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Preliminary agreements approved for development of northwest business park
Jan. 2, 2012
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By Ryan Gueningsman
Managing Editor

DELANO, MN – Progress has been made and a lot of groundwork has been laid for the development of a business park just northwest of Delano.

At the Delano City Council’s regular meeting Dec. 20, the council took action on two agreements associated with the project.

The council approved a memorandum of understanding with Ken and Penni Murphy for an agreement with them, and also a preliminary development agreement with Westedge Properties/Delano Development Partners.

Since the city’s 2002 comprehensive plan was approved, Delano has focused its attention to the northwest, with a goal to provide additional land for commercial and industrial development, Delano City Administrator Phil Kern said in a request for action to the city council. He added that the city’s present industrial park is “boxed in,” with very little space left to locate a business or accommodate an expansion.

“The city has enjoyed a very prosperous year this year,” Kern said. “We’ve experienced over $8 million in commercial and industrial growth in 2011. That exceeds the cumulative total of the previous four years combined. That is a testament, I think, to the economic condition of the community.”

He said it’s also a testament to the existing businesses in the community, as three have recently expanded in the industrial park over the past 18 months.

“We’re very lucky to have that,” Kern said. “One of the main objectives is to try to provide the space for those businesses to grow in town, rather than force them to leave because we don’t have the opportunity for them to stay.”

In 2006, private development groups Westedge Properties and Delano Development Properties submitted land use applications for the development of its 57-acre parcel along Highway 12. The parcel, known as the “Moonen property,” was the subject of the development plan at the time. The process to install infrastructure and improvements to the site was overwhelming to the private financial model, and the project ceased, according to Kern.

In 2009, the council at the time identified the development project as one of its primary goals. Meetings took place between city staff, representatives of the Westedge Properties/Delano Development Partners, and also Ken and Penni Murphy, who own land adjacent to the Moonen property.

Kern said it was determined both parties still had interest in the development, but each property individually had burdens that made development difficult alone.

Also in 2009, the city began working toward acquiring portions of the Murphy property. The Murphys have maintained the position, since early in the development process, they did not want to participate in the land development process.

“The Murphys made it clear they wanted to sell their land to a willing buyer when the time was right, and exit the process in that fashion,” Kern wrote.

The Westedge Properties/Delano Development Partners group has a much different approach to the project, Kern said. In early 2010, city staff and these two entities began working on the framework for a “public/private partnership” for development.

Since that time, a proposal was created that “ultimately provides the private development group with the opportunity for reward, but also sharing in the risk of the project,” Kern explained.

Both agreements approved by the city council are to express good faith of all parties involved to continue on the project under the terms outlined, Kern said. Both agreements are non-binding, with termination clauses for all parties involved.

Murphy preliminary agreement

Kern explained the agreement with Ken and Penni Murphy is the least complex of the two agreements.

Essentially, the Murphy agreement is a letter of intent to purchase the property, he said.

The Murphys have about 166 acres of undeveloped property, of which about 58 percent would be unbuildable and used for storm water, ponding, and wetland developments in the master development plan. The remaining 42 percent of land would be available for development.

The Murphys’ stated asking price for the property is $2,310,752. The city plans to gain rights to purchase the property, but delay the actual purchase transaction until development projects are secured, Kern explained. This would allow the acquisition of property in a pass-through fashion.

City staff and the Murphys have been working toward an agreement that would divide the property into four pieces, which would allow the pieces to then be acquired over time. The Murphys have also requested interest payments once the option agreement starts.

As part of the agreement with Westedge Properties/Delano Development Partners, the city will convey all interests in the Murphy agreement to the group upon the closing of the first sale of property.

The council reviewed the four “phases,” and Kern said, ultimately, the development project is planned with the intent of the city not becoming the owner of marketable property or responsible for development. The agreement also outlines terms regarding the waiver of special assessments in the event the options are not exercised.

As part of the greater development project, and the relationship with Westedge Properties/Delano Development Partners, the city is using special assessments as the means to secure and pay for public improvements for the business park.

Westedge Properties/Delano Development Partners agreement

Kern said this agreement is a more typical development agreement which outlines city and developer requirements.

An important point for both agreements, Kern said, is the concept of a “trigger point.” This means a commitment by an end user or users to purchase at least 10 acres of land and build at least 10,000 square feet of building space.

This transaction, or series of transactions, will then provide cash flow for the developer and the city to provide a minimum level of security against the risks of the project.

Before getting to that point, Kern outlined a number of “metaphoric dominos” that first need to be set in place, including surveys, soil borings, land approvals and annexations, the development of final public improvement plans, a plan for an intersection on Highway 12, marketing, and securing additional outside funding.

“Once the trigger point has been reached and all of these items take place, the development will require the investment of approximately $4.1 million of public improvements,” Kern wrote. He said this is a rough cost estimate and based on limited information at this point.

Kern explained the city is proposing to finance these improvements through special assessment general obligation bonds, which will be secured by land owned by the development group. If the development group fails to make payments, the city can secure and sell the land itself to recover funds to repay the debt obligations.

The council also discussed terms of repaying special assessments, as well as noting the core of the financial relationship between the development group and the city is centered around a principle of “aligned interest.”

“Both parties are going to share a similar amount of risk. Both parties are going to realize those benefits at about the same time,” Kern said.

He added it’s important for the city to be protected if the development doesn’t go as planned. He reviewed two “tests” in place – a collateral test that makes sure the value of the land securing the public improvements is sufficient to cover the city’s obligation, and a cash flow test, which determines the city will be able to make debt service payments in a default scenario.

He reviewed a plan to provide up to six years of debt service payments without any additional burden on existing taxpayers, and said the creation of a debt service reserve fund would need to take place prior to hitting the trigger point.

Kern said the biggest risk with the project, at this point, is market conditions, which is why the trigger point concept is in place.

Benefits of the park include growth in the city’s tax base, the creation of new jobs, and the generation of economic activity. It is hoped this project will be “shovel ready” by this spring, Kern added.

He noted the Delano Area Chamber of Commerce’s economic development committee is planning to meet with representatives of Westedge Properties/Delano Development Partners to assist in the marketing and promotion process.

“This is a lot of years in the making,” Council Member Derek Schansberg said.

Delano Mayor Dale Graunke said this is another step in a long process, and said the project is “getting a little closer to fruition.”

“Instead of waiting and reacting to probably the economy, we’re trying to be ready for it, instead of waiting and doing something after everything is going,” Graunke said, adding that time has been lost on the process due to issues with county ditch 34 that have now been resolved.

Will Haack, representing the Delano Area Chamber of Commerce as a board member and also as the chairman of the chamber’s economic development committee, said there has been a lot of discussion regarding this project at economic development committee meetings and chamber board meetings.

“I just want the council to know we’re very supportive of it,” Haack said, noting the pending meeting with Westedge Properties/Delano Development Partners to assist in marketing the project.

“As the chamber, we look at the retention, the growth, and the attraction of businesses into Delano, and we suffer from no capacity on the industrial side, and limited capacity on the commercial side, and this very much addresses that,” Haack said.

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