AR 060606 Sublease/Option Agreement and site lease

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ITEM #20 CITY OF COLTON AGENDA REPORT FOR COUNCIL MEETING OF June 6. 2006 TO: HONORABLE MAYOR AND CITY COUNCIL FROM: DILU DE ALWIS, FINANCE DIRECTOR SUBJECT: APPROVAL OF SUBLEASE/OPTION AGREEMENT AND SITE LEASE TO FINANCE REMODEL OF CITY HALL AND FIRE STATION NO. 1 AND COMPLETE CONSTRUCTION OF THE FIRE TRAINING TOWER DATE: May 30, 2006 BACKGROUND: At the March 7, 2006 meeting the City Council previously approved the remodeling of City Hall and Fire Station No. 1, as well as approving the construction of the Fire Training Tower in fiscal year 2005/06. The Finance Department has been working with Municipal Finance Corporation as leasing agent for financing the approved remodels and construction. Municipal Finance Corporation specializes in providing tax-exempt financing for public agencies and non-profit institutions and we have used them in the past for the initial financing for the City Hall remodel. DISCUSSION/ANALYSIS: The finance director and the treasurer have developed a financing plan that will meet the financing goals of the City, minimizes the cost of the financing and provide future financing flexibility. The plan is to use the equity in fire station #4 in a lease transaction to fund the improvements. Fire station #4 is the newest fire station in the City so it was built under the most recent building standards. In addition, it meets the credit standards as an essential use facility because it is an integral part of our fire and paramedic operations. Once the improvements to fire station #1 are completed, fire station #1 will be substituted for fire station #4. This will avoid some cost that would otherwise be required using the proceeds of the lease to improve fire station #1. Municipal Finance Corporation has offered the City a competitive lease finance arrangement to accomplish the two remodel projects and complete the construction of the Fire Training Tower. The lease will be in the amount of $1.5 million at 4.25 percent interest. The term will be for a maximum of 10 years. The lease will be a "qualified tax exempt obligation" within the meaning of IRS Code section 265(b)(3) because the proceeds are being used for a governmental purpose. FINANCIAL IMPACT: The Principal and Interest costs for this lease financing are included in the proposed fiscal year 2006/07 budget. The Fire station remodel is budgeted in 100-6090-6091-2500 (Principal) and 100-6090-6091-2510 (Interest). The City Hall remodel project debt service payments are budgeted in 100-1000-1000-2500 (Principal) and 100-1000-1000-2510 (Interest) in the Non - Departmental series of accounts since these costs are not directly attributable to a specific department.