Text of Kraft's memo
By request, here it is:
MEMORANDUM
DATE:
October 5, 2007
TO: Richard A. Wollangk, City Manager
FROM: Warren P. Kraft, City Attorney
SUBJECT: Construction Escrow Agreements/1 00 Block LLC
As it relates to the 100 Block development, the City's entry into a construction escrow agreement occurred because the developer's attorney requested that the City's TIF-supported development assistance grant be readily available to ensure the developer had proper lender financial support for the above project. The City of Appleton used this same approach with the Richmond Terrace project in that community. With a construction escrow agreement and account in place, a neutral third party (in this instance, Schmitt Title Company of Oshkosh) is given the fiduciary responsibility for the proper disbursement of funds to cover the project costs, i.e. the grant funds as well as the lender's funds.
An issue arose over an e-mail exchange in which Director of Planning Services Darryn Burich and I reviewed and discussed the terms of this particular agreement, which has been reported locally as my recommendation for secrecy. While the particular paragraphs come in the context of a fuller exchange of issues related to the agreement, the particular paragraphs (which have not been fully published) read in their entirety:
(Darryn:) Page 11, Article X, Budget Section. The last sentence states that from time to time we can examine the records upon reasonable notice and at the developer's offices. I am wondering if we should not be sent all cost records regarding the project as they are incurred or expended for our own record keeping purposes.
(Warren:) Open records law causes a problem. Anything you collect as part of your supervisory role is generally subject to public inspection. All we need to have are costs related to TIF expenses, which form our 250/0 commitment. If HUD requires more because of CDBG funding, we need to accommodate that, but no more than necessary.
That discourse, which could have been worded better, reportedly, and improperly so, has been converted into a recommendation for a secrecy requirement for all construction costs, when the above-quoted paragraph indicates that the City's 250lb TIF commitment should be subject to public inspection, unless any HUD requirements imposed greater detail. It was a legal and proper commentary, because it was based on the then-current appellate
Richard A. Wollangk
October 5, 2007
Page 2
court rulings concerning records in the hands of third parties. Otherwise, it would have been unethical not to provide this legal information. However, earlier this year, the Court of Appeals reinterpreted and reapplied its past decisions to h old that certain records kept by third parties are generally subject to public inspection, in the same manner as the public records law applies to record keeping authorities such as the City of Oshkosh. In that light, I have requested permission from the parties to the 100 Block LLC foreclosure and receivership litigation to consent, via e-mail on Monday which read:
I ask for your consent to enable Schmitt Title Company to release to the City the records it accumulated in carrying out the obligations as escrow agent for the construction project covered by the agreement between the City and the 100 BLOCK LLC. I confirmed this afternoon with Mike Skoglind of Schmitt Title that the records remain in tact. It would appear that the Court of Appeals recent published decision in WIREdata, Inc. v. Village of Sussex, 298 Wis.2d 743, 729 N.W.2d 757 Wis.App.,2007., would support this release anyway.
The attorneys and the receiver have responded affirmatively and at this writing, we will make arrangements with Schmitt Title to accomplish this task.
Reviewing with Atty. Gempeler this week the use of such construction escrow agreements, he emphasized there are two primary purposes: firstly, developers are assured that the public money is in place to support the project because the money is deposited into escrow at the time of closing. The developer needs the municipal dollar commitment in order to obtain the construction loan. For the lender, which provides funding, it also removes the risk that a future councilor board will change its mind and withhold public funds if the monies remain in the municipal treasury.
Secondly and for the municipality's protection, the local government is assured that grant funds are used for the intended purposes (in this situation, for the TIF-related costs) because the agreement details what costs are TIF-supported expenditures. That is consistent with the municipality's fiduciary responsibility to ensure that public money is spent appropriately for public purposes. In the Richmond Terrace project, also represented by Atty. Gempeler (who previously served as the Madison city attorney and represented the City of Madison on its redevelopment projects), the attorney said the City of Appleton was required to spend TIF dollars upfront for environmental remediation of the former Zwicker Knitting Mill. The City of Appleton reserved the same right of review that
the City of Oshkosh retained in the 100 Block agreement.
Additionally this week, I reviewed with the RDA's legal counsel for drafting development agreements, Atty. Rebecca Speckhard of Quarles and Brady in Milwaukee. She agreed with Atty. Gempeler that construction escrow agreements are very typical when funds are
Richard A. Wollangk
October 5, 2007
Page 3
received from various sources and a neutral third party is designated to disburse the money. In the 100 Block development case, the agreement established the criteria by which Schmitt Title Company could pay expenses. There is no further need for any approval provided the requisite criteria are met. The developer requests payment, the title company reviews the submission to ensure there is a sufficient level of documentation to support the request and makes the payment. She said the lender typically requires this arrangement and agreed that it is fairly customary to put all the funds into the same place.
Both attorneys indicated that this is similar to the private homeowner whose lender may require using an escrow agent in the construction of one's own house.
In a typical construction escrow agreement approach, records remain with the title company and as noted above, at the time of the then-prevailing public records law, would not be considered subject to public inspection. However, the inte nt behind this approach (which was the first time the City invested multi-million dollars into a project), according to Atty. Gempeler, was to satisfy the developer's and lender's desire to ensure that the City's funds are timely available to the developer and that the TIF-dollars were properly expended for public purposes according to the agreement. Under the 2007 WIREdata, Inc., decision, the public records question should no longer arise.
Please advise if you have any questions. Thank you very much.
MEMORANDUM
DATE:
October 5, 2007
TO: Richard A. Wollangk, City Manager
FROM: Warren P. Kraft, City Attorney
SUBJECT: Construction Escrow Agreements/1 00 Block LLC
As it relates to the 100 Block development, the City's entry into a construction escrow agreement occurred because the developer's attorney requested that the City's TIF-supported development assistance grant be readily available to ensure the developer had proper lender financial support for the above project. The City of Appleton used this same approach with the Richmond Terrace project in that community. With a construction escrow agreement and account in place, a neutral third party (in this instance, Schmitt Title Company of Oshkosh) is given the fiduciary responsibility for the proper disbursement of funds to cover the project costs, i.e. the grant funds as well as the lender's funds.
An issue arose over an e-mail exchange in which Director of Planning Services Darryn Burich and I reviewed and discussed the terms of this particular agreement, which has been reported locally as my recommendation for secrecy. While the particular paragraphs come in the context of a fuller exchange of issues related to the agreement, the particular paragraphs (which have not been fully published) read in their entirety:
(Darryn:) Page 11, Article X, Budget Section. The last sentence states that from time to time we can examine the records upon reasonable notice and at the developer's offices. I am wondering if we should not be sent all cost records regarding the project as they are incurred or expended for our own record keeping purposes.
(Warren:) Open records law causes a problem. Anything you collect as part of your supervisory role is generally subject to public inspection. All we need to have are costs related to TIF expenses, which form our 250/0 commitment. If HUD requires more because of CDBG funding, we need to accommodate that, but no more than necessary.
That discourse, which could have been worded better, reportedly, and improperly so, has been converted into a recommendation for a secrecy requirement for all construction costs, when the above-quoted paragraph indicates that the City's 250lb TIF commitment should be subject to public inspection, unless any HUD requirements imposed greater detail. It was a legal and proper commentary, because it was based on the then-current appellate
Richard A. Wollangk
October 5, 2007
Page 2
court rulings concerning records in the hands of third parties. Otherwise, it would have been unethical not to provide this legal information. However, earlier this year, the Court of Appeals reinterpreted and reapplied its past decisions to h old that certain records kept by third parties are generally subject to public inspection, in the same manner as the public records law applies to record keeping authorities such as the City of Oshkosh. In that light, I have requested permission from the parties to the 100 Block LLC foreclosure and receivership litigation to consent, via e-mail on Monday which read:
I ask for your consent to enable Schmitt Title Company to release to the City the records it accumulated in carrying out the obligations as escrow agent for the construction project covered by the agreement between the City and the 100 BLOCK LLC. I confirmed this afternoon with Mike Skoglind of Schmitt Title that the records remain in tact. It would appear that the Court of Appeals recent published decision in WIREdata, Inc. v. Village of Sussex, 298 Wis.2d 743, 729 N.W.2d 757 Wis.App.,2007., would support this release anyway.
The attorneys and the receiver have responded affirmatively and at this writing, we will make arrangements with Schmitt Title to accomplish this task.
Reviewing with Atty. Gempeler this week the use of such construction escrow agreements, he emphasized there are two primary purposes: firstly, developers are assured that the public money is in place to support the project because the money is deposited into escrow at the time of closing. The developer needs the municipal dollar commitment in order to obtain the construction loan. For the lender, which provides funding, it also removes the risk that a future councilor board will change its mind and withhold public funds if the monies remain in the municipal treasury.
Secondly and for the municipality's protection, the local government is assured that grant funds are used for the intended purposes (in this situation, for the TIF-related costs) because the agreement details what costs are TIF-supported expenditures. That is consistent with the municipality's fiduciary responsibility to ensure that public money is spent appropriately for public purposes. In the Richmond Terrace project, also represented by Atty. Gempeler (who previously served as the Madison city attorney and represented the City of Madison on its redevelopment projects), the attorney said the City of Appleton was required to spend TIF dollars upfront for environmental remediation of the former Zwicker Knitting Mill. The City of Appleton reserved the same right of review that
the City of Oshkosh retained in the 100 Block agreement.
Additionally this week, I reviewed with the RDA's legal counsel for drafting development agreements, Atty. Rebecca Speckhard of Quarles and Brady in Milwaukee. She agreed with Atty. Gempeler that construction escrow agreements are very typical when funds are
Richard A. Wollangk
October 5, 2007
Page 3
received from various sources and a neutral third party is designated to disburse the money. In the 100 Block development case, the agreement established the criteria by which Schmitt Title Company could pay expenses. There is no further need for any approval provided the requisite criteria are met. The developer requests payment, the title company reviews the submission to ensure there is a sufficient level of documentation to support the request and makes the payment. She said the lender typically requires this arrangement and agreed that it is fairly customary to put all the funds into the same place.
Both attorneys indicated that this is similar to the private homeowner whose lender may require using an escrow agent in the construction of one's own house.
In a typical construction escrow agreement approach, records remain with the title company and as noted above, at the time of the then-prevailing public records law, would not be considered subject to public inspection. However, the inte nt behind this approach (which was the first time the City invested multi-million dollars into a project), according to Atty. Gempeler, was to satisfy the developer's and lender's desire to ensure that the City's funds are timely available to the developer and that the TIF-dollars were properly expended for public purposes according to the agreement. Under the 2007 WIREdata, Inc., decision, the public records question should no longer arise.
Please advise if you have any questions. Thank you very much.
posted by Miles Maguire at 4:13 PM
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