04/19/01 Ramlow to Neier/Development Agreement4—Ia-01_; 8:25AM;kvh IaW ;406 755 5783
LAW OFFICES OF
LTF A , VIDAL & HILEMAN, P.C.
Leonard L. Kaufman
James E. Vidal
Daniel W. Hileman
James M. Ramlow
Angela M. Vaninetti
Tia R. Robbin
Shelly F. Brander
Ken A. Kalvig
Mr. Glen Neier
City Attorney
City of Kalispell
P.O. Box 1997
Kalispell, MT 59903-1997
22 Second Avenue West
P. O. Box 728
Kalispell, MT 59903-0728
April 19, 2001
Re: Southfield Park Development Agreement
Dear Glen:
Telephone:
406-755-5700
Fax:
406-755-5783
kvhlaw@digisys.net
I have reviewed all of the materials which you submitted to me concerning the City's dealings with
Richard Dasen's development of Southfield Park. I understand from my review that Mr. Dasen
does not deem that he is bound by Paragraph 5.5 of the February 11, 1998 Development
Agreement for a variety of reasons outlined in.Kent Saxby's October 11, 2000 letter to Chris
Kukulski. You have requested me to provide a legal analysis of Kent's letter and to make
recommendations concerning Mr. Dasen's proposed compromise of the City's claim to payments
in lieu of taxes.
This matter originated with the City's request for bids on the Haven Field property, also known
as Southfield Park, in October of 1996. The Outlaw Inn bid was accepted by the City on February
18, 1997, in part because the purchase price offered by The Outlaw Inn was higher than the next
highest bid and in part because the development plans submitted were more valuable to the City
as taxable property than the next highest bid.
Following acceptance of the bid, the City began negotiations with The Outlaw Inn concerning the
terms of a Development Agreement. An element of the negotiations concerned the City's
requirement that the property actually be developed as taxable property and not simply purchased
for resale by The Outlaw Inn. Accordingly, the Development Agreement contemplated that The
Outlaw Inn would construct the improvements which, together with acquisition costs, would result
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in an assessed valuation of at least $6,229,700. (,Section 2) This valuation, in turn, would produce
an estimated annual tax revenue to the City of $124,000. (Section 5.5)
A draft of the Development Agreement was faxed to The Outlaw Inn's attorney, Mary Dyer, on
May 16, 1997. The draft included a provision that for a period of ten years commencing January
1, 1998, if the annual amount of tax generated by the project property was not $124,000, The
Outlaw Inn would pay the difference.
The City received no notice of any objection to this or any other provision of the Development
Agreement prior to July 15, 1997 so proceeded to close the sale. Richard Dasen was substituted
as the purchaser in the place of The Outlaw Inn.
Sometime in the late fall of 1997 Mr. Dasen's attorneys first advised the City that he had an
objection to the payment in lieu of tax provision of the Development Agreement. In December
of 1997 and January of 1998 the City and Mr. Dasen negotiated changes to the Development
Agreement, including a change of the contractinIg party from The Outlaw Inn to Richard Dasen,
and a change in the commencement date of the developer's obligation to make payments in lieu
of taxes from January 1, 1998 to January 1, 1999. The dollar value of the improvements and the
projected property taxes to be generated did not change.
On January 8, 1998 Mr. Dasen applied to the Flathead Regional Development Office (FRDO) for
approval of a preliminary plat, and subsequently on May 22, 1998 applied to FRDO for "Minor
Subdivision Preliminary Plat Approval." The City approved the preliminary plat on July 20,
1998.
On August 2, 2000 City Manager Kukulski wrote to Mr. Dasen to follow up on a series of meeting
he had with him in the preceding weeks concerning the Development Agreement. Mr. Kukulski
noted that 1999 taxes on the development were $25,745, leaving an obligation of payments in lieu
of taxes for 1999 of $98,255. The letter indicated that the 2000 taxes would probably not change
significantly, therefore leaving a similar amount of payments in lieu of taxes due for 2000. The
letter proposed a compromise in the payment schodule, allowing Mr. Dasen to pay only $70,513
on the date of signing an amended Development Agreement, the balance of $27,742 by December
15, 2000, and no -interest installments of the 2000 payments, payable in December 2000 and May
2001.
Developer's Objections to Enforcement of Development Agreement
On October 11, 2000 Mr. Dasen's new attorney, Kent Saxby responded to the City Manager's
letter and proposals. Mr. Saxby outlined several objections to payment of the payments in lieu
of taxes, including arguments that
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1. The City improperly accepted additional bids after expiration of the original bid
deadline;
2. The City delayed closing for six months after acceptance of the bid;
3. The City delayed approval of the final plat approval for thirteen months after
closing;
4. The City increased the developer's infrastructure costs from an estimated $560,000
to an estimated $800,000 by requiring among other matters, an expensive storm drain system;
5. The City mistakenly advised that the property was outside the tax increment
financing district, and upon discovering its mistake, refused to assist with infrastructure costs
because the improvements were already constructed; and,
6. The City's delays of two years from the date of bid to the date of plat approval
resulted in Mr. Dasen losing his original prospective purchasers and tenants, a matter for which
two prior City Managers (Thelen and Krepps) had acknowledged the City was primarily
responsible.
In addition, Mr. Saxby contended that Mr. Dasen learned of the requirement to sign a
Development Agreement only after he had purchased the property, indeed that the City would not
review his application for plat approval until after the Development Agreement was signed. He
argues that the Development Agreement is unenforceable due to "lack of consideration" since the
City was obligated by law to review the application, with or without a Development Agreement.
Developer's Compromise Proposal
Having made these arguments, however, Mr. Dasen indicated a willingness to live with the
Development Agreement provided that the dates for payments -in -lieu -of -taxes could be postponed
to July 1, 2002, thereby allowing him sufficient time to complete the development and sell or lease
the property. The proposal would require Mr. Dasen to pay one-half of any deficiency (under
$124,000) in assessed taxes for 2002, and all of the deficiencies for the next nine and one-half
years. I understand this to mean that in 2011, he would be required to pay one-half of that year's
deficiency.
Analysis and Recommendations
1. Time Delays
Mr. Saxby's arguments (summarized above as points 1, 2, 3, and 6) claim, in effect, that Mr.
Dasen's efforts at developing this property in a timely fashion were frustrated by the City's
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unreasonable delays and requirements. It is certainly true that the City extended the time for
bidding, closed the sale nearly five months after accepting The Outlaw Inn's bid, and approved
the subdivision plat just over a year after closing the sale. It is also true, however, that The
Outlaw Inn could have withdrawn its bid if it believed the bidding process was unduly prolonged,
was negotiating a Development Agreement with the City between acceptance of its bid and the
closing on the property, and Mr. Dasen did not submit an application for preliminary plat approval
to the Flathead Regional Development Office until January 8, 1998. Mr. Saxby's letter does not
explain why his client took nearly six months after closing to file his plat application.
In addition, whatever delays that Mr. Dasen complains of prior to his execution of the
Development Agreement appear to have been already resolved in his favor by changing the start
date for payments in lieu of taxes from January 1, 1998 to January 1, 1999 in the final version of
the Development Agreement.
2. Infrastructure Costs
The City did, indeed, require modification of the original drainage plan submitted by Mr. Dasen's
engineers. While Mr. Saxby's letter (point 4 summarized above) contends that the storm drain
system required by the City was "extremely expensive" he does not say that the system was
unreasonable or unnecessary. Indeed, correspondence with Mr. Dasen's engineers indicates that
the City eventually permitted the development to go forward with a storm drainage system that the
City Engineer doubted was adequate. (July 16, 1998 letter from James C. Hansz to Jackola
Engineering) I don't have any verification of the $800,000 figure stated in Mr. Saxby's letter. It
is certainly much higher than the $560,000 estimated in the Development Agreement.
3. Tax Increment Funding
Mr. Saxby states (point 5 summarized above) that his client's inability to obtain tax increment
funding of the infrastructure costs is an "especially sore point" because it occurred as a result of
the City's mistake. It may be that the City did make that mistake, but it is also true that The
Outlaw Inn's bid specifically assured the City that the City would incur no cost in connection with
the storm drain hookups, water and sewer lines, perimeter sidewalks, street lights, or street
resurfacing. (February 3, 1997 letter from Richard Dasen to Lawrence Gallagher) It is also true
that there is no mention of tax increment financing in the Development Agreement, where it
logically would have been addressed.
This leaves a so -far unresolved fact question. If it is true that a City representative had advised
Mr. Dasen that tax -increment funding was unavailable, there would have been no point in Mr.
Dasen applying for such funding. I gather from Mr. Saxby's letter, however, that Mr. Dasen did
not learn otherwise until after the infrastructure improvements were in place, at which time tax
increment funding could not be used to finance existing infrastructure.
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It is unclear to me what Mr. Saxby believes the significance of this mistake to be. In the absence
of a settlement of the City's claim, however, he may claim that his client is entitled to reformation
of the Development Agreement based upon a mutual mistake of fact. Such a claim for reformation
would most likely demand reduction of the payment in lieu of tax obligation by the amount of tax -
increment financing that was actually available.
4. Lack of Consideration for Development Agreement
Mr. Saxby argues that his client was unaware of the requirement of his signature on the
Development Agreement "as a condition" to the City's review of his application for preliminary
plat approval. I don't know who, if anyone, on behalf of the City communicated that "condition"
to Mr. Dasen. Even if some City official did state that the plat application would not be approved
before Mr. Dasen signed the Development Agreement, it is at least clear that the City did not
intend to go forward with the sale of the Southfield Park property without such an agreement. It
had been drafted for review and comment by Mr. Dasen's attorneys in May of 1997, nearly eight
months before he submitted his application for plat approval.
The City's legal position with respect to consideration appears to be that absent a Development
Agreement, the property would not be sold. In other words, the City relied upon representations
from Mr. Dasen's attorneys that the Agreement would be signed shortly when it went forward
with the closing on the property. (December 9, 1997 letter from Glen Neier to Dan Johns)
In addition, City Manager Kukulski's letter to Mr. Dasen dated August 2, 2000 indicates that the
City had incurred over $70,000 in obligations in reliance upon Mr. Dasen's compliance with the
terms of the Development Agreement. I don't know what that sum represents, nor am I clear that
it would not have been incurred but for Mr. Dasen's promise to make payments under the
Development Agreement. Consideration to support a contract need not be in the form of a direct
benefit to the other party, but could also be in the form of acts taken in reliance on the other
party's expected performance. If the City would have incurred those expenses anyway, however,
they would not be "consideration" to support the contract.
5. Compromise Proposal and Litigation to Collect
It is obviously to the developer's interest to delay his obligation for payments in lieu of taxes until
after the improvements to the property are complete. In so doing, the actual obligation in excess
of tax liability may be decreased or even eliminated as valuable improvements are completed.
Plainly the effort to blame the City for delays in completion of construction is designed to give
Mr. Dasen some leverage to extend the time for commencing of a payment in lieu obligation.
At least one answer to the compromise proposal is to counter the offer with an earlier starting
date, say January 1, 2000 or July 1, 2000. This could be done by pointing out that a full year has
already been extended by a revision of the original commencement date from January 1, 1998 to
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January 1, 1999. In addition, there is no explanation at all in Mr. Saxby's letter why Mr. Dasen
waited from July 15, 1997 until January 8, 1998 to submit his application for preliminary plat
approval. That does not seem to be a delay attributable to the City. Even if Mr. Saxby's analysis
of approximately two years' delay attributable to the City were correct, the maximum extension
of time for commencement of the payment in lieu period that would justify would be an additional
year, to January 1, 2000. None of the delays in the City's performance asserted in his letter
justify an extension of three and one half years from the original commencement date.
The advantage of this answer is that it is most likely to result in a timely settlement of the dispute.
A drawback would be that the City would forego some of the money already owed to it, though
some of that may be made up in the final years of the payment in lieu of taxes period. 'What the
City would actually receive under a compromise proposal depends on the timing and amount of
actual taxes assessed against this property.
In considering an appropriate compromise date for commencement of the payment in lieu period,
some further analysis of the tax increment funding issue is warranted. If a mutual mistake of fact
concerning availability of tax increment funding resulted in Mr. Dasen incurring all of the cost of
infrastructure, it may be that he will assert a claim for reformation of the Development Agreement
reducing his obligation by the amount that he might normally have benefitted from tax increment
financing. I don't know how much that amount would be, or even if Mr. Saxby's discussion of
that issue is accurate. If some amount of financing would have been available in the absence of
a mistake, this is certainly an issue that would come up in any litigation to recover payments in
lieu of taxes, and should be taken into account in negotiations over the commencement date of the
payment in lieu period.
Another possible answer is to demand performance of the Development Agreement according to
its terms. Such a position would require the City to file'a lawsuit, since Mr. Saxby's letter makes
plain that Mr. Dasen does not intend to pay on those terms. Some aspects of any such lawsuit are
already apparent. It would involve numerous documents and witnesses due to the complexity of
the dealings between the City and Mr. Dasen over a period of years. Nor would the City's case
be "open and shut" because the case would concern claims that the City had unreasonably delayed
closing and plat approval, and each person involved would undoubtedly have an opinion about
what was reasonable. In addition, I would anticipate a counterclaim for reformation based on the
tax increment funding issue, and possibly a counterclaim based on an allegation that Mr. Dasen
was damaged by unreasonable delays after he had committed himself to purchase the property.
It is also likely that any lawsuit to collect payments in lieu of taxes would be expensive and take
considerable time to prepare for trial. The Development Agreement does not include a provision
for an award of legal fees to the prevailing party, so the City would be responsible for its own
litigation costs regardless of the outcome. It is d4fficult to calculate the actual costs, but given the
relative complexity of this case, $50,000 to $75,000 would probably be a reasonably good
estimate. The City would also need to take into account the "downtime" cost of involving its
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employees in interviews, document preparation, appearance at depositions, and preparation for
and appearance at trial. The matter would probably take two to three years to reach a final
judgment. If a counterclaim for damages is filed against the City it is possible that its municipal
insurance would provide the cost of defense, but would not cover the cost of the City's prosecution
of its claim.
Based on these considerations, I recommend that the City make an effort to try to settle its claim.
I do not recommend that the City accept the proposal to delay commencement of the payment in
lieu period until July 1, 2002. But I also do not recommend litigation to enforce the January 1,
1999 commencement date. The City undoubtedly is better able than I am to evaluate the likely
cost of any proposed period of deferral of the commencement date based upon the difference
between $124,000 and the actual tax amount billed on this property. What I can do, however, is
to point out to Mr. Saxby that the calculations of delay contained in his response to the City's
letter are inflated, have already been mitigated by revision of the commencement date in the final
Development Agreement, and do not justify the delay of commencement of the payment in lieu
of tax period until July 1, 2002.
Please let me know if you have any questions.
Sincerely,
t HILEMAN, P.C.
Jam M. Ramlow
Rlkjid