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6.1 EDSR 05-18-2015Elk River Request for Action To Item Number Economic Development Authori 6.1 Agenda Section Meeting Date Prepared by General Business Aril 28, 2015 Amanda Othoudt, EDD Item Description Reviewed by GATR of Sauk Rapids, Inc. Property Tax Cal Portner, City Administrator Reviewed by Abatement Financing Action Requested Approve, by motion, and provide a recommendation to City Council for Tax Abatement Assistance for GATR of Sauk Rapids, Inc. Background /Discussion The Finance Committee reviewed and recommended the EDA approve GATR's application for Property Tax Abatement financing. GATR is requesting a 15 year pay -as- you -go Tax Abatement from the City of Elk River for up to $546,814. The tax abatement will allow GATR to purchase the property and provide operating flexibility. The county also received a tax abatement application that they considered at their April 21" County Board meeting with formal review and a public hearing anticipated for May 19. The EDA and City Council recently approved an amendment to the Business Subsidy Policy, allowing business subsidies for service and retail commercial businesses. The proposed project would consist of a 42,912 square foot facility with an estimated taxable value of approximately $3.9 million. The project is estimated to generate $160,500 in total property taxes per year upon completion. The city share of the property taxes abated per year equal approximately $36,454. The project scored 43, at the higher end of the desirability range. Based on the analysis provided by Springsted, it appears that GATR would not proceed with the project without assistance. A public hearing has been scheduled for the May 18 City Council meeting to invite comments from the public. A public hearing must be held for any business subsidy in the amount greater than $150,000. Financial Impact Up to $546,814 in city tax abatement assistance, to be distributed "pay as you go" for 15 years. This abates the entire city share of taxes on the property. Attachments Tax Abatement Application • EDA Finance Committee Staff Memo • Springsted Analysis (April 23, 2015) P O w E 8 E U A Y 1 CIA R Elk 2015 Financial Incentive Application River Tax Abatement I. PROjeCT INFORMATION Property In ormation Oleuse print) Address: L a S 1 4 2 B 1 G G K 1 Parcel Number: 75- v p Vlc;t P p P, Ni► +tn� -cs "s �'!C B��a�ntSS L`�h�tlt `r � . �iz,C�7 ' OI I C3 The project e: H be: J Industr al: 1� New Construction F?spsnsion — Redevelopment % Rehab. Dffice/ research facility tint coutorin !o BU -incs, Park zowng standards Commc rcial Redevelopment or Rehabilitation L Yle'W C 0 MS INVi Gi-i on T tug c k So► j�5 W�r-c irGi+io+1 1Y —other- VVIIY e-ILmIticd in inclWS44011 UnCS In addition to the City of Elk River, applicant is requestitag Tax Abatement from: Sherburne County School District 728 The project xv ll be: ' ` Owner Occupied — Leased Snace � I F► 4' t Total Atnoun of Tax Abatement Requested: S� ► p d -over-li, dears. G", Portion: Annual S_ 454_Total $ '610 County Portion: Annual _ 4 0, 154 Total $ j 0 ISD 728 Portion: Annual 5 --- "Total S Current Real .state Taxes on Project Site: Estimated Re 1 Estate "faxes upon Completion: Phase I S + 1) 6Phase II Construction 'tart bate M°► 15 Construction Completion Date N 0 V 2-0 1 5 Percent of pr ject complete,on December 31, current year. 10 D-/° II. CONTACT INFORMATION Name: Address: (please pfiw) f 0 1 = I K KI Vt F -mail address: �) ,e i Kr' V+F -nnyl. �ov Bobs oKoho FmF-Kv Ay MN G53SD ( :in- State Zip (:ctdc Phone: 14 3. b35. 1034 Legal Name c�f Business:. Check One: Pro )rictor ^ Corporation Partnership Federal ID State ID # Oar \lk.AlnII \DLcklan ( roup\( 'hcnt;lli(:() \I)!( \' \Shurtsrh, Inc11:zP:uuinn\l ?nn. From (;isr \I?t) 1 rn al).iEcmam apphcatii>mdocx 2/3/3115 Last \lodifickl Agent Infor ation (ptig) Same as Propertt• Owner ❑ Different, as below- & (Check ow) Name: 0101C Dt C kC F-1 is -mail address: 11 -tC.k- v► Gel iLA_f1 Address: 12 Moir GJt Nw V1 4V 7-50 c1 V, hVc'F- MT11 5 5330 5tre163-5b13-9+<90b trite Mate Zip Code Phone (w): III, SIG ATURE I certify that & A T t is deftned as a small business, For - Profit and is not a religious, (liusin�.a aiaenr) political, casin , sports facility, or pornographic enterprise. I further certify that all information provided in this applicatiot is true and correct to the best of my knowledge. I authorize the city of Elk River and the. 1'tllallce Ot71 1ttCt t0 Clli`Cli credit rC1('i't 5,4 i dat, 'r Lll� .. :.�jC :4i ilt_ i other it]fG1Yliiltlf)il. I further agree, if approved, to t e loan security and guarantees required by the Subsidy policy. I agree to provide any additional info ation as may be requested by the city and the Finance Committee. It is the policy of the City of Flk River to rcquire applicants to pay- costs incurred by the City in reviewing and acting upon a plications, so that these costs are not borne by the taxpayers of the Cir(-. These costs include all of the City out -of- pocket costs for expenses, including the Citt•'s costs for review of the application by the City's Financial Consultant and Cite Attorney, or other consultants, recording fees, and necessary publication colts. "I'lle application processing fees cover anticipated costs; costs incurred above the application fee will be invoiced as th y are incurred, and payment will be due within thirty (30) days. Application fees are not refundable, though any unused portion is returned at the request of the applicant. If payment is not received as required by his agreement, the City may suspend the application review process and may deny the application f6t failure to comply with the requirements for processing the application. Payment for costs will be required NVI ether the application is granted or denied. '17ie undersigr ed has received the City's policy regarding the payment of costs of review, understands that reimburserne to the City of costs incurred in reviewing the application will be required, agrees to reimburse the Cite as re uired in the policy and make payment when billed by the City, and agrees that the application may be denied for failure to reimburse the City for costs as provided in the policy. Notes dl Maj ar charcholdcrs will he required to sign. pc:snnal guarantees and a minimum 9sses4ment agreement if up front financing of the project L' APPL WAN SIGN A'TURE TITTLE vi rl -r O �' � t6 � � � h 1 DATE b �� �' � ti � / V } iJ C: \t , sa :+ \TimOfFiicc \1)vskL0r \I)cckhii (irotap \Chcius \I .i :( )NIA-- Sportech, Inc \I?sp :nn >st \1`a,rans from ( :111y\F1)A U.\ alrtictttena applicatioomd rcz 2 /.1/?t115 Last Modilicd IV. PUBLIC PURPOSE It is t1i po icy of the City of Elk River that the use of Tax :Abatement should result in a benefit to the pu lic. Plcase indicate how this project will serve a public purpose: &]o Creation /Retention {Complete table in Section \' Ni v industrial development which will result in additional private ini estinent in the area. New de,lcl0f V1,e1�i _LEr hancement and /or diversification of the City of Elk River's economic base. "Tl project contributes to the fulfillment of the City's Economic Development Sti ategic Plan. _R oval of blight. Rdiabilitation of a high profile or priority- site. -A—Si iificantly increase the City's tax base. V. JOB & WAGE GOALS I pledre Ee I of � Olckcj SP{r MJ34cl X14- v1�1d, }i a V1 A ve-r -oi( c hp-.J`f be'nrflfs Hourly Wage l3. (New) Full- C. (New) Ilourl� Value of Value of (excluding A. Existing g time Job Part -time Job Total Jobs alue l Non- Ilealth Benefits) Jobs Retained Creation Creation (A +B +C) Insurance Insurance within 2 years within 2 years Benefits $9.110 to $10.99 $ $ $11.00 to $12.99 $ 4. i 6 $ $13.00 to $14.99 $ 4 35 $ $15.00 to $16.99 $ + 53 $ $17.00 to $18.99 V $ 4 $19.00 to $20.99 $ $ $21.00 to $22.99 $ $23.00 to $24.99 $ $25.00 to $26.99 i} $ 4(� $ $27.00 to $28.99 $ $ ;:::9.00 to $30.99 $31.00 and higher C:1 €�crs \'!'ina(ifticc \t)c ° >i a P1ih'cl lan G ra- ur \Chcnas\I {C0Nt)I•:\' \tihnrtech. Inc \I xpanswtl\hamns from (:itOIDA aas abate muna allplicatinn..locx 2/3/3 15 Last Modiflcd Vl. SOURCES & USES Generally, con cspondence to and from Staff is considered public information. Specific data related to a financial assist nce re_ ques is deemed not public: financial Information, Financial Statements, Net Worth Calculations, B isiness flans, Income and Expense projections, Balance. Sheets, Customer Lists, Income Tax returns. Whet public financial assistance is reccived, only the following remains not public: Business Plans, Income and Expense projections, Customer lists, Income tax returns, design, market, and feasibility studies not paid for vA th public funds. The city does allow an applicant to submit sensitive financial information directly to the .it<'s financial consultant, for additional security. 5()U CES NAME AMOUNT, Bank .oan $ Za 0 1 Other Private funds $ Own Crash Equit}v �� [� 411 +1 Lied ( rant /Loan $ State ,rant /IA)an $ EDA Micro Loan $ Tax atetnent n , _ pn7 q5 "4 go $ ID Bonds $ TOT USE AMOUNT Land cguisitivn $ 3 b`15 Site E evelopment �' i 00 0 sons ruction Q$+ $ - t� go M Vlach ncry & F.'quipment S 0 2-111 0 D Archi ectural & Engineering Dees S PQI M-$ s f 1KV" tV 1LY $ 1. � 0 0 , 00 0 Inter t During; Construction $ Debt 3ervice Reserve $ Conti gencies $ 2- � v o, D o 0 TOT $ ' 3 Z+ f:: \U r, \'I'int( ) Rice\. I) cAtnr\ I) cckl: m )NIAW \Sportcch. Inc\ IaranSinn \I�,n°ms firs sill( :it+r \FD% tax abatcnnnt -1phcw innA x N 3 /3 /2ttl51.a;t \I'dificil Elk River Request for Action To Item Number Economic Development uthority Finance Committee 4.1 Agenda Section Meeting Date Prepared by General Business Aril 28, 2015 Amanda Othoudt, EDD Item Description Reviewed by GATR of Sauk Rapids, Inc. Tax Abatement review Jeremy Barnhart, Deputy Director, CODD Reviewed by Action Requested Consider and provide recommendation to the EDA on the following GATR of Sauk Rapids, Inc. tax abatement application. Background /Discussion The City has received an application for tax abatement for GATR of Sauk Rapids, Inc. The County has also received a tax abatement application; they have considered that application at their April 21" County Board meeting with formal review and a public hearing anticipated for May 19`''. The EDA and City Council recently approved an amendment to the Business Subsidy policy, allowing business subsidies for service and retail commercial businesses. GATR is a full- service heavy duty and medium duty truck dealer with locations in Cedar Rapids and Des Moines, Iowa and Sauk Rapids, Minnesota which employ approximately 200 people. The proposal for this project site is to provide new and used truck sales, rental, leasing parts and service. GATR Truck Center would be a unique business in Elk River with no direct competitors within Sherburne County. GATR is proposing to build a facility in Elk River in order to better provide service to customers in the southeastern corner of their market area. Total sales generated from the property are expected to exceed $20 million by 2017 and $30 million by 2023. If approved, this would be the first project to break ground in Elk River's City Owned Nature's Edge Business Center 2nd Addition. The proposed project would consist of a 42,912 square foot facility with an estimated taxable value of approximately $3,900,000. The project is estimated to generate an approximate $160,500 in property taxes per year upon completion. The company has applied for a 15 years of tax abatement financing from the City of Elk River in the amount of $546,814. The tax abatement will allow GATR of Sauk Rapids, Inc. to purchase the property and provide operating flexibility. Tax Abatement The attached memo from Springsted summarizes the analysis completed to date. The project includes the creation of 63 new jobs. The project scored 43, at the higher end of the desirability range. Mikaela Huot will be at the meeting on Tuesday to verbally support the analysis. P a f E R E a a i 1 CIA R Staff's review assumes abating taxes of the entire property for 15 years. Based on the analysis provided by Springsted, it appears that GATR of Sauk Rapids, Inc. would not proceed with the project without assistance. Attachments • Springsted Analysis (April 23, 2015) • Tax Abatement Application In accordance with MN State Statute 3.591 BUSINESS DATA. Subdivision 1, the following data, that are submitted to a government entity by a business requesting financial assistance or a benefit financed by public funds, are private or nonpublic data: financial information about the business, including credit reports; financial statements; net worth calculations; business plans; income and expense projections; balance sheets; customer lists; income tax returns; and design, market, and feasibility studies not paid for with public funds are not included in this packet. N: \Departments \Community Development \Economic Development \EDA \Administrative \Agenda \EDA Agenda Packets \2015 \5 -18- 2015 \x6.1 at2 GATR EDA Finance Committee Staff Report.docx Springsted DRAFT MEMORANDUM TO: Amanda Othoudt, Economic Development Director FROM: Mikaela Huot, Vice President /Consultant DATE: April 24, 2015 SUBJECT: GATR Proposed Tax Abatement — Project Analysis Springsted Incorporated 380 Jackson Street, Suite 300 Saint Paul. MN 55101 -2887 Tel: 651 - 223 -3000 Fax: 651 - 223 -3002 www.springsted.com The City of Elk River has asked Springsted to evaluate a tax abatement request for assistance submitted by the developer, GATR Truck Center. (GATR). The developer proposes to purchase land from the Economic Development Authority of the City located within the 2nd phase of the Nature's Edge Business Center and construct an approximate 42,912 square foot facility. GATR Truck Center is a full service heavy and medium truck dealership. The proposal for this project site is to provide new and used truck sales, rental, leasing parts and service. GATR anticipates having 100 -150 trucks in inventory, with customer and service trailers stored on the lot periodically. The purchase price of the land from the City is $2.25 /SF for a total of $1,316,695. According to the applicant, the tax abatement assistance will be used as annual cash flow to support debt service on the approximate $13.25M project to be financed with a combination of debt and equity. The purpose of this memo is to summarize the analysis that Springsted prepared, including the estimate of tax abatement revenues for the project and to assist with determining whether the project as proposed is likely to proceed "but for" the requested tax abatement assistance. The analysis is based on our review of the project components and financials and general rationale for assistance as submitted by the developer. There are several methods available to determine if a project would proceed "but for" the assistance. An analysis comparing the rates of return with and without assistance is a common method used to analyze the "but for" test. However, in some cases, a review of the project's sources and uses of funds and operating cash flow performance is done to determine if an operating gap exists or if the project performance is not expected to meet minimum financing requirements and return thresholds to assist with determining that a project meets the "but for" test. If, following the review, it is determined that the project has a shortage of debt, cash, and /or equity based on the projected value of the project upon completion and net operating income available to support debt service, it can be determined that the project would not proceed "but for" the assistance. It is important to note that tax abatement does not statutorily require a "but for' analysis to determine if the project would proceed without assistance, however it must be determined that the project is in the public interest and that the benefits outweigh the costs and the City's current tax abatement policy requires this finding be made. Public Sector Advisors City of Elk River, Minnesota GATR request for Tax Abatement April 24, 2015 Page 2 Tax Abatement Assumptions Springsted made certain assumptions to calculate the estimated amount of tax abatement revenue generated by the proposed new project. Those assumptions include the following: • City of Elk River proposed tax abatement • Abate incremental land & building value: • P I D: 75- 828 -0110 • EMV as of Jan. 2, 2014 for taxes payable 2015 is 7500 • Assumed to be `base' value of abatement • Value estimate provided by Sherburne County website • EMV as of Jan. 2, 2016 for taxes payable 2017 is $3,900,000 • Land: $1,550,000 • Building: $2,350,000 • Total Value: $3,900,000 • Value estimate provided by County Assessor • Abatement term and participation o City for up to 15 years • First Year of Abatement • Taxes payable 2017 • Construction complete by December 31, 2015 • 2015 tax rates remain constant through term (Rates Provided by Sherburne County) o City: 47.190% • Class rates remain constant through abatement term • Fiscal disparities contribution - NA • 0% annual market value inflator assumed • Present Value Assumptions 0 4% Discount Rate o Dated Date of December 31, 2015 Tax Abatement Revenue Estimates GATR Abatement Project City Abatement Estimated Annual Tax Abatement Revenue $36,454 Total Estimated Tax Abatement Revenues 15 Years $546,814 Estimated Present Value of Total Revenues $389,722 City of Elk River, Minnesota GATR request for Tax Abatement April 24, 2015 Page 3 The above table illustrates the projected net revenues that tax abatement would generate for the proposed term of 15 years for the City. The company has also requested tax abatement assistance from the County for a term of 12 years. The estimated total abatement revenues as requested from the County are equal to $481,848. The maximum abatement term for the City is up to 20 years if only 1 or 2 entities participate in the abatement or the City receives written denial of participation from one of the other taxing entities (County or School District). All participation levels and amounts would be subject to individual policy and Board decisions following anticipated public hearings. Revenues captured through tax abatement and provided as reimbursement to the property owner for certain costs must be used only for those properties that benefit from the tax abatement. Developer Request for Tax Abatement Assistance The developer submitted a request for tax abatement assistance from the City of Elk River and Sherburne County to assist with financing the proposed $13.25 million acquisition and subsequent construction of City -owned property located in the 2 °d phase of the Nature's Edge Business Center. The developer has requested approximately $546,810 in abatement assistance over 15 years from the City and $481,848 over 12 years from the County. The Developer's submittal includes a preliminary total project budget of $13,249,495 as shown in the table below. Project Costs Total Cost Sources of Funds Total Sources Land Acquisition $1,316,695 Bank Loan $5,200,000 Site Development $1,400,000 Equity $8,049,495 Construction $5,450,000 Machinery & Equipment * $1,082,800 Parts /Inventory * $1,500,000 Contingency $2,500,000 Total Costs $13,249,495 Total Sources $13,249,495 * assumed to be business costs, as opposed to real estate investment costs Project Financing 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 revenues 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 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. However, in some cases pay as you go financing may not be financially feasible. With bonds, the City would still need to make debt service payments and City of Elk River, Minnesota GATR request for Tax Abatement April 24, 2015 Page 4 would have to use other sources to fill any shortfall of revenues. With internal financing, the City reimburses the loan with future revenue collections and may risk not repaying itself in full if revenues are not sufficient. The form of financial assistance proposed in this case is pay -as- you -go financing. Developer Proforma "But For" Analysis In approving an abatement project, the Elk River EDA has requested that a finding be made that the proposed project 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 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 has stated the assistance is necessary due to the costs of developing the site and inability of the project to fully support those costs upon completion. The current estimated project costs are in excess of the estimated future value of the building upon development as provided by the County. Based on this analysis, the EDA could be justified in determining that the project meets the "but for" test and would not proceed without assistance. As stated tax abatement does not statutorily require a "but for" analysis to determine if the project would proceed without assistance. A city, county or school district may grant a tax abatement, by contract or otherwise, of the taxes imposed by the city on a parcel of property, which may include personal property and machinery, or defer the payments of the taxes and abate the interest and penalty that otherwise would apply, if: • it expects the benefits to the city of the proposed abatement agreement to at least equal the costs to the city of the proposed agreement or intends the abatement to phase -in a property tax increase, as provided in clause (2)(vii); and • it finds that doing so is in the public interest because it will: • increase or preserve tax base; • provide employment opportunities in the political subdivision; • provide or help acquire or construct public facilities; • help redevelop or renew blighted areas; • help provide access to services for residents of the political subdivision; o finance or provide public infrastructure; o phase -in a property tax increase on the parcel resulting from an increase of 50 percent or more in one year on the estimated market value of the parcel, other than increase attributable to improvement of the parcel; or o stabilize the tax base through equalization of property tax revenues for a specified period of time with respect to a taxpayer whose real and personal property is subject to valuation under Minnesota Rules, chapter 8100. The developer has indicated that the abatement revenues are necessary to ensure business sustainability and support projected annual debt service. The implication being that "but for" abatement assistance the project will not proceed. City of Elk River, Minnesota GATR request for Tax Abatement April 24, 2015 Page 5 The Developer's submittal includes a 15 year financial and cash flow projection and proforma with and without abatement assistance. The 15 year financial and cash flow projection indicates negative income before taxes for the first 8 years, and increasingly stabilizing each year, followed by positive income for the remaining 7 years. The proforma with and without tax abatement is an analysis of the developer's use of the annual abatement revenues to reduce the mortgage liability on the property and increase the projected return on equity for the project. The analysis indicates the tax abatement assistance will have a positive impact on the return. Conclusion The developer has requested assistance in the amount of $546,810 from the City of Elk River and that the project would not be feasible without assistance as demonstrated by the return on equity comparisons. There are several methods to determine if a project would proceed "but for" assistance. Based on the available information, in this case a debt service and project cash flow gap analysis was utilized to test the viability of the project. The tables as provided in the application indicate that the tax abatement assistance reduces the annual debt service burden on project cash flows and improve the projected return on equity. "But for" abatement assistance, a reduction in operating and /or borrowing costs, or increased revenues or some combination of the above, the developer has indicated the project as proposed would not go forward. In addition, it is important to note that the developer has indicated that the project will aid in the creation of 63 new jobs in the City of Elk River. Thank you for the opportunity to be of assistance to the City of Elk River. Please contact me at 651 - 223 -3036 or mhuot(o)springsted.com with any questions or to discuss. Projected Tax Abatement Report City of Elk River, Minnesota Proposed Tax Abatement for GATR Participation of City for 15 years and County for 12 years Total EMV of $3,900,000 with Incremental EMV of $3,892,500 Annual Period Ending 1 Total Estimated Market Value 2 Total Net Tax Capacity 3 Less: Non- Abated Net Tax Capacity 4 Retained Captured Net Tax Capacity 5 Times: Tax Capacity Rate 6 Maximum Tax Abatement City 47.19% 7 Maximum Tax Abatement County 51.98% 8 Maximum Tax Abatement School District 42.48% 9 Total Tax Abatement 10 P.V. Annual Abate To 12/31/15 4.00% 12/31/17 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 33,704 12/31/18 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 32,408 12/31/19 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 31,161 12/31/20 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 29,963 12/31/21 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 28,810 12/31/22 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 27,702 12/31/23 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 26,637 12/31/24 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 25,612 12/31/25 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 24,627 12/31/26 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 23,680 12/31/27 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 22,769 12/31/28 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 21,893 12/31/29 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 21,051 12/31/30 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 20,242 12/31/31 3,900,000 77,250 113 77,137 146.431% 36,454 0 0 36,454 19,463 $546,814 $0 $0 1 $546,814 1 $389,722 Public Sector Advisors