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Home My WebLink AboutR-2006-010 Sports Center Restaurant Section 108 Loan Fund ApplicationRESOLUTION NO. R-2006- 10 A RESOLUTION Authorizing the City Manager to submit an application for funding from the Section 108 Loan Guarantee Program of the United States Department of Housing and Urban Development (HUD) in the amount of $75,000 for Sports Center Restaurant. WHEREAS, the City of Yakima has been awarded a $1 million Economic Development Initiative (EDI) grant from the U.S. Department of Housing and Urban Development (HUD); and WHEREAS, the grant award from HUD is conditioned upon the usage of at least $4 million loan from the HUD Section 108 loan guarantee program; and WHEREAS, the EDI grant has been awarded for the capitalization of an Economic Development Loan Fund; and WHEREAS, the City has worked with the National Development Council (NDC) in developing the guidelines for the program that at provides more flexibility and opportunity for development; and WHEREAS, a request for financing from Sports Center Universe, LLC was determined to meet the program eligibility criteria and was ready to proceed; and WHEREAS, the NDC has reviewed the application and determined that Pepper's application meets the criteria for this type of loan, demonstrates a good plan for expanding its business, and possesses sufficient collateral to back this loan in case of default; and WHEREAS, economic development is a priority for the City of Yakima, and the City intends to approach economic development on an inclusive, comprehensive basis which involves public, private and community-based efforts to achieve new investment and redevelopment in the City; and WHEREAS, under Section 108 of the Housing and Community Development Act of 1974, federal loans are available for the purpose of funding property rehabilitation for economic development activities that will create new and stable jobs for low and moderate -income residents; now therefore BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF YAKIMA: The City Manager is hereby authorized to submit an application for funding from the Section 108 Loan Guarantee Program of the United States Department of Housing and Urban Development (HUD) in the amount of $75,000 for Sports Center Restaurant. The City Manager is hereby designated as the official representative of the City to act in connection with that funding application and is authorized to take such additional actions as may be necessary and prudent to complete the application process. ADOPTED BY THE CITY COUNCIL this 7th day . February, 2006. ATTEST: City Clerk avid Edler, Mayor CITY OF YAKIMA APPLICATION FOR SECTION 108 LOAN GUARANTEE FROM U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT FOR THE SPORTS CENTER, a restaurant IN THE AMOUNT OF $75,000 JANUARY 23, 2006 SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON Project Description The purpose of this Section 108 application is to assist with economic and community development activities in the City of Yakima. The proceeds will be drawn from the previously approved Yakima Economic Development Loan Fund. The borrower will be Sports Center Universe, L.L.C. (Sports Center Universe). Sports Center Universe will use the proceeds of the loan as initial working capital to operate a start up restaurant in the sports center building at 214 East Yakima Avenue in Yakima, Washington. The vacant building was purchased by Sports Center Universe L.L.C. on January 26, 2005 for $180,000. On August 9, 2005 Sports Center Universe borrowed $320,000 from Central Valley Bank, N.A. to refinance debt associated with the acquisition of the building and to remodel the first floor of the building for use by a new restaurant under the name of The Sports Center and to be operated by Sports Center Universe. The loan will be the fifth and final loan within this loan fund. The loan is for $75,000 including fees and closing costs. It will be for a 10 year term. The City of Yakima will use the $18,750 in EDI funds associated with the loan as a loan loss reserve. The borrower, Sports Center Universe, L.L.C. is a limited liability company comprised of four members: Christopher Malland of Yakima, Washington; Dave Givant-Eastlick of Sacramento, California; Eric Phillips of Saint Helena, California; and Benjamin Grossman of Yakima, Washington. Each member holds a 25 percent interest in the company. Sports Center Universe has used the proceeds of the Central Valley Bank loan to remodel the building's first floor to accommodate the new restaurant. The original concept was to operate a "high class" restaurant, with an entertainment area with a stage for live music, a bar space, a cafe, dining room, and a brewery on the first floor of the building. The second floor and basement were to be remodeled for other uses as cash flow allowed. Because of increased costs associated with remodeling of the building, the inclusion of the brewery has been postponed until this summer The original concept also included a card room and a number of amusement games common to sports bars. Again because of costs, these have been dropped from the current plan. In addition to the Central Valley Bank loan, the owners will enter into a $50,000, 5 year lease with Dolsen Leasing for kitchen and bar appliances and a point of sales system. This lease is conditioned on obtaining the City of Yakima working capital loan. Kitchen and bar supplies are anticipated to be provided though supplier agreements. The owners estimate that they have contributed $100,000 in cash and sweat equity to the project to date, including the $54,000 down payment on the building purchase. It is estimated the project will create 18 full time jobs, the majority of which will be available to low -moderate income persons. Project Costs Building Acquisition 180,000 Refinance member loan used to re -roof the building 40,000 Bank loan fees 4,000 Renovation of main floor 150,000 Kitchen and Bar Appliances and furniture 43,500 Point of Sale System 16,500 2 SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON Operating Capital (including beer, wine and liquor) 75,000 Total $509,000 Project Sources Central Valley Bank Loan 320,000 Appliance Lease 60,000 Operating Capital Loan 75,000 Equity 54,000 Total $509,000 The loan will be secured by a second deed of trust on the real estate and by the personal guarantees of all members of Sports Center Universe, L.L.C. The real estate was appraised by Anthony E. Clayton, for Central Valley Bank at $680,000 as improved with a high class restaurant, with an entertainment area with a stage area for live music, bar space, a cafe, a dining room, and a brewery. The borrowers have since postponed the brewery and scaled back some of their planned entertainment. They have maintained the stage area and will provide live music for their patrons. Section 108 Submission Requirements A. Community Development Objectives The Section 108 loan fund was established to promote economic and community development in the City of Yakima's Renewal Community. A loan to Sports Center Universe, L.L.C. will further the City of Yakima's Economic Development Goals as listed in the City's 2000 — 2004 Consolidated Plan. The Strategic Plan section of the Consolidated Plan states that: "The City of Yakima is committed to combating poverty on all fronts. The chief weapon in this battle is economic development. This has been identified by our city council as our number one priority. We are actively engaged in fostering and pursuing new partnerships with both public and private organizations to create new employment opportunities and better utilize our limited resources to meet community needs." Stated in the Strategic Plan is the expectation that the City of Yakima will directly assist businesses and development projects with Section 108 loans. 3 SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON B. Description of how the Proposal meets one of the Criteria in 24 CFR 570.200(a)(2) - National Objectives. Section 570.200(a)(2) lists the National Objectives that must be met by all Community Development Block Grant and therefore Section 108 projects. This section requires that all funded activities meet one of three national objectives. These objectives are: 1) benefit to low and moderate income families; 2) aid in the prevention or elimination of slums or blight; and 3) meeting other community development needs having a particular urgency because existing conditions pose a senous and immediate threat to the health or welfare of the community where other financial resources are not available. Section 570.208 defines the criteria under which an activity may meet the requirements of Section 570.200(a)(2). Each project funded through the Section 108 loan fund will meet one of the National Objectives listed in Section 570.200(a)(2) as detailed in Section 570.208. The loan to the Sports Center Universe, L.L.C. will allow the company to create 18 new jobs, the majority of which will be available to low- and moderate -income persons. The loan will specifically meet the requirements of Section 570.208(a)(4) and (a)(4)(iv). Section 570.208(a)(4) defines activities that meet the requirements of 570.200(a)(2) through the creation or retention of jobs. The subsection states that to qualify as a job creation or retention activity the project must "create or retain permanent jobs where at least 51 percent of the jobs, computed on a full time equivalent basis, involve the employment of low -and moderate -income persons." Sections 570.208(a)(4)(i) & (ii) specify that to qualify under Section 570.208(a)(4) the jobs created or retained must be either held by or be available to low- and moderate -income persons. Section 570.208(a)(4)(iv) lists minimum standards for the presumption that jobs will be "held by or made available to low- and moderate -income persons." Finally Section 570.208(a)(4)(v) states that a census tract will qualify for the presumption permitted under paragraph (a)(4)(iv) if it meets the following criteria: A: It has a poverty rate of at least 20 percent as determined by the most recently available decennial census information; B: It does not include any portion of a central business distract, as this term is used in the most recent Census of Retail Trade, unless the tract has a poverty rate of at least 30 percent as determined by the most recently available decennial census information; and, C: It evidences pervasive poverty and general distress by meeting at least one of the following standards. (1) All block groups in the census tract have poverty rates of at least 20 percent; (2) The specific activity being undertaken is located in a block group that has a poverty rate of at least 20 percent; or (3) Upon written request of the recipient, HUD determines that the census tract exhibits other object determinable signs of general distress such as high incidence of crime, narcotics use, homelessness, abandoned housing, and deteriorated infrastructure. The Sports Center building is located in a census tract with over 40 percent poverty and 4 SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON within a block group with greater than 20 percent poverty. The project will qualify for the presumption test available under 570.208(a)(4)(iv). C. Community Development Block Grant Eligibility In addition to furthering a National Objective, all Section 108 loans must also meet the eligibility requirements of the Community Development Block Grant program. All activities funded through the City of Yakima's Section 108 loan fund will meet the program eligibility requirements as set forth in Sections 570.201,202,203 or 204. The loan to Sports Center Universe, L.L.C. meets the eligibility requirements of Section 570.203(b). Under 24 CFR 570.203 (b) the City can provide assistance to private for- profit business, including, but not limited to, grants, loans, loan guarantees, interest supplements, technical assistance, and other forms of support, for any activity where the assistance is appropnate to carry out an economic development project, excluding those described as ineligible in Section 570.207(a). In addition, all activities funded under Section 570.203 must the guidelines provided in Section 570.209 (Guidelines for evaluation and selecting economic development projects). Section 570.207(a) excludes: buildings or portions thereof, used for the general conduct of government, general governmental expenses and political activities. Proceeds of the Section 108 loan to Sports Center Universe, L.L.C. will not be used for the general conduct of government, general governmental expenses, nor for political activity. Section 570.209 Guidelines Guidelines and Objectives for Evaluating Project Costs and Financial Requirements. All activities eligible under Section 570.203 must meet the requirements of Section 570.209. This section outlines guidelines for ensuring that a proposed project carnes out an economic development objective in an appropriate manner. These guidelines under 570.209(a) are not mandatory but serve as a framework for financially underwriting economic development projects. In evaluating proposed projects benefiting from the Section 108 Economic Development Loan Fund the City of Yakima uses the following criteria. Project Management The City of Yakima, Department of Community and Economic Development (DCED) administers the fund. DCED will underwrite all loans and uses the National Development Council (NDC) to advise on project feasibility. NDC has a more than 35 - year track record of assisting local governments in structuring and implementing 5 SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON economic development and housing projects. Underwriting Standards for City of Yakima EDI / Section 108 Loan Fund 1. National Objective All loans must meet a national objective as specified in 24 CFR 570.208. No loan shall be approved without verification of compliance with the national objective requirements, specified in 24 CFR 570.208, by the Washington State Office of the United States Department of Housing and Urban Development. 2. Eligibility In addition to meeting one of the program's National Objectives all projects assisted through the loan fund must fall within one of the eligible activities listed in 570.703. 3. Guidelines for evaluating and selecting economic development projects For all activities eligible under 570.703(i), economic development activities, the project will be required to meet the guidelines listed under 570.209: Guidelines for evaluating and selecting economic development projects. No loan shall be approved without verification of compliance with the public benefit standards as specified in 24 CFR 570.209(b) by the Washington State Office of the United States Department of Housing and Urban Development. 4. Financial Underwriting In loan underwriting the City shell adhere to the follow criteria. A. Real Estate Loans Real Estate Loan shall be evaluated based on: Ability to Repay Collateral Development Team Capacity and Experience Developer Commitment Character of the Developer 6 SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON Ability to Repay Projects to be funded will have at least a 1.1 projected debt coverage ratio. If the project includes more than a small percentage of its rental income from start-up or financially weak tenants then a higher debt coverage ratio shall be required. Collateral Projects to be funded should have a loan to value ratio of not greater than 80 percent. This value must be supported by an appraisal prior to funding. If greater than an 80 percent loan to value ratio is proposed, outside collateral sufficient to provide an 80 percent loan to value shall be required. In certain cases outside guarantees may suffice for additional collateral. Development Team Capacity and Experience Projects funded shall have a development team that has both the capacity and experience to complete the project as demonstrated by past projects and financial strength. Developer Commitment Developer commitment can take many forms. While each project is likely to be different the fotius of developer commitment that can be expected include: adequate equity, guarantees of completion, guarantees to fund shortfalls or guarantees of minimum cash flow. Character Projects to be funded should have developers with good credit histories, demonstrated integrity, and quality references. B. Business Loans Business Loans shall be evaluated based on: Ability to Repay Collateral Guarantees SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON Financial Strength Management Experience Character of the Principals Ability to Repay All businesses funded with the program shall have existing cash flow (profits after tax, plus deprecation, plus excess officers income, plus rent savings if applicable) sufficient to repay the loan. Projections must be supported by strong evidence that they will materialize. Collateral All business loans must be supported by collateral. Real Estate must be supported by an appraisal and will be generally accepted up to 80 percent of its value. Machinery and equipment depending on its nature will be accepted from 40 percent to 60 percent of its fair market value. Accounts receivable and inventory will nonnally be used to secure operating debt and will generally not be taken as collateral. Outside collateral such as personal residences shall be valued up to 90 percent of their fair market value. Guarantees All principals with 20 percent or more or a controlling interest, if less than 20 percent, shall provide personal guarantees. Financial Strength Three years of financial statements on the business plus a personal financial statement on all principals of the business shall be analyzed to determine if the company is well run and has the ability to manage its accounts and pay its obligations. Management Experience The management must have experience in the business or in a similar business, be able to demonstrate an ability to manage and have the depth in management to withstand unforeseen transitions. Character of the Principals SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON The personal financial statements and credit history of the principals must demonstrate honesty and trustworthiness. D. Eligibility under 24 CFR 570.703 Each of the projects to be assisted with Section 108 guaranteed loan funds and Economic Development Incentive grant funds must meet one of the eligibility requirements listed in 24 CFR 570.703. The initial two projects detailed in this application are eligible under 570.703(i), - economic development activities eligible under Section 570.203. Other projects to be funded under the program may also qualify under 570.703 (a)(b)(c)(d)(e)(f)(h)&(1). E Project Evaluation 1. Project Underwriting - Sports Center Universe, L.L.C. — DBA The Sports Center a. Ability to Repay This loan to the Sports Center Universe L.L.C. is for initial operating capital to start a new restaurant. Since this is a new business venture, it must be considered speculative in that it relies on income derived from the operations of a currently vacant property. In evaluating the business's projections Central Valley Bank labeled the borrower prepared projections optimistic. The bank instead relied on sales and expenses from a similar type of restaurant located in downtown Yakima to determine profitability and ability to repay. In doing so, the bank reduced the restaurant's projected sales to 37 percent of the borrower's estimate. At this reduced level of sales, the bank felt that the restaurant would be still be profitable and able to service its debt obligations. While the City of Yakima takes some comfort from the bank's analysis, it will also look to the members of the LLC to fund any operating shortfalls. Of the four members of the L.L.C. only one will work in the restaurants while the other three will maintain their current employment. b. Collateral The loan will be collateralized by a second deed of trust in the real estate, and a second security interest in inventory, equipment and fixtures. The appraised value of the real estate as improved is $680,000. Because of the 9 SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON modestly scaled back nature of the improvements the City has estimated the appraised value as $600,000. The loan to value at the reduced value of $600,000 is 66 percent. The loan to value at the appraised value is 48 percent. A copy of the appraisal is attached. c. Guarantees The four members of the L.L.C. will all personally guarantee the loan. d. Financial Strength In evaluating the loan, consultants to the City of Yakima have reviewed the business plan, personal financial statements, tax returns, credit reports, projections, reviewed the collateral and have evaluated the site. While the projections appear quite optimistic, even scaled back by 60 percent they still show an ability to repay. In addition, all of the members of the ownership L.L.C. will actively participate in the restaurant operations. One of the members will work for the restaurant. The other three members, while maintaining their current employment, will have active rolls in management and operation of the restaurant. Two of the members have significant personal net worth. e. Management Experience Christopher Malland has lived in Yakima for the past 11 years and currently works as an insurance agent for Terril, Lewis and Wilke Insurance, Inc. Benjamin Grossman recently moved to Yakima from St. Helena, California. He currently works for Windy Point Winery. Eric Phillips will relocate to Yakima in February to work in the business. David Givant-Eastlick is the Chief Financial Officer of Ron DuPratt Ford in Dixon, CA within the Sacramento metropolitan area. Three of the members of Sports Center Universe have direct food and restaurant experience. Eric Phillips has the broadest experience having worked as a soux chef and line cook in a number of established restaurants, as well as managing restaurant kitchens. Benjamin Grossman has direct brewery management experience. Malland, while having worked in a number of restaurants, will not directly work in the Sports Center. His experiences in the front of the house in a number of restaurants will be valuable to the new operation. f. Character of the Principals All of the L.L.C.'s members are individually successful and of good character. SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON 2. Section 570.209 Guidelines for evaluating project costs and financial feasibility a. Reasonableness of the Proposed Project Costs Each use of loan funds shall be evaluated to ensure the reasonableness of proposed project costs. The scope of this evaluation shall depend on the size and nature of each project. Care will be taken to use third party evaluations of costs wherever appropriate, and particular attention will be exercised when an activity involves a non -arms -length transaction. The buildings rehabilitation is currently 90 percent complete. The restaurant and bar equipment will be provided through a lease from Dolsen Leasing. The section 108 loan will be for operating capital. The City of Yakima will not have construction exposure. Because the restaurant expects to have a negative operating cycle it should have minimum operating capital needs after initial start up. It is the borrowers and the City's belief that a $75,000 operating capital loan should be more than sufficient. b. Commitment of all Sources of Funds. The City and its consultants shall review every project to verify that all sources of funding are committed and available prior to approval of an activity to be funded by the Section 108 /EDI fund. The project as proposed will be complete before the Section 108 loan is to be fund. Approval shall be conditioned on the Sports Center having obtained both an equipment lease and vender agreements for restaurant and bar supplies. c. Substitution of CDBG funds for Private Sources. City staff, assisted by consultants, will review all projects to insure that each loan minimizes the use of CDBG funds. It is in the City of Yakima's self interest to insure that there is no substitution of CDBG funding for non-federal funding. Given the limited availability of federal funds, the city staff will work diligently to maximize the use of private, non-federal funding in all projects. All projects will be reviewed to insure that private sources of financing have been maximized and that the rate of return on equity is reasonable and within general standards. 11 SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON The Section 108 funds are not being used to substitute for private sources. The start up nature of the project makes conventional operating capital unlikely. The Section 108 loan is at a rate and term that is not conventionally available and as such it will help assure the success of the project. d. Feasibility of the Project. All projects seeking assistance under the Section 108 / EDI loan fund shall be evaluated as to project feasibility. The scope of each evaluation will depend on the nature of prospective projects. For existing businesses, three years of financial statements will be reviewed and analyzed, projections evaluated and project costs verified. For business start-ups, projections will be compared to industry averages and evaluated by others experienced in the line of business. In addition, at risk capital will be required on the part of the borrower. For real estate projects, appraisals will be required and reviewed, appropriate pre -leasing levels will be set and prospective tenants' credit worthiness will be evaluated. In some cases formal market feasibility studies will be required. In other cases less formal evaluations will be sufficient. In all cases the prospective borrowers' experience and capacity to perform will be reviewed. Please refer to the discussion under project underwriting above. e. Return on owner's equity. Staff will evaluate all projects to determine the owner's return on equity and compare this projected return to industry norms. The loan fund will seek to participate in projects where its participation will help secure the owner a return commensurate with the risk. Projects where the return on equity is high will need to demonstrate why the fund's involvement is necessary, or why its participation should not be lessened. Projects where the return on equity is low will need to further justify feasibility and accuracy of costs. It shall be the goal of the fund to maintain a viable portfolio of loans with the minimum fund involvement. The project is an operating business; as such return on owner's equity is not a meaningful exercise. Based on the Central Valley Banks expectation for return the venture will be profitable but not unreasonably so. f. To the extent practicable the Section 108 funds should be disbursed on a pro rata basis It shall be a goal of the fund to disburse funds on a pro rata basis with SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON other funds being used in specific projects. In those situations where pro rata disbursement is not followed, staff will justify the procedure and seek alternative means to mitigate risk. The City will fund only after the project is ready to begin operations. It is anticipated that the members of the L.L.C. will obtain a bridge loan to be taken out when the Section 108 funds. 2. Standards for evaluating public benefit All projects eligible under Section 203 and Section 204 will be required to comply with Section 570.209. Section 570.209(b)(1) establishes the standards for evaluating public benefit in the aggregate, Section 570.209(b)(2) applies those standards and 570.209(b)(3) establishes the standards for individual activities. All projects funded through the Section 108/EDI loan fund will comply with the standards of subsections 570.209(b)(1), (2) & (3). All projects funded through the loan program will be required to meet the individual standard of Section 570.209(b)(3). The City of Yakima anticipates qualifying projects under both 570.209(b)(3)(i)(A) & (B) - the creation or retention of at least one full-time equivalent permanent job for every $50,000 of CDBG assistance and the provision of goods and services to low- and moderate - income persons where the CDBG assistance does not exceed $1,000 per low- and moderate -income person to which goods or services are provided by the activity. The Sports Center Restaurant will create approximately 18 full time equivalent jobs. This represents a ratio of 1 job for every $5,208 in combined Section 108 and EDI funds. Projects assisted with the loan fund will be located within the federally designated Renewal Community. Within this area all census tracts have levels of poverty exceeding 40 percent. Section 570.209(b)(2)(v)(F) exempts activities from meeting the aggregate standard for public benefit if the activity provides assistance to businesses that operate within a census tract that has at least 20 percent of its residents who are in poverty. If a project should fall outside of this area, it will be required to meet the aggregate standard as well as the individual standard. The Sports Center Restaurant is within the Renewal Community boundary. As such it can be exempted from the aggregate standard. Because of the number of jobs created by the project, it will not be necessary to exempt the project from the aggregate standard. The project expects to exceed the minimum individual job creation standard. D. A Description of the Pledge of CDBG Guarantee 13 SPORTS CENTER RESTAURANT - A SECTION 108 LOAN FUND LOAN YAKIMA, WASHINGTON The City of Yakima understands that if the participants in this Section 108 loan fund fail to make timely payments and the City of Yakima therefore fails to make a required payment on its notes, HUD will deduct that payment from the City of Yakima's CDBG Letter of Credit and in accepting this loan guarantee, the City of Yakima has pledged its CDBG funds and all other applicable grants as security for the guarantee. (Please refer to Attachment A - Certifications.) E. Schedule of Loan Repayment Principal repayments will be due monthly from the borrowers reflecting an annual principal payment due HUD on August 1 of each year as follows: Date Principal Amount Date Principal Amount August 1, 2006 $ 2,000 August 1, 2011 $ 8,000 August 1, 2007 6,000 August 1, 2012 9,000 August 1, 2008 6,000 August 1, 2013 9,000 August 1, 2009 7,000 August 1, 2014 10,000 August 1, 2010 8,000 August 1, 2015 10,000 14 BUSINESS OF THE CITY COUNCIL YAKIMA, WASHINGTON AGENDA STATEMENT Item No. For Meeting Of: February 7, 2006 ITEM TITLE: Consideration of a resolution approving a Section 108 loan application and authorizing the City Manager to submit application materials to the United States Department of Housing and Urban Development for a $75,000 loan to Sports Center Universe, LLC. SUBMITTED BY: it ook, Director CONTACT: " Michael Morales, Deputy Director 575-3533 SUMMARY EXPLANATION: Attached are the Resolution and Loan Application for a $75,000 operating capital loan to Sports Center Universe, LLC (Sports Center Restaurant). Funding for the loan will come from the city's Economic Development Loan Fund, which is capitalized by an Economic Development Initiative grant and Section 108 loan from the U.S. Department of Housing and Urban Development. Sports Center Universe will use the proceeds of the loan as initial working capital to operate a start up restaurant in the downtown Sports Center building at 214 East Yakima Avenue. The loan will be the fifth and final loan within this loan fund. The loan will be for a 10 year term, and the city will use $18,750 in EDI funds associated with the loan as a loan loss reserve. It is estimated the project will create 18 full time jobs. Sports Center Universe has used the proceeds of a senior bank loan for acquisition, and to remodel the building's first floor to accommodate the new restaurant. The concept is to operate a restaurant, with an entertainment area and stage for live music, a bar space, a cafe, dining room, and a brewery on the first floor of the building. The second floor and basement are to be remodeled for other uses as cash flow allowed. Because of increased costs associated with remodeling of the building, the inclusion of the brewery has been postponed until this summer CONTINUED ON NEXT PAGE Resolution X Ordinance Contract Other: Loan Application Funding Source: U.S. Department of Housing and Urban Development Approval for Submittal:• City Manager STANK RECOMMENDATION: Staff recommends approval of the resolution. BOARD RECOMMENDATION: Economic Development Committee recommends approval. COUNCIL ACTION: Resolution adopted. RESOLUTION NO. R-2006-10 1 In addition to the Central Valley Bank loan, the owners will enter into a $50,000, 5 year lease for kitchen and bar appliances and a point of sales system. This lease is conditioned on obtaining the City of Yakima working capital loan. Kitchen and bar supplies are anticipated to be provided though supplier agreements. The owners estimate that they have contributed $100,000 in cash and sweat equity to the project to date, including the $54,000 down payment on the building purchase. The borrower, Sports Center Universe, L.L.C. is a limited liability company comprised of four members: Christopher Malland of Yakima, Washington; Dave Givant-Eastlick of Sacramento, California; Eric Phillips of Saint Helena, California; and Benjamin Grossman of Yakima, Washington. Each member holds a 25 percent interest in the company. The National Development Council (NDC) has reviewed the application and determined that the application meets the criteria for this type of loan, demonstrates a sound plan for operating the business, and possesses sufficient collateral to back this loan in case of default. NDC has also recommended that the following conditions be met prior to loan closing and fund disbursement: 1. All applicable city, county, state or federal certificates and licenses must be issued, including: Certificate of Occupancy, Business License, Liquor License, Labor & Industnes permit, and Health Department Permit. 2. In addition to the Loan Agreement and Promissory Note, the loan shall be evidenced by the personal Guaranties signed by the principals, with each member guaranteeing the full amount of the loan. The parties have also agreed to execute additional agreements to grant a security interest as needed. 3. Approved and executed equipment lease and vendor agreements. 4. Liability insurance fully paid for the first year. 5. UCC filings on brewery equipment and fixtures. 6. 2nd Deed of Trust on building with not more than $320,000 in a senior lien position. 2