01-0539R

RESOLUTION AMENDING AGREEMENT NO. 16157 WITH DULUTH LIGHTHOUSE FOR THE BLIND AND SETTLING ANY CLAIMS FOR RIGHTS UPON DEFAULT.

BY COUNCILOR GILBERT:

        RESOLVED, that the proper city officials are hereby authorized to enter an amendment, substantially in the form of that on file in office of the city clerk as Document No. ____, to city Contract No. 16157, with Duluth Lighthouse for the Blind (the Lighthouse), providing for payment in the amount of $42,411.60 as settlement for default on said contract, said funds to be deposited in Fund 0265, Agency 020, Org. 0093, Obj. 4706.



STATEMENT OF PURPOSE:  The purpose of this resolution is to authorize an amendment to a 1991 CDBG agreement with the Lighthouse. At that time, the Lighthouse requested financial assistance to expand its production of bathroom tissue for the Federal Government by acquiring the "Bomadier Building" at 4505 West Superior Street (the Facility). The U.S. Economic Development Authority (EDA) awarded the Lighthouse $747,000 for acquisition and restoration of the Facility under a 1993 and 1994 agreement and mortgage. The agreement and mortgage require the Lighthouse to repay the grant in the event the Lighthouse transfers or conveys the facility prior to April 28, 2009.

The City extended a CDBG renovation and equipment grant to the Lighthouse in the amount of $445,000 under a grant agreement and mortgage dated February 21, 1991. The grant was used to acquire, renovate and equip the Facility. Under the agreement, a default occurs if, during the term of the agreement, the Lighthouse sells or abandons the Facility or equipment or converts the Facility to any use other than the provision of employment opportunities for low- and moderate-income persons (the Approved Use).

In 1999, the Lighthouse requested the City's permission to convey approximately half of the Facility to A&L Partnership and asked the City to release its mortgage lien on the portion conveyed. The City agreed to a partial release of its lien and also authorized an amendment to the original agreement which provided that the term of the mortgage lien on the remaining portion of the Facility continues until July 1, 2004 (Council Resolution 99-0465). The City's lien is in second position behind the lien of the EDA.

Until the fall of 1999, the Lighthouse carried on a paper converting industrial operation to provide job training and employment opportunities. When industrial operations were discontinued because of problems associated with the operation of the paper converting equipment, the Lighthouse developed an alternative revenue source by leasing approximately 48,000 square feet of the remaining portion of the Facility to SMDC in April of 2000. The Lighthouse retained approximately 12,000 square feet. In 2000, the EDA consented to the Lighthouses' Lease with SMDC in exchange for a partial grant repayment by the Lighthouse to EDA in the amount of $20,000. However, the Lighthouse is in default under the 1991 CDBG agreement for converting the remaining portion of the Facility to other than the Approved Use.

Additionally, the Lighthouse confirmed in a document entitled "CDBG inventory performed" that a 1991 tissue wrapper machine was being used in February of 1999 for the benefit of low- and moderate-income persons, consistent with the requirements of the CDBG funding. However, in July of 1998, the piece of equipment had been pledged by the Lighthouse to GCI Capital as collateral to support a loan associated with the financing of a new line of paper converting equipment. The 1991 tissue wrapper was repossessed and sold by GCI Capital along with several other pieces of equipment when the Lighthouse's industrial operations were discontinued in late 1999. There is an issue as to whether the 1991 tissue wrapper was purchased with the proceeds of the City's CDBG grant or alternatively, whether the tissue wrapper appeared on the inventory form because it had been financed with CDBG proceeds administered by the 1200 Fund as part of a 1995 participation loan with Pioneer National Bank. The 1200 Fund has been paid in full. The tissue wrapper was appraised in 1995 at a value of $85,000, or "quick sale" at $70,000. Applying a depreciation of $7,000, the tissue wrapper would have a value of approximately $42,000.

The Lighthouse desires to continue to provide social services, rehabilitation and vocational training to blind and visually impaired persons, including use of approximately 5,000 square feet of industrial space for potential future employment activities. See attached. As settlement for default on the grant agreement, the Lighthouse has proposed to pay the City of Duluth the sum of $42,411.60 in twenty-four (24) monthly installments of $1,767.15 each commending October 1, 2001. Once payment in full has been made, the Lighthouse will be released from the mortgage lien on the remaining portion of the Facility and all obligations under the grant agreement. The Community Development Committee recommended accepting this proposal at its meeting of July 31, 2001 and further recommended using the settlement proceeds for administrative costs.