Council approves Clearwater bid, funding option

Northland Security presented members of the Waseca City Council with preliminary funding options for Clearwater Preserve Phase 1 construction during their regular meeting on Tuesday, Oct. 7. The council then approved acceptance of bids and the amount for bonds. 

 

Jessica Green, Managing Director of Public Finance at Northland Securities, reviewed the Clearwater Preserve project with the council and then proceeded to provide three preliminary funding options. 

 

The Clearwater Preserve Development consists of 42 acres of city-owned property split into three phases. Phase 1 will create 17 single-family housing lots; phase 2 will create seven single family lots and 22 twin home lots; Phase 3 will create nine single family lots and 12 twin home lots. 

 

The council first approved the resolution of the development of the Clearwater Preserve Property, then known as the Gaiter Lake project, in 2016. To date, the council has passed resolutions approving residential development of a portion of the Clearwater Preserve area, the preparation of plans and specifications and the transfer of $332,000 from the Northwest Commercial Development Fund to the Clearwater Preserve Development. 

Green presented an “as-bid” total cost for phase 1 of $1.58 million, about $300,000 lower than the preliminary estimate.

 

She summarized funds the city has available to cover the costs. One, from Northwest Commercial Development Fund at $332,035; the Clearwater Reserve Fund has $308,900 and the Annexation and Growth Fund has almost $1.4 million. Total available cash comes to nearly $2 million; the investments are also accruing interest at a rate of 4.7 percent. 

Green presented the council with three financial scenarios, all of which assume the general obligation bonds that would be tax-exempt, bank-qualified, 15-year amortization and an eight-year call date on the bonds, where the city is locked out for the first several years of a bond. Each scenario included different levels of cash provided by the city. 

After Green summarized three different financing scenarios, council members selected  the first one, referred to as “Scenario A.” It includes a par amount of $1,350,00 with a use of cash of $800,000. It includes an average debt service payment of $120,000 a year with a total debt service of $1,750,000 and an average interest rate of 3.5%. Green said the scenario would be credit enhanced, meaning based on the proposed cash going into the scenario, the city can apply to a credit enhanced program, a benefit of the Pre-Filing Agreement (PFA) program that helps large businesses resolve tax issues proactively. Scenario A also includes a public offering method of sale instead of private placement so the city can solicit bids from underwriters. 

 

Finance Scenario B included a par amount of bonds as $1,245,000 with a use of cash of $900,000. The average debt service payment would be $110,000 a year with an average interest rate of 3.5%. The total debt service would be $1,615,000 and the scenario also includes the credit enhancement and public offering method of sale. 

 

Financing Scenario C included a par amount of bonds of $1,095,000 with a use of cash of one million to buy down the project. The average debt service payment would be $100,000 a year with an increased average interest rate of 4.4%. The method of sale for this scenario includes a private placement. Green said the city would prefer public sale of the bonds because of the access to lower interest rates. 

 

She also said the city has a capital levy of $100,000 reallocated to debt service on bonds discussed during the meeting. Green added in this set of scenarios, one of those lots would be sold per year based on a price of $50,000, but that the estimate is very conservative and simply for discussion purposes. 

 

The next step for the council was to consider awarding the construction bids, which the council approved in the first resolution of the meeting with a 4-3 vote. The lowest bid for Phase 1 construction was $1.58 million.

 

Once all elements are selected, Green said the city staff will start to prepare a finance plan to bring back in front of the council in November and move to a bond sale in December. 

After Green’s presentation, councilmember Mark Christiansen asked about the higher interest rate with the lower debt. Green responded that the larger the bond issue, the better it is received by the market. The larger the maturity value, the easier it is to place with certain funds and banks, as the banks hold the bonds with the private placement option. 

 

Green then suggested using cash because of the credit enhancement program, which is only available to utility projects. She said having the borrowing authority related to various pieces of the project (water, sanitary, sewer, streets) will require some additional procedural steps and increase overall costs to the city. 

 

Mayor Randy Zimmerman asked Green which option she would take if she were the council. 

 

“If you are looking to finance, I would say you choose option A or B,” she said due to the size being a little bit larger and working better for public sale, an option for better interest rates. “I think they’re equally good options.” 

 

Green said the main question is whether the council wants to preserve more cash or issue less in bonds. 

 

Councilmember Jeremy Conrath asked if this financing was just for Phase 1 or whether the city  would be looking at this again for each of the following phases. City Manager Carl Sonnenberg responded that it depends on how quickly the lots sell. 

 

After approving the resolution accepting the bids and awarding the construction bid for the Clearwater Preserve Residential Development Phase 1, the council voted on which financial scenario to go with. Christiansen moved for Scenario A, with the cash amount of $800,000. 

 

“I think this is the better scenario,” he said. “I think right now with where we’re at financially, this gets us a little leeway.” 

 

The motion carried unanimously. 

 

City Finance Director and HR Manager Alicia Fischer then presented the resolution for reimbursement for the Clearwater Preserve Development. The resolution would allow the city to be reimbursed for construction costs or engineering costs related to the project that the city is bonding for if they spend any before they issue the bonds or receive the bond proceeds. Fischer said the council will still have additional resolutions and actions coming forward about the bondings in the future.