Twenty-year financing plan totals $4.7 million after interest; financial projection shows profit
Clint Riese and Mary Bailey
Forest Lake Times
District 831 officials hope to close the school district’s purchase of the Forest Lake Area Athletic Association Sports Center next week, in the wake of the facility hitting the market at a sheriff’s foreclosure sale Thursday, Nov. 21.
The district has been looking into buying the ice arena since being approached by FLAAA in December 2011 and moved close to doing so last week after the School Board on Nov. 7 signed off on three resolutions relating to the deal.
With the closing looking unlikely to occur before the sheriff’s sale, the district will be looking to buy the 5-year-old complex from the new owner, Business Manager Larry Martini said. Often, banks holding a mortgage will foreclose on a property, then buy it back for the amount left on the mortgage and sell it to a different party. Martini said the banks with the sports center mortgage have agreed to offer the facility to the district at the same terms the district negotiated with FLAAA.
“Everyone has agreed that if our process takes longer, they wouldn’t change the terms of the sale price,” he said.
Those terms involve a lease purchase agreement whereby the district would pay a set amount over 20 years, at which time it could obtain the building’s title for a nominal fee. The purchase price would be $3.3 million, but the district would pay $4.7 counting interest and fees. Of that total, $300,000 would be paid up front from the district’s general fund.
The district’s financing agent, Springsted Inc., is marketing securities known as certificates of participation to investors who would hold the facility’s title. Proceeds generated would finance the transaction, but they will not be available until January, Martini said. One of the School Board’s resolutions on Nov. 7 authorized Martini and Superintendent Linda Madsen to use existing general funds to facilitate the closing as soon as possible. This would allow the district to take advantage of the facility’s most profitable season. The proceeds of the certificate sale would be used to replenish the general fund.
Martini compared the lease purchase process to an individual buying a motorcycle for $5,000. The buyer could use $5,000 of his own cash and drain his account, or he could finance it at a favorable interest rate without taking on the risk of depleting his cash at hand. Either way, it’s still his bike, Martini said.
The interest rate for the arena purchase would likely be between 3 and 4 percent, Martini said. Providing a down payment will likely contribute to lowering the rate, while a state law giving the district an annual option to walk away from the deal will likely raise it.
A lease purchase agreement and related paperwork could come up for School Board approval Dec. 5.
“All that should happen,” Martini said of the financing plan. “Now, that’s in a perfect and normal world, and I think we’re close to that, but if nobody wants to lend us money at 4 percent, if they’ll only lend us money at 6 or 7 percent, then we may have to rethink this.”
The district’s most current pro forma estimates annual revenue of $686,300. Rental fees account for $600,000 of this total. The district has paid about $100,000 in annual rental fees to FLAAA, as the sports center is home ice for the Ranger hockey teams. These payments would continue, Martini said, though the district would essentially be billing itself. No ice arena lease levy is contemplated in the financials. In fact, the district would eliminate the current arena levy of about $75,000.
Annual expenses are estimated at $367,300. Most of this price will go to salaries and benefits, utilities and maintenance. Of an estimated $319,000 in operating income, the annual lease purchase payment will take up approximately $208,000, leaving an annual cushion of about $110,000.
Martini called the calculations conservative, noting they were based on revenues produced by FLAAA. The school district is better positioned to run the facility, Martini said, due to efficiencies in areas such as maintenance, marketing and accounting. Current rates for ice time are likely below market, he said.
“We’re hoping to grow it. If we just use what they did, that’s a conservative estimate,” Martini said. “Let’s say we get a junior hockey team and we get more figure skating than currently, well, that would be additional rental income. … I don’t see this as a proposition that has a trajectory of decline. I see it as a trajectory of opportunity.”
In a worst-case scenario, the school could exercise the annual option to walk away from the agreement without owing anything. To do so, it would be required to demonstrate significant financial hardship.
“I think it probably would be a pretty severe situation for us to ever go in the red here,” Martini said.
In a best-case scenario, the district could pay extra in its annual payments and take ownership of the facility in less than 20 years.
“We would definitely foresee keeping it up, doing maintenance and repairs so the building’s useful life would be beyond 20 years.”
Martini is exploring the possibility of replacing the fabric bubble over the facility’s multipurpose fieldhouse with a permanent enclosure. Footings for concrete walls already exist, he noted.
Arena manager Brian Christianson has been on the school district’s payroll since June. FLAAA is reimbursing the district for Christianson’s salary and benefits. Martini said he is comfortable with the arrangement because he was allowed to provide input in the hiring process, and Christianson would stay on in that role for the district. The purchase would create two other full-time openings, both of which are accounted for in the pro forma.
The financing proposal the district had approved by the Minnesota Department of Education highlighted additional benefits of the district’s involvement with the facility. The district would have priority scheduling and would expand its Community Education programming. Also, the arena would be made more accessible to the public through increased open skating times.
It will be up to auditors to determine whether the purchase would be counted as net debt for the district, Martini said. If so, it would not affect the district’s ability to pursue a significant levy for facility improvements that it is contemplating for 2014. School districts have debt limits, but even a levy in the range of $140 million would bring District 831 to only a quarter of its debt capacity, Martini said.
On the other hand, the purchase would count in the calculations the state uses to determine qualification for the Alternative Facilities Revenue Bond and Levy program. The district made an unsuccessful bid to the state Legislature this year for inclusion to that program, which allows districts with significant capital needs to levy for improvements without needing voter approval. The district falls short of automatically qualifying for the program because it does not have enough total square footage of property. Purchasing the arena would bring the district’s square-footage within 5 percent of meeting the requirement.
The city and school district would enter into a ground lease for the property. The district agreed it would complete unmet parking lot improvements required of FLAAA.
An appraisal from 2012 valued the facility and the property at $8.3 million. The arena was built for $5 million in 2008.