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3.0. EDSR 11-09-1998 ELK RIVER ECONOIVINMENbt9PMENT AUTHORITY TO: Economic Development Authority FROM: Paul T. Steinman,Director of Economic Development DATE: November 9, 1998 SUBJECT: Worksession Agenda Memo Tax Increment Financing District No. 19 -Associated Developers Project Issue The purpose of this worksession is to discuss,issues relating to the provision of tax increment financing to Associated Developers as part of their mixed use development proposal on the Earl Hohlen property located at 169 and Main Street. Staff hopes to have the EDA arrive at some general consensus regarding the amount of tax increment proposed and the method of providing such tax increment. After this EDA worksession, staff hopes it will be able to begin constructing the two primary development agreements for this project for the EDA to consider at their regular meeting on December 14, 1998. Background For ease of discussion at this worksession, staff proposes to break the issue down into two components: • industrial component • commercial component Industrial Component - At this time it is difficult to estimate the actual expenses involved in portions of the industrial project. For the purpose of this discussion, staff proposes that we use the figure of$2.5 million in total costs associated with the industrial piece. This amount breaks out as follows: • land purchase $ 700,000 • mass grading and wetland remediation $ 600,000 13065 Orono Parkway • P. O. Box 490 • Elk River, MN 55330-1743 • (612) 441-7420• Fax (612) 441-7425 Equal Opportunity Housing and Equal Opportunity Employment EDA Worksession Agenda Memo November 9, 1998 Page 2 • • construction of internal ring road and sewer and water $ 330,000 • costs of industrial piece trunk/lateral Tyler Street, and oversizing $ 869,000 (only approx. $240,0000 to be assessed) TOTAL $2,500,000 (rounded) The developer of the industrial component of this project will be a partnership formed between Amcon, Brookstone, Inc., and Associated Developers. This partnership is proposing that the EDA provide the following costs up front to the industrial project: • mass grading and wetland remediation $ 600,000 • construction of internal ring road and sewer and water $ 330,000 • costs of industrial piece trunk/lateral Tyler Street, and oversizing $ 869,000 (only approx. $240,000 to be assessed) TOTAL $1,799,000 • All of the above-mentioned costs, with the exception of the $600,000 for mass grading, could be rolled into the general obligation bond proposed to be sold for various improvements relating to the overall eastern expansion. These costs would then be assessed back to the industrial piece, thereby essentially guaranteeing repayment and minimizing the city's risk. Those assessments would then be paid,each year by the new partnership with tax increment being rebated to the new partnership in an amount equal to the assessment, if enough increment is being generated to do so. There is a gap between what is assessable and the actual cost of improvements. This gap is proposed to be filled through the use of federal grant dollars on the construction of Tyler Street. The $700,000 purchase price would be borne by the new partnership up front with tax increment being used to repay this cost over the term of the district or as lots are sold in the industrial park. Staff has proposed to the new partnership that the costs of mass grading the site- $600,000 - be borne by the new partnership up front, and that tax increment would be used to pay the new partnership over time as lots in the industrial park were developed. Negotiation is continuing on whether the city or the partnership will provide • $600,000 up front to the project to complete mass grading and wetland EDA Worksession Agenda Memo November 9, 1998 Page 3 40 remediation. If these dollars are to be provided by the EDA up front, an additional bond would be sold, thereby increasing our risk. All the other costs being discussed to be provided up front are essentially being assessed back to the industrial piece, thereby providing excellent security for the bond which would be sold to complete such activities. The EDA would have to rely upon build-out of the industrial park and generation of increment over time in order to recoup the $600,000 provided up front to the project for mass grading and wetland remediation. The industrial project is proposed to be completely built out in years 5-7 with approximately 350,000 square feet of industrial space. The proposed market value of land and buildings at full build out is approximately $18 million. Commercial Component Associated Developers' request for tax increment for the commercial component of this project is in the amount of approximately$2.7 million. Staff and developer discussions have led to a reduction in this original TIF request from $2.7 million to approximately $1.6 million. This revised request includes the following line items: • gas pipeline relocation $ 350,000 • public improvements to be assessed $ 627,000 • • 40% of the cost of soil corrections and grading $ 638,060 Total Revised TIF Request $1,600,000 (rounded) To date staff has discussed the concept of agreeing to provide tax increment to reimburse the developer for the costs of public improvements in the amount of$627,000. In addition, staff has discussed the concept of agreeing to provide tax increment to pay the actual cost of the gas pipeline relocation. Of these costs being discussed,the $627,000 for public improvements would be included as part of the overall city general obligation bond and installed up front to the project and assessed back to the commercial component of the project. This assessment, as with the industrial piece, provides a strong security mechanism to reduce the risk of the project for the city. Any dollar amount agreed to be provided over and above $627,000 for public improvements, would be proposed to be paid for up front by the developer with a reimbursement from tax increment being provided over the term of the tax increment district. For example, if the EDA were to agree to provide an additional $350,000 to pay for gas pipeline relocation, Associated Developers would pay this cost up front and agree to be reimbursed with tax increment • over the life of the district at a negotiated interest rate. EDA Worksession Agenda Memo November 9, 1998 Page 4 • A pay-as-you-go tax increment note with Associated Developers is proposed to be lowest on the priority list for tax increment payment. This priority list deals with the length of term of the tax increment district and amount of tax increment that is generated in each given year. Such priority list is proposed as follows: First Priority Pay annual installment on general obligation bonds. Second Priority - Pay increment to the new partnership (industrial) and Associated Developers (commercial) in an amount equal to the assessments against the property for public improvements. Third Priority- Pay annual installment on bond issued for $600,000 for mass grading/wetland remediation on industrial piece (still in negotiation regarding who will pay this cost upfront). If the EDA were to pay this up front it would become a higher priority. Fourth Priority - Pay annual installment on pay-as-you-go note to the new partnership for the purchase price of the industrial property. (This property may be based on development rather than a guaranteed annual payment) Fifth Priority Pay annual installment on pay-as-you-go note to Associated Developers for gas pipeline relocation costs - $350,000 (still in negotiation regarding who will pay this cost up front). If EDA were to bond and pay this up front it would become a higher priority. This priority scenario shows that Associated Developers' pay-as-you-go note would bear a good deal of risk in that if there aren't enough tax increments generated in any given year to make payment on this note, then repayment would not occur in that given year. If enough increment is generated in following years,full repayment of the note could still be accomplished within the term of the tax increment district. Example: TIF Priority Priority Priority Priority Priority Excess Generated 1 2 3 4 5 Year 1 $100 50 20 20 10 0 0 Year 2 $120 50 20 20 10 20 0 Year 3 $150 50 20 20 10 30 20 Year 4 $170 50 20 20 10 30 40 EDA Worksession Agenda Memo November 9, 1998 Page 5 Any year in which there is an excess we would have the ability to use such excess to possibly retire bonds or pay other obligations so that the term of the TIF district can be potentially shorted. Conclusion In conclusion, there are numerous other issues related to this project such as: • LGA/HACA penalty versus local contribution • Methods of recourse for non-performance by developer • Interest rate on pay-as-you-go notes • Use of TIF to pay city costs of project • Condemnation issues. At this time staff would encourage discussion primarily on the concept as outlined in this memo and the FDA's reaction to the dollar amounts being discussed. It is staffs hope that at the conclusion of this worksession we can begin to formulate the development agreement with the new partnership on the industrial piece and Associated Developers on the commercial piece. At the time these agreements are brought back before the EDA, possibly on December 14, 1998, the specific details associated with the above-mentioned • items can be more appropriately discussed. BROOKSTONE,INC. NOV a 1993 vck /otze- 7400 / a 1 Metro Blvd.,Suite 212 Edina,Minnesota 55439 612.837.9167 phone 612.837.8010 fax November 4, 1998 Mr. Paul Steinman Director of Economic Development City of Elk River 13065 Orono Parkway PO Box 490 Elk River,Minnesota 55330 Dear Paul: Further to our recent discussions,we are writing this letter to begin the process of finalizing an agreement with the City of Elk River with regard to the use of tax increment financing for the Elk River Business Center. Please keep in mind that at this point we need to remain fluid pending the result of additional planning and analysis we are undertaking on this site. Specifically,the areas that at this point continue to create some degree of uncertainty are: 1. Soil conditions—we plan on undertaking detailed studies. 2. A final wetland mitigation plan. 3. Potential additional topographical analysis required. 4. Planning approvals including the abandonment of the existing ditch through the property,the creation of the regional pond, city approvals and external governmental approvals including the Corp of Engineers. We are moving ahead on all of these fronts and expect to have a certain amount of work completed prior to year-end. Without completion of further planning and analysis as described above,it is not possible to provide firm numbers for the overall mass grading for this 40 acres. Preliminarily,we estimate that the cost for this work will be$12,000 per acre for a total of$480,000 and adding in the very preliminary estimate for our wetland mitigation of$70,000 and a$50,000 contingency would yield an overall site preparation estimate of$600,000. This excludes any possible soil correction required. Pursuant to our specific discussions with you, and the meeting with your economic development authority,we are proposing the following conceptual framework for a tax increment financing agreement . with the City of Elk River. This is outlined below: REAL ESTATE ADVISORY SERVICES,INVESTMENT AND DEVELOPMENT 1. The developing partnership would contribute the land as front-end equity into the partnership. Land cost is approximately$700,000. 2. The city,we are proposing,would provide: (a) The cost for grading,wetland mitigation and soil correction. (b) The full installation of Tyler including all trunk utility lines. (c) The ring road through the 40 acres of industrial property and related utilities per plans that have been preliminarily submitted to the city. We have carefully assessed our risk position on this development and have based our proposal,in part, on that assessment. In order to move this project forward under the framework proposed above,we will have over$3 million at risk. This is comprised of approximately$700,000 for the land and$2,500,000 of combined equity and debt (on which we will have personal guarantees) for the Phase I—speculative multi-tenant building. 3. The city is to assess the industrial share of Tyler Avenue only and you have indicated to us that there will be an assessment of approximately$6,000 per gross acre or approximately$240,000 on the industrial property. The balance of the costs which would then include the ring road,utilities, grading, soil corrections and wetland mitigation would then be an up front investment by the city. 4. The city would receive from tax increment proceeds from the 40 acres annual amounts required to cover the payment on the special assessments related to Tyler and to cover principal and interest 1110 paid on bonds established to cover the front end investment costs for the items specified above. On an annual basis,the partnership would receive any amounts remaining to cover the pay-as-you-go note established to repay the partnership for its land investment. While it is anticipated,based upon previous projections,that this would be repaid much sooner we would request that the potential amortization period for the pay-as-you-go note be as long as 15 years at an interest rate of 8.5%. In addition,we understand that it would be agreeable to the city to have surplus tax increment proceeds from the retail portion of the property used to cover any payments under the pay-as-you-go note on the industrial property to the extent that there are not sufficient funds available from the tax increment generated by the industrial property in any given year. We are excited about moving ahead on this property development with you and look forward to further discussion of this at the EDA meeting on Monday,November 9. In the meantime, should you have any questions concerning this letter or any other related matter,please do not hesitate to call. You ryt , Richard V. Martens President RVM/bb Cc: Tony Gleekel Jim Winkels • Pat Pelstring ........�........r�... OC' 3 v8 yrII • 4 5. PELSTRING CAPITAL CORPORATION 4205 Lancaster Lane North lo Suite 1100*Minneapolis,MN 55441 October 28, 1998 Mr. Paul Steinman Economic Development Director City of Elk River P.O. Box 490 Elk River, MN 55330 Re: Associated Developers of the Twin Cities, Inc. Tax Increment Financing Request Dear Paul: On behalf of Associated Developers of the Twin Cities, Inc., I appreciated the opportunity • to meet with you and review your offer for Tax Increment Financing assistance. Following review of the proposed assistance package, which is in response to Associated Developers' application for assistance, Associated Developers has revised its original request as a result of the discussions we have had over the past number of months. From our meeting, we understand that the City of Elk River has tied the proposed assistance directly to the public improvements, particularly the construction of Tyler Street and the utility trunk lines. Review of Associated Developers' proformas and the excessive development costs associated with developing the site, results in Associated Developers' need for reimbursement for not only the public improvements, but also for certain site costs. In reviewing Associated Developers' request for assistance, we adjusted our financial analysis to recognize the actual public improvements (to be assessed) against the property to be approximately $6,000 per acre. It is important to recognize that the City's approach providing TIF assistance solely for the public improvements does not significantly improve the developer's proforma. The land is being sold at cost plus assessment basis, and as such, the developer does not reduce its costs or increase revenues. • Accordingly, in reviewing the cost of the public improvements, as well as certain costs which Associated Developers believes are augmented in part by the location of Tyler Street (612)550-7980 800-642-6258*(612)550-9221 Fax G31'@ pelstring@earthlink.net and further constraints put on the site by the said location as well as the topography and existence of wetlands on the property, Associated Developers proposes that the City provide pay-as-you-go Tax Increment Financing assistance for the following costs, which Associated Developers believes are clearly allowed under the requisite statutes: Pipeline relocation- section of natural gas pipeline located under proposed building $350,000 Insulation of trunk utilities to be assessed through the property 420,000 Installation of lateral utilities 207,000 40% of soil corrections and grading costs 638.060 Total TIF Request/Eligible Costs $1,615,060 With the excessive cost of this development, which include wetland mitigation, excessive grading costs, relocation of the gasline easement, closure of the manufactured home park, the need to buy additional land (resulting from the location to Tyler Street and other constraints on the property) and other somewhat extraordinary costs associated with this development, the development is economically feasible only with the assistance. The assistance would make deals with the big box users economically feasible for both parties, thus jump-starting the development. • Please contact me so we can set up a meeting to discuss Associated Developers revised request for the assistance. I understand that you would like to bring this matter to the EDA's work session on November 9, 1998. I look forward to hearing from you. Sincerely, PELSTRING CAPITAL CORPORATION pit4a) pl Patrick W. Pelstring 4 Partner cc: Tony Gleekel Matt Fischer Dave McGillivary •