Developer Agreements & Evaluating Private Sector Financial Statements December 3, 2010 Developer Agreements & Evaluating Private Sector Financial Statements

Today’s Presentation Irgens Overview Framing the Issues Developer Agreements Evaluating Private Sector Financial Statements Discussion

Irgens Overview A Strategic Partner Who We Are Financial Capabilities

Irgens… A Strategic Partner “ First and foremost, you have to understand the customer’s objectives and capabilities. And you have to know the customer well enough to guide and lead them to the best possible conclusion. Successful partnerships are formed when people feel comfortable and trust one another.” - Mark F. Irgens Manager/President

Who We Are A multi-faceted real estate development and services firm… In business for more than 25 years Offices in Milwaukee, Chicago and Phoenix Staff of 65 highly-qualified professionals Hundreds of successful projects totaling more than $3 billion in value Current projects worth $250+ million Manage and lease 4.3million SF of real estate Committed to “green”

Financial Capabilities Irgens is an operating company Projects are owned through individual special purpose entities (LLCs) Irgens performs as managing member Ability to raise debt and equity Long-term relationships with lenders and other funding sources Oversee all financial details by experienced, internal asset managers Create and maximize real estate value for clients

Framing the Issues When is a Developer Agreement Necessary? When is Financial Evaluation Necessary? What are the Risks?

When is a Developer Agreement Necessary? Developer is looking for something from the municipality Land Grant Loan Loan Guarantee Land improvements When you care about your career and reputation

When is a Financial Evaluation Necessary? Developer is looking for something from the municipality Land Grant Loan Loan Guarantee Land improvements When you care about your career and reputation

What Are the Risks? Completion Runaway Budget Market Risk Operational default Failure to repay the loan Failure to realize the necessary tax increment Lender foreclosure Fraud/misrepresentation TIF debt gets put back to the municipality Career Risk Reputation Risk

Developer Agreements Review Risks Essentials Nice to Have When to Get it in Writing Some Object Lessons Resources

Developer Agreements - Essentials The Parties to the deal The real parties with the $$$$ Project description Proof of blight Statement of current value Expected project benefits (value creation) Municipality’s obligations (how much $$$, when to pay, etc.) How developer gets paid Time of performance

Developer Agreements - Essentials Security for the deal Guarantee LLC Parent Company Personal Insurance Project upkeep Bind successors and assigns

Developer Agreements – Nice to Have Cash flow participation Use restrictions No assignment without permission Non-precedent setting Police powers not affected Loss-sharing with lenders Other special considerations (MBE participation, Resident’s preference, Living wage, Buy local, etc.)

When to Get it in Writing Just met? No Getting serious? No Got a deal? Good time to get started Lender’s commitments? YES

Some Object Lessons Remember the Golden Rule Don’t kill the Golden Goose Manage Risk – Don’t try to Eliminate it Keep your eye on the objectives Try hard Be creative Don’t be afraid to walk away if the deal is no good Think in terms of Not Yet as opposed to No Get it in Writing

Resources Your peers in other municipalities Consultants/Advisors Get a penny’s worth of free advice GFOA Bond Lawyers WAPA International Economic Development Council [IEDC] National Assn of Development Companies [NADCO]

Evaluating Financial Statements Which Entity’s Financial Statements to Evaluate? What to Look For Danger Signs Protections Balancing Risks and Rewards Resources

Which Entity’s Statements to Evaluate? Developer risk shedding – the LLC Not much initial value The “parent” entity Personal finances Guarantor’s finances

What to Look for Audited Balance sheet (Ideally for the previous three years) CASH IS KING Liquidity ratios Debt outstanding Total equity A/R and A/P Look at the notes Track record of developer Any failures? Do they stand behind their deals? Reputation in the marketplace

What to Look for Audited Profit and Loss Statements (Ideally for the Last three years) Profitability Revenue growth Expenditure growth in line with revenues? Gross profits Profits from operations versus sale of assets Analysis Ability to digest growth Payment cycle Revenue cycle

Danger Signs Low cash Current ratio < 1.25 Shrinking profitability Owners taking $$$$ out of the company “Borrowing” from one entity to fund another Over-leveraging Balance sheet unable to backstop “pessimistic” performance of the current deal

Protections Security Parent entity Personal guarantee Know who you are dealing with Track record Get independent advice about the deal if you are unsure Involve your fellow staff, CDA, Council, Board Keep risk and potential rewards in balance

Balancing Risks and Rewards Don’t kill the Golden Goose Pioneers get the best deals Always ask yourself “What’s in it for my city/village?” Tax base Employment Quality of life Other Consider the impacts of the deal on the larger real estate market

Resources Your peers in other municipalities Consultants/Advisors Get a penny’s worth of free advice GFOA Bond Lawyers WICPA Municipal Auditors International Economic Development Council [IEDC] National Assn of Development Companies [NADCO]

Optional Review Development Agreement

Discussion