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MEMORANDUM

TO: MRA Board of Commissioners

FROM: Ellen Buchanan, Director

DATE: July 16, 2018

SUBJECT: Mercantile Residence Inn Additional Funding Request

The MRA Board approved funding in an amount not to exceed $3,597,844 for the new hotel
at the June 30, 2017 Board meeting. At that time, Mr. Holloran believed that he had all of his
numbers as accurately as possible with the exception of the cost to restore the Pharmacy.
We all understood that those costs would only become clear as the deconstruction
progressed. That said, he believed that the amount approved for the Pharmacy restoration
was adequately sized to cover additional costs that might become apparent as
deconstruction around the building progressed. Several things have occurred since the
meeting last June that have resulted in increased costs for TIF eligible items. This memo will
deal with the additional Pharmacy costs last in this discussion.

When the deconstruction/demolition bids were prepared in 2016, both Home Resources, the
building deconstruction subcontractor, and Crum Excavation, the site demolition
subcontractor, apparently bid the work using their typical pay scale rather than using State
Prevailing Wage Rates as required. The adjustment of those hourly rates to reflect the
required wage rates resulted in a Change Order in the amount of $102,270. It is difficult to
understand why this work was bid in this manner since it was made clear that State
Prevailing Wage Rates would be required on all work funded using public, TIF, funds. We
have received documentation from the contractor that clearly demonstrates how the work
was bid along with an analysis of the increased cost driven by State Prevailing Wage Rates.
There are some additional deconstruction/demolition costs unique to preservation of the
Pharmacy which will be addressed later in this memo.

When the application for TIF funding was submitted to MRA, the developer was convinced
that all of the utility relocation costs had been identified. There was a detailed breakdown
from Northwestern Energy for the trenching and relocation of their lines. The plan was that
Century Link, Blackfoot and Charter would go into the same trench with no additional cost to
the project. Charter charged them a fee of $115,606 for relocation of their lines. This was
not something that the developer was in a position to anticipate and is an eligible TIF
expense. If they had known that there would be a charge for relocating the lines, that cost
would have been included in the original application. There was an additional utility related
Change Order from NWE of $9,807 to move a power pole and power lines in the alley to
allow for demolition of the building foundation. The total additional utility cost which is eligible
for TIF reimbursement is $125,413.

140 West Pine Street, Missoula MT 59802 phone 406.552.6160 fax 406.552.6162 email mra@ci.missoula.mt.us www.ci.missoula.mt.us/mra
As noted above, the preservation and restoration of the Pharmacy building facade had a lot
of unknowns that could not be identified or quantified on the front end of the project. The
east wall collapse during deconstruction created the need for additional measures to keep the
remaining three walls stable. Shoring costs in general and specifically on the south wall ran
well above what could have been anticipated. The building literally was peeled apart in
sections, all of which were unique, having been built in different decades often using different
construction methods. Consequently, preservation of the Pharmacy became a much larger
undertaking than originally anticipated. In hindsight, the developer would have been better
served to have taken the conservative route and greatly overestimated the Pharmacy
preservation cost which could have resulted in him not needing to spend those extra funds.
Additionally, how to restore the Pharmacy building was only able to be addressed in a very
general manner with little or no detail in the original construction documents. Once
deconstruction around the building was undertaken, the architects and structural engineer
were able to provide the detailed scope needed for Dick Anderson Construction to price the
work appropriately. The additional costs associated with preserving the Pharmacy building
fall into two categories. The first is the additional cost of shoring and interior deconstruction
which was able to be quantified once the materials around the Pharmacy were removed. The
original application for TIF assistance included a Change Order of $111,879 for south wall
shoring and interior demolition. That Change Order was ultimately voided and replaced by a
change order in the amount of $143,588, all of which was exclusively applicable to shoring
the south wall and interior demolition, thus allowing for preservation of the Pharmacy building.
This request for additional reimbursement includes the difference between the original
$111,879 and the new change order for $143,588, resulting in an additional $31,709 as part
of the request before you. There are additional charges for general shoring of the Pharmacy
building in the amount of $48,975.

The second component is the cost to restore the Pharmacy exterior which resulted in a
Change Order of $134,571 after the architects were able to provide the level of scope and
detail required by the contractor. The resulting cost increase, over the original $335,746
identified in the TIF application, is $134,571 bringing the total cost of preserving this portion
of the original building to an additional $278,159 above what was included in the base bid.
When including what we know was in the base bid specifically for the Pharmacy, the cost for
that part of the project is $662,880. This number does not include the impact of State
Prevailing Wage Rates on work on the Pharmacy or any numbers in the base bid that were
specific to the Pharmacy restoration. This was not a part of the original scope of the hotel
project, but was what the public and the City Council wanted to incorporate in order to
memorialize the original Missoula Mercantile.

If the MRA Board determines that it is reasonable to cover these additional costs in the bond
issue, the amount being approved would increase from $3,597,844 to $4,040,782. The hard
costs for the entire project are between $30MM and $31MM including tenant finishes and the
land is valued at $2,725,000. Using a conservative “rule of thumb” based on discussions
over the years with the Department of Revenue, our calculations indicate that the tax
increment from this project will support a bond issue large enough to cover the increased
eligible costs and still meet the 1.25 coverage with some room to spare.

140 West Pine Street, Missoula MT 59802 phone 406.552.6160 fax 406.552.6162 email mra@ci.missoula.mt.us www.ci.missoula.mt.us/mra
The breakdown of the request is as follows:
• Deconstruction/demolition Wage Rates $102,270
• Shoring and Interior Demo – Pharmacy South Wall $ 31,709
• General Shoring of Pharmacy Building $ 48,975
• Pharmacy Restoration $134,571
• Utility Relocation $125,413
$442,938
Pharmacy Building Costs:
• Base Bid Unknown
• Shoring & Interior Demolition $192,563
• Pharmacy Restoration $470,317
$662,880
Bond Breakdown
• Bond Amount $4,081,000
• Tax Exempt $1,733,322
• Taxable $2,307,460
• Cost of Issuance and Rounding $ 40,218

Staff understands the Board’s reluctance to consider approving additional allocations on

projects that have already been considered. The Merc is a more complex project than those
normally presented to the Board, particularly as a result of the requirement to preserve and
restore the Pharmacy building. The fact that the building consisted of eight separate
buildings built during different eras using current construction methods of the time certainly
did not simplify deconstruction. The fact that the building and site demolition contractors
failed to bid State Prevailing Wage Rates is unfortunate, but is a requirement that we
imposed on the project. All of the additional costs that are being requested are eligible for
TIF reimbursement and would have been approved on the front end if the costs had been
known at that time and if the projected increment from the hotel could have supported the
debt service. Based on real construction costs and a conservative approach recommended
by DOR over the years, it is evident that the newly created increment can cover the additional
debt service.

Recommendation: Staff recommends that the MRA Board approve the request for
additional funding for the Mercantile Residence Inn in an amount not to exceed
$442,938, bringing the total TIF assistance up to $4,040,782 and authorize the Chair to
sign the Reimbursement Agreement.

140 West Pine Street, Missoula MT 59802 phone 406.552.6160 fax 406.552.6162 email mra@ci.missoula.mt.us www.ci.missoula.mt.us/mra