MINUTES OF THE MEETING

BOARD OF DIRECTORS

SAN FRANCISCO MUNICIPAL RAILWAY IMPROVEMENT CORPORATION (SFMRIC)

A meeting of the Board of Directors of the San Francisco Municipal Railway Improvement Corporation was held on December 17, 2003, at 1:45 p.m. The meeting was held at 401 Van Ness Avenue, Suite 334, San Francisco, California.

The following Directors were present at the meeting:

Mrs, Lily J. Cuneo, Mr. Michael J. Moylan, and Ms. Nancy C. Lenvin were not present.

Also present at the meeting were the following individuals:

1. Call to order

Board President James J. Ludwig, having determined that a quorum was present, called the meeting to order at 1:45 p.m.

2. Approval of minutes of the Board meeting of February 26, 2003

The minutes of the February 26, 2003, Board meeting were approved as submitted.

3. Public comment

None.

4. Election of officers

Board President Ludwig stated he has been on the Board since SFMRIC's inception, and recommended someone younger be his successor. Mr. Ludwig nominated Mr. Rudy Nothenberg for Board President, Mr. Nothenberg accepted. Approved by the Board.

Mr. Nothenberg expressed his gratitude and elaborated on the excellent job Mr. Ludwig has done and nominated Mr. Ludwig to serve as vice president. Mr. Ludwig accepted. Approved by the Board.

Mr. Ludwig nominated Mr. Joseph Ozan for second vice president, Mr. Thomas Escher for treasurer, and Ms. Nancy Lenvin for secretary. Mr. Ludwig requested that the signature card include space for all officers. Approved by the Board.

5. Presentation by Douglas Wright Consulting regarding the Kirkland economic evaluation and land use study and MTA request for contract amendment

Mr. Scott Emblidge, in consultation with Mr. Douglas Wright and Muni, made some changes to the agreement that was distributed in the packet. The scope of services is virtually identical in substance but the preliminary paragraph in the scope of services changed because the prior draft of the scope of services anticipated an action by the MTA that was slightly different than the action that occurred at the last MTA meeting. The changes relate to clarifying some of the language in the agreement.

Douglas Wright, principal of Douglas Wright Consulting (DWC), provided an update on the reuse study of the Kirkland yard. He described the mixed-use alternatives that were considered, including hotel, commercial retail, office, and housing. Bay Area Economics, a sub-consultant to DWC, conducted a market analysis of the area and prepared fairly detailed pro forma financial statements.

Mr. Wright explained that the Municipal Railway was considering outright sale of the property to maximize its return in the short-term, rather than entering into a long-term ground-lease contract. Mr. Ludwig expressed concern about selling the property and giving up ownership rights to a valuable asset. Mr. Nothenberg pointed out that Muni's need for cash was being driven by the acquisition of the Islais Creek property. Mr. Cisneros noted that the Islais Creek site is larger than the Kirkland site, and a new facility there would replace the functions previously performed at the Kirkland site. The proceeds from the sale of the Kirkland site will be used to acquire the land, construct new facilities, and other capital projects. When asked what Muni would do if the property did not sell, Mr. Cisneros explained that Muni would be forced to delay or cancel those projects that would otherwise be funded from the proceeds.

Mr. Ludwig inquired whether the amount of space designated for public use is large enough to house a major museum. Mr. Wright advised that his report examines the use of retail shops, museum and a historic car restoration center. These aspects would be designed to attract passersby, and could provide a public relations benefit to Muni. He also suggested that architectural design factors be examined. Mr. Wright explained that future reports would include responses from a community advisory committee that will be established, and that design as well as other social and economic concerns will be addressed. The Board will have an opportunity to review the proposed alternatives.

Mr. Nothenberg suggested that the MTA consider placing restrictions on the use of the proceeds from the sale of the property to ensure that the funds are used only for capital projects. Ms. Carey advised that at its last meeting, the MTA Board adopted a capital reserve policy that requires all proceeds from transactions such as this one be deposited into the capital reserve fund. She agreed to provide a copy of the policy to members of the Board.

Mr. Escher suggested that the Board consider purchasing the property and developing housing, and at the end of the term of the ground lease the property would revert back to Muni. Mr. Nothenberg pointed out that it would be very difficult to sell condominiums with a ground lease. Mr. Wright noted that it would significantly reduce the value of the transaction to Muni.

Members of the Board praised the work of the consultants on the economic reuse study. Mr. Nothenberg then moved to approve the new contract with Douglas Wright Consulting and his motion was seconded. He questioned whether the contract could stipulate that SFMRIC be repaid the cost of the consulting contract from the proceeds of the sale of the Kirkland property. Mr. Emblidge opined that since the contract was between SFMRIC and DWC, such a stipulation would not be binding on Muni. Mr. Nothenberg withdrew the suggestion.

In public comment, Mr. Rolfe suggested that Muni simply sell the property to the highest bidder and let them deal with the planning approvals (zoning, permits, etc.). Mr. Wright advised that the property would likely have greater value at the end of the entitlement process. He noted that it would not be in Muni's best interest to put the property up for auction now because the incremental increase in value is much greater than the cost of moving through the entitlement process. Mr. Ludwig advised that Muni should maintain control and place some restrictions on the reuse. He also proposed that the study consider the economic feasibility of incorporating a true museum in the design. The Board approved a new contract with Douglas Wright Consulting in the amount of $49,200.

Mr. Nothenberg requested that Muni provide the Board with a report on its plans for the acquisition, rehabilitation, utilization, maintenance, and storage of additional historic streetcars. He suggested that SFMRIC could play a role in funding such a program. Mr. Emblidge indicated that he would submit a request for a report and place the item on the agenda for the next Board meeting.

6. SFMRIC Finances

Andrew Fung, Vice President of US Bank, provided a brief summary of the current balances in each of the SFMRIC accounts. Most of the money is in the construction and equipment funds, which have been invested per the instructions of the Board. Mr. Fung noted that the rates on SFMRIC's investments are relatively good; in comparison, one-year treasury notes are yielding 1.21%, six-month commercial paper is yielding 1.14%, and six-months T-bills are earning only 1.97%. Most of the SFMRIC investments have a two-year maturity, but can be liquidated easily if funds are needed to pay for large requisitions. The remaining funds are in money market accounts yielding approximately 0.5% and are being used to pay the Board's operating expenses.

Mr. Nothenberg requested that Muni review the financial commitments listed in the 2003 financial statements, and provide the Board with a list of projects that are completed. Any remaining funds should be deobligated and returned to SFMRIC uncommitted fund balance.

Mr. Ozan provided the Board with a financial report from the Board's accountant, Matthew F. Desmond, CPA. Mr. Emblidge clarified that Mr. Desmond provides bookkeeping services, and checks expenditures against bank deposits. The books are then turned over to an auditor, who prepares information for incorporation into Muni's financial statements. Mr. Desmond's most recent fee for service was approximately $6,000. Mr. Emblidge will renew his request to Mr. Desmond to computerize SFMRIC's records. The Board would like Mr. Desmond to attend meetings when possible, and will evaluate the continuation of his services.

7. Presentation by Municipal Railway regarding potential uses of remaining bond authorization

Ms. Carey explained that there is about $38 million in remaining bond authorization that could be issued by SFMRIC. The debt service on that amount would translate into a lease payment from Muni of $2.6 to $3.6 million a year depending on the term of the lease, either 15 or 30 years. Muni does not have any specific requests for the use of these funds, as the MTA does not have the capacity to make those lease payments within the operating budget. Muni is also considering the policy implications of using operating funds to make lease payments for capital projects. Ms. Carey also pointed out that the passage of Proposition K, which is a continuation of the half-cent sales taxes, provides a continuing source of local matching funds. SFMRIC funds have been used in this capacity in the past.

Mr. Nothenberg observed that capital needs are not always predicable, and that Muni could find itself in a position where it needed funding quickly. He asked whether there were any constraints to selling SFMRIC bonds, and how quickly the bonds could be sold. Ms. Carey advised that the City Attorney's office has indicated that the bonds could be sold, subject to approval by the Board of Supervisors and validation by the court. Mr. Nothenberg recommended that the City seek validation of the entire remaining authorization, even if only a portion of the bonds are sold initially.

8. Next Board meeting

The members tentatively agreed to hold the next Board meeting in April 2004. Mr. Emblidge was instructed to confirm members' availability to ensure a quorum is available.

9. Adjournment

There being no further business before the Board, the meeting was adjourned at 3:10 p.m.

Meeting adjourned in memory of James Ludwig's late wife, Eileen Ludwig.

Recorded by:
Erika L. Crowder
Executive Secretary