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San Marcos may use reserves to finance projects

SAN MARCOS — San Marcos is poised to use more than $20 million of its reserves to finance the construction of the Hobby Lobby and WinCo project and the proposed California Department of Motor Vehicles building on Rancheros Drive.

The City Council voter 5-0 to direct staff to proceed with the unique funding mechanism, which City Manager Jack Griffin said would be cheaper and a greater return on investment than seeking a traditional financing deal, and the city refunds its reserves within 10 years.

“It is a good use of money in the long run, you will have more money reserves in by doing it this way,” Griffin said. “I am trying to save you money and make you more money in the long run.”

But the City Council expressed concern with the financing proposal for the DMV building — which will be built on land owned by a longstanding joint partnership between the city and Lusardi Construction.

The first half of the two-part financing plan involves the former Lowe’s building in the Creekside Marketplace, which is slated to be the site of the craft store and 24-hour supermarket.

The proposal calls for the city to use about $12 million of its surplus revenues to pay for the purchase of the building and construction costs and improvements to the building.  Reserves would be repaid with the lease revenue from the two businesses.

The Council voted in June to approve a 20- and 10-year lease with the grocery store and crafts store, respectively.

WinCo’s lease calls for lease payments of $875,000 a year for the first 10 years, and $962,500 during the final 10 years. Hobby Lobby’s lease payments are $768,500 during the first five years and $826,500 during the last five years of the lease.

Council members largely approved of this agreement, but split as it pertained to the more complex arrangement with the DMV building, which the city anticipates will be completed by May 2015 on property in the Rancheros Commercial Park.

The commercial park is a limited partnership composed of the former redevelopment agency and a branch of Lusardi known as LBP Partnership, of which the redevelopment agency has a 60 percent stake.

The financing plan calls for the city to use $1.37 million of its reserves, as well as loan the partnership $10 million for the rest of the construction costs at a below-market interest rate of 2.5 percent.

This is where several of the council members split with staff.

Councilman Chris Orlando said he believed the city should be charging a higher interest rate to Lusardi for its 40 percent share of the construction costs.

“Why would we let them benefit from our financing,” Orlando said, which prompted Mayor Jim Desmond to ask if such an arrangement would be a gift of public funds.

City attorney Helen Holmes Peak said the financing deal wouldn’t be a gift of public funds because it would result in a public benefit — a new DMV building.

When Griffin told the council that splitting the interest rates on the loan to the partnership would be unfeasible, Orlando proposed financing the entire project at a higher rate. While this would increase the costs of the project, Orlando said, it would guarantee the city would receive market-level returns from the partnership.

The Council’s vote directed staff to explore Orlando’s proposal and come back with a detailed analysis of the impacts of a higher interest rate on the loan.

Desmond also expressed concern with using such a large amount of the city’s reserves, which would temporarily dip the city below its longstanding threshold of having reserves amounting to 50 percent of its operating budget. Less reserves also limits the city’s ability to fund infrastructure improvements in the short term, Desmond added.

While Griffin acknowledged this, he said the city would receive more money in the long-term by using the reserves in this manner.

The city is expected to purchase the Lowe’s building Oct. 31 and award the construction contract shortly thereafter.