2020-00763 - Aquifer thermal energy storage (ATES) system in the Towerside Innovation District

2019-01362 - Declaration of a climate emergency

2018-00770 - Minneapolis 2040 Comprehensive Plan

2015-00954 - University Avenue Innovation District redevelopment

Towerside Innovation District (Towerside), a Minnesota non-profit corporation, is requesting a $2 million loan from the City of Minneapolis to cover a portion of the costs to construct an aquifer thermal energy storage system (ATES) to provide district energy in the Towerside area of Prospect Park.

Project Overview 

The ATES system would provide heating and cooling to multiple buildings in a two-phase development. ATES system uses a series of wells and piping system that move heat between buildings and the local aquifer, allowing buildings to be heated and cooled without onsite natural gas consumption. Replacing natural gas with the ATES would reduce carbon production in the atmosphere. The use of this technology addresses alternatives to using greenhouse gas emitting natural gas and addresses the City of Minneapolis’ (City’s) climate action plan.  The ATES would remove up-to 500,000 tons of carbon at full build out of both proposed development phases. At that level the social cost of carbon savings over its 30-year life cycle is approximately $21 million using the City-set $42.46 per ton-of-carbon.

Phase one financing of up to $15 million includes the construction of the ATES system, then subsequent construction of three planned buildings. Towerside would partner with Ever-Green Energy (Ever-Green), a St. Paul based developer and operator of district energy systems, to construct and operate this system. Towerside would enter into service agreements with the developer of the new buildings planned for this area, Wall Companies (Wall). These buildings would eventually provide the ratepayers and revenue to fund system operations and debt service. Wall plans to develop 850,000 square feet of space for the two-phase project. This financing request is for the first 450,000 square feet of development defined as three buildings. 

Building 1:
Malcom Yards Mixed Use – a 143-unit market rate, rental housing building with up to 30,000 square feet of commercial space. 

Building 2:
Malcom Yards Affordable Housing – a 142-unit, 100% affordable, rental housing building; and

Building 3:
Malcom Yards Office – a 200,000 square foot, four-story office and commercial building.

Phase two is a second phase, speculative development of buildings totaling 400,000 square feet. The proposed development is a 50,000 square foot office building, a mixed-use building with 110 units of housing plus between 50,000 and 70,000 square feet of commercial space, and a third building consisting of 100,000 square foot commercial office building. 

Sources and uses of Phase One funding:

In July 2020, the City Council directed staff to hire a consultant and evaluate the use of the City’s Common Bond Fund program to finance the $22 million two-phase project, then report those findings back to the Council. Through this negotiation process, the Staff team, working with the borrower, determined the Common Bond Fund was not a strong fit for this project because it would require a “credit enhancement”. The credit enhancement needed was overly complex due to the pooled nature of the Common Bond Fund source.

Towerside has shifted gears and engaged Piper Sandler to instead underwrite private activity bonds to finance the first phase of this project. Under this proposed structure, Piper Sander would underwrite City private activity bonds to finance phase one development. Even with this underwriting, a $3 million financing gap would exist. Thus, the project seeks to fill this gap in the form of a subordinate loan from the City of $2 million with funding from the McKnight Foundation contribution. The McKnight Foundation is currently reviewing a $1 million grant request.  If the grant is not secured, Towerside would have to find an alternative source of funds.   

Common Bond Fund excess reserve funds is the proposed source for the subordinate loan request of $2 million. The City holds a cash reserve for the Common Bond Fund to maintain its high rating for the overall fund.  Overtime, interest will accrue in excess of the minimum amount needed to keep this rating and these excess funds can be used for any public purpose the City deems appropriate. Currently interest reserves of $3,013,499 exceed the minimum amount and are currently held in a trust account on behalf of the City’s Common Bond Fund program. Authorization of this loan request would allow for the process of transferring those remaining funds to initiate the financing process.

Staff will return to the City Council will specified terms for the loan when Towerside is ready to apply for the public facilities bonds from the State of Minnesota’s Office of Management and Budget (MMB).  These bonds, described below, will provide a majority of the funding for this project.  Approval of the general terms now provides needed assurance to the Towerside team to proceed with the next steps of this process.

The proposed subordinate loan terms would be favorable to realize this innovative technology.  The term of the loan will mirror the term of the bonds, which is expected to be 30 years.  There will be no interest rate on the loan to increase the likelihood of success of carbon emission reduction.  When phase one construction is complete and development has stabilized, loan repayments would begin.  The length of this stabilization period will depend on the completion of the three buildings that will use the system.  The City will annually review the cash flow of the project to determine what, if any, excess cash is available for the repayment during the stabilization period for the first 10 years of the loan.  The remaining balance of the loan will fully amortize repayment starting in year 10 of the loan.  Loan closing will be contingent upon the approval of all other sources needed to complete Phase One including, but not limited to,  private activity bond and foundation sources. Bonds and debt would be secured by the service agreements between Towerside and Wall on the to-be-constructed phase one buildings.

The present action only involves approval of the $2 million loan from the Common Bond Fund reserves.  Towerside is assuming an allotment of private activity bonds subject to volume capital in order to finance this project. The City has fully allocated its volume cap for 2021 for other projects, Towerside would need the City to apply directly to the MMB for a Public Facilities Project Allocation later this year or in 2022 for project approval and allocation. The City would then seek issuance of private activity bonds using this allocation. Staff will return to the City Council for authority to apply for this pool of bond funds when Towerside is ready to proceed with that component of the financing.  Staff will also return to the City Council at the same time with specific terms for the proposed subordinate loan. The subordinate loan financing closing is contingent upon successful approval of the Towerside application by the MMB.