Cottages Industries, LLC ("Developer"), a subsidiary of LAB Holdings acquired twelve (12) properties and leased five (5) properties in the Downtown-Civic Center area in 2016 through a Disposition and Development Agreement and a Promissory Note.  The Cottage Industries Project is comprised of two parts described as the Farm Block and the Art Block.The Developer has been working diligently to obtain the necessary entitlement approvals to undertake the adaptive reuse of the Cottage Industries project that would support local small business growth such as eateries, makers and artesian retail spaces, and boutique-style hotel uses in the downtown Civic Center area. The Developer has received entitlement approvals to develop the Farm Block in March 2018, and the Art Block in December 2019, respectively.

Undertaking an adaptive reuse requires substantial resources to ensure preservation and rehabilitation of each property within the Cottage Industries project is maintained.  To that end, the Developer is requesting a deferral payment period in which the financial resources can be dedicated to complete the rehabilitation work for both the Farm Block and the Art Block. The Developer brings a high-caliber of experience and vision when it comes to ensuring preservation of craftmen-style properties. The development team does anticipate construction of the Farm Block and Art Block to begin in early 2020.

To achieve the requested payment deferral period, a modification to the the current Promissory Note is needed. The current terms of the Promissory Note requires the Developer to make monthly interest payments in the amount of $9,030. Since 2016, approximately $316,067 of interest payments have been made. For City Council consideration, an Amended Promissory Note for a 10-year period has been negotiated to provide for a 30-month deferral period in which the additional time would allow the Developer to complete the proposed rehabilitation and tenant improvements for the Cottage Industries Project.

The salient deal points of the Amended Promissory Note are as follows:

• The term will be ten (10) years;
• Payments would be deferred for a period of 30 months;
• Interest Payment of $9,476 will begin at the 31st month or July 1, 2022;
• Principal and Interest Payments of $19,476 will begin at Year 6 or July 1, 2025; and
• A Balloon Payment in the amount of $2,453,304.58 will be due at the end of the Loan Term or the maturity date of December 1, 2029.

Approval of the Amended Promissory Note will have no impact to the General Fund.  The future Principal and Interest Payments will be deposited into two Housing Funds.  Fund 510 (Housing Authority Asset) receives 64 percent of the payments and Fund 507 (Housing Successor Fund) receives 36 percent of the payments.

It is recommended that City Council:

• Approve the Amended Promissory Note secured by a Deed of Trust and authorize the City Manager to approve any pertinent documents on behalf of the City, and to approve minor modifications as appropriate.

By:  Grace Lee, Sr. Economic Development Specialist