After a bank that initially offered Morgan Hill a long-term financing deal to purchase two fire stations revoked the deal out of fear of the outcome of pending litigation, City Hall received a proposal from Pinnacle Bank that is almost as affordable.
The City Council Wednesday unanimously directed City staff to proceed with negotiations with Pinnacle for a 15-year, 3.5-percent interest “lease purchase” loan to pay for the two fire stations - one at Hill Road and Dunne Avenue and one on Old Monterey Road.
The principal cost of the stations is $2.9 million, an amount negotiated last year between the City and their previous owner, the Santa Clara County Central Fire District.
The City is required to purchase the stations from the County in order to house its new fire and EMS provider CalFire. The previous contract with the County says at termination of the contract, the City would purchase the stations.
In January, after City staff solicited financing bids, the Council approved a 12-year deal for the purchase with Bank of the West, at 2.65 percent. However, days later that bank withdrew the offer due to pending litigation that might result in a loss of revenue that would make it difficult to make the $300,000 annual payments - a possibility that City staff and Council members described as “remote.”
The deal from Pinnacle Bank approved by the Council Wednesday provides for lower annual payments - about $260,000 - despite the higher interest rate, due to the longer term of the financing, according to City staff.
Specifically, Bank of the West was worried about a lawsuit filed by the City against the California State Controller’s Office, involving about $14 million worth of downtown properties that the Controller claimed were illegally transferred to a third party, the Morgan Hill Economic Development Corporation.
If the EDC fails to return the properties, the state can withhold local revenues from the City such as sales and property taxes, and impose other costly penalties, according to the 2011 state redevelopment law. However, the city says such a penalty is illegal.
Bank of the West was worried about the possibility that the state might withhold the revenues the City would require to pay off the $2.9 million fire station purchase, City staff said at the time.
In July, the Council approved a five-year, $19 million contract for CalFire to provide fire and EMS to Morgan Hill residents, in order to save money on the same level of service. City staff started negotiating with CalFire on the fire stations about that time, and arrived at the $2.9 million price tag.