Bond Ordinance 09-05

Here you'll find a copy of Bond Ordinance 09-05, along with some discussion on the ordinance and an explanation of what exactly the ordinance does, how it will applied, and so on - as I understand it.

First, the ordinance itself can be found at this link:

ORDINANCE 09-05 as introduced

Some explanation (some of this will probably be obvious. Just skip past it if it is):

This ordinance allows the borough to issue bonds up to $1,200,000, primarily to purchase properties in the TCE Redevelopment area. See section 7 of the ordinance itself. Not all of the properties listed are in the designated redevelopment area. For examples, 25-27 S Centre Street is the now-closed Philadelphia Fruit, and 1 S. Centre Street is the medical building. There are several others I'm not sure about yet (I walked Park, Chestnut, Centre and Maple, and many buildings don't have numbers). I'll be checking the legal descriptions (Block & Lot numbers) and matching them to businesses, parking lots and so forth. I'll post the full list here in a few days.

The lion's share of the bond monies will go to the previously-announced purchase of the PNC Bank building (located at 9 South Centre) and it's associated parking lots (a large fraction of the triangle lot will come with that purchase). This location is now closed - for those with a PNC Bank account locally, you'll have to go to the new location in the new Maple-Chapel building.

I'll be adding to this throughout the week. If you have any questions, e-mail me at Mark@MABrunton.com and I'll try to answer them, both here and cia e-mail (I won't post your name here - just answer your anonymous question).

Right now, I'm going to go do what a whole lot of folks are about to do - watch the superbowl!

3 February:

I've done a bit of checking on the addresses listed in the ordinances. Turns out that several are included by mistake. The one's that should be removed include:

25-27 S Centre St. - Philadelphia Fruit.

10 E Chestnut Av. - The Railroad Station

1-3 S Centre St. - The Medical Building

19-21 S Centre St. - The Creation Gallery

The remaining properties, all within the defined TCE Redevelopment Zone, will be on the revised ordinance to be presented for adoption February 9. The Verizon parking lot on Park Av., one corner of 17 E Maple that is adjacent to the Verizon lot and 17 E Park Av. (the "House built in a day") are the only properties not belonging to PNC Bank that will be listed on the ordinance, to the best of my knowledge. I'll try to check that out a bit more tomorrow and post anything new that I learn.

I'll post additional data as I find / develop it. I'm going to try to calculate some numbers that will show the monthly cost of purchasing the properties, including interest on the bond and lost property taxes, in the next day or so. Stay tuned!

4 February:

I put together a simple spreadsheet to calculate our annual and monthly costs/losses for a variety of situations. The explanation is below. Here it is:

Looking at "THE BOND" block first - Maximum bonds issued amount to $1.2 million, and are repayable over 30 years. The maximum interest rate is 8%. We may be able to get a lower rate, so the table I've created increments from 2% in steps of 2% up to 8%. So for 8% interest, our payment (principal & interest, or P&I) will be $8,746.86 per month for 30 years, with a total payback amount of $3,148,870.49.

But payments on the Bond are just one part of the total cost. We also have to account for tax losses to get in the ballpark for real costs of this project.

The center section lists the PNC Bank properties and their current tax rates. As you can see, total monthly taxes on the whole, which we will lose by purchasing the property, is $3,994.67. (Tax numbers were verified from two different sources).

In the bottom section, "MONTHLY COST," I've included a breakdown of property taxes by what percentage goes to which entity - borough, school or county. You can see this on your own tax bill. We don't want to include any tax loss for the county in our calculations, because that's money we never see anyway. So in a table similar to the one for "THE BOND," which shows costs for even-numbered percentages from 2 to 8,  I've calculated the Bond P&I+ Borough Taxes (BT) lost, and in the next column to the right I've added school taxes (ST) lost to the calculation.

Since any lost school taxes will have to be made up in one way or another (either by higher school taxes or a payment from the borough similar to what we do with PILOT programs, like the townhomes on Crump Lane), we can add them here for simplicity. So at 8% interest, our total outflow is $11,822.76 per month, or $116,629.97 per year. That's roughly equivalent to seven cents, or 5%, local tax increase to cover the cost.

To make the project zero impact to the borough with an 8% bond, we would have to charge any user of the PNC Bank building $11,822.76 rent per month.

At 6% that's equal to $7,158.81 per month, or $97,573.37 per year, equaling about 6 cents, or just under 5% local tax increase.

To make the project zero impact to the borough with a 6% bond, we would have to charge any user of the PNC Bank building $10,234.71 rent per month.

And so on.

Of course, the situation isn't that simple, but it's close enough to provide some sense of the financial impact. If we assume we will sell the extra properties that come with the bank proper, say to whoever the TCE developer turns out to be, for example, and apply that profit to the outstanding bond balance, we can significantly reduce out-year costs and perhaps bring the entire project more into balance between our project costs and our project revenues. I'll try to work up some sample numbers and post them tomorrow evening.

5 February:

Paying for the Bond and lost taxes costs can be done in five ways. I talked about some yesterday. The entire list:

1. Through increased property taxes;

2. Through lease payments from the bank building tenants;

3. Through selling some or all the non-bank-building properties;

4. Through monies gained from some other recent project(s) in town, like Maple-Chapel;

5. Through an outright grant of money from an outside source (state, federal, private foundation, etc.).

Of these, 1. is not very palatable (though perhaps likely in the short term) and 5. is probably highly unlikely, (though the most desirable).

Regarding 4. - do we have money from another project laying around that would offset a not-insignificant chunk of the PNC Bank purchase? Some say that such claims were made in late 2007 by the current administration. I don't recall if such assertions were made or not, but I also don't know of any big chunk of money laying around waiting to be spent on the Bank, so let's rule that out, for the sake of argument.

That leaves 2. and 3., which I believe are the most likely longer-term payment options.

At 6%, our cost, as discussed yesterday, is $9650, roughly. Can we get that from the lessee from the beginning? If so, then we've solved our problem and still have some property to sell (presumably to the TCE developer, but that's another topic). If we can get several hundred thousand for it, we can pay down the bond somewhat and have a revenue source that is possibly several thousand dollars more than our cost each month!

Now, I don't know what sort of lease income we can get from the Bank building, and I don't know how much we could sell the additional properties for. But just for fun, let's make a few assumptions and see what sort of trends the numbers give us.

This may get a little tricky to follow - bear with me.

This spreadsheet will serve as an example of how we calculate our revenue stream and time to payback any startup costs.

We assume the lessee pays $5,000.00, and at the end of 24 months we get $400,000 from selling the other Bank properties.

We also assume that $400k goes to pay down the bond, and assume we adjust the payment of the bond for the remaining 28 years of its term, and do NOT simply shorten the term of the bond and retain the higher initial payments (if we do that, we won't see any positive cash flow until the end of the bond term).

So with an 8% bond, our initial outflow is reduced from $11,822.76 per month to $6,822.76 per month for the first 24 months. Beginning at month 25, after we've realized our $400,000 from the property re-sales and applied that to our bond, our monthly outflow drops to $5,790.83 per month, leaving us to make up $790.83 per month until the end of the bond term in 2038. NOT the best of situations - it will take just shy of 40 years to recover our "investment."

With a 6% bond, we pay out only $5,234.71 per month for the first 24 months, then the cash flow reverses and we take in $283.87 per month, giving us a total time to payback our initial negative cash flow of about 32 1/2 years. Still not good.

I included rows for four and two percent bond interest just to be consistent with what I presented yesterday, but I doubt if we'll see interest lower than about 5% (At 5%, by the way, our payback time is about 26 1/2 years).

But suppose our lease earns us more money, say $6,000 per month? Or suppose we realize $500,000 from the resale of the properties? What would those do to our figures?

With $6,000 lease income and all else the same, even at 8% bond interest we would see an income of about $209.per month after month 24, giving us a payback time of about 33 years. At 6% interest that becomes income of $1284 per month after 24 months, with a payback time of 27 1/2 years.

Adding an extra $100,000 to the re-sale proceeds along with the $6,000 lease payment and putting that onto the bond yields $951 per month income at 8%, with payback in 29 1/2 years. At 6% those numbers become $1,896 and 24 1/2 years, respectively.

We can play games like this all night, but the point is that the bond costs and resulting payback time may render this an unwise debt to assume.

Tomorrow I'll discuss borough indebtedness a bit, and give my perspective on the risks and potential of the PNC Bank purchase project.

As always, e-mail me at Mark@MABrunton.com with comments or questions.

6 February:

I had a formula error in one column of cells of the spreadsheet I used to calculate the revenue stream table above. Once corrected, it gave a VERY different picture of the finances of the Bank purchase. My apologies - please go back and re-read the February 5 entry so you can see the correct information.

Let's look a bit at the overall indebtedness of the Borough over the past few months. I've rounded everything to the nearest $100,000.

In October 2008, Merchantville's long-term debt sat at about $1,700,000.00.  That's 1.7 million dollars.

In November the Council, including myself, voted for a $1,800,000.00 bond for sewer re-lining throughout the town. That was a wise move - sewer repair costs due to collapsing mains has been on the rise the last few years. Plus, the money to do the work is available very cheap - some at 0% interest, the remainder at around 2%.

In that one move, we more than doubled the borough's long-term debt, though.

Now, in February 2009, we're looking at increasing the debt yet again, this time from a total of $3,500,000.00 to $4,700,000.00.

That's 276% of what it was only three short months ago!

To be fair, that 4.7 Million dollars is less than 2% of the net worth of the borough, and the law allows nearly double that.

Looked at another way though, that's almost $12,400 for every resident of Merchantville!

 Is this what we want?

7 February:

Now I'll talk a bit about some of the risks and potential gains of this deal.

The tenant we're talking with to lease the PNC Bank building will turn it into a brewpub. That's no secret. But just what is a brewpub, anyway? A brewpub is basically a restaurant that sells beer it brews on the premises. They are not just another corner bar with pretzels and peanuts in little bowls (that's still a corner bar). A brewpub prepares food on the premises. They can range from something akin to a mid-range pizza parlor like Vino's in Little Rock, AK to Snake River Brewing and Brewpub in Jackson WY to an upscale establishment like the Columbus Brewing Company Restaurant in Columbus OH (those are just a few examples. Search for brewpubs on the web and you'll find a lot more listings).

Is this project risky? Let's see...

We're obligated to purchase the PNC Bank building and surrounding properties for $950,000. That will not only require a significant monthly bond payment, but we compound out cost by losing over $37,000 in tax revenue each year. Leasing the building out will reduce the monthly cost, but we'll need to sell some of the parking lots to reduce the debt burden and make the project pay, even over a relatively long period of time (10 to 15+ years is likely).

If the brewpub fails to come through, we're stuck with the building, and a BIG cash outflow each month. Could we re-sell the properties? I think so, but consider that our purchase price was negotiated before the real estate value decline, and no effort has been made to even try to renegotiate the deal (even if it is possible). I don't think we would be able to sell the property for anywhere near enough to recoup our costs, especially considering that up to $150,000 of that cost is in fees, and not property value. While I can't back this up with anything but gut feel, I believe we would lose between 300 thousand and 500 thousand dollars of our initial outlay of about $1.1 Million.

I wonder if a brewpub would have much staying power if it DOES come through. Right now, they're popping up all over the country. I've even heard, but haven't verified, that a brewpub is going into Maple Shade - a couple miles down the road from ours. Can the area support TWO brewpubs? And are brewpubs more than just a fad, anyway? If not, we could be left holding the bank when the fad fades and the brewpub shutters it's operation.

Finally, how can we be sure we'll be getting an upscale brewpub, and not a mid-range pizza parlor brewpub? Ensuring the former would be part of pre-lease negotiations with the brewpub owners. I don't think I'm giving away anything by saying that the Mayor is on top of this concern.

Yes, there is plenty of risk here. I am not convinced, however, that it's unreasonable risk.

How about the other side of the coin - potential gains?

If the brewpub is more than just a glorified pizza shop (and I'm confident that it will be, for a variety of reasons) -

The brewpub will advertise the town. The local population by itself won't be enough to support a brewpub, so they'll advertise. I can't remember the last time I heard an advertisement for a business in Merchantville. So any advertising would almost have to be good for the business district.

While most of the folks who come into town to dine at the brewpub will probably leave town after finishing their meal, a few will stay to walk around, particularly on special event evenings like First Friday. That can only help our downtown businesses.

The potential returns to the borough financially should not be "sneered at." While we are likely looking at ten years or more to recoup our total outlay, we begin seeing a positive cash flow in the relatively near term (after re-selling the parking lots). Unless the brewpub subsequently fails, it would remain positive from that point on (so this should not be looked at as another PILOT project from which we will see no benefit for years).

There may be other gains for the town as well, depending on how things play out.

A few notes about the calculations above: They are simplified calculations designed to provide some feel for costs versus "profits." They are very simplified from what the real world will be, and are not meant to predict accurate dollar amounts. The figures I used are "conservative" (pardon that word) amounts - in the real situation I think we will fare somewhat better than these numbers show.

One other thing - we are obligated to buy the PNC Bank properties. If we don't pass the bond ordinance we are not released from our purchase contract because we can't obtain financing - there is no "contingent upon financing" clause (I looked). We would have to find another way to finance the purchase, or default on the contract, lose our $60,000 down payment and quite likely face a lawsuit.

This bond ordinance will be voted up or down at the Council meeting on Monday, February 9 at Borough Hall. The meeting begins at 7:30 pm. There will be a public comment period specifically for this ordinance - come down and tell us what you think. I, for one, will hear and consider what you have to say. I believe others will, too.

8 February:

A letter from the Merchantville Taxpayers' League was distributed around town during the last few days. Today, February 8, Mayor North penned a response. Presented below is the Taxpayers' League letter, followed immediately by Mayor North's letter.

Mark B.