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EDSR INFORMATION #2 09-21-1998 iNFORMATiON c � .ity of ikRiver August 11, 1998 David Loch, Sherburne County Administrator Sherburne County Commissioners Sherburne County Government Center 13880 Highway 10 Elk River, Minnesota 55330 Dear Mr. Loch: Subject: Tax Increment Financing District No. 19 - City of Elk River This letter is in response to the input provided by the Sherburne County Board of Commissioners regarding the City of Elk River Tax Increment Financing District No. 19 ("TIF No. 19"). Enclosed please find the following information: • Economic Development Authority Minutes of July 13, 1998 • City Council Minutes of July 13, 1998 • TIF Tax Capacity Information Sheet • County Commissioners Response to TIF No. 19 • Outline of City of Elk River Tax Increment Finance Districts Please note both the EDA and City Council minutes reflect the distribution of the Sherburne County Commissioners response to TIF No. 19. I would like to take this opportunity to respond individually to each of the issues outlined by the County Commissioners in their response to the city's request to provide public input on TIF No. 19. Issue I The County believes that ample space is presently available for commercial use. Issue II The County believes that there are ample restaurants and • convenience stores to service the population. 13065 Orono Parkway • P.O. Box 490 • Elk River, MN 55330 • TDD &Phone: (612) 441-7420 • Fax: (612) 441-7425 Mr. David Loch August 11, 1998 Page 2 • Issue III The County believes that there is a glut of supermarket space in the community. Issues I, II, and III as stated above, bring to the forefront the county's perception that TIF No. 19 is being created to facilitate a commercial development. Although untrue, it is a valid point given that the TIF Plan which the County Commissioners received is not required to discuss the various alternative motivations of the City Council and Economic Development Authority. First of all, it is important to note that creation of TIF No. 19 (completed on July 13, 1998) does not guarantee any tax increment assistance to the developer. The creation of TIF No. 19 simply establishes the tool which the Economic Development Authority can use to provide an incentive to the developer to complete a project. There are two primary components of TIF No. 19: • 68 acre commercial development • 40 acre industrial park development The physical layout of the overall project is such that the industrial park lies on the southern 40 acres of the project area. The developer has indicated the • following in its tax increment request and subsequent discussions with the Economic Development Authority: • Due to extraordinary costs of site development, the commercial component of this project cannot proceed without the use of tax increment. • Should the commercial component proceed, the developer will agree to construct the 40 acre industrial park at the south side of the project area beginning with a 50,000 square foot building proposed to be under construction in spring 1999. • Developer will construct an additional approximately 350,000 square feet of industrial product over the next five-seven year period. Tax increment assistance, should the EDA decide to provide it, will only be used to pay for extraordinary costs of the overall development. The commercial project, when completed, will therefore be in no better or worse position to compete with other commercial projects in this area. I provide the following specific response to issues I, II, and III in the County Commissioner's letter: s Mr. David Loch August 11, 1998 Page 3 • • Additional commercial development at the corner of 169 and Main Street, I believe, will make the "old" shopping mall a more desirable retail space due to the number of people being attracted to the new commercial development. (There is 76,000 square feet available in the "old" shopping mall, not 100,000) • TIF is not being provided to "attract" a new commercial development, but rather to achieve the construction of a 40 acre industrial park. • The market will drive (and should drive) the timing of building out the commercial development and the various uses contained within the commercial development. Issue IV The County disagrees with the length of the TIF District There are several different types and respective lengths of tax increment districts including: • Economic Development Districts - Maximum duration - 9 years • Renovation and Renewal Districts - Maximum duration - 15 years • • Soils Condition Districts - Maximum duration - 12 years • Housing Districts - Maximum duration - 25 years • Redevelopment Districts (TIF No. 19) - Maximum duration - 25 years The City of Elk River and Elk River Economic Development Authority have mostly made use of economic development districts. These economic development districts are, generally, single use industrial/manufacturing types of projects. Examples of Elk River's economic development districts/projects: • Tescom • Marketech • Alltool • McChesney Cabinets • TimRon Precision Gear The city also has several redevelopment districts in place including: • AmericInn • • Mork Clinic Mr. David Loch August 11, 1998 Page 4 • • Jarmoluk Dental Clinic • King and Main (vacant site) TIF No. 19 is not necessarily a 25 year TIF District. Since it is a redevelopment TIF District it is "allowed by law" to be in existence for a total of 25 years from the date the first increment is received. The tax increment plan for TIF No. 19 bases all of its assumptions on the maximum duration of 25 years. The city will only know the precise duration of the District at the time of execution of the final development agreement which will identify the amount of assistance being provided to the developer and the amount of tax increment which may be used for other eligible project expenses, i.e., streets, sewer and water improvements, etc. At the time this package has been negotiated and the final development agreement executed, the city can potentially "guarantee" a specific year for decertification of the TIF District. It is unlikely that increment will be collected for an entire 25 year period in TIF No. 19. It is important to note that, over the past several years, new state laws with regard to TIF have eliminated "pooling" of tax 111) increment. What this means is that prior to 1990, cities had an incentive to keep a district in place for the maximum duration allowed by law because of the ability to use excess tax increment generated in that district for various other legal uses. Pooling of tax increment is no longer allowed, therefore there is no incentive or legal authority to keep a tax increment district in place once the developer and other costs have been paid. New state laws have actually added a penalty clause for cities creating new tax increment districts. This monetary penalty is equal to 10 percent of the tax increment generated, or in the case of TIF No. 19, up to $1.6 million. This is a cost the city is required to bear from a funding source other than tax increment from the district. The purpose of this penalty is to assure that cities are committed to the projects and share a portion of the risk of these projects through paying the penalty. I can assure you the city of Elk River does not take lightly its decision to pay a potential penalty of up to $1.6 million to facilitate the proposed development within TIF No. 19. • Mr. David Loch August 11, 1998 Page 5 • Issue V The County does not accept the "but/for" test in the Plan Information regarding the "but/for" analysis can be found in Section J (2), Page 5, Findings and Need for Tax Increment Financing, in the Tax Increment Financing Plan for TIF No. 19 which states: "The reasons and facts supporting this finding are that the developer has represented to the city that it would not undertake the proposed development without the assistance of tax increment financing. Private investment will not finance these development activities because of prohibitive costs. It is necessary to finance these development activities through the use of tax increment financing so that other development by private enterprise will occur within the Project Area." The City Council of the City of Elk River has made a finding that the facts presented to it by the developer support, in the opinion of the city, that the development would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future. • All supporting information provided by the developer with regard to the but/for analysis is public information and available to the Commissioners at your request. Some of the information can be found in the developers tax increment application package which is attached to this letter. Issue VI The County has concern about the total captured value that the city has in TIF Districts. As indicated in the County Commissioner's response to the City Council's request for public input on TIF No. 19, you indicate that "Assuming the same rate of growth that has occurred in the last five years, the Sherburne County Board is concerned that 9 percent of the city's tax base will be involved in TIF Districts." This is an invalid assumption. • Does this assumption anticipate any growth in the city's total tax capacity, or does it simply anticipate growth in the city's TIF tax capacity? • Does this assumption consider that TIF No. 19 is somewhat of an anomaly in that its estimated market value is more than 410 Mr. David Loch August 11, 1998 Page 6 • six times the combined total of the estimated market value in the last five certified TIF Districts? As indicated in the attached information, Elk River's captured tax capacity (TIF Districts) is 2.67 percent of the city's total tax capacity. This is far below three of the other Sherburne County communities: • Big Lake - 11.05% • Princeton - 9.31% • Zimmerman - 6.34% Elk River's percentage of captured TIF tax capacity is also far below the statewide average of 7.58 percent. This reflects that recent and past City Council's have used tax increment in a very conservative manner. I anticipate that this trend will continue in Elk River as tax increment has become more cumbersome and difficult to use over the past several years, and city's are now being required to bear the financial penalties associated with creation of new TIF districts. • Another issue addressed by the Commission is regarding bonding for this project in TIF No. 19. The developer has requested pay-as-you-go tax increment assistance. This means that the developer takes all the risk in the project and the city is not required to bond to provide the developer's assistance. The developer would be paid their agreed upon level of assistance in future years as the increment is generated from the project. The Commissioner's final question under this issue says "Is it in the best interest of the city to finance this District in the event that an industrial project comes along?" It is my hope that I have addressed this question in the first part of this letter wherein I indicate that the creation of this TIF District is entirely predicated upon the developer agreeing to construct a 40 acre industrial park which will create approximately 400,000 square feet of industrial buildings with an estimated market value of approximately $20 million. This industrial park has the potential to create 300 to 500 new jobs over the next five year period for residents of Elk River and all of Sherburne County. • Mr. David Loch August 11, 1998 Page 7 In conclusion, I feel strongly that without the use of tax increment, the city of Elk River would not be able to attract quality industrial businesses. Every quality industrial prospect knows that it is a marketable product to almost every municipality in the state of Minnesota. When such a prospect presents its request for TIF assistance to our Economic Development Authority, we all realize that this prospect will receive an identical TIF assistance package in Ramsey or Rogers. We then are faced with a decision to: • Say no and make a point about the use of tax increment and then watch the project go to either Rogers or Ramsey • Say yes and in 9 years, or sometimes up to 25, reap the benefits of the additional tax base which would not have been here in Sherburne County without the initial use of tax increment. The industrial prospects are driving the use of tax increment in the state of Minnesota, not municipalities. Industrial prospects know that TIF is available and will only discuss their project with communities that are willing to utilize this tool for their benefit. Saying no to TIF at this point will have a detrimental effect upon the future tax base of the city and Sherburne County. Quality industrial projects are unlikely to occur anywhere in Sherburne County without the use of tax increment financing. • If you have any questions or comments about tax increment or any other economic development issues, please feel free to call me at 441-4905. Thank you for your time and attention to this matter. S- ► ely, Paul T. Steinman Director of Economic Development PTS:akh c: City Council Economic Development Authority •