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EDSR MEMORANDUM 11-10-1997 ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY MEMORANDUM TO: Economic Development Authority FROM: Paul T. Steinman, Director.of Economic Development DATE: November 5, 1997 SUBJECT: Agenda Memo for November 10, 1997, Meeting 5. Gregg Karnis Micro Loan Application Issue Greg Karnis was recently denied a $50,000 micro loan request by the EDA for partial financing of a restaurant in the Sax Food building. Since the October EDA meeting, when this action was taken, Mr. SKarnis has modified his loan proposal and bank participation in this project. His current request is in the amount of$35,000 amortized over a ten year period with a four year balloon payment. Background Mr. Karnis' modified loan request came before the EDA Finance Committee on Thursday, October 30, 1997. The recommendation from the Finance Committee at that meeting was for the EDA to deny Mr. Karnis' loan request based upon the retail/service type of use and a possible future redirection of micro loan funds to altogether eliminate the funding of these types of uses. This motion was supported 4-0. At the initial meeting of the Finance Committee, a similar discussion was held regarding the type of use and the City's strategic planning process which indicated a clear focus to industrial development and redevelopment, rather than the subsidization of retail/service uses in a non-redevelopment project. EDA action at its October meeting denied the loan application, however, members of the EDA asked that Mr. Karnis be given another • 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 Agenda Memo November 10, 1997 Page 2 • opportunity to come before the EDA with a modified request if necessary. Attached is a letter from Gregg Karnis indicating his modified request and minutes from the October 9 and October 30 Finance Committee meetings. Also included is a current status summary of the micro loan fund. As indicated, as of October 31, 1997, the loan fund had available approximately $277,000. Recommendation The EDA Finance Committee recommends denial of the Gregg Karnis micro loan request due to the type of use proposed and a shift in the philosophy of providing micro loans for retail/service type uses in non- redevelopment target areas. 6. Tax Increment District No. 5 Plan Modification Issue The purpose of this issue is to provide final EDA action on the plan modification of Tax Increment Financing District No. 5. The following actions have been taken on this plan modification to date: • September 8, 1997 EDA requested City Council to call a public hearing on December 1, 1997 • September 22, 1997 City Council called for a public hearing to be held on December 1, 1997, to modify Tax Increment Financing District No. 5 • October 1, 1997 Staff completed plan modification with review by legal council • October 15, 1997 Plan modification was forwarded to representatives of the School District and County Commissioners • October 28 1997 Planning Commission approved the plan modification finding it to be in compliance with the City's Compre- hensive Plan EDA Agenda Memo November 10, 1997 Page 3 • Items scheduled for completion November/December, 1997: • November 10, 1997 EDA approves plan modification • November 12, 1997 Elk River Star News publishes hearing notice and map • December 1, 1997 City Council holds public hearing on the modification of Tax Increment Financing District No.5 and passes resolution approving plan modifi- cation • December 2, 1997 Send plan to County/State for certification Attached to this memo is a copy of the actual plan modification. As indicated in the Estimate of Public Costs - Project Costs Summary, expenditures for land acquisition and public improvement costs total approximately $225,000. It appears from discussions with the Finance • Department that excess funds in TIF District No. 5 will be between $180,000 and $225,000 at the end of 1997. The plan modification will allow for the expenditure of these excess dollars to purchase property or complete public improvements anywhere within the boundaries of Development District No. 1 (city limits of City of Elk River). Recommendation Staff recommends that the EDA approve the modifications to Tax Increment Financing Plan for Tax Increment Financing District No. 5 as attached, which includes a new estimate of public costs for land acquisition and public improvements in an amount not to exceed $225,000. 7. Tax Increment District No. 17 Concept Approval -Dave Decker Issue Dave Decker has provided an application requesting$160,000 in tax increment funds to develop a 25,000 square foot industrial facility on east Highway 10 in Elk River. The purpose of this agenda item is to provide concept approval of Mr. Decker's TIF application in order to proceed with the schedule for establishment of Tax Increment District No. 17. EDA Agenda Memo November 10, 1997 Page 4 410 Background Attached to this memo is Dave Decker's application for $160,000 in tax increment financing to assist with a proposed 25,000 square foot industrial project on east Highway 10. This industrial project is described as a multi-tenant facility with a total of five, 5,000 square foot bays available for lease to industrial users. Mr. Decker is proposing a phase II expansion of the facility for a total building size of approximately 70,000 square feet. Total phase I project costs are estimated to be $1.2 million. Mr. Decker also estimates there will be between 20-25 jobs created in this facility. The "state imposed penalty" for creation of this TIF District is approximately $20,000. This penalty can be funded using the city's development fund. Dave Decker and consultant Gary Santwire will be available at the November 10 EDA meeting to provide a brief presentation of this project and address questions from the EDA. Recommendation Staff recommends that the EDA approve this tax increment concept as discussed and that we continue to move forward to establish TIF District No. 17. 8. Tax Increment Concept Discussion Morrell Project Issue The purpose of this a enda item is to discuss the concept of providing up to $300,000 in tax increment dollars to facilitate the construction of an approximately 45,000 square foot trucking/distribution/office facility for Morrell Companies. Back 'round Most of you are likely aware that Morrell Companies has been working through the various city processes over the past six months to obtain necessary approvals to construct their facility in east Elk River off of 173rd Avenue. All necessary approvals have been provided to Morrell Companies to date. As is the case in projects of this size, there was substantial negotiation between the city and Morrell Companies regarding the specifics of the project. A number of city requirements were negotiated in an attempt to provide a more feasible project for EDA Agenda Memo November 10, 1997 Page 5 • Morrell Companies. This conceptual discussion of providing tax increment dollars to aid in the funding of this project leads to several questions: • Is the EDA in favor of providing tax increment dollars to assist in the development of this project? • If tax increment dollars are to be provided to this project, would the initial city requirements be upheld? • What is the local contribution or "penalty" which will be required as part of this TIF District? The answer to this question is, from initial cash flow projections,that the city will be required to provide a minimum contribution to this project of approximately $80,000 to cover the "penalty"which is required under new state laws regarding creation of tax increment districts. It is necessary for the EDA to provide specific direction on whether Morrell Companies should proceed with a formaltax increment application. Terry Morrell will be available at the November 10 EDA meeting to address questions and provide additional information on this project. 9. Tax Increment Concept Discussion -Earl Hohlen Project Issue The purpose of this agenda item is to hold a concept discussion of providing tax increment dollars to a commercial/industrial project at the corner of Highway 169 and Main Street -the Earl Hohlen property. Background Attached to this memo is a letter from Pelstring Capital Corporation, representing Associated Builders,the developer of the Earl.Hohlen property. Pat Pelstring has been retained by Associated Builders to aid in researching the tax increment issues for this project. His letter explains a variety of issues related to TIF and the overall development of this site. Mr.Pelstring and representatives of Associated Builders will be in attendance at the November 10 EDA meeting to address questions and provide additional information regarding this issue. The purpose of this discussion is to provide direction to staff and Associated Builders on whether to proceed with a formal tax increment application in the near future. They currently, as indicated in their Ak letter, do not have a specific request for tax increment financing or EDA Agenda Memo November 10, 1997 Page 6 40 direct assistance at this time. They indicate that they wish to enter into a conceptual discussion of this project with the EDA to determine the EDA's preferences and interests in the project. It may be difficult at this time for the EDA to provide clear direction to the applicant on whether to proceed with a formal tax increment application. Further information on this project will likely be necessary and should be requested of the applicant at this time. Staff will then continue to meet with Associated Builders to discuss various financial scenarios and project information which can then be brought back before the EDA at a future date. • GLK "incorporated P.O. Box 111 • Elk River, Minnesota 55330 • 612-374-6706 October 22, 1997 Mr.Paul Steinman Director of Economic Development City of Elk River 13065 Orono Parkway Elk River, Mn. 55330 Paul, I,m writing this letter to you to inform you of some developments that have occured since I last sat in front of the finance committee review board for the EDA. First of all, The Bank of Elk River has reconsidered my loan application and decided to increase the loan amount for my project from$200,000 to$265,000. I consider this effort on their part to be a strong affirmation in the confidence of our restaurant endeavor. Secondly,since the Bank of Elk River decided to increase their loan amount to me,this decreases the amount of exposure the EDA has in our project by$15,000. Considering the entire project cost is$350,000, if The Bank of Elk River contributes $265,000 and I contribute my $50,000,this totals $315,000 which in turn brings the amount needed from the EDA from$50,000 down to $35,000.Considering the fact that The Bank of Elk Wver and myself are at the point where we have both contributed the amount that we can fully put into the oject, I now submit to you that we do have an actual gap of$35,000 that is needed to make Pattiniccio's Restaurant a reality in Elk River. Thirdly, I appreciate that First National Bank of Elk River is interested in my loan,but with all do respect, because of time constraints and a number of other factors involved in order to bring this project in at budget,I cannot afford to take the time it would take for me to get an approval from the SBA, which the powers at be said I would have to do in order for them to get involved in my project. The biggest risk in First National Bank's approach for me is that if I do spend the number of weeks involved in dealing with the SBA,not only do I delay the project for one to two more months,but if the SBA denies me their involvment,my loan with First National is all but over.It's also important to mention that the SBA will require more cash input than I can afford. Paul, at this point,I am asking that you bring my issue before the finance review committee once again especially in light of the things that have happened since we last met. My request is that I secure an EDA micro loan in the amount of$35,000 with payments to be amortized over a ten year period with a balloon payment due after four years. In closing, I hope this matter is resolved in a satisfactory fashion for all parties involved and finally we can get this project underway not only for myself,but for the City of Elk River which desperately needs a fine dining restaurant to compliment the way in which our city is growing. Respectfully, egg W. Karnis cc:EDA Finance Committee Review Board 071 !h1 ; , ! i ORRELL �� 0, RANF& R, INC. 809 JACKSON AVENUE•ELK RIVER, MINNESOTA 55330 NOV. 3, 1997 TO:EDA/CITY OF ELK RIVER FROM:MORRELL COMPANIES RE: TIF APPLICATION THE ISSUE THAT MORRELL COMPANIES WOULD LIKE TO BRING BEFORE THE EDA BOARD IS THE CHALLENGE OUR COMPANIES HAVE BEEN PRESENTED WITH IN TRYING TO BUILD A NEW FACILITY. THE SITE THAT WE HAVE SUBMITTED TO THE CITY AND HAVE RECEIVED APPROVAL ON HAS MANY SOIL PROBLEMS. OUR COMPANIES LOYALTY TO ELK RIVER IS BECOMING A DECISION OF ECONOMICS.THE OPTIONS ARE LIMITED FOR SITES THAT WILL WORK FOR A COMPANY OF OUR SIZE. OUR COMPANY EMPLOYS 110 FULL • TIME AND PART TIME EMPLOYEES AND THE TRANSPORTATION BUSINESS REQUIRES A LARGE AREA TO MANEUVER OUR COMPANY HAS GROWN SIGNIFICANTLY IN THE LAST 5 YEARS AND WITH THE EXTENSIVE INTERNAL STRUCTURING AND OWNERSHIP TRANSITION IN THE NEAR FUTURE WE ANTICIPATED EVEN MORE GROWTH. THE REQUEST THAT WE ARE ASKING OF THE EDA BOARD IS THAT THEY WOULD BE ABLE TO CLEARLY GIVE MORRELL COMPANIES INDICATORS THAT THE EDA WOULD BE IN FAVOR OF THIS PROJECT RECEIVING TIF ASSISTANCE. THE NEXT REQUEST THAT WE WOULD LIKE THE EDA TO DISCUSS WITH OR ADVISE US ON IS HOW DOES TIF ASSISTANCE ON THIS PROJECT IMPACT THE PRESENT APPROVED SITE PLAN? THE BASIS FOR THIS REQUEST IS THE SOIL CORRECTIONS. ADDITIONAL SITE IMPROVEMENTS WOULD NULLIFY THE TIF ASSISTANCE THAT IS TO BE USED FOR THE SOIL CORRECTIONS. THE ESTIMATED COST OF EXCAVATING THIS SITE HAS BEEN PROJEC l'ED TO BE IN EXCESS OF 3 TIMES GREATER THAN A SITE THAT POSSIBLY COULD BE USED.I WE FEEL STRONGLY THAT THIS IS A WIN/WIN SOLUTION TO A LONG AWAITED PROBLEM OF RELOCATING AND VACATING PRESENT SITE.WE THANK YOU FOR YOUR TIME AND ATTENTION CONCERNING THIS ISSUE. SINCERELY, 60 • TERRY S.MORRELL 612-441-2011 DIRECT-DAILY-SERVICE 612-441-3395 NOV-04-97 09 :25 AM PELSTRING01 5509221 P. 02 •vn._enoaim 110 PELSTRING CAPITAL CORPORATION 4205 Lancaster Lanc North*Suite 1100*Minneapolis, MN 55441 November 3, 1997 Mr. Paul Steinman Economic Development Authority City of Elk River 720 Dodge Avenue Elk River, MN 55330 Re: Associated Builders of the Twin Cities • Dear Mr. Steinman Our firm has been retained to assist with the potential development of the 108 acre parcel at the intersection of Highway 10 and Highway 169. On behalf of Associated Builders of the Twin Cities, Inc., we would like to request consideration by the Elk River Economic Development Authority to consider establishment of the development site as a Redevelopment Tax Increment Financing District. BACKGROUND Associated Builders gained control of the 68 acre parcel of property with the intention of developing a major commercial center. The site is particularly difficult to develop as the City will need to extend utilities to the site, there are significant wetlands which must be reconfigured and mitigated, there are numerous utility/pipeline easements which inhibit the development, and there is a sizable mobile home park which will require additional acquisition costs. After our initial assessment, we are having great difficulty in establishing the financial viability of the project, given the extraordinary costs associated for the • project's infrastructure and site development. In our recent discussions, it has also become clear that the City would encourage the development of additional industrial and/or office showroom space in the City of I`ik River. For this reason, we are (h12)550-798O*8(X)-642.6258alr(612)55(1-9221 Fax*pclstringfePcanhlink.nct NOV-04-97 09 :26 AM PELSTRING01 5509221 P. 03 • exploring the opportunity to acquire the 40 acres immediately south of the site, which could serve as office/showroom development as a part of the overall development. TAX INCREMENT FINANCING DISTRICT Our analysis of estimated development cost suggests that the project does not provide the potential investment returns to justify the development costs to complete the project. For this reason we would request consideration of the site as a "redevelopment" tax increment financing district. Our analysis suggests that the site would qualify as a renewal and renovation redevelopment tax increment district, with a statutory tens of fifteen years. The statutory requirements are as follows: 1. At least 70% of the parcels, by area, must be "occupied" by buildings, utilities or public improvements. To be classified as "occupied", the improvements must cover at least 15% of the site. Our review suggests that the mobile home park constitutes at least 15% of the main parcel for development. • 2. Additionally, 20% of the buildings must be termed as "substandard" and at least 50% of the buildings must be '`substandard" or require significant renovation. Based upon our review, more than 50% of the mobile homes within the park meet the statutory definition of"substandard" or requiring "substantial renovation". Although our preliminary review suggests that the site may qualify, we recognize that the EDA's legal counsel would be responsible for establishing the statutory • findings to qualify the site as a redevelopment district. We also understand that physical inspections of the buildings may be required to verify these findings. TIF DEVELOPMENT ISSUES We would appreciate the opportunity to review the project with the Elk River Economic Development Authority. We do not have a specific request for T1F funding or direct assistance at this time. Instead, we would appreciate reviewing the project in a conceptual discussion with the EDA to determine their preferences and interest in the project. In advance of the EDA meeting we will prepare additional cost detail and more information on the proposed office/showroom development. • As an introduction to this discussion and to help gain a better understanding r of the key development issues, please consider the tbIlowing: NOV-04-97 09 :26 AM PELSTRING01 5509221 P. 04 1. The appraised value for the "buy out" of the mobile homes far exceeded our preliminary estimates. If the developer pays the costs, as appraised, the our overall project costs increase by over $300,000. 2. The site needs considerable fill to bring the development sites to a proper elevation which justifies the proposed retail/commercial uses. Additionally, we are concerned that there may significant additional costs for soil corrections. 3. The plat indicates a pipeline on the site which may have to be relocated. The costs for relocating the pipeline could easily range from $250-$600,000. 4. Should the EDA be willing to consider TIF assistance, what types of costs would they have a preference to fund? 5. The addition of an office/showroom component to the project adds to the overall cost and is much more speculative than the planned retail/commercial uses. How would the EDA anticipate participating in this aspect of the project? We had • briefly discussed a potential EDA/developer "joint venture". How would you anticipate that we structure this aspect of the project? SUMMARY We have appreciated your cooperation and assistance in these matters. At this stage, however, it is clear to the developers that the project is not viable without City assistance. We appreciate the opportunity to review the project and these development issues with the Economic Development Authority. Sincerely, PELSTRING CAPITAL CORPORATION PtrAtitk C,c� . PJMtn) Patrick W. Pelstring cc: Tony Gleekel, Siegel, Brill, Gruepner, Duffy & Foster 10 Mathias Fischer, Associated Builders of the Twin Cities •rof E1k Ri ver October 13, 1997 Chuck Christian C-K Christian & Kinghorn, Inc. 21000 Rogers Drive Rogers, Minnesota 55374 RE: WEST BUSINESS PARK - ELK RIVER Dear Mr. Christian: At your request I am sending you this letter regarding our conversations about potential development in Elk River's West Business Park. As • indicated, the City of Elk River would give serious consideration to providing an up-front tax increment incentive to your projects on the Gagne property. This is based upon the assumption that these projects are eligible uses under the current tax increment financing laws of the State of Minnesota. Such qualifying uses include manufacturing, warehousing, storage and distribution, and research/development. Since our meeting, I have had discussions with the Economic Development Authority and City Council members regarding this issue. All have supported the concept of providing an up-front incentive in order to move this project forward. We have already began to examine various options to provide the necessary level of up-front funding for this project. These options currently include an internal financing mechanism or selling bonds. I would suggest that the most appropriate method to proceed with this issue is for you to confirm interest from your business prospects, and then proceed with a tax increment financing application. This application process generally takes approximately 90 days, so it is best that it be started as soon as possible if you are looking at a spring construction start date. I have attached a tax increment application for your review. • This letter is not to be considered a commitment to financing in the manner discussed above, but rather is intended to show that the City will give serious 13065 Orono Parkway • P.O. Box 490 • Elk River, MN 55330•TDD &Phone: (612) 441-7420 • Fax: (612) 441-7425 • consideration to providing an up-front tax increment incentive for this project. We will be able to affirm the type and level of financial assistance within a month or so of submittal of the tax increment application. If you have any questions or issues you would like to further discuss, please feel free to contact me directly at 441-4905. Also, if I may be of help addressing questions from your business prospects, please feel free to provide them my number. I look forward to working with you on this project. Sincere Paul T. Steinman Director of Economic Development PTS:jkp cc: Pat Klaers, City Administrator Lori Johnson, Finance Director Economic Development Authority • \\elkriver\sys\shrdoc\eda\letters\christn.doc