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8.1. SR 10-21-2013 City of Elk=' Request for Action River To Item Number Mayor and City Council 8.1 Agenda Section Meeting Date Prepared by General Business October 21, 2013 Brian Beeman,Director of Economic Development Item Description Reviewed by Set Public Hearing for Black Hawk Woods Housing Jeremy Barnhart, CODD Deputy Director Tax Increment Financing (TIF) Reviewed by Cal Portner, City Administrator Action Requested Authorize by motion,to set a Public Hearing for December 16, 2013, for a proposed Black Hawk Woods Housing TIF district. Background/Discussion The Housing and Redevelopment Authority reviewed the Black Hawk Woods Housing TIF project at their October 7, 2013, meeting. Typically, the Council establishes a public hearing following a recommendation by the HRA or FDA. The HRA discussed the project and had some concerns with the length of the TIF,whether TIF should be used for affordable housing projects, and how the HRA TIF is scored. The existing TIF application and scoring is designed for commercial/industrial projects and should be amended to include housing projects. Based on the current scoring sheet,this project scored as Moderate on the eligibility scale. After discussion,the HRA passed a resolution recommending the City Council set a public hearing. On October 7, 2013, the City Council tabled setting the public hearing to the October 21 City Council meeting to further discuss the project. Once the public hearing date is set,the school district and county will also be notified of the project. A description of the Black Hawk Woods project is outlined in the attached October 7,2013, regular HRA meeting staff report. Staff recommends the Council set the public hearing date for this project. Setting a public hearing does not obligate the Council to a commitment of the project. After the public hearing is held in December, the Council will vote whether or not to use TIF to finance the project. Financial Impact N/A Attachments • Resolution Calling for TIF Hearing • HRA Black Hawk Woods Housing TIF Packet Dated October 7, 2013 • Springsted TIF Financial Report P a w E A E U s r NaA f RE] City of Elk River Resolution 13- A Resolution of the City of Elk River Calling for a Public Hearing on a Modification to the Development Program for Development District No. I, Establishment of Tax Increment Financing District No. 24, and the Adoption of a Tax Increment Financing Plan Therefor NOW, THEREFORE, BE IT RESOLVED by the City Council (the "Council") of the City of Elk River,Minnesota (the "City"), the following: Section 1. Public Hearing. This Council shall meet on December 16, 2013, at approximately 6:30 p.m., to hold a public hearing on a proposed modification to the Development Program for Development District No. I (the"Modification"), the proposed establishment of the Tax Increment Financing District No. 24 (a Housing District) (the "TIF District"), and the proposed adoption of a Tax Increment Financing Plan for the TIF District (the "TIF Plan"), pursuant to Minnesota Statutes, Sections 469.174 to 469.1794, as amended. Section 2. Notice of Public Hearing Filing of Plans. City staff and consultants are directed and authorized to prepare the Modification and TIF Plan and to forward such documents to the appropriate taxing jurisdictions,including Sherburne County and Independent School District No. 728 (Elk River). The City Clerk is authorized and directed to cause notice of the hearing as required by law, to be published at least once in the official newspaper of the city not less than 10, nor more than 30, days prior to December 16, 2013, and to place a copy of the Modification and TIF Plan on file in the City Clerk's office at City Hall and to make such copy available for inspection by the public. Passed and adopted this 21" day of October, 2013. John J. Dietz,Mayor ATTEST: Tina Allard, City Clerk row € R10 8 NATUREI Ells -Vft _ Request for Action River To Item Number Housing&Redevelopment Authori 6.2 Agenda Section Meeting Date Prepared by Click here to enter text. October 7, 2013 Brian Beeman,Director of Economic Development Item Description Reviewed by Black Hawk Woods Housing TIF Jeremy Barnhart,Deputy Director, CODD Reviewed by Action Requested Review Black Hawk Woods Housing TIF project and approve a resolution to make recommendation to the City Council to set a Public Hearing for Monday,December 2, 2013. Background/Discussion Senior 30 Elk River Limited Partnership and Roger Derrick proposes Blackhawk Woods,an 84 unit one- level rental project serving residents aged 55 and above with low and moderate incomes pursuant to Section 42 of the IRA Tax code. There are 49 one bedroom and 35 two bedroom apartments and a Clubhouse Activity Center. Each housing unit includes an attached garage. There is no medical staff or assisted living personnel on site, although individual assistance can be contracted through Guardian Angels or others. The project will serve seniors with incomes from $20,000 to $40,000. (the maximum 2 person income allowed by HUD). It will offer townhome rents based on 30% of income. Monthly rents for the one bedroom unit will range from $500-775. Two bedroom units will rent from $795-$975 a month. Blackhawk Woods is located at 183 Td NW at Yankton,Elk River,MN,Lots 1-41,BL 1,West Oaks Third Addition and Oudot A,West Oaks Fourth Addition. (A map is attached) Current real estate taxes on the property is $6,000. After the project is completed, the proposed real estate taxes is anticipated to be $94,500. The applicant is planning the construction to begin in late spring or early summer of 2014 with expected completion of the project by fall of 2014. The applicant requests pay as you go TIF, over 25 years. The city would retain 10% as an administrative fee. Because there will be no children living in the development, the developer does not believe there will be a negative impact on schools or parks. Springsted has reviewed the project and it scored moderately on the high, moderate,low and not eligible scale. Therefore,the project is eligible for further review and consideration. It should be noted that some of the questions within the application focus more on commercial/industrial projects, making them not applicable for this project. As a result, staff supports this project. Springsted, the City's Financial Consultant,will be providing a presentation of the project and the TIF process,and will be available for questions. As part of the TIF requirements for housing TIF's,the HRA rawEn10 0 Y A R reviews the project and then recommends to the City Council to set a Public Hearing. During the TIF process, the School and County are also notified of the project. The project has not yet received land use approval, though it is generally consistent with the zoning district. Financial Impact N/A Attachments • HRA TIF Resolution Recommending to City Council • Blackhawk TIF Application • Blackhawk Woods Map • Springsted Blackhawk Woods TIF District Project Review NAPublic Bodies\Agenda Packets\10-07-2013\4.5 at 3a sr 6.2 Black Hawk Woods TIF Memo jb.docx HOUSING AND REDEVELOPMENT AUTHORITY IN AND FOR THE CITY OF ELK RIVER,MINNESOTA CITY OF ELK RIVER SHERBURNE COUNTY STATE OF MINNESOTA RESOLUTION NO. RESOLUTION RECOMMENDING THE CITY COUNCIL CALL A HEARING TO MODIFY DEVELOPMENT DISTRICT NO. 1, ESTABLISH TAX INCREMENT FINANCING DISTRICT NO. 24 THEREIN AND ADOPT A MODIFICATION TO THE DEVELOPMENT PROGRAM AND ADOPT THE TAX INCREMENT FINANCING PLAN THEREFOR WHEREAS,There is a proposal to modify Development District No. 1,establish Tax Increment Financing District No. 24, adopt a Modification to the Development Program (the "Development Program Modification"), and adopt the Tax Increment Financing Plan (the "TIF Plan") therefor (the Development Program Modification and the TIF Plan are referred to collectively herein as the"Program Modification and TIF Plan"),all pursuant to and in conformity with applicable law,including Minnesota Statutes, Sections 469.124 to 469.134, and Sections 469.174 to 469.1794, inclusive, as amended (the "Act"); and WHEREAS, the Housing and Redevelopment Authority in and for the City of Elk River, Minnesota(the"HRA")has received a report and other information relating to the Program Modification and TIF Plan and the proposed development of an 84-unit senior living townhome community consisting of approximately 49 1-bedroom units, 35 2-bedroom units, and a clubhouse activity center (the `Blackhawk Woods Project"); and NOW, THEREFORE, BE IT RESOLVED by the Board of Commissioners of the Housing and Redevelopment Authority in and for the City of Elk River,Minnesota as follows: 1. The HRA hereby finds that the Program Modification and TIF Plan and the Blackhawk Woods Project will increase decent, safe and sanitary affordable housing for seniors in the City and the state and preserve and enhance the tax base of the City and the state. 2. The HRA recommends that the City Council call for a public hearing and consider establishing Tax Increment Financing District No. 24 and adopting the Program Modification and TIF Plan for the Blackhawk Woods Project. Approved by the Housing and Redevelopment Authority in and for the City of Elk River, Minnesota this 7th day of October, 2013. Chair ATTEST: Secretary 432917v1 EL185-22 Springsted Incorporated 380 Jackson Street, Suite 300 Springsted Saint Paul,MN 55101-2887 Tel: 651-223-3000 Fax: 651-223-3002 www.springsted.com DRAFT MEMORANDUM TO: Members of the Housing and Redevelopment Authority of the City of Elk River Brian Beeman, Economic Development Director FROM: Mikaela Huot,Vice President Tom Denaway,Analyst DATE: October 4, 2013 SUBJECT: Tax Increment Financing Application Review Worksheet The City of Elk River has asked Springsted to evaluate the tax increment financing (TIF) request submitted by Senior 30 Elk River Limited Partnership (the developer) for the proposed development of a senior housing rental project consisting of approximately 84 one-level townhome units. The City's Tax Increment Financing Policy also requires that the Tax Increment Financing Application Review Worksheet be completed to evaluate the project and ensure it meets the criteria of the City's policy. The application for Tax Increment Financing proposes the development of a senior living townhome community. The Developer is proposing to construct an 84-unit townhome development, containing 49 one-bedroom units, 35 two- bedroom units, and a clubhouse activity center. Additionally, each unit will include an attached garage. The development is proposed for persons of low and moderate income;which will result in income limitations for potential residents and reduced rental rates. The Developer will be undertaking both the construction and operation of the proposed development. Attached to this memo are the results of Springsted's review based on information provided by the Developer and the City's existing Tax Increment Financing Policy and Application. It should be noted the Application Review Worksheet includes questions focuses more on commercial/industrial development with job creation goals than affordable housing. However one of the objectives of the City's Tax Increment Financing Policy as listed on page 3 of the application is to create opportunities for affordable housing. Our initial review of the project and completion of the worksheet would rank this project as moderate based on a high, moderate, low and not eligible scale. Public Sector Advisors City of Elk River, Minnesota Blackhawk Woods Proposed Housing TIF Project Tax Increment Financing Application Review Worksheet October 4,2013 Page 2 Based on this information, we believe the City could proceed with consideration of approval of the TIF District as the proposed project meets the `moderate' criteria of the City's Tax Increment Financing Application Review Worksheet and Policy. Thank you for the opportunity to be of assistance to the City of Elk River. Please contact me at (651) 223-3036 or mhuot(cDspringsted.com with any questions or comments. Springsted Incorporated 380 Jackson Street, Suite 300 pCIC1gSt2d Saint Paul,MN 55101-2887 Tel: 651-223-3000 Fax: 651-223-3002 www.springsted.com DRAFT MEMORANDUM TO: Members of the Housing and Redevelopment Authority of the City of Elk River Brian Beeman, Economic Development Director FROM: Mikaela Huot,Vice President Tom Denaway,Analyst DATE: October 3, 2013 SUBJECT: But-For Analysis for proposed Blackhawk Woods Senior Living Development The City of Elk River has asked Springsted to evaluate the tax increment financing (TIF) request submitted by Senior 30 Elk River Limited Partnership (the developer) for the proposed development of a senior housing rental project consisting of approximately 84 one-level townhome units. We have reviewed the project assumptions and general rationale for TIF assistance submitted by the developer. It is our understanding that the developer is in the process of assembling financing for the project, including tax credits and permanent financing from HUD and is currently working on finalizing those commitments necessary to proceed with the project. It has been indicated that project funding would be at least partially contingent on City tax increment financing assistance and that a TIF Note is necessary to provide sufficient cash flow to meet the annual debt service coverage requirements in the operating proforma. Based on this information, the City could be justified in making a "but for" finding that the anticipated development would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future. We recommend, however, that the City also consider an appropriate level of TIF assistance for reimbursement of certain eligible project costs based on the developer's information. The purpose of this memo is to outline our analysis of the project including review of the developer's request for assistance, tax increment revenue projections, review of the developer's project proforma and projected rates of return as provided by the developer. Background The application for Tax Increment Financing proposes the development of a senior living townhome community. The Developer is proposing to construct an 84-unit townhome development, containing 49 one-bedroom units, 35 two- bedroom units, and a clubhouse activity center. Additionally, each unit will include an attached garage. The Public Sector Advisors City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 2 development is proposed for persons of low and moderate income;which will result in income limitations for potential residents and reduced rental rates. The Developer will be undertaking both the construction and operation of the proposed development. The Developer will be seeking to utilize federal low-income housing tax credits through the Section 42 4% program. These tax credits will provide an equity source for funding of the project. The use of the Section 42 program will result in building cost constraints, tenant income limitations and rent ceilings that are imposed and monitored by the Federal Department of Housing and Urban Development (HUD). The Developer indicated the receipt of TIF assistance from the City is necessary to meet scoring requirements set by the Minnesota Housing Finance Agency (MHFA). The permanent financing for the project is anticipated to be obtained through a HUD FHA low interest loan program. The Developer will be undertaking the construction and operation of the proposed senior housing facility, for which they have sought TIF assistance from the City. The purpose of this analysis is two-fold, first to determine if the project is unlikely to proceed "but-for" the assistance, and second to determine if the requested assistance would create a rate of return in excess of typical market expectations. Developer Request for Tax Increment Financing Assistance The developer, Senior 30 Elk River Limited Partnership, submitted a request for TIF assistance with the purpose of TIF to finance extraordinary costs associated with constructing affordable senior housing within the City. The developer has requested tax increment assistance for financing a portion of the site improvement costs associated with construction of the project and the initial amount in the application was$1,481,404 for the full 25-year term of the district. After preliminary analysis and review, the developer revised the TIF amount to$996,871 based on revenue estimates for the full 25 year collection. The updated total estimated sources and uses of funds are $10,074,657. Based on the developer's application and total estimated project costs, the City could consider tax increment assistance for financing of the site improvement costs (not including acquisition)associated with the project up to the requested amount for the senior housing project: Project Costs Estimated Amount Original Request for Site Improvements $1,481,404 Developer's total estimated revenues $996,871 (based on 25-year TIF collection) Estimated Reduction of Request $484,533 There are generally two ways in which assistance can be provided for most projects, either upfront or on a pay-as- you-go basis. With upfront financing, the City would finance a portion of the developer's initial project costs through City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 3 the issuance of bonds or as an internal loan. Future tax increment would be collected by the City and used to pay debt service on the bonds or repayment of the internal loan. With pay-as-you-go financing, the developer would finance all project costs upfront and would be reimbursed over time for a portion of those costs as revenues are available. Pay-as-you-go-financing is generally more acceptable than upfront financing for the City because it shifts the risk for repayment to the developer. If tax increment revenues are less than originally projected, the developer receives less and therefore bears the risk of not being reimbursed the full amount of their financing. With bonds, the City would still need to make debt service payments and would have to use other sources to fill any shortfall of tax increment revenues. With internal financing, the City risks not repaying itself in full if tax increment revenues are not sufficient. Typically in either case of upfront financing, there is a shortfall payment guarantee with the developer. The developer has requested financial assistance as pay-as-you-go through a developer note. Tax Increment Analysis In order to estimate the amount of TIF revenues generated by the proposed development, certain assumptions were made based on the value of the project, construction schedule, and anticipated financing terms. • Estimated base value(2 parcels)as of Jan. 1, 2013 0 75-741-0182(EMV of$14,600) 0 75-753-0010 (EMV of$296,500) ■ anticipated to be reclassified as 4d rental following development • Estimated incremental market value upon completion o $7,869,290 estimated market value 0 84 total townhome units ■ 35 2-bedroom units • $105,000 per unit(preliminary assessor's estimate) ■ 49 1-bedroom units • $84,000 per unit(preliminary assessor's estimate) • Increment based on new building value only • Construction commences in 2014 and is completed in spring 2015 0 70%assessed in January of 2015 for taxes payable in 2016 0 100%assessed in January of 2016 for taxes payable in 2017 • 0%Annual market value inflator • Present value(discount) rate of 4% • Tax rates, class rates and future market values remain constant • 90%increment pledged to developer • Maximum term of housing district(26 total years) City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 4 Tax Increment Revenue Estimates The tax increment revenue estimates are based on collection of revenues for the full term of the district. Based on the assumptions outlined above, the projected tax increment revenues to be generated from the project are shown in the chart on the following page. Scenario 1 Annual Market Value Inflator 0% Total Gross Tax Increment $2,323,089 City Retainage (10%) $232,319 Net Amount Available for Developer(90%) $2,090,770 Present Value at 4.70%of Developer Amount(full 26 $1,079,005 year term of district) Projected Amounts based on Developer's Revenue Estimates PayGO Principal Amount $996,871 PayGO Interest(4.70%)Amount $769,398 Total Payments $1,766,269 Estimated Term of Assistance 23 Years Estimated Surplus Increment $324,501 The Developer has requested TIF financing on a pay-as-you-go basis, to help offset the reduced rent limitations required by the Section 42 program. The Developer has requested the assistance over the full term of the District (up to 25 years) based on the initial revenue projections. The revenue projections as prepared by Springsted and illustrated in the table above are slightly different and show an increased present value, or principal amount, of $1,079,005 as opposed to the original estimated amount of$996,871 with a term of approximately 23 years instead of 25 years. Further discussion regarding the actual term and amount is recommended. Project Qualification Initial discussions with the developer indicate that the project as proposed will qualify as a housing TIF District. A housing TIF District is a type of tax increment district which consists of a project that is intended for occupancy by persons or families of low and moderate income. Revenue derived from tax increment from a housing district must be used solely to finance the cost of a housing project as defined. The cost of public improvements directly related to the housing projects and the allocated administrative expenses of the City may be included in the cost of a housing project. City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 5 In order for the proposed project to qualify as a tax increment financing housing district, the property must satisfy the income requirements for a qualified residential rental project as defined in section 142(4) of the Internal Revenue Code. The requirements of this subdivision apply for the duration of the tax increment financing district. The income requirements are as follows: ➢ at least 20%of units are occupied by individuals whose income is 50%or less of area median income, or ➢ at least 40%of units are occupied by individuals whose income is 60%or less of area median income. In addition, not more than 20 percent of the square footage of the buildings that receive assistance from tax increments may consist of commercial, retail, or other nonresidential uses. Project Costs The Developer's submittal includes a preliminary total project budget of$10,074,657 as illustrated in the table below: Blackhawk Woods Project Budget Total Cost Land Acquisition $1,200,000 Construction Costs 6,479,000 Soft costs 275,000 Finance Costs 390,000 Marketing 285,000 Development Fee/Overhead 593,240 Contingency(4%) 368,000 Reserves 209,760 Working Capital 274,657 Total Project Costs $10,074,657 The Developer has indicated they currently own one of the two parcels on which the development is proposed, and has indicated the second parcel is currently under contract, assuming the project is able to proceed. A portion of the land acquisition cost estimate will be used to repay delinquent real estate taxes on the parcel the Developer has under contract at the time of closing. The two parcels combine for an approximate area of 8.52 acres. The per acre purchase price equates to approximately $140,845 including the repayment of delinquent taxes, and approximately $120,305 net of the tax payment. It should be noted that one of the parcels on which a majority of the rental units will be located is already improved with site grading, utilities, and roadways installed. The Developer has estimated the total for the remaining hard costs and vertical improvements to be $6,479,000, which equates to a per-unit construction cost of approximately $77,131. The Developer has indicated the construction cost budget is based on meeting Davis-Bacon wage requirements pursuant to compliance requirements of the tax credit program. Blended within this construction cost line-item are costs associated with the development City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 6 of the clubhouse activity building as well as remaining site improvements. The construction cost line-item appears reasonable. The Development Fee/Overhead cost equates to approximately 6% of the total development cost. The Soft Cost category is for expenses related to the professional service costs incurred in the planning and development of the site. The Financing Cost line-item is for expenses related to the Tax Credit process as well as costs associated with the permanent financing, and construction loan interest cost. The Contingency line-item is based on approximately 4%of project costs, and the Reserves line-item represents 6 months of debt-service. Sources of Funds The Developer's submittal includes a preliminary total project budget of$10,074,657 as illustrated in the table below: Sources of Funds Private Equity $558,575 Equity(Tax Credit Proceeds) 2,375,000 Permanent Financing 6,866,425 Developer Working Capital 274,657 Total Sources of Funds $10,074,657 The Developer has indicated they are expecting to receive long term financing through HUD in an amount of $5,869,554 and the loan is anticipated to have a 40-year term with an effective interest rate of 4.70%. Additionally, the Developer has indicated they will be able to seek a second mortgage based on the TIF revenue stream, which will provide $996,871 of funding. The term of the second year is 25-years to coincide with the District, and the effective interest rate is 4.70%. In addition to the traditional mortgage financing the Developer has projected they will receive additional equity from the sale of the Tax Credits of $2,375,000. The Tax Credits allows the Developer to reduce both their private borrowing amount and their private equity investment in the project. Their total private equity investment in the Development, not including Tax Credit Proceeds, is $558,575. The return on this private equity investment is measured in the return analysis section. Developer Proforma But-For Analysis In approving a TIF district and project, the City must make several findings, including the "but for" test: that the proposed development would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future. The developer has provided a "but-for" argument stating that the developer's lender has indicated that financial assistance from the City is necessary to provide sufficient project cash flow and market returns to investors that will achieve project feasibility. The developer states the assistance is necessary to construct the project as proposed based on current financial indicators. Based on the developer's stated position relative to the City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 7 need for tax increment financing assistance, the City could make its "but for" finding and provide tax increment assistance. We recommend, however, that the City also consider an appropriate level of TIF assistance for the project based on the information submitted by the developer. The City's position relative to the use of tax increment has typically been to finance extraordinary costs. The level of assistance is in part dictated by the `extraordinary' costs of the project. Initial discussions about the project indicate the assistance would be provided as reimbursement to assist the developer with extraordinary costs associated with construction affordable housing on the project site. Following thorough evaluation of the project, the City will be prepared to make an informed "but-for" decision based on the likelihood of the project needing assistance, as well as the appropriate level of assistance. The"but-for' test is used to determine whether a project is likely to proceed as proposed without the use of public dollars. To complete this analysis we constructed and examined two ten-year project proformas, one showing a result if the developer receives the requested TIF assistance and one showing a result without assistance. Our analysis of the proforma included a review of the development budget, projected operating revenues and expenditures, and the project's capacity to support annual debt service on the first mortgage and notes. Springsted performed an analysis using the Internal Rate of Return (IRR) mechanism to estimate the proposed project's rate of return. The internal rate of return measures the average annual yield on an investment, generally over a longer period of time, which in this case is 10 years. The internal rate of return measurement is typically what is used by public agencies to determine the need for a subsidy. Generally, should the rates of return lie below a reasonable range without assistance; we could assume the project as proposed would not move forward without assistance. Should the returns lie within a reasonable range with the assistance, we could assume the amount of assistance tested is appropriate for the project. All such estimates should be viewed as general indicators of performance and not exact forecasts. The number of current and future variables affecting these estimates and actual results are great. In order to understand the potential return realized by the Developer, with and without the tax increment assistance, we utilized the project cost and operating information provided by the Developer to generate a 10-year operating pro forma to calculate an estimated IRR analysis. The purpose of evaluating the operating pro forma is to understand the potential return to the Developer through the initial development of the project and the operation of the enterprise over a period of time. A 10-year period may not be indicative of the Developer's intended investment period. The first step in analyzing the return to the Developer is to determine if the costs presented are reasonable. We provided a breakdown of the estimated project costs within a previous section of the memo. Assuming all other assumptions and variables remain constant, a reduction in total project costs may have a positive impact on the projected returns. The majority of the project costs outlined above are estimates, and subject to future change, however appear to be reasonable within the scope of the project. City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 8 The second step in calculating the return to the Developer is to determine if the operating revenues and expenses are reasonable. • The Developer proposes average rental rates of $632 per month for the one-bedroom units and $895 per month for the two bedroom units. The rental rates will be limited based on the requirements of the Tax Credit program and tax increment statutes, assuming tax increment financing is provided to the project • The Developer is assuming operating expenses related to administration, utilities/trash, operations & maintenance, real estate taxes, insurance, and replacement reserves. The third step in performing an internal rate of return analysis is to assume a hypothetical sale of the asset at the end of the pro forma review period, which in this case is 10 years. The use of a hypothetical sale in this analysis is only for purposes of calculating the potential return to the Developer, and is by no means indicative of the likelihood of a sale in Year 10. In order to accurately perform the return analysis all assets have to be converted to a cash position at the end of the pro forma, in order to calculate the return on the initial equity investment. The Developer has indicated they intend to own and lease the building for an extended term greater than the 10 years we analyzed in calculating the return. For the purpose of accounting for the value of the asset in year 10 of the operating pro forma, we used a capitalization rate of 6.5%to determine the development value. The table below shows the result of our pro forma analysis based on the project costs and operating information provided by the Developer. Base Pro Forma With TIF Without TIF Assistance Assistance Estimated Leveraged IRR 17.90% 3.90% There is no set IRR benchmark that dictates whether a project needs TIF assistance or not. There are general market indicators that determine a project should be"doable"with a 10-year average return of 10-20%. However this is only an indicator and may or may not apply for each individual project, especially in today's market, and there may be other factors impacting the developer's ability to proceed. The developer has stated that the project will not occur without TIF assistance. Therefore, the City should view the IRR calculations as one factor in arriving at a decision for this particular project. An additional measure of project feasibility is the Debt Coverage Ratio (DCR), which is a calculation detailing the ratio by which operating income exceeds the debt-service payments for the project. If the DCR is greater than 1.0 it indicates the project has operating income that is greater than the debt-service payment by some margin; conversely if the DCR is less than 1.0 it indicates the project is incapable of meeting its debt-service payment and would need to seek additional revenue sources in order to pay its debt. Typical lending standards will require a DCR of greater than City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 9 1.0 as a measure of cushion in the vent actual revenues and expenses are different than projected. In this case the Developer indicated a need to meet or exceed a DCR of 1.15. Our pro forma calculation, which included slightly revised TIF projections from the Developer, resulted in a stabilized DCR of 1.19 with assistance and 0.98 without assistance. In order to understand the sensitivity of the DCR to changes in project assumptions we analyze the amount by which project costs and operating income would have to change in order for the project to have a feasible DCR. In regards to project costs, the development would need to realize either a project costs savings of approximately 10% or conversely the Developer would need to increase their equity investment into the project by approximately 10%of the total development cost. In regards to net operating income, the project would need to realize an increase in operating revenue of 17%to be feasible without assistance. Based on this analysis, it could be stated the Developer would be unlikely to undertake this project, as proposed, "but-for" the provision of the Tax Increment assistance as requested. The return analysis outline above is based on the Developer's request for a 25-year TIF reimbursement term, as this would represent the maximum potential return to the Developer as a result of TIF assistance. The Developer did perform a calculation on the impact of the receipt of TIF over a shorter 15-year period. If the TIF were to be received over a shorter period, the Developer indicated the revenue would be capable of supporting a reduced TIF mortgage amount of$730,734, while maintaining a desirable DCR. However, a reduced TIF term would decrease the potential borrowing capacity of the revenue stream and result in a decrease of$266,137 from available financing. As a result of the shorter term, the Developer would be required to increase their equity investment in the project by the $266,137 amount and/or defer payment on their Developer Fee. Conclusion Should the developer receive TIF assistance, it would be required to reserve at least 20% of the units for persons of low and moderate income for the term of the TIF assistance. When the TIF assistance has been completely repaid, the developer will be under no obligation to continue reserving affordable housing units. As a result, the projected time frame for the repayment of the TIF assistance should be considered when determining the assistance amount. The developer has requested TIF assistance of $996,871 as necessary to attract additional equity to assist with project feasibility due to reduced operating revenues resulting from the affordable housing units. Current revenues projections indicate that with a 0% market value inflator, it would take approximately 23 years of the TIF District to repay the TIF Note assuming a 4.70% interest rate. Assuming all other variables remain constant, an increase in the market value inflator would result in increased revenues, potentially decreasing the repayment term. As indicated previously, once the note is repaid the developer will be under no obligation to continue providing affordable housing units. The developer has indicated that the assistance is necessary for the project to proceed as proposed. The developer would use the pay-as-you-go note assistance to finance the additional debt required to fund the initial projects that cannot be supported due to the reduction in operating revenues from the affordable units. As we had indicated earlier City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 10 in this memo, based on current assumptions it would take approximately 23 years of the district to meet the request. The need for TIF assistance can be evaluated on an annual basis, due to the reduced operating revenues resulting from the affordable units and will remain the case as long as a portion of the units are income restricted. As a result, the length of time the City desires to maintain the affordable housing units may become a factor in determining the level and amount of TIF assistance. In some cases, there may be opportunities to fill a portion of the gap by other means—thereby reducing the required TIF subsidy and/or term. The developer could consider deferring a portion of the upfront developer fee, rental rates might also be able to be increased if the project proves successful, however the rates are ultimately dictated by both market and income requirements of TIF Districts, actual project costs may be less than projected, and finally, a reduction in the TIF note interest rate (from 4.70%) may also be considered. As illustrated in our analysis outlined above, it appears the project is infeasible without assistance absent significant changes to either the equity investment, project cost assumptions, or projected operating income. Given our review of the current assumptions it appears as if changes of this magnitude are unlikely to be realized. Therefore, we feel the proposed project is unlikely to proceed but-for the requested TIF assistance. Additionally, if the City were to undertake the provision of TIF assistance for the project, the duration of the District would need to be determined. The Developer has indicated a request for a TIF District term of 25-years, to allow them to maximize the additional mortgage they could secure based on the TIF revenue. If a TIF duration of a shorter period were to be utilized it would require the Developer satisfy a$266,137 through additional equity. It is important to note that the project will be providing affordable senior housing in the City of Elk River. Without the tax increment assistance, the developer has indicated he is not able to proceed with the project due to rent restrictions required. Thank you for the opportunity to be of assistance to the City of Elk River. Please contact me at (651)223-3036 or mhuot(@springsted.com with any questions or comments. p O O (O N N 00 0 (D (!) 00 O 0 O 0) 00 (h 0 0 CY) N V N 00 O) N V 0 LO 0 (O (h O) 00 (O (h O O 00 oc C 00 O O 00 N (C O (h l!7 l!7 O) O O � O (h 00 V � O) 00 I- 00 O N (O O V O (O (h O 00 (O (f) V O Ln 00 I- V O) (O (h O) (O V N O O) I- N V N O) 00 I- N V (h N O) •- d o V (O (O (O (f) l!) l!) l!) 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Q d w d UHOOd Projected Pay-As-You-Go Note Report City of Elk River,Minnesota Tax Increment Financing(Housing)District No.24 Blackhawk Woods Senior Housing Project Preliminary TIF Projections:84-unit Townhomes 4d classification Note Date: 12131/13 Note Rate: 4.70% Amount: $996,871 Cumulative Unpaid Semi-Annual Loan Interest Accrued Net Balance Date Principal Interest P&I Due Interest Revenue Outstanding (1) (2) (3) (4) (5) (6) (1) (8) 996,871.00 02/01/14 0.00 0.00 0.00 3,904.41 3,904.41 0.00 996,871.00 08/01/14 0.00 0.00 0.00 27,330.88 27,330.88 0.00 996,871.00 02/01/15 0.00 0.00 0.00 50,757.35 50,757.35 0.00 996,871.00 08/01/15 0.00 0.00 0.00 74,183.82 74,183.82 0.00 996,871.00 02101/16 0.00 0.00 0.00 97,61029 97,61029 0.00 996,871.00 08/01/16 0.00 27,985.00 27,985.00 121,036.76 93,051.76 27,985.00 996,871.00 02101/17 0.00 27,985.00 27,985.00 116,47823 88,49323 27,985.00 996,871.00 08/01/17 0.00 40,696.00 40,696.00 111,919.70 71,223.70 40,696.00 996,871.00 02101/18 0.00 40,696.00 40,696.00 94,650.17 53,954.17 40,696.00 996,871.00 08/01/18 0.00 40,696.00 40,696.00 77,380.64 36,684.64 40,696.00 996,871.00 02101/19 0.00 40,696.00 40,696.00 60,111.11 19,415.11 40,696.00 996,871.00 08/01/19 0.00 40,696.00 40,696.00 42,841.58 2,145.58 40,696.00 996,871.00 02101/20 15,123.95 25,572.05 40,696.00 25,572.05 0.00 40,696.00 981,747.05 08/01/20 17,624.94 23,071.06 40,696.00 23,071.06 0.00 40,696.00 964,122.11 02101/21 18,039.13 22,656.87 40,696.00 22,656.87 0.00 40,696.00 946,082.98 08/01/21 18,463.05 22,232.95 40,696.00 22,232.95 0.00 40,696.00 927,619.93 02101/22 18,896.93 21,799.07 40,696.00 21,799.07 0.00 40,696.00 908,723.00 08/01/22 19,341.01 21,354.99 40,696.00 21,354.99 0.00 40,696.00 889,381.99 02101/23 19,795.52 20,900.48 40,696.00 20,900.48 0.00 40,696.00 869,586.47 08/01/23 20,260.72 20,43528 40,696.00 20,43528 0.00 40,696.00 849,325.75 02101/24 20,736.84 19,959.16 40,696.00 19,959.16 0.00 40,696.00 828,588.91 08/01/24 21,224.16 19,471.84 40,696.00 19,471.84 0.00 40,696.00 807,364.75 02101/25 21,722.93 18,973.07 40,696.00 18,973.07 0.00 40,696.00 785,641.82 08/01/25 22,233.42 18,462.58 40,696.00 18,462.58 0.00 40,696.00 763,408.40 02101/26 22,755.90 17,940.10 40,696.00 17,940.10 0.00 40,696.00 740,652.50 08/01/26 23,290.67 17,405.33 40,696.00 17,405.33 0.00 40,696.00 717,361.83 02101/27 23,838.00 16,858.00 40,696.00 16,858.00 0.00 40,696.00 693,523.83 08/01/27 24,398.19 16,297.81 40,696.00 16,297.81 0.00 40,696.00 669,125.64 02101/28 24,971.55 15,724.45 40,696.00 15,724.45 0.00 40,696.00 644,154.09 08/01/28 25,558.38 15,137.62 40,696.00 15,137.62 0.00 40,696.00 618,595.71 02101/29 26,159.00 14,537.00 40,696.00 14,537.00 0.00 40,696.00 592,436.71 08/01/29 26,773.74 13,92226 40,696.00 13,92226 0.00 40,696.00 565,662.97 02101/30 27,402.92 13,293.08 40,696.00 13,293.08 0.00 40,696.00 538,260.05 08/01/30 28,046.89 12,649.11 40,696.00 12,649.11 0.00 40,696.00 510,213.16 02101/31 28,705.99 11,990.01 40,696.00 11,990.01 0.00 40,696.00 481,507.17 08/01/31 29,380.58 11,315.42 40,696.00 11,315.42 0.00 40,696.00 452,126.59 02101/32 30,071.03 10,624.97 40,696.00 10,624.97 0.00 40,696.00 422,055.56 08/01/32 30,777.69 9,918.31 40,696.00 9,918.31 0.00 40,696.00 391,277.87 02101/33 31,500.97 9,195.03 40,696.00 9,195.03 0.00 40,696.00 359,776.90 08/01/33 32,24124 8,454.76 40,696.00 8,454.76 0.00 40,696.00 327,535.66 02101/34 32,998.91 7,697.09 40,696.00 7,697.09 0.00 40,696.00 294,536.75 08/01/34 33,774.39 6,921.61 40,696.00 6,921.61 0.00 40,696.00 260,762.36 02101/35 34,568.08 6,127.92 40,696.00 6,127.92 0.00 40,696.00 226,19428 08/01/35 35,380.43 5,315.57 40,696.00 5,315.57 0.00 40,696.00 190,813.85 02101/36 36,211.87 4,484.13 40,696.00 4,484.13 0.00 40,696.00 154,601.98 08/01/36 37,062.85 3,633.15 40,696.00 3,633.15 0.00 40,696.00 117,539.13 02101/37 37,933.83 2,762.17 40,696.00 2,762.17 0.00 40,696.00 79,605.30 08/01/37 38,82528 1,870.72 40,696.00 1,870.72 0.00 40,696.00 40,780.02 02101/38 39,737.67 958.33 40,696.00 958.33 0.00 40,696.00 1,042.35 08/01/38 1,042.35 24.50 1,066.85 24.50 0.00 1,066.85 0.00 02101/39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 08/01/39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 02101/40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 08/01/40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 02101/41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 08/01/41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 02101/42 0.00 0.00 0.00 0.00 0.00 0.00 0.00 $996,871 $769,397.85 $1,766,268.85 $618,754.94 $1,766,268.85 Surplus Tax Increment 324,501.15 Total Net Revenue $2,090,770.00 Public Sector Advisors VI. APPLICATION FOR TAX INCREMENT FINANCING A. APPLICANT INFORMATION Name of Corporation/Partnership Senior 30 Elk River Lirr�ited Partnership Address 5001 American Blvd West.#501 Blogmi on MN 55437 Primary Contact RoW Derrick Address 5001 American Blvd West, # 501.Bloomington,MN 55437 Phone 612-644-3724 Fax 952-831-1215 _Email LQ=@chofmnejica.com 1 Brief description of the corporation/partnership's business,including history,principal product or service: Senior 30 Elk River Limited Partnership is a single purpose Limited Partnership that will develop,build,and own Blackhawk Woods. The development team will be the General Partner;the Tax Credit Investor will be the Limited Partner;INH Property _ Management cg=ggy will gmagc. 1 Brief description of the proposed project _Blackhaw_k_W_oods is an 84 unit one-level rental project serving Seniors with low and moderate incomes pursuant to Section 42 of the IRS Tax code There are 49 one bedroom and 35 two bedroom apartments and a Clubhouse Activity Center. Each a artment has an attached Attorney Name Ion Peterson. tro & eins ' e. P.A. Address 225 South 6th Steee #3500 Minnea olis MN 55402-4629 Phone 612-604-6400 Fax Email jpeterson�throp.coln _ Accountant Name Steve Erchul; Sr th Schafer Associates LTD. Address 6800 France Ave S #178 Ed'" MN 55435-2004 Phone 952-920-1455 Fax252-920-6603 Email s.erchul@smithschafer.com Contractor Name Resid tial Structures LLC Address_ 3036 Timberwood Trail Eagan,MN 55121 Phone 612-644-3725 Fax 952-831-1215 Email..dentse a chofamericaxom Engineer Name o Pederson&Associates Inc Address_ 13076 First Street,Becker,MN 55308 Phone 763-262-8822 Fax 763-262-8844 Email.,jbogarQj ogart pedersonxom Architect Name Charles Levin Architects Address 2300 Milwaukee Ave Minna olis MN 55404-3150 Phone 612.729-5333 Fax 612-729-8351 Email chuck clevin.com Page 7 of 13 NATURIN B. PROJECT INFORMATION 1. The project will be: Industrial Greenfield: New Construction Expansion Commercial Redevelopment New Construction Rehabilitation, Industrial Redevelopment: New Construction Rehabilitation __X_0 Residential X New Construction 2. The project will be: _Owner Occupied —2L—Leased Space 3. Project Address 183rd NW at Yankton Elk River MN Legal Description&Parcel Identification Number(s) , Lots 1-41,BL 1,West Oaks Third Addition and Outlot A,West Oaks Fourth Addition 4. Site Plan and Preliminary Construction Plans Attached: X Yes No 5. Amount of Tax Increment Requested for: (See attached worksheet) Land Purchase$ 0 Public Improvement$ 0 Site Improvement$ 1,481.404 _ (Based upon 15 yrs with 3%trending) 6. Current Real Estate Taxes on Project Site: $ 6,000.00 Estimated Real Estate Taxes upon Completion: Phase I $ 4.500 Phase II$ incl 7. Construction Start Date: September 2013 Construction Completion Date: August 2014 _ If Phased Project: N A Year %Completed Year % Completed C. PUBLIC PURPOSE It is the policy of the City of Elk River that the use of Tax Increment Financing should result in a benefit to the public. Please indicate how this project will serve a public purpose. _X—Job Creation/Retention: Number of existing jobs 0 Number of jobs created by project 73 lmpg=and 3 on gaLng Average hourly wage of jobs created/retained $25.00 `New industrial development,which will result in additional private investment in the area. _Enhancement or diversification of the city's economic base. The project contributes to the fixlfillment of the City's Economic Development Strategic Plan. _Removal of blight or the rehabilitation of a high profle or priority site. Significantly increase the City's tax base. X Other: Create affordable ho for area Senior Citizens Page 8 of 13 ► I1EE I E 1 I r NA i 3072 COTTAGE HOMESTEADS, USA► LLD useaNK 5001 AMERicAN`BLVD w' STE 501 17-2 91.0' Kbom1NGTON MN 554371 1 1 6 , 6/5/2013 PAY TO THE ORDER OF City of Elk River ""10OOp.0,0 Ten Thousand and 001100* . **. ,"t******, "****** �** **** ** 4. *# oau.Ars City of EI�C River MEMO SIGNATURE - lac hawk_ ds TIF gat-166 000 30 7 2ir i:09 L000❑ 2 2i: iO4 28 L 5 2 39 3 Lei' COTTAGE HOMESTEADS USA LLC 3072 City of Elk River 6/5/2013 Date Type Referenoe Original Amt. Balance Due Discount Payment 6/5/2013 Bill TIF App 10,000.00 10,000.00 10,000.00 Check Amount 10,000.00 US Bank Blackhawk Woods TIF Application 10,000.00 S 11311ackhawk Wcuds Rental Townhomes Elk River, MN (Sherburne County) TIF Calculation Worksheet Assessor estimate of Real Estate Taxes(4-D) $ 1,260 (2 BR) Assume 1 BR Units @ 80% $ 1,080 (will send Final Construction Plans to Assessor) 501 BR @$1,080= $ 50,400 35 2 BR @$1,260= $ 44,100 Total New Real Estate Tax Estimate $ 94,500 Existing Tax(estimate) $ (6,000) Estimated Increment $ 88,500 City Retains 10% $ (8,850) Project Increment $ 79,650 15 Year TIF 3%Trending $79,650 x 18.598914=$1,481,404 C:\Users\Denise Johnson\Documents\2012 New Projects\Roger\New Project Info 8-2-10\Elk River\ER 05 2-28-13 614/201324:44 AM D. SOURCES & USES SOURCES NAME AMOUNT Bank Loan Bell Bank $ 6,900,000 I Other Private Funds $ Owner Cash Equity Tax Credit Syndication $ 2,300,000 1 Fed Grant/Loan $ State Grant/Loan $ EDA Micro Loan $ Tax Increment Pay as y au gQ TIF $ ID Bonds writes down rents $ T TOTAL $ 9,200,000 i i USES AMOUNT Land Acquisition $ Site Development $ Construction $ Machinery&Equipment $ Architectural&Engineering Fees $ Legal Fees $ Interest During Construction $ Debt Service Reserve $ Contingencies $ TOTAL `See schedule of Sources:.&. Uses Page 9of13 NAtME E. ADDITIONAL DOCUMENTATION AND CHECKLIST Applicants will also be required to provide the following documentation. i ---X--A) Written business plan,including a description of the business, ownership/management,date established,products and services, and future plans See updated Project Narrative B) Financial Statements for Past Two Years Profit&Loss Statement Balance Sheet C) Current Financial Statements Profit&Loss Statement to Date Balance Sheet to Date —X—D) Two Year Financial Projections E) Personal Financial Statements of all Major Shareholders Profit&Loss Current Tax Return F) Letter of Commitment from Applicant Pledging to Complete During the Proposed Project Duration G) Letter of Commitment from the Other Sources of Financing, Stating Terms and Conditions of their Participation in Project —IL—H) Non-refundable application deposit of$10,000 —X-1) Construction Plans and Itemized Project Construction Statement ]) Attach the following documentation as Exhibits Exhibit A–Corporation/Partnership Description Exhibit B–Description of Project Exhibit C–List of Shareholders/Partners Exhibit D–But-For Analysis Exhibit E–List of Prospective Lessees Exhibit F–Legal Description and PID Number(s) Note:All Major shareholders will be required to sign personal guarantees if up front financing of the project is required. The undersigned certifies that all information provided in this application is true and correct to the hest of the undersigned's knowledge. The undersigned authorizes the City of Elk River to check credit references and verify financial and other information. The undersigned also agrees to provide any additional information as may be requested a after the filing of s placation. Applicant N Date___-5/26/2013 Page 10 of 13 IiNAE TRELI NT See attached Sources.& .Uses and Operating Statement: VII. SAMPLE BUT-FOR ANALYSIS WITH NO WITH TAX INCREMENT TAX INCREMENT SOURCES AND USES SOURCES AND USES SOURCES SOURCES Mortgage 9,600,000 8,667,000 Equity 2,400,000 2,400,00 Tax Increment Financing 0 933,000 ' TOTAL SOURCES 12,000,000 12,000,000 USES USES II Land 1,500,000 1,500,000 1 Site Work 300,000 300,000 Soil Correction 468,000 468,000 Demolition 100,000 100,000 Relocation 65,000 65,000 Subtotal Land Costs 2,433,000 2,433,000 Construction 6,750,000 6,750,000 Finish Manufacturing 250,000 250,000 Subtotal Construction Costs 7,000,000 7,000,000 Soft Costs 350,000 350,000 Taxes 35,000 35,000 Finance Fees 850,000 850,000 Project Manager 35,000 542,000 Developer Fee 850,000 540,000 Contingency 542,000 250,000 Subtotal Soft Costs 2,567,000 2,567,000 TOTAL USES 12,000,000 12,000,000 Income Statement Income Statement Sq.Ft. Per Sq.Ft. Sq. Ft. Per Sq.Ft. Rent-Space 1 100,000 $8.00 800,000 100,000 $8.00 800,000 Rent-Space 2 25,000 $8.50 212,500 25,000 $8.50 212,500 Rent-Space 3 25,000 $9.00 225,000 25,000 $9.00 225,000 Other 0 $0,00 0 0 $0.00 0 1,237,500 1,237,500 Mortgage 20 Term 1,051,646 20 Term 949,439 9.00%Interest 9.00%Interest 9,600,000 Principal 8,667,000 Principal Net Income 185,854 288,061 Total Return on Equity 7.740/6 12.004. Page 11 of 13 FI1fEAEA Af Narrative updated May 2013 Senior 30, LLC would like to construct Blackhawk Woods,an 84 unit, one-level rental townhome r development for Seniors with low and moderate incomes in the West Oaks subdivision located just south and west of Highway 10 and Waco Street. Senior 30, LLC is associated with Cottage Homesteads at West Oaks, LLC which already owns the property. We propose building 49 one Bedroom and 35 two bedroom, one-level townhomes with attached garages to serve area Seniors whose income is limited primarily to social security payments. A clubhouse activity center will also be built providing a place to socialize and meet new friends. The clubhouse will have a game room, recreational area with large screen digital N and a party room with complete kitchen facilities. Maxfield Research has recently completed a market study showing a need for subsidized independent living Senior housing in Elk River. The study notes that our proposed development has no competition in the marketplace. For that reason,the study recommends building the entire development at one time. Blackhawk Woods will. • Serve Seniors 55 years and older who have limited incomes. • Provide comfortable independent living one-level townhome apartments. There are no medical Staff or assisted living personnel on site, although individual assistance can be contracted for through Guardian Angels or others. • Serve Seniors with incomes from $20,000 to$40,000. (the maximum 2 person income allowed by HUD). • Offer townhome rents based on 30%of income: o Monthly rents for one bedroom apartments with attached garage will range from $50Q- $775. o Two bedroom apartments with attached garages will rent from $795-$975 a month. There are many older folks in the area who feel trapped in their houses because they have nowhere to move to that feels safe and secure and where they can associate with people their own age. Blackhawk Woods Townhome Apartments will provide them with their own separate front door and attached garage, so they can easily come and go and won't have to worry about climbing stairs or doing the exterior maintenance that their old houses constantly require. Section 42 low and moderate income housing projects utilize Government financing programs that provide equity and mortgage financing. The equity,consisting of 25%of the project cost, is provided by Syndicators who market the low and moderate income housing tax credits generated by the project to Corporate Investors. The mortgage is obtained through a community bank or through a HUD FHA low interest loan. Section 42 projects have building cost constraints,tenant income limitations and rent ceilings that are imposed and monitored by HUD and Minnesota Housing inance g Agency(MHFA). The 4%tax credit program that we will be utilizing does not require winning a MHFA competition like the 9% program does, but still must adhere to MHFA scoring requirements. Although Section 42 4%tax credit Senior housing projects have not usually been financially feasible in the past,the economic problems facing the housing industry can actually help in this instance because costs can be significantly reduced. The developer that originally sold us the lots is willing to discount them by more than 50%. The subcontractors are able to give us exceptionally good prices because they need the work and the mortgage interest rates are less than 4%,an all-time low. The project also requires TIP assistance to achieve the targeted rents and is actually required by MHFA in order to meet scoring requirements for the 4%tax credits. We have developed 17 one-level Senior projects during the past 20 years including Elk Run Village in Elk River. Six projects have been Section 42 tax credit projects similar to the one we are now proposing. In summary,we are requesting from the City, approval of our proposed Blackhawk Woods Senior Planned Unit Development. We are familiar with the City's standards for building design and products and will meet those standards. The property has already been developed with streets and utilities. Our engineers have designed a development that consists of 84-one-level townhome apartments, plus a clubhouse activity center. We will need tax increment financing approval from the City,which will provide the project with necessary resources to achieve the reduced rents and meet the requirements of MHFA. This would be a pay as you go TIF program so would not require a financial commitment from the City. The existing lot taxes would continue to be paid and in addition,the City would collect 10%annually of the increment amount. A 15 year use agreement with corresponding pay as you go TIF,will insure that Blackhawk Woods remains a Senior Citizen community serving residents with low and moderate incomes. Because there will be no children living in the development,there will be no negative impact on schools or parks. Thank you for considering our proposal. Q p fully, r Roge err! Senior 30, LLC Chief Manager i s S&IO0 Income Qualification Schedule Affordable Rents for Seniors based on 30% of Income r i Affordable Rent Unit Annual Montly Rent @ 30% Range Type Income Income of Income $895 Average 2-811 $ 40,000 $ 3,333 $ 1,000 ($795-$975) 2-1311 $ 39,000 $ 3,250 $ 975 2-1311 $ 38,000 $ 3,166 $ 950 2-BR $ 37,000 $ 3,083 $ 925 2-1311 $ 36,000 $ 3,000 $ 900 2-1311 $ 35,000 $ 2,916 $ 875 2-1311 $ 34,000 $ 2,833 $ 850 2-1311 $ 33,000 $ 2,750 $ 825 2-BR $ 32,000 $ 2,666 $ 800 $632 Average 1-1311 $ 31,000 $ 2,583 $ 775 ($500-$775) 1-1311 $ 30,000 $ 2,500 $ 750 1-1311 $ 29,000 $ 2,416 $ 725 1-1311 $ 28,000 $ 2,333 $ 700 1-BR $ 27,000 $ 2,250 $ 675 1-1311 $ 26,000 $ 2,166 $ 650 1-BR $ 25,000 $ 2,083 $ 625 1-1311 $ 24,000 $ 2,000 $ 600 1-1311 $ 23,000 $ 1,916 $ 575 1-BR $ 22,000 $ 1,833 $ 550 1-BR $ 21,000 $ 1,750 $ 525 1-1311 $ 20,000 $ 1,666 $ 500 2013 HUD Income Limits: 1 Person: $34,620/year 2 Person: $39,540/year C kUserADenise lohnson\Documertsk2012 New ProjectskRoger\New Project Info 8-2-10\Coon Creek\lncome Qualification Schedule 6/4/201310:50 AM S&1fb DhClcha"lK WOOdS Rental Townhomes Elk River, MN (Sherburne County) Sources And Uses Budget p 84 One-Level Townhome Apartments and Clubhouse Activity Center for Seniors with Low and Moderate Incomes Sources: Project w O TIF " (25%)Equity:(Tax Credit Proceeds) $2,300,000 (75%)Financing: $6,900,000 $ 5,706,205 Total Sources: $9,200,000 $ 8,006,205 Uses: soft costs $ 275,000 Finance Costs $ 390,000 Land/Land Development Costs $1,200,000 Construction Costs $5,860,000 Marketing Costs $ 315,000 Project/Development,General Conditions,Consulting, $ 968,180 Overhead&Contingency Reserves: 6 Months Debt Service Reserve: $ 191,820 ** Total Development Costs: $9,200,000 Note: *Tax Credit Investment(calculation): 88%Typical Eligible Tax Credits Project: $9,200,000 x 88%x 3.1%=$2,509,760 Tax Credits x 92 t=$2,308,979(rounded to$2,300,000) ::WsersWenise lohnson\0ocumentA2012 New Projects\Roger\New Project info 8-2-10\Eik River\ER 05 2-2 8-13 5/30/201312:11 PM i * i I i PlacR6lha%k Woods Rental Townhomes Elk River, MN(Sherburne County) Operating Statement Budget 84 One-Level Townhome Apartments and Clubhouse Activity Center for Seniors with Low and Moderate incomes Rents: Average MID YR RANGE 491-BR with Garage $632 x 12 $ 371,616 $489/MO-$775//MO 35 2-BR with Garage $895 x 12 $ 375,900 $795/MO-$993/MO Total Bldg Rent $ 747,516 Income: Rent: W Annual O TIF $ 747,516 7%Vacancy $ {52,326) W/o Tax Increment Financing $ 79,650 Total Income: $ 774,840 $ 695,190 Expenses: Administration $ (75,240) Water/Sewer/Trash $ (38,704) Operations&Maintenance $ (61,968) RE Taxes $ (94,500) Insurance $ (16,416) Replacement Reserves $ (26 845) Total Expenses: $ (313,669) Net Operating Income(NOI): $ 461,171 $ 381,521 Debt Service: $5,706,205 Mortgage: $6,900,004 @ 3.75% 30 YR AMM(5 56) $ (383,640) $ (317,265) $63,553 Surplus/Deficit: 1.30 DSC $76,728 $ 77,531 $ '6'4,256 Note: ♦ Rent includes: Water/Sewer/Trash/Maintenance ♦ Renter Pays: Gas,Electric,.Phone&Cable 2013 HUD Maximum Incomes Allowed: 1- Person Income: $ 34,620 2- Person income: $ 39,540 C:\Users\Denise Johnson\Documents\2012 New Projects\Roger\New Project Info 8-2-10\Elk River\ER 05 2-28-13 5/30/201312:19 PM r--_------------------------"------ ro e ell e I v I r r as �e l s�aa � r � fix_ - I I�a r �x I I , I gm u BLACK HAWK TRAIL P.U.D. 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TAX INCREMENT FINANCING APPLICATION REVIEW WORKSHEET [3 I,z�c�_hQw k- Wo S TO BE COMPLETED BY CITY STAFF �� oser !r e CT 1. The project meets the criteria set forth in Section IV of the City's Tax Increment Financing policy. a) Meets minimum thresholds for size,valued tax revenue. b) Meets at least one of the objectives in Section Il and satisfies the provision set forth in Section III.(Pcx r+:0 i c) Demonstrates need for TIF with the but for analysis. e) Consistent with all city plans and ordinances. f) Serves at least two public purposes as defined in Section IV. 2. Ratio of Private to All Public Investment in Project: Points: 5- $ Private investment 5:1 5 $ Public Investment 4:1 4 r Ratio Private : Public Financing 3:1 3 2:1 2 Less than 2:1 1 3. Job Creation in the City of Elk River: Points: r - A i. _Number of new jobs as a result of the project. 40+ 5 Number of existing/retained jobs divided by 10. 30+ 4 Total 20+ 3 3 0 rmw-e 10+ 2 _9 3 f� rKf b Less than 10 1 4. Ratio of Public Investment to Job Creation: Points: l n, - T $9q Public Investment $15,000 or less 5 _ „3 Number of nex jobs created/retained $20,000 or less 4 $ Public Investment per newjob $22,000 or less 3 $25,000 or less 2 J 0 Over$25,000 1 5. Wage Level of new jobs created/retained: Points: Minimum hourly wage Over $21/ hour 5 of jobs created/retained: $18-21 / hour 4 $14-17 / hour 3 $10-13 / hour 2 Under$10 / hour 1 6. Project size: Points: The project will result in the construction 80,000+ 5 of square feet 65,000+ 4 50,000+ 3 r d0 �j� � ' I S Fx 35,000+ 2 2- w-rh d 25,000+ 1 Page 12 of 13 INAYUP O w 1 0 1 0 8 � 7. Market Value/Tax Base Generation: Points: ' The project will result in a per square foot Industrials Commercial -V- ; estimated market value (land and building) $80/sf+ $110/sf+ 5 of � _ -F _ $70/sf+ $100/sf+ 4 _ S-F - $60/sf+ $90/sf+ 3 J;ie �_ r� �� 1051C00" d aaC�Ga ; I � ��3� 50 sf+ $80/sf+ 2 � $40/sf+ $70/sf+ 1 8. Type of Project: Points: 100% Owner Occupied 5 Na Owner Occupied&Investment 4 Investment Property 3 9. Use: Points:_,,_ Manufacturing 5 Research&Development 4 Commercial Redevelopment 3 Warehouse./Dis.tribution 2 _ Housing 1 10. Likelihood that the project will result in Points: unsubsidized, spin-off development. High 5 Moderate 3 vs Low- 1 Sub-Total Points: of a possible 45 points. 11. Bonus Points Bonus Points: The project will be 100%Pay-asyou go TIF. 3 points The project contributes to the goals of Energy Ciy. 2 points • Product promotes sensible use of energy,OR • Project utilizes significant energy efficient design&/or materials in construction. Total Points: 30-1— Overall project analysis: High 4� 5--3388 points r7o erate 37-Opoimnt 2� Not Eligible 19-0 points Page 13 of 13 INAYUREJ P 0 1 1 R E 0 0 i Total Apartments:84 2-Bedrooms: 36 999 sq ft+Garage des - �!- 892.71 N- 1-Bedroom: 24 667 sq ft+Garage {J'. �s +� !' 92,21 Suites: 24 611 sq ft+Garage a� `9' ,n� � p• •t � h ' 48 I 1 3 ° ;� •r;a• ,� - 890.3 Ix (i�} 859,7' 1 pf(�'-•(IP V It PARK -•'.M ,yv FF� ~`srrrr .�• 7 +1f�i �•��•••'''��..1^•!'664 37 3 \3S 3 3 31, ,3J 3 y ' 783rd Ave MW ,. W r....... .. r - - r..._- -- r-°----- r • 3� § 8� y s . 8Re§ �.r !"q9 ° 5 I i 899.5 699.5 899,I 899.I 898 i : 898 898.8 t I 83,9.5 Fe I I Fs 1 F® I ;1 F8 1'• `.I I l I 1' 1 I ' C, 1 k ess.o i it a O F ` ' BBB.6 i s Iv e97-s®I L Roy C i; i i 898.8411 t 89 l 1 tr.19 O ' LL � LL O � a I b ® ❑ ❑ F LL 0 ❑ � O tr. tr.11 U k DC a 3 yak� cc EA _ F2 a ul F2 a^ m = n men w 6 tr.rl �Y s Z 11 I Z � g I g w it a -- -------- o-.aL a lrI I tr.11 --_ O ^^^ - 1F.LL L_____ ____ pp ------ •.IL �g � LeI - L------ EQ a-.a o-.n a 4d p w m LU O m I[M F g nf in A-,LI - ❑rrn❑ ❑ i b LL L(v\T-Cl��a tr.S 4.IK ❑ � N I ❑ ❑ O ❑ ❑ 4 Doi "2 L=== I LL ". _ f � e N I O-.Il O-AL -.19 Springsted Incorporated 380 Jackson Street, Suite 300 pCIC1gSt2d Saint Paul,MN 55101-2887 Tel: 651-223-3000 Fax: 651-223-3002 www.springsted.com DRAFT MEMORANDUM TO: Members of the City Council of the City of Elk River Brian Beeman, Economic Development Director FROM: Mikaela Huot,Vice President Tom Denaway,Analyst DATE: October 16, 2013 SUBJECT: Financial Analysis for proposed Blackhawk Woods Senior Living Development The City of Elk River has asked Springsted to evaluate the tax increment financing (TIF) request submitted by Senior 30 Elk River Limited Partnership (the developer) for the proposed development of a senior housing rental project consisting of approximately 84 one-level townhome units. We have reviewed the project assumptions and general rationale for TIF assistance submitted by the developer. It is our understanding that the developer is in the process of assembling financing for the project, including tax credits and permanent financing from HUD and is currently working on finalizing those commitments necessary to proceed with the project. It has been indicated that project funding would be at least partially contingent on City tax increment financing assistance and that a TIF Note is necessary to provide sufficient cash flow to meet the annual debt service coverage requirements in the operating proforma. Based on this information, the City could be justified in making a "but for" finding that the anticipated development would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future. We recommend, however, that the City also consider an appropriate level of TIF assistance for reimbursement of certain eligible project costs based on the developer's information. The purpose of this memo is to outline our analysis of the project including review of the developer's request for assistance, tax increment revenue projections, and review of the developer's project proforma and projected rates of return as provided by the developer. Background The application for Tax Increment Financing proposes the development of a senior living townhome community. The Developer is proposing to construct an 84-unit townhome development, containing 49 one-bedroom units, 35 two- bedroom units, and a clubhouse activity center. Additionally, each unit will include an attached garage. The Public Sector Advisors City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/16/2013 Page 2 development is proposed for persons of low and moderate income;which will result in income limitations for potential residents and reduced rental rates. The Developer will be undertaking both the construction and operation of the proposed development. The Developer will be seeking to utilize federal low-income housing tax credits through the Section 42 4% program. These tax credits will provide an equity source for funding of the project. The use of the Section 42 program will result in building cost constraints, tenant income limitations and rent ceilings that are imposed and monitored by the Federal Department of Housing and Urban Development (HUD). The Developer indicated the receipt of TIF assistance from the City is necessary to meet scoring requirements set by the Minnesota Housing Finance Agency (MHFA). The permanent financing for the project is anticipated to be obtained through a HUD FHA low interest loan program. The Developer will be undertaking the construction and operation of the proposed senior housing facility, for which they have sought TIF assistance from the City. The purpose of this analysis is two-fold, first to determine if the project is unlikely to proceed "but-for" the assistance, and second to determine if the requested assistance would create a rate of return in excess of typical market expectations. Developer Request for Tax Increment Financing Assistance The developer, Senior 30 Elk River Limited Partnership, submitted a request for TIF assistance with the purpose of TIF to finance extraordinary costs associated with constructing affordable senior housing within the City. The developer has requested tax increment assistance for financing a portion of the site improvement costs associated with construction of the project and the initial amount in the application was$1,481,404 for the full 25-year term of the district. After preliminary analysis and review, the developer revised the TIF amount to$996,871 based on revenue estimates for the full 25 year collection and assumptions of what could be supported as a second mortgage. The developer also provided a 15-year scenario that equated to approximately $730,734 for a second mortgage ($266,137 less on a present value basis) and indicated this scenario would create an upfront financing gap equal to the approximate$266,137 difference and would have to be filled with another source(yet to be determined). The updated total estimated sources and uses of funds are $10,074,657. Based on the developer's application and total estimated project costs, the City could consider tax increment assistance for financing of the site improvement costs associated with the project up to the requested amount of$996,871. Project Costs Estimated Amount Original Request for Site Improvements $1,481,404 Developer's total estimated revenues $996,871 (based on 25-year TIF collection) Estimated Reduction of Request $484,533 City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/16/2013 Page 3 There are generally two ways in which assistance can be provided for most projects, either upfront or on a pay-as- you-go basis. With upfront financing, the City would finance a portion of the developer's initial project costs through the issuance of bonds or as an internal loan. Future tax increment would be collected by the City and used to pay debt service on the bonds or repayment of the internal loan. With pay-as-you-go financing, the developer would finance all project costs upfront and would be reimbursed over time for a portion of those costs as revenues are available. Pay-as-you-go-financing is generally more acceptable than upfront financing for the City because it shifts the risk for repayment to the developer. If tax increment revenues are less than originally projected, the developer receives less and therefore bears the risk of not being reimbursed the full amount of their financing. With bonds, the City would still need to make debt service payments and would have to use other sources to fill any shortfall of tax increment revenues. With internal financing, the City risks not repaying itself in full if tax increment revenues are not sufficient. Typically in either case of upfront financing, there is a shortfall payment guarantee with the developer. The developer has requested financial assistance as pay-as-you-go through a developer note. Tax Increment Analysis In order to estimate the amount of TIF revenues generated by the proposed development, certain assumptions were made based on the value of the project, construction schedule, and anticipated financing terms. • Estimated base value(2 parcels)as of Jan. 1, 2013 0 75-741-0182(EMV of$14,600) 0 75-753-0010 (EMV of$296,500) ■ anticipated to be reclassified as 4d rental following development • Estimated incremental market value upon completion o $7,869,290 estimated market value 0 84 total townhome units ■ 35 2-bedroom units • $105,000 per unit(preliminary assessor's estimate) ■ 49 1-bedroom units • $84,000 per unit(preliminary assessor's estimate) • Increment based on new building value only • Construction commences in 2014 and is completed in spring 2015 0 70%assessed in January of 2015 for taxes payable in 2016 0 100%assessed in January of 2016 for taxes payable in 2017 • 0%Annual market value inflator • Present value(discount) rate of 4.70% • Tax rates, class rates and future market values remain constant • 90%increment pledged to developer • Maximum term of housing district(26 total years) City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/16/2013 Page 4 Tax Increment Revenue Estimates The tax increment revenue estimates are based on collection of revenues for the full term of the district. Based on the assumptions outlined above, the projected tax increment revenues to be generated from the project are shown in the chart on the following page. Scenario 1 Annual Market Value Inflator 0% Total Gross Tax Increment $2,323,089 City Retainage (10%) $232,319 Net Amount Available for Developer(90%) $2,090,770 Present Value at 4.70%of Developer Amount $1,079,005 (full 26 year term of district) Projected Amounts based on Developer's Revenue Estimates PayGO Principal Amount $996,871 PayGO Interest(4.70%)Amount $769,398 Total Payments $1,766,269 Estimated Term of Assistance 23 Years Estimated Surplus Increment $324,501 The Developer has requested TIF financing on a pay-as-you-go basis, to help offset the reduced rent limitations required by the Section 42 program. The Developer has requested the assistance over the full term of the District (up to 25 years) based on the initial revenue projections. The revenue projections as prepared by Springsted and illustrated in the table above are slightly different and show an increased present value, or principal amount, of $1,079,005 as opposed to the original estimated amount of$996,871 with a term of approximately 23 years instead of 25 years. Further discussion regarding the actual term and amount is recommended. Project Qualification Initial discussions with the developer indicate that the project as proposed will qualify as a housing TIF District. A housing TIF District is a type of tax increment district which consists of a project that is intended for occupancy by persons or families of low and moderate income. Revenue derived from tax increment from a housing district must be used solely to finance the cost of a housing project as defined. The cost of public improvements directly related to the housing projects and the allocated administrative expenses of the City may be included in the cost of a housing project. City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/16/2013 Page 5 In order for the proposed project to qualify as a tax increment financing housing district, the property must satisfy the income requirements for a qualified residential rental project as defined in section 142(4) of the Internal Revenue Code. The requirements of this subdivision apply for the duration of the tax increment financing district. The income requirements are as follows: ➢ at least 20%of units are occupied by individuals whose income is 50%or less of area median income, or ➢ at least 40%of units are occupied by individuals whose income is 60%or less of area median income. In addition, not more than 20 percent of the square footage of the buildings that receive assistance from tax increments may consist of commercial, retail, or other nonresidential uses. Project Costs The Developer's submittal includes a preliminary total project budget of$10,074,657 as illustrated in the table below: Blackhawk Woods Project Budget Total Amount Land Acquisition $1,200,000 Construction Costs 6,479,000 Soft costs 275,000 Finance Costs 390,000 Marketing 285,000 Development Fee/Overhead 593,240 Contingency(4%) 368,000 Reserves 209,760 Working Capital 274,657 Total Costs $10,074,657 The Developer has indicated they currently own one of the two parcels on which the development is proposed, and has indicated the second parcel is currently under contract, assuming the project is able to proceed. A portion of the land acquisition cost estimate will be used to repay delinquent real estate taxes on the parcel the Developer has under contract at the time of closing. The two parcels combine for an approximate area of 8.52 acres. The per acre purchase price equates to approximately $140,845 including the repayment of delinquent taxes, and approximately $120,305 net of the tax payment. It should be noted that one of the parcels on which a majority of the rental units will be located is already improved with site grading, utilities, and roadways installed. The Developer has estimated the total for the remaining hard costs and vertical improvements to be $6,479,000, which equates to a per-unit construction cost of approximately $77,131. The Developer has indicated the construction cost budget is based on meeting Davis-Bacon wage requirements pursuant to compliance requirements of the tax credit program. Blended within this construction cost line-item are costs associated with the development City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/16/2013 Page 6 of the clubhouse activity building as well as remaining site improvements. The construction cost line-item appears reasonable. The Development Fee/Overhead cost equates to approximately 6% of the total development cost. The Soft Cost category is for expenses related to the professional service costs incurred in the planning and development of the site. The Financing Cost line-item is for expenses related to the Tax Credit process as well as costs associated with the permanent financing, and construction loan interest cost. The Contingency line-item is based on approximately 4%of project costs, and the Reserves line-item represents 6 months of debt-service. Sources of Funds The Developer's submittal includes a preliminary total project budget of$10,074,657 as illustrated in the table below: Blackhawk Woods Project Budget Total Amount Private Equity $558,575 Equity(Tax Credit Proceeds) 2,375,000 Permanent Financing 6,866,425 Developer Working Capital 274,657 Total Sources of Funds $10,074,657 The Developer has indicated they are expecting to receive long term financing through HUD in an amount of $5,869,554 and the loan is anticipated to have a 40-year term with an effective interest rate of 4.70%. Additionally, the Developer has indicated they will be able to seek a second mortgage based on the TIF revenue stream, which will provide $996,871 of funding. The term of the second mortgage is anticipated to be 25 years to coincide with the maximum term of the District,with an effective interest rate of 4.70%. In addition to the traditional mortgage financing the Developer has projected they will receive additional equity from the sale of the Tax Credits of $2,375,000. The Tax Credits allows the Developer to reduce both their private borrowing amount and their private equity investment in the project. Their total private equity investment in the Development, not including Tax Credit Proceeds, is $558,575. The return on this private equity investment is measured in the return analysis section. Developer Proforma But-For Analysis In approving a TIF district and project, the City must make several findings, including the "but for" test: that the proposed development would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future. The developer has provided a "but-for" argument stating that the developer's lender has indicated that financial assistance from the City is necessary to provide sufficient project cash flow and market returns to investors that will achieve project feasibility. The developer states the assistance is necessary to construct the project as proposed based on current financial indicators. Based on the developer's stated position relative to the City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/16/2013 Page 7 need for tax increment financing assistance, the City could make its "but for" finding and provide tax increment assistance. We recommend, however, that the City also consider an appropriate level of TIF assistance for the project based on the information submitted by the developer. The City's position relative to the use of tax increment has typically been to finance extraordinary costs. The level of assistance is in part dictated by the `extraordinary' costs of the project. Initial discussions about the project indicate the assistance would be provided as reimbursement to assist the developer with extraordinary costs associated with construction affordable housing on the project site. Following thorough evaluation of the project, the City will be prepared to make an informed "but-for" decision based on the likelihood of the project needing assistance, as well as the appropriate level of assistance. The"but-for' test is used to determine whether a project is likely to proceed as proposed without the use of public dollars. To complete this analysis we constructed and examined two ten-year project proformas, one showing a result if the developer receives the requested TIF assistance and one showing a result without assistance. Our analysis of the proforma included a review of the development budget, projected operating revenues and expenditures, and the project's capacity to support annual debt service on the first mortgage and notes. Springsted performed an analysis using the Internal Rate of Return (IRR) mechanism to estimate the proposed project's rate of return. The internal rate of return measures the average annual yield on an investment, generally over a longer period of time, which in this case is 10 years. The internal rate of return measurement is typically what is used by public agencies to determine the need for a subsidy. Generally, should the rates of return lie below a reasonable range without assistance; we could assume the project as proposed would not move forward without assistance. Should the returns lie within a reasonable range with the assistance, we could assume the amount of assistance tested is appropriate for the project. All such estimates should be viewed as general indicators of performance and not exact forecasts. The number of current and future variables affecting these estimates and actual results are great. In order to understand the potential return realized by the Developer, with and without the tax increment assistance, we utilized the project cost and operating information provided by the Developer to generate a 10-year operating pro forma to calculate an estimated IRR analysis. The purpose of evaluating the operating pro forma is to understand the potential return to the Developer through the initial development of the project and the operation of the enterprise over a period of time. A 10-year period may not be indicative of the Developer's intended investment period. The first step in analyzing the return to the Developer is to determine if the costs presented are reasonable. We provided a breakdown of the estimated project costs within a previous section of the memo. Assuming all other assumptions and variables remain constant, a reduction in total project costs may have a positive impact on the projected returns. The majority of the project costs outlined above are estimates, and subject to future change; however appear to be reasonable within the scope of the project. City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/16/2013 Page 8 The second step in calculating the return to the Developer is to determine if the operating revenues and expenses are reasonable. • The Developer proposes average rental rates of $632 per month for the one-bedroom units and $895 per month for the two bedroom units. The rental rates will be limited based on the requirements of the Tax Credit program and tax increment statutes, assuming tax increment financing is provided to the project • The Developer is assuming operating expenses related to administration, utilities/trash, operations & maintenance, real estate taxes, insurance, and replacement reserves. The third step in performing an internal rate of return analysis is to assume a hypothetical sale of the asset at the end of the pro forma review period, which in this case is 10 years. The use of a hypothetical sale in this analysis is only for purposes of calculating the potential return to the Developer, and is by no means indicative of the likelihood of a sale in Year 10. In order to accurately perform the return analysis all assets have to be converted to a cash position at the end of the pro forma, in order to calculate the return on the initial equity investment. The Developer has indicated they intend to own and lease the building for an extended term greater than the 10 years we analyzed in calculating the return. For the purpose of accounting for the value of the asset in year 10 of the operating pro forma, we used a capitalization rate of 6.5%to determine the development value. The table below shows the result of our pro forma analysis based on the project costs and operating information provided by the Developer. With TIF Without TIF Operating Proforma Assistance Assistance Estimated Leveraged IRR 17.90% 3.90% There is no set IRR benchmark that dictates whether a project needs TIF assistance or not. There are general market indicators that determine a project should be"doable"with a 10-year average return of 10-20%. However this is only an indicator and may or may not apply for each individual project, especially in today's market, and there may be other factors impacting the developer's ability to proceed. The developer has stated that the project will not occur without TIF assistance. Therefore, the City should view the IRR calculations as one factor in arriving at a decision for this particular project. An additional measure of project feasibility is the Debt Coverage Ratio (DCR), which is a calculation detailing the ratio by which operating income exceeds the debt-service payments for the project. If the DCR is greater than 1.0 it indicates the project has operating income that is greater than the debt-service payment by some margin; conversely if the DCR is less than 1.0 it indicates the project is incapable of meeting its debt-service payment and would need to seek additional revenue sources in order to pay its debt. Typical lending standards will require a DCR of greater than City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/16/2013 Page 9 1.0 as a measure of cushion in the vent actual revenues and expenses are different than projected. In this case the Developer indicated a need to meet or exceed a DCR of 1.15. Our pro forma calculation, which included slightly revised TIF projections from the Developer, resulted in a stabilized DCR of 1.19 with assistance and 0.98 without assistance. In order to understand the sensitivity of the DCR to changes in project assumptions we analyze the amount by which project costs and operating income would have to change in order for the project to have a feasible DCR. In regards to project costs, the development would need to realize either a project costs savings of approximately 10% or conversely the Developer would need to increase their equity investment into the project by approximately 10%of the total development cost. In regards to net operating income, the project would need to realize an increase in operating revenue of 17%to be feasible without assistance. Based on this analysis, it could be stated the Developer would be unlikely to undertake this project, as proposed, "but-for" the provision of the Tax Increment assistance as requested. The return analysis outline above is based on the Developer's request for a 25-year TIF reimbursement term, as this would represent the maximum potential return to the Developer as a result of TIF assistance. The Developer did perform a calculation on the impact of the receipt of TIF over a shorter 15-year period. If the TIF were to be received over a shorter period, the Developer indicated the revenue would be capable of supporting a reduced TIF mortgage amount of$730,734, while maintaining a desirable DCR. However, a reduced TIF term would decrease the potential borrowing capacity of the revenue stream and result in a decrease of$266,137 from available financing. As a result of the shorter term, the Developer would be required to increase their equity investment in the project by the $266,137 amount and/or defer payment on their Developer Fee. Conclusion Should the developer receive TIF assistance, it would be required to reserve at least 20% of the units for persons of low and moderate income for the term of the TIF assistance. When the TIF assistance has been completely repaid, the developer will be under no obligation to continue reserving affordable housing units. As a result, the projected time frame for the repayment of the TIF assistance should be considered when determining the assistance amount. The developer has requested TIF assistance of $996,871 as necessary to attract additional equity to assist with project feasibility due to reduced operating revenues resulting from the affordable housing units. Current revenues projections indicate that with a 0% market value inflator, it would take approximately 23 years of the TIF District to repay the TIF Note assuming a 4.70% interest rate. Assuming all other variables remain constant, an increase in the market value inflator would result in increased revenues, potentially decreasing the repayment term. As indicated previously, once the note is repaid the developer will be under no obligation to continue providing affordable housing units. The developer has indicated that the assistance is necessary for the project to proceed as proposed. The developer would use the pay-as-you-go note assistance to finance the additional debt required to fund the initial projects that cannot be supported due to the reduction in operating revenues from the affordable units. As we had indicated earlier City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/16/2013 Page 10 in this memo, based on current assumptions it would take approximately 23 years of the district to meet the request. The need for TIF assistance can be evaluated on an annual basis, due to the reduced operating revenues resulting from the affordable units and will remain the case as long as a portion of the units are income restricted. As a result, the length of time the City desires to maintain the affordable housing units may become a factor in determining the level and amount of TIF assistance. Following discussion at the October 7 HRA meeting, Springsted has prepared several alternate scenarios to understand the impact that a market value inflator would have on the term of the pay-go repayment. A 1% annual market value inflator has been estimated to result in a reduced repayment term of 20 years and a 2%annual market value inflator has been estimated to reduce the term further to 18 years. In order for the repayment term to be reduced to a 15-year term, a 4%annual market value inflator would need to be realized. In some cases, there may be opportunities to fill a portion of the gap by other means—thereby reducing the required TIF subsidy and/or term. The developer could consider deferring a portion of the upfront developer fee, rental rates might also be able to be increased if the project proves successful, however the rates are ultimately dictated by both market and income requirements of TIF Districts, actual project costs may be less than projected, and finally, a reduction in the TIF note interest rate (from 4.70%) may also be considered but currently matches the term of the anticipated second mortgage and a reduced rate may cause an additional gap. As illustrated in our analysis outlined above, it appears the project is infeasible without assistance absent significant changes to either the equity investment, project cost assumptions, or projected operating income. Given our review of the current assumptions it appears as if changes of this magnitude are unlikely to be realized. Therefore, we feel the proposed project is unlikely to proceed but-for the requested TIF assistance. Additionally, if the City were to undertake the provision of TIF assistance for the project, the duration of the District would need to be determined. The Developer has indicated a request for a TIF District term of 25 years, to allow them to maximize the additional mortgage they could secure based on the TIF revenue. If a TIF duration of a shorter period were to be utilized it would require the Developer satisfy a $266,137 financing gap through additional equity, reduction in project costs that would not impact the tax credit allocation, or increased mortgage amount. It is important to note that the project will be providing affordable senior housing in the City of Elk River. Without the tax increment assistance, the developer has indicated he is not able to proceed with the project due to rent restrictions required. Thank you for the opportunity to be of assistance to the City of Elk River. 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Q d w d UHOOd Projected Pay-As-You-Go Note Report City of Elk River,Minnesota Tax Increment Financing(Housing)District No.24 Blackhawk Woods Senior Housing Project Preliminary TIF Projections:84-unit Townhomes 4d classification Note Date: 12131/13 Note Rate: 4.70% Amount: $996,871 Cumulative Unpaid Semi-Annual Loan Interest Accrued Net Balance Date Principal Interest P&I Due Interest Revenue Outstanding (1) (2) (3) (4) (5) (6) (1) (8) 996,871.00 02/01/14 0.00 0.00 0.00 3,904.41 3,904.41 0.00 996,871.00 08/01/14 0.00 0.00 0.00 27,330.88 27,330.88 0.00 996,871.00 02/01/15 0.00 0.00 0.00 50,757.35 50,757.35 0.00 996,871.00 08/01/15 0.00 0.00 0.00 74,183.82 74,183.82 0.00 996,871.00 02101/16 0.00 0.00 0.00 97,61029 97,61029 0.00 996,871.00 08/01/16 0.00 27,985.00 27,985.00 121,036.76 93,051.76 27,985.00 996,871.00 02101/17 0.00 27,985.00 27,985.00 116,47823 88,49323 27,985.00 996,871.00 08/01/17 0.00 40,696.00 40,696.00 111,919.70 71,223.70 40,696.00 996,871.00 02101/18 0.00 40,696.00 40,696.00 94,650.17 53,954.17 40,696.00 996,871.00 08/01/18 0.00 40,696.00 40,696.00 77,380.64 36,684.64 40,696.00 996,871.00 02101/19 0.00 40,696.00 40,696.00 60,111.11 19,415.11 40,696.00 996,871.00 08/01/19 0.00 40,696.00 40,696.00 42,841.58 2,145.58 40,696.00 996,871.00 02101/20 15,123.95 25,572.05 40,696.00 25,572.05 0.00 40,696.00 981,747.05 08/01/20 17,624.94 23,071.06 40,696.00 23,071.06 0.00 40,696.00 964,122.11 02101/21 18,039.13 22,656.87 40,696.00 22,656.87 0.00 40,696.00 946,082.98 08/01/21 18,463.05 22,232.95 40,696.00 22,232.95 0.00 40,696.00 927,619.93 02101/22 18,896.93 21,799.07 40,696.00 21,799.07 0.00 40,696.00 908,723.00 08/01/22 19,341.01 21,354.99 40,696.00 21,354.99 0.00 40,696.00 889,381.99 02101/23 19,795.52 20,900.48 40,696.00 20,900.48 0.00 40,696.00 869,586.47 08/01/23 20,260.72 20,43528 40,696.00 20,43528 0.00 40,696.00 849,325.75 02101/24 20,736.84 19,959.16 40,696.00 19,959.16 0.00 40,696.00 828,588.91 08/01/24 21,224.16 19,471.84 40,696.00 19,471.84 0.00 40,696.00 807,364.75 02101/25 21,722.93 18,973.07 40,696.00 18,973.07 0.00 40,696.00 785,641.82 08/01/25 22,233.42 18,462.58 40,696.00 18,462.58 0.00 40,696.00 763,408.40 02101/26 22,755.90 17,940.10 40,696.00 17,940.10 0.00 40,696.00 740,652.50 08/01/26 23,290.67 17,405.33 40,696.00 17,405.33 0.00 40,696.00 717,361.83 02101/27 23,838.00 16,858.00 40,696.00 16,858.00 0.00 40,696.00 693,523.83 08/01/27 24,398.19 16,297.81 40,696.00 16,297.81 0.00 40,696.00 669,125.64 02101/28 24,971.55 15,724.45 40,696.00 15,724.45 0.00 40,696.00 644,154.09 08/01/28 25,558.38 15,137.62 40,696.00 15,137.62 0.00 40,696.00 618,595.71 02101/29 26,159.00 14,537.00 40,696.00 14,537.00 0.00 40,696.00 592,436.71 08/01/29 26,773.74 13,92226 40,696.00 13,92226 0.00 40,696.00 565,662.97 02101/30 27,402.92 13,293.08 40,696.00 13,293.08 0.00 40,696.00 538,260.05 08/01/30 28,046.89 12,649.11 40,696.00 12,649.11 0.00 40,696.00 510,213.16 02101/31 28,705.99 11,990.01 40,696.00 11,990.01 0.00 40,696.00 481,507.17 08/01/31 29,380.58 11,315.42 40,696.00 11,315.42 0.00 40,696.00 452,126.59 02101/32 30,071.03 10,624.97 40,696.00 10,624.97 0.00 40,696.00 422,055.56 08/01/32 30,777.69 9,918.31 40,696.00 9,918.31 0.00 40,696.00 391,277.87 02101/33 31,500.97 9,195.03 40,696.00 9,195.03 0.00 40,696.00 359,776.90 08/01/33 32,24124 8,454.76 40,696.00 8,454.76 0.00 40,696.00 327,535.66 02101/34 32,998.91 7,697.09 40,696.00 7,697.09 0.00 40,696.00 294,536.75 08/01/34 33,774.39 6,921.61 40,696.00 6,921.61 0.00 40,696.00 260,762.36 02101/35 34,568.08 6,127.92 40,696.00 6,127.92 0.00 40,696.00 226,19428 08/01/35 35,380.43 5,315.57 40,696.00 5,315.57 0.00 40,696.00 190,813.85 02101/36 36,211.87 4,484.13 40,696.00 4,484.13 0.00 40,696.00 154,601.98 08/01/36 37,062.85 3,633.15 40,696.00 3,633.15 0.00 40,696.00 117,539.13 02101/37 37,933.83 2,762.17 40,696.00 2,762.17 0.00 40,696.00 79,605.30 08/01/37 38,82528 1,870.72 40,696.00 1,870.72 0.00 40,696.00 40,780.02 02101/38 39,737.67 958.33 40,696.00 958.33 0.00 40,696.00 1,042.35 08/01/38 1,042.35 24.50 1,066.85 24.50 0.00 1,066.85 0.00 02101/39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 08/01/39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 02101/40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 08/01/40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 02101/41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 08/01/41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 02101/42 0.00 0.00 0.00 0.00 0.00 0.00 0.00 $996,871 $769,397.85 $1,766,268.85 $618,754.94 $1,766,268.85 Surplus Tax Increment 324,501.15 Total Net Revenue $2,090,770.00 Public Sector Advisors Public Sector Advisors �+ tl t -P4 - 16 ® springsted City of Elk River Presentation to: City Council October 21 , 2013 Blackhawk Woods Proposed TIF District Presenter: Mikaela Huot, Vice President/Consultant Public Sector Advisors Purpose of Presentation • To provide overview of tax increment financing — Uses of tax increment — Outline the major components of a TIF Plan • Qualification as a TIF District • But-For Test • Authorized uses of tax increment (budget) — Process for establishing TIF District • To discuss initial review of developer's proposal Public Sector Advisors ® springsted What is Tax Increment Financing (TIF)? • A method of capturing tax base growth resulting from new development • Captures new local taxes (increment) to pay for public improvements related to development • Fixed term for capture, then new development added to tax base Public Sector Advisors a Springsted How is TIF calculated? • Net Tax Capacity from existing land and building value is called the Original NTC after conversion from Base Value. — Property taxes generated by the ONTC of the TI F district continue to flow to individual taxing jurisdictions (e.g. City, County, ISD). • NTC growth above the ONTC is captured by the TI F district and generates tax increment. Public Sector Advisors $pringsted How is TIF calculated? Property Taxes Tax Increment Revenues Taxes to Other Taxing Jurisdictions New NTC Time Decertification Online Public Sector Advisors ® Springsted Tax Increment Financing (TIF) • Cities Use TIF to: — Stimulate development where it would otherwise not occur ("but for" test) — Encourage development of uses that would otherwise not occur, such as low income housing — Enhance tax base — Facilitate infrastructure improvements — Coordinate new developments with existing plans Public Sector Advisors springsted Tax Increment Financing (TIF) Eligible Costs • Public Improvements • Land Acquisition • Soil Correction-Site Grading • Site Preparation/Demolition • Relocation • Cost of Qualifying Housing • Financing Fees/Capitalized Interest • Administrative Costs Public Sector Advisors Springsted Tax Increment Financing (TIF) Public Improvement Costs Allowed • Streets and Roads • Utilities • Bridges and Interchanges • Parking • Sidewalks and walkways • Soft costs related to any of the above Public Sector Advisors $pringsted Tax Increment Financing (TIF) Public Improvement Costs Not Allowed • Public Buildings such as a City Center, Public Safety, Public Works buildings • Culture and Recreation such as parks, community centers, golf courses, etc. • Administration beyond 10% of TIF collections Public Sector Advisors ® Springsted Tax Increment Financing (TIF) Common Methods for Financing Costs • Pay-as-you-go Notes — Project financed upfront by developer — Developer is reimbursed over time • Interfund Loans • G.O. Tax Increment Bonds — Can be issued without a referendum if tax increment contributes at least 20% of debt service costs • Revenue Bonds — For seasoned development with a "coverage" factor and/or guaranteed Public Sector Advisors springsted Types of TIF Districts Determines Timeframe, Uses of TIF and Ongoing Requirements • Redevelopment • Renewal and Renovation • Economic Development • Housin • Soils Condition • Other — Hazardous Substance Sub-district Public Sector Advisors springsted Statutory Findings to Approve TIF District • That the TIF Plan will afford maximum opportunity, consistent with the sound needs of the City as a whole, for development by private enterprise • That the TIF Plan conforms to general plans for development of the City as a whole • That the project will qualify as a TIF District — Specific criteria for each type of district Public Sector Advisors ® Springsted Statutory Findings to Approve TIF District • That the proposed development, in the opinion of the City, would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future — The but/for test: • The proposed development would not occur but/for the use of tax increment financing Public Sector advisors Springsted TIF District Requirements Budget Authority • Revenues — Tax increment — Other • Expenditures — Project costs — Bonds/Loan Principal and Interest — Other • Administrative expenditures Public Sector Advisors springsted How is a TIF District Created? • Development District • TIF District — TIF Plan • Budget • Geographic boundaries • Purpose — Public Hearing — Certification Public Sector Advisors 15 ® Springsted What Does a Tax Increment Financing Plan Do? • Provides statutory authority for a City Council to use tax increment financing • Establishes the geographic boundaries of a TI F District • Establishes an estimated budget of revenues and expenses of the TI F District over the term of the District • Shows the estimated impact on other taxing jurisdictions _ Public Sector Advisors $pringsted What Doesn' t a Tax Increment Financing Plan Do? • Does not approve nor guarantee the future provision of tax increment subsidies • Does not approve nor guarantee the future sale of tax increment bonds • Does not approve an increase in property taxes • Does not alter the method by which property taxes within the District are calculated Public Sector Advisors Springsted Purpose — Review of Developer Proposal • Developer Request for Assistance — Blackhawk Woods Senior Housing Project — 84-unit rental townhome housing project • Tax Increment Analysis • Tax Increment Revenue Estimates • Project Qualification • Developer Proforma But-For Analysis • City Policy Application Review Worksheet Public Sector Advisors springsted Developer Request for Assistance • 25 Years of Tax Increment Assistance — Also provided 15 year scenario showing upfront gap • Approximately $996,871 — Site Improvements • Pay-GO — Developer incurs costs, reimbursed over time Public Sector Advisors ® springsted Tax Increment Analysis • Base Value of $311 , 100 • Completed Building Value of $7,869,290 • Construction schedule — 70% complete by 12/31 /14 — 100% complete by 12/31 /15 • Maximum TIF District term 25+ years • Present value rate of 4.70% • 0% annual market value inflator Public Sector Advisors $pringsted Tax Increment Revenue Estimates • Total Gross TIF: $2,323,089 • City Retainage (10%): 232,319 • Net amount (90%): $2,090,770 • TIF Note Principal: $996,871 • TIF Note Interest (4.70%): $769,398 • Total payments to developer: $1 ,766,269 • Estimated term of assistance: 23 years • Estimated surplus revenues: $324,501 Public Sector Advisors 21 Springsted Project Qualifications • Qualifies as housing TI F District — 20% of units restricted for persons or families at 50% area median income — 40% of units restricted for persons or families at 60% area median income • Not more than 20% of square footage of project for commercial, retail or other nonresidential use • Must maintain units as affordable for term of district Public Sector Advisors springsted Developer Proforma But-for Analysis • Proposed development would not occur without assistance • Developer has stated it would not construct this project without TI F • City could make its but-for finding • Consider appropriate level of TI F assistance Public Sector Advisors ® Springsted Developer Proforma But-for Analysis • 10- Year Operating Proforma Review — (overtime ownership project) • With and without scenarios • Internal Rate of Return (IRR) analysis — Below certain range, assume project does not move forward • Purpose is to understand potential return to developer Public Sector Advisors ® springsted Developer Proforma But-for Analysis • Review of assumptions provided by developer — Upfront • Sources — equity and financing • Uses — project costs — Operating • Revenues Vacancy rates • Expenditures Public Sector Advisors 25 Springsted Developer Proforma But-for Analysis • Create operating proforma showing cash flow — Hypothetical sale of property in year 10 — All assets converted to cash to show projected return on initial equity investment • 1 RR without assistance: 3.90% • I RR with assistance: 17.90% Public Sector Advisors ® springsted Developer Proforma But-for Analysis • Both scenarios — equity and debt same (because paygo) • With scenario: TIF revenues used for cash flow • IRR analysis one mechanism used to measure project performance, based on certain assumptions Public Sector Advisors $pringsted Developer Proforma But-for Analysis • IRR not only measurement • Debt Coverage Ratio (DCR) — Ratio of operating income and debt service payments • Minimum threshold — 1 .15x • Without scenario: 0.98 • With scenario: 1 . 19 Public Sector Advisors springsted City Policy Application Review Worksheet • Review worksheet focuses more on commercial/industrial development • One of the objectives of the policy is to create opportunities for affordable housing • Initial review is moderate to low — depending on some of the review categories Public Sector Advisors $pringsted Summary • Project would provide affordable senior housing for duration of district • Developer request for 25 years of assistance — Estimated $996,871 of revenues — Springsted calculation is 23 years with 4.7% interest rate • Developer has stated assistance is necessary for project to proceed — Revenues necessary to meet DCR requirements Public Sector Advisors springsted Summary • Potential ways to reduce gap: — Developer fee — reduce or defer portion — Increased rents — subject to market and rental restrictions — Reduce interest rate — subject to market and feasibility Public Sector Advisors $pringsted Next Steps • Recommend City Council call for public hearing • Approximate 60-day process for approval • Notification to County Commissioner • Draft TIF Plans and Fiscal & Economic Impacts sent to County Auditor and School District Clerk • Publication of Public Hearing Notice with maps • Public Hearing: December 16, 2013 • Commencement of project: spring 2014 Public Sector Advisors $pringsted Questions ? Mikaela Huot, Consultant 651 -223-3036 Springsted Incorporated 380 Jackson Street, Suite 300 Saint Paul, MN 55101 -2887 Public Sector Advisors ® Springsted