piece is that there is a 15 $5 million piece that will be used as a revolving 16 loan fund. That also creates that same sort of 17 situation. It's not a tax exempt purpose in the 18 truest sense, and because of that, puts us into a 19 taxable market. 20
And to answer your question, 21 Councilman Nutter, a tax exempt rate in today's 22 market, you're looking at a 4.5 percent interest 23 rate. And again, we're looking at 120 basis points 24 at a maximum over the tax exempt rate. The numbers that we've shown -- go ahead. 59 05/27/03 - FINANCE - BILL 030335
I don't have the numbers in front of me. I can run those numbers and get that answer to you. Also, in terms of utilizing the City's tax exempt -- we will be using the City's credit, which is less than using the credit of the investor. That's another reason why we'll get a lesser rate, by going out and using an investor's credit rating, instead of the City's at this time.
Between our doing it through PAID and this lease arrangement. We're going to expend some amount between 4 and 5 1/2 million dollars anyway.
With doing a brief estimate, I think the savings were about $200,000 a year less to do it through the investor, instead of through PAID.
Yes. That's the initial 60 05/27/03 - FINANCE - BILL 030335 estimate.
What is the cost to us, the increase in cost of the City doing it and doing it through this mechanism? Are there additional fees?
No. We look at it on an all-in (ph) basis. And again on an all-in basis --
I guess the question I'm asking is, how much would it cost us to do it in-house, and costing us to do it through the investor group?
Councilwoman, if you did it yourself on a taxable basis, as Ms. Davis suggested has to be, you have to borrow all the money taxable. Some significant portion of the money in the transaction we proposed is not borrowed, but it's equity. The cost of the equity is very, very inexpensive. It's about to percent because they 61 05/27/03 - FINANCE - BILL 030373, 030377 get a very small return, in addition to the return of their money. When you blend the equity money with the reduced amount of borrowing on a taxable basis that our proposal suggests, it's less by, as has been suggested, $200,000 to 300,000 a year than if you borrowed it all on a taxable basis. So we've run numbers for a long time with the Finance Office and have shown them that on an all-in basis, this is a less expensive way, if you have to use taxable funds, to do that because we have an equity investor. They're taking advantage of the tax advantages of owning real estate that you can't take advantage of because the City's not a taxpayer. That's essentially how it works. And it becomes less expensive for you than if you did it through PAID on a taxable basis. I think that was the basis in which Ms. Davis' office decided to proceed.
Mr. Gross, you said something which I may have slight disagreement with. We don't have to do this transaction taxable, correct?
Well, you made the 62 05/27/03 - FINANCE - BILL 030373, 030377 statement just a second ago.
I understood that the Department of Finance made a judgement that they couldn't do a tax exempt because they had arbitraged restrictions under the tax exempt rules and non-tax exempt purpose for some of the money.
We have those same arbitraged issues with regard to our current NTI program. We didn't borrow all the money. We're borrowing it in a series to allow us to do certain things that we need to get done. It's a total of $300 million. I believe we've only borrowed 142, which we're now spending over the next couple years. There's no obligation by the City to do that.
Because we're using that $30 million to attract additional fund-raising, it needed to be borrowed in advance to put it with the Library. And that creates the large part of that problem. Initially, NTI is using taxable bonds for some of their borrowings that are non -- where it's unclear whether or not the purpose will be exempt or not. And that $5 million that represents the revolving loan fund is another piece that would 63 05/27/03 - FINANCE - BILL 030373, 030377 have to definitely be taxed.
Well, I understand. We haven't talked that much about that, and we don't necessarily need to get into all those details. I mean, we're talking about a long-term borrowing for what will probably be some rather short-term obligations. Why wouldn't the City just put $5 million on the table if it wanted to do the Child Safety and Health Fund? Is that what it's called?
We just combined that because we were already doing the $30 million for the Library. We wanted to do the $25 million to retrofit the school properties.
You figured you'd just throw it on in, just throw it on into the pot?
Since we're talking about the $30 million, what is it that compels us -- in light of the school CEO Paul Vallas' proposal to borrow one-and-a-half billion dollars to build new schools and renovate other schools, what is it that causes us to put an additional into that pot of 24 dollars, when we know that the schools are already 25 renovating their buildings? 64 05/27/03 - FINANCE - BILL 030373, 030377 And, again, this has nothing to do with my general support for the schools. But I don't understand why we do that, since they're borrowing one-and-a-half billion dollars to fix the schools in the first place.
It was the Administration's decision that in order to make the schools accessible to the community and for after school purposes that it was to our benefit to have them retrofitted so that access could be gained without going through the schools.
Have those plans been put together, and has all of that detail been worked out with the School District?
The Planning Department, I understand, has looked at the buildings that should be made available for use by the community and for after-school programs and has a list of those that would be so retrofitted.
And why couldn't the District do that with the funds that they plan to borrow to do their buildings anyway?
It was felt that the City was the one requesting the use of these facilities 65 05/27/03 - FINANCE - BILL 030373, 030377 for after-school programs, that it would aid in some of our consolidation around facilities that weren't adequate to provide recreation, and that we, by gaining access to the schools that are already in the neighborhoods, would just make a better use of the funds in that way.
What's the impact of this transaction on the Five-Year Plan?
Is that accounted for in the Five-Year Plan that we passed?
Until we have some funding in the Plan, I'm not certain at what level. But once we have the final numbers, we will have to make an adjustment if it's insufficiently funded.
Well, I thought you had $4 million in the FY '05 Plan.
I don't know the exact dollar, but we have some funding in the Plan. And once we determine the exact amount of the debt service on that transaction, we'll make an adjustment.
Mr. Dubow's 66 05/27/03 - FINANCE - BILL 030373, 030377 testimony back on February 10th, 2003, at the Fiscal Stability Committee hearing says -- the question was regarding, "Do these funds appear in the Five-Year Plan? "Mr. Dubow: They're only covered in the Five-Year Plan in terms of debt service on the sale lease-back. There's $4 million a year beginning in '05 to the extent that we -- when we get to a point where we want to actually spend money, we'll have to come back for transfer Ordinances to move money into appropriate places."
We'll have to make an adjustment once the final numbers are in.
I'm sorry, Ms. Davis. Would you come back? Do you know the schools that have been slated for school-based facilities improvement? 67 05/27/03 - FINANCE - BILL 030373, 030377
Early in the year I know the Planning Department had worked with the School District to look at some of their facilities.
If we don't know the number of schools or whether the schools are going to be replaced or whether they're going to be renovated, how could we possibly come up with a number of $25 million to determine that that's what the need is? To me, it seems that the School District is not exactly ready to go yet with demolition or improvement. They're working on that matrix now. How could we ever determine, through just cursory examination of needs, facilities' needs? We don't know how many buildings, we don't know really which ones they are, and we don't know whether or not they're going to be renovated or demolished. How could we ever come with -- where did $25 million 68 05/27/03 - FINANCE - BILL 030373, 030377 come from?
There have been meetings and discussions between our Planning Department and the Capital Office over at the School District.
And the School District has indicated that they're prepared to say that the schools that are involved are going to cost $25 million for the School-Based Facilities Improvement?
I don't know the exact dollar that they've placed on it, but we've committed to $25 million, yes.
I just can't imagine how we can determine the need -- I mean, the process, as I understand it, that the School District is going through is that Vallas wants to build between 12 and 14 new high schools, but there are also going to be substantial renovations to a large number of schools that have yet to be determined because they don't exactly know the extent of the renovations that are needed. Based on their still trying to cull the information down and make it usable, I can't imagine that our Planning Department would have any way of 69 05/27/03 - FINANCE - BILL 030373, 030377 determining a $25 million -- it seems that the number was basically pulled out of the air. I don't know how you could be further along than the School District when they're not ready yet. We certainly can't be ready yet. So why $25 million -- why don't we just put the $25 million in the library, in addition to the 30?
I haven't been a party to the discussions on which building, so I can't begin to give you a dollar amount on the that. I can get you the list of the schools and try to determine what that amount is. But our commitment was to 14 because it was felt that we would give the Library 15 what they'd requested. There was 5 that we wanted 16 for the Child Safety. And the remainder that we 17 felt was derived from the transaction would go to 18 the School District for this purpose. 19
What is this 20 $5 million for Child Care Health and Safety? 21
It's to create a revolving 22 loan fund to allow day care centers to be fixed to a 23 standard that would allow them to seek reimbursement 24 from the federal government for their day care 25 activities. 70 05/27/03 - FINANCE - BILL 030373, 030377
How do we arrive at that figure? Do we know how many day care centers are involved?
I don't have that information. I can get it for you and get it to you.
Just to add on, haven't we provided that funding? Has that program been set up before? It's not a new program; it's an existing program.
I understand that there may be a very small fund that exists now, a fund that has maybe a few hundred thousand dollars, and in fact, is not reaching the numbers that need to be reached. This actually has a payback because it would allow these centers to qualify for federal funding and reimbursement.
It would be a revolving loan fund, yes. They would get certified and then pay it back.
Who would administer the loan fund? 71 05/27/03 - FINANCE - BILL 030373, 030377
I understand the need for the $30 million and more for the Library. I don't understand at all the planning or the level of detail that seems to not be there for the $25 million and the 5. It also seems illogical to me that we need to put City dollars into capital expanse or improvements to School District property, as Councilman Nutter indicated, with a $1.5 billion borrowing coming to do just that. Would it make more sense just to take the whole amount of money and put it into the Library? Wouldn't we be much further along in our fund-raising needs if we just did that? We may have questions about the transaction or the vehicle for the transaction, but as far as connecting the dots, doesn't it make more sense -- we need a hundred million or more for the Library. If we can raise $60 this way, why are we taking $25 here and $5 there? Just do what the project needs and put the $60 million in the Library. 72 05/27/03 - FINANCE - BILL 030373, 030377
The Administration felt that the needs were in other areas, other than all in the Library, and chose to kind of apportion the money in this way.
But with all due respect -- I know you're doing the financial stuff, and you do it well, and I appreciate your work. I don't understand how we can have such an ill-defined program or lack of program and spend $30 million -- or at least earmark $30 million for it, when the needs of the Library are clear. And the $60 million certainly propels us much faster to a point where we can get the work done in our lifetime. I just really -- you don't have to answer. I just, for the record, have a serious problem with some concerns about this exact financing vehicle. But besides that, to me, if we have need for the Library to be renovated, it would seem to me to make more sense to put it all in the Library as opposed to sending money to the General Fund, which then we won't have any -- as you know, once it gets in the General Fund, we're done. We won't have any say in what's going on, how it's being spent. And as far as I understand, if we approve this and 73 05/27/03 - FINANCE - BILL 030373, 030377 $30 million goes to the General Fund, the Administration could feel it wants to change its priorities and use the money for something else all together, and we don't have anything to say about it. So I have real serious concerns. I want to see the Library done. I want to see it as popular an attraction as the New York City Public Library and others, but I can't see taking $30 million of this away for an undefined program at this point. So I just want the record to be clear that I have those concerns. Thank you.
Thank you, Councilman. Councilwoman Tasco and then Councilman Ortiz and then Councilman Nutter. Thank you.
Ms. Davis, how do we pay -- where do we get the $5 million to pay the debt service?
That will just be general operating. It will come from the General Fund.
From what Councilman Nutter 74 05/27/03 - FINANCE - BILL 030373, 030377 said, it's accounted for from '05 on. We'll have to make an adjustment to put it in the '04 budget.
So where would we get the $5.5 million? We can't get $125,000 for a rec center or a day care program, after-school program in his district, and I certainly don't have one in mine, so how do we come up with $5 million to do a debt service? Plus the fact that I can't get the CLIP Program in my neighborhood because we don't have the dollars. So how do we get $5.5 million when we can't give services to some of the people in some of our districts? We never have the money for what we request for our district. How do we get additional dollars for code enforcement citywide and to enhance the status of employees in the L&I department to provide code enforcement? We never have the money for that. But we can find $5.5 million to float this bond. We just went through the budget process where we were told we couldn't have this and we couldn't have that in our district for people who need some direct services, but we're going to pay this money for one special project. So I have a real concern about that. I'd like to have some 75 05/27/03 - FINANCE - BILL 030373, 030377 answers to that. The other thing is, on of Exhibit A, you have the extension options. "The City has the option to extend the building sublease -- no, that's not the area I want. What would be the advantage of the City to exercise an extension option on this?
If the investors didn't surrender the property in the 20th year and instead paid what they owed, which we estimate is $78 million, the City then has the option to decide that it wants to continue to use the building as the Library. If the City wants to use the building, it will use that money or some other funds to extend its leasehold rights in the building. Eventually, the City will get the building back, in any event. But unless the investors surrender it after the 20th year, they'll give the City a large amount of cash, and the City can use that to rent the building until the investors do surrender it. But the City will always get the building back. The question only is when.
What is the governance? How will the governance work for the 76 05/27/03 - FINANCE - BILL 030373, 030377 Board? These investors, anonymous investors, what input do they have in terms of the operation of the Library? The issue on the permitted use, including subleasing the Free Library to another entity, who makes that decision? Would the investors request that of the Board, or would the Board make that decision? What is the relationship between the Board and the investors?
The investors have no role in that decision. They won't be anonymous. The name of the company will be known to the City. But the investors have no role in that decision. That is a decision made by the City in consultation with the Library Board. Investors have no say over the use. This clause is intended to make it clear that the use of the building is fully up to the City, without the investors' input of any kind. All the investors care about is getting the rent and having the building maintained. They have no other opportunity to direct the use of the building, its hours of operation, the colors in which it's painted, how much marble is restored, and the like. They only have the right to get their rent. They're purely passive. So they do not have control of or 77 05/27/03 - FINANCE - BILL 030373, 030377 access to any of those decisions, Councilwoman.
On maintenance and repair -- let's start with utilities and operating expenses. "During the initial term, the City will be obligated to pay all costs and expenses related to the operation of the Free Library Building. During any extended terms, the investor group will be obligated to pay all costs and expenses related to the operation of the Free Library Building or shift this obligation to a future tenant." Would you explain that to me?
For the first years, the 15 initial term, the Library will be operated exactly 16 as it is today, by the City undertaking exactly the 17 same maintenance and repair and utility cost and 18 standards it has. 19 If the building is not surrendered in 20 the 20th year and the City does not choose to extend its lease because it doesn't want the building for some reason, then the investors find a new tenant. That new tenant and the investors will negotiate who pays for the heat and the maintenance and the real estate taxes. I believe it will be real taxable at 78 05/27/03 - FINANCE - BILL 030373, 030377 that point. If the City extends, I assume the City would extend on a similar basis and continue to assume the obligations that it had, but that's a discussion that will take place years in the 6 future. For the present time, nothing will change 7 about the operation of the Library. 8
So at the end of 9 the 20 years -- the City is going to sublease this 10 up for 20 years? 11
It's expected that the 15 investors will surrender the building and the rest 16 of the ground lease and disappear from the 17 transaction. 18
Yes, ma'am. That is what is expected. That's what the pricing is. That's what the intentions of the parties are. But if they don't surrender because it got much more valuable than they thought, they have to pay the City $78 million more in cash and start paying ground 79 05/27/03 - FINANCE - BILL 030373, 030377 rent in cash and real estate taxes. So the City has an enormous pot of gold in the 20th year, with which it can continue to rent the building or decide that half the building is all that's necessary for Library services in the year 2023 or whatever the City wants to do with it. So the investors will have paid $60 million on day one, and another $78 million on year 20, and still have to maintain the building and lease it to the City, if the City wants. But it's the City's choice, not the investors, at that the point.
Ms. Davis, back to you. On the $25 million for the School-Based Facilities Improvement, was the decision to commit $25 million to the School District made prior to their decision on the notion to float one whatever billion dollars for new schools and/or renovations?
I'm trying to remember the timing. The Mayor announced it during his budget speech, and I think they may have made their announcement subsequent to that.
They may have been a little 80 05/27/03 - FINANCE - BILL 030373, 030377 before. I'm not certain of the timing, but I know this was a part of the Mayor's initiative identified in his budget speech, budget address, in January. And I don't remember the timing.
Do we have the legal authority to complete this transaction?
Good afternoon. Henry Schwartz from the Law Department. We believe that we do have the legal authority. We need to still negotiate final transaction documents. We'll probably need to give a City Solicitor opinion at the end when the transaction is authorized.
I want to ask, what are the professional services that will be needed to complete this transaction? Have the contractors for the services been identified and will there been an RFP process?
From the City's perspective, 81 05/27/03 - FINANCE - BILL 030373, 030377 we already have a financial advisor on board. That's PG Corbins Firm. Other than that, our Law Department will do legal from internally, but there will not be an RFP process. BW Realty brought the proposal to us, and we normally deal with the firm that brings proposals to the City.
Thank you very much. Councilman Ortiz, would you yield a moment to Councilman O'Neill? Then Councilman Ortiz.
Mr. Gross, you mentioned the City Hall in Washington, D.C. That transaction, what size was that, the sale lease-back?
Do you know if all $78 million was used for capital down there?
I believe all $78 million went into renovation of the building. It was a historic renovation, and I believe all of it went into the building. There was -- I want to say a 82 05/27/03 - FINANCE - BILL 030373, 030377 very small amount was used for non-capital purposes, but the great bulk was capital renovation of the building at 14th and Pennsylvania.
Since we are balancing the budget with this action and you spoke about adjustments that have to be made both to the Five-Year Plan, I imagine, and the current budget that we have not approved as of yet, it seems that we're putting the horse before the cart. We're approving things and we still have a budget, operational budget, that we have not approved as of this instance. What are the adjustments that are going to be made to bring the budget under the constraints that are necessary by statute? 83 05/27/03 - FINANCE - BILL 030373, 030377
When we get the final numbers in, Rob Dubow and I will have to look at where we can cut and move funding to cover any --
You mean that we gave no thought -- that we are balancing the budget, and we have given no thought, that we're going to wait until we get the final numbers? Obviously, we know what those numbers are approximately. Why haven't we given thought to how the adjustments are going to be made?
We will have to look at where exactly we can move funding from.
Mr. Dubow and I will get on that as soon as we have an exact number.
But what happens -- I mean, it looks like we're entering either into an episode of Star Trek into the future or the Twilight Zone. We're creating a budget. We're not 84 05/27/03 - FINANCE - BILL 030373, 030377 speculating as to the ebbs and flow of the stock market. We have to have definite aspects in terms of where it is that we're going to be spending this money that we're supposed to be getting or spending and what cuts are going to happen, other than just suppositions. There has to be an idea. And when do we get that as a legislative body so that we can look and see whether we agree with them or not?
Don't you think that it would be best to come before this body and say, "This is the amount of money that we're going to need and we're going to change, and these are the changes in the budget that we're going to have to make," in order to get a clear view of this whole transaction, and then ask for our approval? Don't you think that that type of thinking would have been better than, "Trust us and that we will look into it and see how we move the monies around later on"?
The Administration will be forced to re-prioritize its spending in order to accommodate this. We will not put the budget out of balance. We will simply re-prioritize its spending. 85 05/27/03 - FINANCE - BILL 030373, 030377
Re-prioritize its spending. We would like to have a hand into what re-prioritizations are, and we would like to look at them before we approve anything of this nature. Because then we would have a better idea how the money is going to be distributed.
The economic questions are mind-boggling. You want us to approve some $5.5 million in fixed cost, $30 million that is going to a school system in which they have no idea how they're going to use it. They have not brought you a plan as to how they're going to use it. You say you have no idea how the school is going to do it. And you expect us to approve something based on an incredible amount of iffy propositions. To me, that has characterized this government from the very beginning. Thank you. Mr. Gross, do you have another company?
Do you have a company known as Property Fundings Group?
It doesn't exist anymore. Why doesn't it exist? When did it go out of business?
Last month? It went out of business last month and you created this new one? When did you create this new one?
You had a company that went out of business last month. When did you create this brand new one?
A company in Boston and a company in Washington, and we merged the companies into the new company, which we created effective the 87 05/27/03 - FINANCE - BILL 030373, 030377 1st of May. We did a merger of the two companies that were doing this, one in the corporate environment and one in the non-profit environment.
You said you had other business in Newark. What other cities did you have business in? Newark?
Newark, Washington, Hartford, Pittsburgh, the West Coast, Hawaii. We have business all over the country.
And what was your role? Did you catch, field? What was your role?
It didn't get completed. The Cardinals decided to proceed with the Bank of America instead of with us at the end of the 88 05/27/03 - FINANCE - BILL 030373, 030377 period.
There were some other problems the Cardinals had with the transaction, yes.
There were some other problems the Cardinals had in the transaction, yes.
The Cardinals had a problem with parts of the transaction and decided to go a different direction in their financing and terminated our arrangement.
And the name of the company that was dealing with the Cardinals was?
And that's the company that merged or just went into bankruptcy, disappeared, what?
The two companies, Property Funding and Corporate Property Funding dissolved, and the new company, BW Realty Advisors, was created.
Could you give us details in writing as to that whole scheme?