Agenda - Council Work Session - 09/29/2009

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CITY RESPONSE: There was a meeting by the parties on July 1, 2008 at which time an oral agreement was reached whereby Knife River agreed to honor its contract and that it would be paid from Oakwood's Letter of Credit (the "LOC") by the bank in return for City reducing the LOC in a like amount. Knife River completed the work but has not been paid. The Developer is obligated to pay its subcontractors per paragraph 6. of the respective Development Agreements and Section 9.50.50 Subd. 5 of City Code which provide in part "Upon total completion of Stage I Improvements (including the removal of 'temporary' erosion control measures as identified in the approved Grading Plan), acceptance by the City, supported by appropriate lien waivers. . ." (emphasis added) the Developer can request a reduction of the LOC. Therefore, the City takes the position that Knife River should be paid from the LOC, notwithstanding that Knife River's lien rights have expired. B. Unfinished Work The City's engineer has furnished a punch list of other work that remains incomplete, and has estimated that the cost of finishing the work would be about $123,000.00. They have suggested that a continuing Letter of Credit for 125% of this work would be necessary (about $152,000.00). There is perhaps another $18,000.00 in potential incomplete work for landscaping and irrigation housing that would bring this total to perhaps $170,000.00. The City is entitled at this point to demand that the Bank pay to the City an amount sufficient to pay for the unfinished work, which by our calculations (based on the City's estimates) would be about $140,000.00, assuming that the Bank did not take the position that some of the punch list items are maintenance issues, for which the Letter of Credit provides no surety. The City would then use this money to complete the punch list items. That would leave about $131,000 remaining on our Letter of Credit. However, as indicated earlier, the Letter of Credit does not guarantee payment to unpaid contractors, project maintenance, Homeowners' association issues or pond construction issues. Absent any agreement, it would appear that the Bank's obligations under its Letter of Credit would be limited to completing the punch list.items. CITY RESPONSE: City agrees Contractor/Bank is responsible to complete punch list items including "Additional Items" as listed on the punch list. In addition, paragraph 6. of the Development Agreements does require that the LOC will be reduced but ". . . only if the maintenance e:uarantee (emphasis added) required by paragraph 8 below has been deposited." City agrees the LOC does not guarantee payment for Homeowner's Association issues and pond liner construction issues. However, it should be noted that trunk and lateral drainage facilities are Stage I improvements and if the liner is not functioning as intended, the design of the pond may need to be amended. The City does agree that the pond liner was initially installed as a developer amenity and was not required by the City. 2