William L. Frost, City Attorney told the Manhattan City Commission Tuesday night that Forest City Commercial Management, owner of the Town Center Mall had notified the City that they may sell the Mall by the end of June.
Here is a memo given to the Commission and the letter from Forent City:
The City has recently received a letter from Forest City Commercial Management, dated March 22, 2002, requesting that the City approve a proposed sale of Manhattan Town Center (MTC).
The City’s approval of the sale is necessary because the City actually owns the real estate upon which MTC is located. This property was acquired with funds the City received, as a grant, from the Department of Housing and Urban Development (HUD). The property was then leased, by the City, to two separate entities. The original leases were entered into in 1984. The two tenants in those leases are Manhattan Mall Company and Manhattan Mall Associates, LLP. Manhattan Mall Company is a Kansas General Partnership, and the partners are corporate subsidiaries of Forest City and J.C. Penny Co. Manhattan Mall Associates, LLP, is a Kansas limited partnership, and the general partner is Manhattan Mall Company. It was necessary to divide the property into two parts, and lease it to two separate entities, in order to facilitate the use of Industrial Revenue Bonds (IRB’s) to finance the construction of the Mall itself. Internal Revenue Service (IRS) rules, at that time at least, would not allow more than $10 million in IRB’s to be issued to one user. The City issued approximately $18 million in IRB’s to finance the construction of the Mall.
Both original leases allowed the Tenants to sell their interest in the Mall, subject to the City’s approval of the purchaser. The leases also provide that the City cannot unreasonably withhold that approval. The leases provide, in effect, that the City must approve a purchaser that has the "...qualifications, experience and financial responsibility required to fulfill the obligations of the Tenant..." The request by Forest City indicates that the proposed purchaser is Wilmorite Property Management, LLC, of Rochester, New York. The request also provides certain information about Wilmorite. The City Commission, in evaluating this request, will be entitled to satisfy itself that Wilmorite has the required qualifications, experience, and financial responsibility.
The original leases have been amended on several occasions since 1984. In an amendment that occurred in 1992, provisions were inserted which require that the City share in any "net proceeds" that the Tenants receive as a result of any sale of their interests. In general terms, the leases require that the City receive 18% of any "net proceeds", if there is additional debt placed on the property by the new purchaser, and 10% of any "net proceeds", if there is no debt greater than what exists presently. The reason for this difference is because the City, under the leases, is entitled to receive, as "percentage rent", a portion to the "net earnings" of the Tenants, and "net earnings" are greatly affected by the amount of debt on the property. In either event, this should result in the City receiving a substantial sum of money if the proposed sale is completed. In the City’s original agreement with HUD, any proceeds the City receives as a result of its Leases can only be used for "Title I" eligible activities.
As indicated above, in responding to this request, the only issue for the Commission to decide is whether or not Wilmorite has the "...qualifications, experience and financial responsibility required to fulfill the obligations of the Tenant..." The purpose of this Work Session is to receive input from the Commission as to what information it may need in order to make such a determination. City Administration has requested the City’s financial advisor (Dave McGillvary, Springsted & Associates) to conduct an analysis of such factors and make a report to the Commission at a future legislative meeting.
As indicated above, the present leases are with Kansas entities, which are entities formed by Forest City and J.C. Penny Co. The only asset owned by the Kansas entities in MTC. It is presumed that Wilmorite may form a similar local entity to actually own MTC.
The request that the City approve the sale will likely be placed on a regular legislative agenda in May or June. It is City Administration’s present understanding that Wilmorite and Forest City most likely will close their sale in June.
It appears the Commission has the following alternative concerning the issue at hand. The Commission may:
1. Provide City Administration with direction as to any information it desires in order to make the future determination required.
As this is a Work Session there is no formal action to be taken.
Letter To The City of Manhattan:
Re: Sale of Manhattan Town Center
Dear Mayor Snead:
By this letter, we wish to inform the City of Manhattan (the "City") that the owners (the "Owners") of Manhattan Town Center (the "Center") have executed Option Agreements (the "Option Agreements") with Wilmorite Property Management, LLC of Rochester, New York ("Wilmorite") granting Wilmorite options to acquire all of the Owners’ respective interests in the Center. The Option Agreements provide that Wilmorite may exercise its options between April 1 and April 30, 2002. Assuming that Wilmorite exercises its options (and we believe such exercise is likely), the closing is expected to occur between May 15 and June 15, 2002.
One of the conditions to the closing is that the City, in its capacity as Landlord, approve the assignment of the Owners’ rights as Tenant pursuant to the two Land Leases, dated as of December 1, 1984, between the City and Manhattan Mall Company (the "MMC Lease") and between the City and Manhattan Mall Associates, L.P. (the "MMA Lease") (collectively, the "Leases’). Section 16.02 of each of the Leases, provides that:
"...Tenant shall have the right to sell, pledge, assign or otherwise transfer from time to time all of Tenant’s right, title and interest in this Lease to any person or entity which has been approved by Landlord, which approval shall not be unreasonably or arbitrarily withheld. Without limiting the generality of the foregoing, it shall be unreasonable for Landlord to withhold such approval if the proposed assignee, transferee or purchaser shall have the qualifications, experience and financial responsibility required to fulfill the obligations of Tenant pursuant to this Lease...."
The Owners hereby request that the City grant its approval to the proposed assignment and sale to Wilmorite pursuant to Section 16.02 of the Leases.
In order to support this request, the Owners have included with this letter the following information with respect to Wilmorite and its affiliates:
1. Excerpt from Wilmorite’s Annual Report;
2. Biographies of Wilmorite’s Senior Management Team; and
3. Brochures describing each of Wilmorite’s Mall Properties.
This information demonstrates that Wilmorite is an experienced shopping center owner and operator and has all of the "qualifications, experience and financial responsibility" required to operate the Center. Wilmorite recognizes the importance of the Center to the economic viability of the City and is committed to continuing to operate the Center as a first-class shopping venue. If the City has any questions concerning the above-referenced information or requires additional information, the Owners will be happy to provide it.
Pursuant to Section 4.05 of the Leases, as am ended, the City, as Landlord, will be entitled to payments (the "City Payments") out of the "Net Proceeds" of sale of the Center, as defined in the Leases. Assuming that Wilmorite exercises its options, the Owners will provide to the City pro forma calculations of the City Payments based upon the agreed purchase prices (as verified by the Escrow Agent) and the methodology set forth in the Leases. The amount of the City Payments will be subject to the City’s confirmation prior to the closing of the sales.
Thank you in advance for the City’s prompt consideration and processing of this request. If the City has any questions, please do not hesitate to contact Mark Siegel at (216) 416-3241.
Very truly yours,
Leighton McCown, Vice President
Forest City Commercial Management, as agent for the Owners