The Manhattan City Commission was told by memo this week that the Quaker Oats building in the Industrial park is owned by the City. Here is the memo:

BACKGROUND

During a recent real estate transaction, the City and the Quaker Oats Company became aware that the Quaker Oats facility, located at 1111 Kretschmer Drive in the Eastside Business Park, was titled in the name of the City of Manhattan. Upon further investigation by City Administration, it was discovered that the facility now occupied by Quaker Oats was built as a result of an industrial revenue bond (IRB) transaction between the City and International Multifoods Corporation in 1972. As is the case with all IRB issues, in order to obtain tax-exempt bond status, the title to the facility or equipment to be financed with the IRB’s is transferred to the City. A lease is then drawn up which effectively leases such facility or equipment back to the company.

The City of Manhattan signed an IRB lease in 1972 with International Multifoods. Unlike most lease arrangements which simply sunset after the bonds are paid in full, the lease with International Multifoods required that the company either extend the lease or purchase the facility from the City. Quaker Oats assumed the lease in 1986. In 1992, when the bonds were paid off, neither City officials nor Quaker Oats officials were aware of the anomaly in the lease agreement. Also, the trustee bank for the IRB issue did not note the requirements upon the closeout of the lease and there appears to be no record that the Trustee notified the City of the bond closeout to transfer the deed. Therefore, Quaker Oats did not pay the City the $424,000 required to purchase the facility in full nor did it extend the lease and make those payments as required by the lease documents. This issue needs to be resolved prior to the City providing clear title for the Quaker Oats facility.

Quaker Oats has been paying property taxes on the property. The most recent tax bill reflects a total of $23,907.38 paid on land, buildings, and equipment in 2000.

DISCUSSION

This issue was brought to the attention of Quaker Oats management during a time when it was considering an expansion of the Quaker facility. In fact, it was during the research regarding transfer of Lot 2 of the Farrar Addition from the City to Quaker Oats that the land title issue came to light.

Quaker Oats is currently under negotiations with Kansas Farm Bureau to secure its facility located at 1200 Kretschmer Drive in order to maintain and expand its operations in Manhattan. As explained in Quaker’s attached letter, the planned expansion may provide an additional 10-40 positions and an approximate investment by Quaker Oats of $1 million. Without the expansion, the number of the current positions at Quaker could be reduced from 170 to 70, which would further jeopardize the local facility.

Quaker Oats has asked the City to forgive its obligations under the 1972 IRB lease agreement in order to enable the company to purchase the Farm Bureau facility and enable its operational expansion in Manhattan. City Administration is seeking an advisory recommendation of MEDOFAB regarding this situation to provide to the City Commission.

In order to evaluate this proposal as an economic development issue, City Administration has utilized standard MEDOFAB guidelines. Quaker’s proposal may yield 10-40 new employees for an investment of $424,000 (assuming that the amount Quaker would owe the City is forgiven) and retain 100 existing jobs at a combined average addition/retention cost per job of $6,057.

ALTERNATIVES

Provide an advisory recommendation to the City Commission concerning action on this item.

RECOMMENDATION

City Administration recommends that MEDOFAB provide a recommendation to the City Commission suggesting that Quaker Oats’ obligations under the 1972 IRB lease be forgiven in order to facilitate the company’s expansion of operations in Manhattan. Enabling the expansion opportunity for Quaker will help secure its future in Manhattan. Failure to assist Quaker in this endeavor will certainly weaken the ability to assure its future presence here in Manhattan. As the Board is aware, the retention and expansion of existing enterprises is a primary area of focus for the City’s economic development policies.

POSSIBLE MOTION

Recommend to the City Commission that the purchase requirement of the lease be waived and the property and facilities be deeded to Quaker as requested.