EDSR INFORMATION 03-14-2011City ~f
~~~~ INFORMATION
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TO: Economic Development Authority
FROM: Catherine Mehelich, Director of Economic Development
DATE: March 14, 2011
SUBJECT: INFORMATION -Development Trends
The attached information has been collected over the past few months and provides good
insight into current development trends, tools, and developer expectations as we evolve
through this economic recovery.
• "Finding Demand, Community Revitalization and Collaborative Partners: Keys to
Tax Base Growth" Presentation by Jeff LaFavre, Integrust Group, January 20, 2011
to Economic Development Association of MN (EDAM) Conference.
• "How To Think Like A Developer" Article by Arne Cook, Montgomery Properties
and Realty Advisors, February 3, 2011 to Ehlers Public Finance Seminar.
• "Economic Development & Redevelopment" Handouts prepared by Ehlers.
• "Finding Balance in Financial Uncertainty" Presentation by Mark Ruff, Ehlers; Rick
Collins, Ryan Cos; Bob Streeter, City of Oakdale, February 23, 2011 for Sensible
Land Use Coalition Program.
C:\Usexs\cmehelich\Desktop\Memo Format Eor All Boaxds.doc
2/23/2011
EDAM PRESENTATIO~t
JANUARY zg 24-11
Finding Demand, Community Revitalization and Collaborative Partners:
Keys to Tax Base Growth
Surrounding Trends/Facts
• Finding Positive Growth
• Financing -Challenging
• Master Developers -Limited Funds
• LGA -Being Dramatically Reduced
• Cyber Monday More Successful than Black Friday
• Funding NewTechnology Opportunities Pose
Difficult
• Minnesota
Experiencing Minimal Job Growth
Not Well Positioned for Distribution
2/23/2011
GrowingTrends
Entrepreneur Magazine December X010
• Child Care-Combines
Education & Enrichment
Programs
• Fitness-Spending is Up
and More Segmented
• Green -Save the Planet
and Save Money
• Health Services-Cutting
Costs and Closerto
Patient
• Moving/Storage -
Economic Recovery
Comes Pent Up Demand
• Pets -Kennels Out,
Hotels In
• Sandwiches -The Fast
Food Healthy Alternative
• Senior Services -Fastest
Growing Population
• Spa Services -
Pampering In with
Luxury on a Budget
• Tutoring -Highly
Competitive
Opportunity #s
Expanding Businesses inYour Backyard
• Case Study: Goodrich in Burnsville, Minnesota
• Opportunity: X59 Million Expansion to Current
Facility, 400-50o Jobs Over Five Years with zoo+ Being
Degreed Engineers
• Secret to Success:
• History of High Quality, Highly Productive Workers
• Mayor Built CEO Forum with Largest Employers
ThreeYears Prior to Expansion Opportunitywith One
Time PerYear Evolved to FourTimes PerYear
• State and City Showed Interest and was Proactive in
Proposing Inventive
• Incentives Were Less than Other States
2
2/23/2011
Opportunity #2 "E"Trends
• Case Study: Elk River Data Centers
• Opportunity: 340,000 Square Feet with
Significant Tax Base, 43 Jobs Averaging
~6o-85K PerYear
• Secret to Success:
• Low Cost Reliable Energy Provider
• Quality I.T. Workforce and Close Proximity to
Metro Area
• Cooler Climate and Disaster Resistance
• Minimal Tax Subsidy
• Actively Involved EDA with Entire Process
3
2/23/2011
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Opportunity #3AfFordable Housing
• Case Study: Colleen Carey
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2/23/2011
Community Revitalization
Matching CommunityAssets to Business
Needs
• What isYour Community's Foundation?
• Businesses (BRE)
• Target the Informal or Semi-formal Process
• Example Shoreview
• Infrastructure
• Roads, Buildings, Land and People
• Can we Build on What We Have?
• TurnaWartlntoanOpportunity
Community Revitalization
• Which Trends Best Fit Our Community's Needs?
• CheckYour: Geography, Population,
Employment Base and Real Estate Community
• What Changes Can WeAffect/Control?
• Barriers
• Physical (Natural and Man-Made)
• Transportation/Access
• Topography
• Redevelopment/Contamination
• Economic (Costs or Financing)
• Local Controls Zoning or OtherOrdinance
7
2/23/2011
Community Revitalization
• Looking under the Rock to Find the Treasure
Chest
• What Tools Are at a Community's Disposal?
• Public Tools
• TIF New and Existing (Pay-As-You-Go and Bonded)
• TIF Temporary Changes
• TAX Abatement
• Return of TCCCF Options
• Bonds: Revenue, IDB, BAB, Bank Qualified, Deferred, Interest
Only, Lease Purchase and Public Improvement
• Housing Improvement Areas
• EDA's
• Regional: County CDBG, Met Council, MHFA, DEED, Initiative
Foundations Regional Development
• Cash Cows: Electric, Water Fund and Liquor
• Chaska Data Center Example
Community Revitalization
• Which Tools Are at a Community's Disposal?
• Private Resources
• Traditional/Conventional Financing
• Private Placement of Bonds and Tax Credits
• Foundations: Blandin, Mckight and GHMC
• Developer Equity, Revenues for Other Projects
• Utility Companies
• What to Do ifYou Do Not Have Loads of ~~~$$
8
2/23/2011
Collaborative Partners
• External Public Partners
• County & State
• Chisago County Model
• External Private Partners
• Utility Companies
• Current Land/Property Owner
• Private Developers
• Broker as Source of Market
Intelligence....MakeThem aCommunity
Partner
• MnCar
9
Ehlers Development App
HOW TO THINK LIKE A DEVELOPER
Ehlers Public Finance Seminar
February 3, 2011
Prepared by Arne Cook, Montgomery Properties and Realty Advisors
The economic recession and real estate depression have left the commercial development business in
turmoil. Multi-family housing is the only bright spot where we are seeing some new construction. For
the most part, the commercial development that will occur over the next two years will be "build-to-suits"
- properties built specifically for the tenant or owner. Build-to-suit customers are usually on tight
development schedules. They require land sellers to be able to act quickly, and local governments to
provide timely approvals. Don't wait until you have a prospect to sort through issues such as future land
use goals or environmental conditions. Get ready for your build-to-suit prospect and for when the market
turns.
You can make your publicly owned site competitive by thinking and acting like a private landowner and
developer. Here's a glimpse into how a developer thinks.
Know Your Site
As a seller, you need to fully understand your site as well as competitive sites. Pricing depends on so
much more than just price per square foot. What are the strengths and weaknesses of your site? Consider:
• Location relative to Minneapolis/St. Paul commercial business districts (metro sites), local
demographics and demand generators
• Location to transportation corridors and other amenities (parks, transit, etc.)
• Access from highways
• Supply of developable land in the market area
• Visibility
• Site conditions (environmental, geotechnical)
• Zoning and city's goals for the site
• Costs associated with developing the site
Know the Market
As community developers we often think about land use in broad terms -mixed use, commercial,
industrial. But to think like a developer you have to understand the market in much narrower segments.
• What is the supply of the land or product type you are targeting? Think very specifically about
product type (i.e., industrial office warehouse, office showroom, distribution).
• What options are available to potential users and at what price?
• What is the demand? From what type of business or companies? For what type and size of
space?
• What is the historical and current absorption?
• How are the debt and equity markets for your deal? Can it be financed? By whom? Under what
terms? What is the blended cost of equity and debt?
Know your Competition
You will want to know every site that you will compete with.
• What are the list prices, and what have been the actual sale prices? Is the pricing on a net or gross
land area basis?
• How does your site compare in terms of dimensions and configuration. Is it more or less
efficient?
• How does your site compare in terms of image, ingress and egress, visibility and amenities?
• How will your development fee structure and approval process compare to your competition?
You need to consider SAC and WAC charges, park dedication fees, building permits, special
assessments. Equally important, what is the speed and clarity of your governmental approval
process vs. competitive sites?
• Does the competitive seller/developer have any special motivations or stresses that can affect the
price? Do you?
• How quickly can the competition make decisions, come to terms of an agreement and close?
How quickly can you?
• What will be the taxes, special assessments, park or downtown association fees, or other ongoing
costs for your site as well as the competition?
• Are there environmental, wetland, geotechnical or offsite infrastructure or other issues that can
have a significant impact on the cost, efficiency or timing of the transaction... both on your site
as well as the competitors?
• What infrastructure is in place and what needs to be built? Consider mass grading, storm water
retention, sewer and water trunks and laterals, and trails.
• Will your or the municipality you are competing with offer special economic incentives, and if
so, in what form, at what level and under what terms? Under what circumstances and at what
levels are you prepared to offer economic incentives?
Know Your Customer
To determine your sales strategy and negotiate the best price you need to know the objectives of the end
user(s) of the site.
• Where are they coming from and why are they considering abuild-to-suit?
• Does abuild-to-suit offer them certain efficiencies or other business advantages/
• Do they have renewal options in their existing space or could they lease an existing building
elsewhere?
• What is the importance of being closer in to the metro area versus farther out? What draws them
to your site versus others? They will always suggest your site is more expensive than the
competitive site (yet inferior). Be ready with your response.
• What is the importance of accessibility and visibility for employees, customers, and marketing
purposes?
What is their business? Are they a growing company? Can they afford to move?What is their
credit worthiness? Qualify your customer before spending a lot of time courting them.
Be Responsive and Flexible
It is very rare for price to be the only consideration for a customer. As land seller and local government
that provides land use approvals, you must be highly responsive. You must know, sell, and prove to
potential customers that you can close and that they will be able to develop a site at the building costs
they are projecting and under the timeline they need to meet. Uncertainty and surprises will kill a deal.
You will need to convince buyers that there will be no major surprises if they select your site.
If you know your site, know your competition, and know your customers, you will be able to make
informed decisions quickly.
Maintain pricing flexibility depending upon size and density of the development and, just as important,
the quality of the customer in terms of their credit, the number of jobs they are bringing to your city and
the quality of the building.
Marketing Options
The old method of doing RFP's in a hot market with a hot site does not work these days. You must
market the site!
The City can access real estate expertise and get daily access to the market by working with a broker
and/or developer. Private land owners often list their sites with commercial real estate brokers.
The City can enter into a contract for private development or redevelopment with a selected developer. In
most cases, developers will want this contract to be exclusive, meaning that the City will not consider
proposals from competing developers.
To maximize the value of a site, consistently and clearly communicate your vision for the property
through professional marketing strategis including signage, branding, conceptual site plans, brochures and
a well-conceived and strictly managed multi-pronged marketing plan directed at brokers, developers,
builders, and end-users.
Pros of Working with a Broker
Real estate is a relationship business and brokers are in the market on a daily basis, augmenting the City's
efforts and relationships. They stay in contact with other brokers, are aware of all the opportunities and
competition from other landowners, developers, and existing buildings. They help formulate and execute
a marketing plan and are incepted to work with and market to other developers and builders and end
users. You will need to manage the marketing process. Brokers are busy and take a lot of listings. Be the
squeaky wheel so they are actively marketing and paying attention to your property.
Cons of Working with a Broker
Brokers charge fees. When selecting a broker, find out what and how they earn fees and if they have any
conflicts of interest. Are they representing a competing site? Chances are, if they are not, they are not
active in your market. If they do, you will need to manage the conflict.
Pros of Working with a Developer
Good developers will have resources, relationships and experience to work through the .entire
development process including design, construction, city approvals process, site issues, marketing the
site, managing brokers, structuring the lease and ultimately financing or selling the completed building.
All these disciplines are necessary to provide solutions to problems, gain the confidence of customers and
aggressively price projects.
Cons of Working with a Developer
None -unless you pick the wrong developer. The developer must have a track record, experience in the
product, and must possess or have ready access to working capital. The developer must be willing to
share the risk with the City. If the developer requires an exclusive development contract, you will be
"putting all your eggs in one basket." However, you may not be able to negotiate anon-exclusive
agreement and still have the developer devote resources to the site.
For questions or comments, please contact:
Arne Cook
Montgomery Properties and Realty Advisors, LLC
612-281-200
arnecook~comcast.net
Happy Developing!
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The State of Minnesota Jobs Bill authorized cash balances in existing tax increment districts to
be used to spur new construction or substantial rehabilitation in your community. Significantly,
local governments can spend existing tax increment regardless of when the district was certified
without worrying about the many restrictions that have heretofore applied, such as the five-year
rule and pooling limitations. Any cash balances must be expended by December 31, 2011.
The project must consist of the construction or substantial rehabilitation of buildings and
ancillary facilities, if doing so will create or retain jobs in the state, including construction jobs.
Construction must begin before July 1, 2011.
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The first step is to adopt a written spending plan that specifically authorized the assistance. You
will then need to enter into a development agreement that specifies how much increment will be
provided, what it will pay for, and what form it will take. Under the law, the assistance may be
provided as a:
• Direct loan
• Grant
Interest rate subsidy on developer's private financing
• Equity or similar investment in corporation, partnership, or limited liability company
® Reimbursement to the City for public improvements such as utilities, streets, and
storm water improvements.
Yes. Assistance can be provided in any form to a private development consisting of construction
or substantial rehabilitation of buildings.
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No. Tax increment cannot be used to pay for public land, public buildings, or recreational
facilities. Increment may be used to pay for public costs associated with a private construction
project, such as utility connection fees, sidewalks, parking, or storm water ponds.
No. Increment from a housing district can be used to help build an office building or increment
from a redevelopment district can be used for a raw land site.
EHLERS
t.EADERS Itd PU8Ut FtNANCE
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There are several ways increment could spur development on improved lots. For example, you
could:
• Pay for special assessments or improvement costs, thereby making the lots more
affordable
• Provide down payment assistance or gap financing to the homeowner
• Provide construction financing to a builder
• Write down the interest cost on the builders construction loan
Remember, the lots you assist must have homes under construction by July 1, 2011.
. , __ ~, -
Increment could be used to make low-interest or forgivable loans to home-owners, rental
property owners, or a businesses that will substantially renovate their property. If the loans are
repaid, the repaid amount is still considered tax increment and will need to be accounted for in
the district.
No. Existing cash balances and increment collected through December 31, 2011 must be used.
No new authority for bonds or interfund loans is allowed. There are techniques for freeing up
tax increment cash flow to use as much tax increment funds as possible before the end of 2011.
The authority must adopt a written spending plan that specifically authorizes the assistance. This
plan must be adopted following a public hearing. A notice of the public hearing must be
published in a newspaper of general circulation at least once and not less than 10 days and not
more than 30 days prior to the date of hearing.
Contact your Ehlers Financial Advisor at 651-697-8500. (A list of Minnesota Financial Advisors
and their direct dial numbers can be found under the Contact Us tab at the top of our website at
www.ehlers-inc.com)
EHLER
LEAOfRS IN PtlBLIC FINANtf
3int~t~ ~~sr?~ 651-697-85{30
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The 2010 State of Minnesota Jobs Bill offers a significant opportunity for cities, HRA's and
FDA's to spur our economic recovery. Through June 30, 2011, local governments can use Tax
Increment Financing to pay for a broad array of economic development activities. Perhaps the
most sweeping change and the most flexible new tool is the new ways in which an Economic
Development District can promote new construction and create jobs.
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No. To spur employment in construction and permanent jobs, the State has temporarily allowed
local governments to create an Economic Development District for any type of new construction.
The site may be raw or improved land. The types of projects that can be assisted with tax
increment now include:
• Housing subdivision
• Market rate apartment building
• Retail development
• Office building
• Agricultural storage or processing facility
• Hotel or Tourist Destination
• Health care facility
• Manufacturing
• Call Center
• Any building and ancillary facility.
Importantly, construction must begin by July 1, 2011.
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Increment from the new Economic Development Districts can be used to pay for any
construction costs or typical qualified costs such as land acquisition, demolition, site
improvements, building construction, debt service, city fees, or other development costs.
The first step is to establish an Economic Development District and request certification no later
than June 30, 2011. You will then need to enter into a development agreement that specifies how
much increment will be provided, what it will pay for, and what form it will take.
FREERS
LEADERS IN PU$Ut FCNANCE
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Under the law, the assistance may be provided as a:
~ Direct loan
® Grant
® Interest rate subsidy on developer's private financing
® Reimbursement to the City for public improvements, i.e. utilities and storm water
improvements.
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No. Tax increment cannot be used to pay for public land, public buildings, or recreational
facilities. Increment MAY be used to pay for public costs associated with a private construction
project, such as utility connection fees, sidewalks, public parking, or storm water ponds.
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Yes. The Jobs Bill did not extend the term of Economic Development Districts.
Yes, for recent districts. The provisions in the new law apply to any Economic Development
District for which the request for certification was made after June 30, 2009. An existing district
may need to be modified to reflect the legislative changes so check with your TIF Attorney.
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In the approving resolution for the district, the municipality must make the following two
findings:
1. The project will create or retain jobs in the state, including construction jobs; and
2. The project would not have started construction by July 1, 2011 without tax increment
assistance.
Contact your Ehlers Financial Advisor at 651-697-8500. (A list of Minnesota Financial Advisors
and their direct dial numbers can be found under the Contact Us tab at the top of our website at
www.ehlers-inc.com)
E~LFRS
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Offices also ~ Wisconsin ark urnois ~~ ts51-6~7-8555 Rosevit~, f~iP155118-1'122
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The State of Minnesota Jobs Bill authorized a new type of tax increment district that will make it
easier for property to qualify for a full 26 years of increment. Over time, as the law has changed, it
has become increasingly difficult to qualify areas in need of redevelopment fora 26 year tax
increment district. But now we have a window of opportunity to create new Compact Development
Districts. For two years, between June 30, 2010 and June 30, 2012, local governments can
create a Compact Development District to assist any project that will significantly increase the
intensity of commercial/industrial (C/I) development on a site.
The spirit of the law is to convert undenatilized C/I property into new C/I development and create
jobs along the way. Specifically, there is a two-part test to qualify.
1. Prior to redevelopment, parcels consisting of 70% of the area must be occupied with a
commercial or industrial structure on them. To be occupied, at least 15% of a parcel must be
improved.
2. The new building(s), when completed, will be at least three times as large (measured in
square feet) as the original building(s).
There is no requirement for existing buildings to be substandard.
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This new district is well-suited for large parcels with a few commercial buildings on them. For
example:
The site of a closed car dealership
• An obsolete rail yard with storage buildings
• A single story warehouse that will be replaced by a mixed use development
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Maybe. Your district would need to satisfy the two-part test above based on existing commercial
buildings. For example, if your parcel is 100,000 square feet and contains a 15,000 square foot
building, it would qualify regardless of whether it contained other types of property. Each district
will depend on the facts on the ground.
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The only restriction is that the overall density of C/I development is tripled.
EHLERS
LEADfRSINPUBUC nNANG€
F~r~riesota p~cs#°~e 651-697-8500 3080 Centre Pointe Drive
Offices aiso in Wisconsin and Illinois #x 651-897-8555 Rosev~le, MN 55113-1122
tcsE1 free 8(~-552-1171
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The new projects could be:
• Office building
• Retail shops
• Manufacturing facility
* Hotel or tourist destination
Housing could also be included in the project, but could not count toward the " 3x" rule.
For example, if the original C/I building is 5,000 square feet, then the completed development could
be 15,000 square feet of retail space with townhomes adjacent to it.
T r'?.
No. The district as a whole, when all construction is completed, must contain C/I buildings which
triple the square footage of all the original C/I buildings in the district.
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Increment from the new Compact Development Districts can be used to pay for:
• land acquisition
• demolition
• site preparation to land in or abutting the district
• administrative expenses
• public infrastructure excluding streets, parking, or other public improvements primarily
designed to serve private motor vehicles.
It appears that parking ramps may only be eligible for tax increment financing from Compact
Development Districts if the ramps are "Park and Rides" associated with public transit. Ultimately,
your attorney will determine which costs are legal uses of tax increment.
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No. Tax increment cannot be used to pay for public land, public buildings, streets, or most parking.
Increment may be used to pay for public costs associated with a private construction project, such as
utility connection fees, sidewalks, or storm water ponds.
No. Only request for certification must occur by June 30, 2012. Your attorney will need to
determine if the five- year rule applies, which would necessitate all projects that receive assistance
to be initiated within five years of the certification date.
Contact your Ehlers Financial Advisor at 651-697-8500. (A list of Minnesota Financial Advisors
and their direct dial numbers can be found under the Contact Us tab at the top of our website at
www.ehlers-inc.com)
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1EADERS IN PUBIIC FINANCE
_ ~,_ 651-697-8500 3{?BD Genire Points C3rr~e
Offices aGso in wiscott~in and iNinais 653-697-8555 Ro~vr~is~ M1ji 55113-1'fi2~
8{10-5:52-'1171
3/1/2011
1 1 1
Speakers
-_ Mark Ruff, Senior Financial Advisor, Ehlers
Rick Collins, Vice President of Development, Ryan
Companies
.:~ Bob Streetar, Community Development Director, City of
Oakdale
1
3/1/2011
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I n the former days of real estate boom and bust,
cities would just wait
Modern elements of infrastructure complicate
matters
^ Roads to build
Sewer and water treatment plans to pay for
Schools to fill
Higher expectations
Plain vanilla is not good enough ~
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2
3/1 /2011
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^ Less land required for ROW/fewer setbacks
^ Pay now for future ROW
Lower fees for park dedication
^ Defer fees including City WAC/SAC/STAG
Longer paybacks
^ Special assessments?
TIF New District
TIF Pooled from Older District
3
3/1 /2011
Buy part of land or outlots and hold
Cities have patient money
Land bank for long term
Sites for public and private use
G.O. Improvement Bonds
Only 20% of debt service from assessments
G.O. TIF Bonds
Only 20% of debt service from TIF
G .O. Abatement Bonds
Can finance public improvements
4
3/1 /2011
Agreement there is a problem
City attorney involvement
Special treatment
Findings
Focus on big need or key sites
Quantify risk
Risk of doing nothing
Risk of development going elsewhere
Risk of homeowners losing confidence in
city
Rating agency risk
10% debt, 20% management, 40% economy
~~.
5
3/1 /2011
Good development partner
Financing thought about ahead of time
Subordination agreement:
Political implications of revisiting agreements
Bank view of special assessments
Provide some security
urre ret
Market Vacancy too high to support New
Construction
Financing (generally) not available for Speculative
Development
Build-to-Suit Developments are being completed
Developers on the Sidelines
Preserving cash reserves
Selling land, not buying ~,~~~r ~~,
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6
3/1/2011
ks ay r filling a
~OanS, Ufi...
Not on raw land (unless VERY LOW loan-to-value)
Property appraised values depressed due to weak
sale market
Regulators forcing banks to "whip their loan
portfolios into shape"
Developers have to "buy down" loans to achieve LTV
guidelines
Result of lower LTV, lower appraised values: ~,:; - ~,~ f~'~7 :r~`
more developer equity required ~ ,~~~~~ ~~ ~,~ ~ ~~,
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bevel ers r el e
a achy
Reduced people resources
Reduced capital available for "pursuit" (pre-
development) costs
Focus on investing resources to create 201 1 or
2012 returns profits
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~,ror
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7
3/1/2011
t i rta nt to e .
Acknowledge current market conditions
Don't expect developers to fund City's up-front costs
Certainty of outcomes (anticipating your Council's
actions reactions)
Collaborative approach to:
-___ Solving problems
Identifying and pursuing funding sources
Managing risks
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3/1 /2011
ale all
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{~-akdale Mall
Site Plan Flexibility
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9
3/1/2011
DEVELOPMENT
CHALLENGES
7• Reduced developer capacity
2• Difficulty in obtaining
financing for land
DEVELOPMENT acquisition
CHALLENGES 3• educed demand for space
OAKDALE SOLUTION
1• Paid for predevelopment
costs
2• Financed the acquisition of
the Mall
DEVELOPMENT
CHALLENGES
3• Participated in the risk
should nothing happen
10
3/1/2011
POLITICAL FEASIBILITY
~ (Is the Council Willing?)
~''~~~ 0
O `` ~ Passive v• Energetic Role
0 OO
~~~
0~
0 `
EVELOPM ENT ~O
CHALLENGES 0
.;0
PO LITICAL
FEASIBILITY ?
` 4
O~
O~
~O
MOVING AHEAD
O Developers -dance with the
0 one that brought you
`•, 0
0 Councils - Be willing to
consider change
"p~~bEVELOPMENT
0~' CHALLENGES
POLITICAL
FEASIBILITY ?
~~O
\0
12
3/1 /2011
Q&A
13