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4.1. EDSR ATTACHMENT 03-28-2017 haw Fejot " 2,01-ZIN-7 ` fir City of Tax Increment Financing Policy & Application HOUSING Amended: April 2015 Amended: February 2014 Amended: Mav 2006 1 Amended: March 2000 Adopted: August 1991 Cin7 of Elk River Economic Beielopment Division 13065 Orono Park-way Elk River,NIN 55330 763.635.1040 Table of Contents I. Policy Purpose 3 II. Objectives of Tax Increment Financing 3 III. Policies for the Use of TIF 4 IV. Project Qualifications 5 V. Subsidy Agreement & Reporting Requirements 6 VI. Application Process for TIF 6 VII. Meeting Schedule 7 VIII. Sample But-For Analysis 9 IX. Application Review Worksheet: Housing Projects 8 Application I I City of Elk River Tax Increment Financing Policy&application-Blousing T Amended April 8 2fl15 JNATU�E Page 2 of 14 1. POLICY PURPOSE For the purposes of this document, the term "City"shall inclsade the Elk Ricer City Council, Economic DevelopmentAuthot7ty, and Housing and Redevelopment Authority. The purpose of this policy is to establish the City of Elk River's position relating to the use of Tax Increment Financing(TIF) for Housing private development above and beyond the requirements and limitations set forth by State Law. This policy shall be used as a guide in the processing and review of applications requesting tax increment assistance. The fundamental purpose of tax increment financing in Elk River is to encourage desirable development or redevelopment that would not otherwise occur but for the assistance provided through TIF. The City of Elk River is granted the power to utilize TIF by the Minnesota Tax Increment Financing Act,as amended. It is the intent of the City to provide the minimum amount of TIF, as well as other incentives, at the shortest term required for the project to proceed. The City reserves the right to approve or reject projects on a case by case basis, taking into consideration established policies,project criteria, and demand on city services in relation to the potential benefits from the project. Meeting policy criteria does not guarantee the award of TIF to the project.Approval or denial of one project is not intended to set precedent for approval or denial of another project. II. OBJECTIVES OF TAX INCREMENT FINANCING As a matter of adopted policy, the City will consider using TIF for Housing to assist private development projects to achieve one or more of the following objectives: • To encourage additional unsubsidized private development in the area, either directly or indirectly through "spin off' development. • To facilitate the development process and to achieve development on sites which would not be developed without TIF assistance. • To remove blight and/or encourage redevelopment of residential areas in the city that result in high quality redevelopment and private reinvestment. • To offset increased costs of redevelopment (i.e. contaminated site clean up) over and above the costs normally incurred in development. • To create opportunities for affordable housing. • To contribute to the implementation of other public policies,as adopted by the city from time to time, such as the promotion of quality urban or architectural design, energy conservation,and decreasing capital and/or operating costs of local government. • To enhance and diversify the City of Elk River's housing stock. City of Elly River Tax Increment Financing Policy&Application-Housing P 8 W I N E Q 8 Y Amended April 8 2015 ���� � Page 3 of 14 M. POLICIES FOR THE USE OF HOUSING TIF a. When possible,TIF shall be used to finance public improvements associated with the project. The priority for the use of TIF funds is: 1. public improvements,legal, administrative,and engineering costs. 2. Site preparation, site improvement,land purchase,and demolition. 3. Capitalized interest, bonding costs. b. TIF assistance will be provided to the developer upon receipt of the. increment by the City, otherwise referred to as the pray-as:yaugo method. c. A maximum of ten percent(10%) of any tax increment received from the district may be retained by the City to reimburse administrative costs. d. Any developer receiving TIF assistance shall provide a minimum of ten percent (10%) owner cash equity investment in the project. e. TIF will not be used in circumstances where land and/or property price is in excess of fair market value. f. Developer shall be able to demonstrate a market demand for a proposed project. TIF shall not be used to support purely speculative projects. g. TIF will not be utilized in cases where it would create an unfair and significant competitive financial advantage over other projects in the area. h. TIF shall not be used for projects that would place extraordinary demands on city services or for projects that would generate significant environmental impacts. i. The developer must provide adequate financial guarantees to ensure completion of the project,including, but not limited to: minimum assessment agreements,letters of credit, personal guaranties, etc, j. The developer shall adequately demonstrate, to the City's sole satisfaction, an ability to complete the proposed project based on past development experience,general reputation, and credit history, among other factors, including the size and scope of the proposed project. k. For the purposes of underwriting the proposal, the developer shall provide any requested market, financial,environmental, or other data requested by the City or its consultants. 1, All TIF proposals shall optimize the private development potential of a site. City of Elk River Tax Increment Financing Policy&Application-Housing t # r Amended April 8 2015 Page 4 of 14 INIM URE IV. PROJECT QUALIFICATIONS Housing TIF projects considered by the City of Elk River must meet each of the following requirements: a. To eligible for TIF, a project shall result in: i. A minimum increase of$37,500 per year in property taxes, excluding � the state portion;and ✓u• Have a market value of at least$1,250,000 upon completion. b. The project shall meet at least one of the objectives set forth in Section II and satisfy all the provisions set forth in Section III of this document. c. The developer shall demonstrate that the project is not financially feasible but for the use of TIF. d. The project shall comply with all provisions set forth in the Tax Increment Financing Act,Minnesota Statutes 469.124 to 469.134,inclusive, as amended, and Statutes 469.174 to 469.1794,inclusive,as amended. e. The project must be consistent with the City's Comprehensive Plan,Land Use Plan,and Zoning Ordinances. f: The project shall serve at least two of the following public purposes: • Enhancement or diversification of the city's housing stock. • Development that will spur additional private investment in the area. • Fulfillment of defined city objectives such as those identified in the City's Comprehensive Plan and the City's Housing and Redevelopment Strategic Plan, among others. • Removal of blight or the rehabilitation of a high profile or priority site. V. SUBSIDY AGREEMENT & REPORTING REQ►UIRMENTS All developers/businesses receiving Tax Increment assistance from the City of Elk River may be subject to the provisions and requirements set forth by the City's Business Subsidy Policy as amended and Minnesota Statutes Sections 116J.993 to 116J.995 (the "Minnesota Business Subsidy Law"). Vi. APPLICATION PROCESS FOR TIF 1. Applicant submits the completed application along with a $10,000 application deposit, to be refunded for any portions not utilized if the tax increment project does not proceed. The application deposit will be used toward the cost of services provided in the evaluation of financial feasibility,establishment or modification of the TIF district, and preparation of legal documents and agreements. An additional deposit of$10,000 will be required for projects that require meeting statutory eminent domain and/or redevelopment substandard tests. Projects that demand professional services in excess of the initial deposit shall be required to reimburse the City for the additional expenses. City of Elk River Tax increment Financing Policy&Application-Housing p 0 !t f 8 E D 8 1 Amended April S 2015 11WATURE1 Page 5of14 2. City staff reviews the application and completes the Housing Worksheets. The Housing Worksheets are primarily designed to score the desirability of the proposed project. Housing projects will be evaluated on a case-by-case basis and as the projects meet the city's desired objectives. 3. Results of the Housing Worksheets are submitted to the appropriate governing authorities (EDA or HRA) for recommendation to the City Council of approval or denial of the request. 4. If preliminary approval is granted,the Tax Increment Financing Plan,along with all necessary notices,resolutions are prepared by City staff and/or consultants. 5. Notices are published and sent to the county and school board. 6. Public hearing(s) on the proposed request are held. 7. The City Council grants final approval or denial of the request. City ofElk River Tax Increment Financing Policy&Application-Housing P @ w E 8 E U 6 1 Amended April 8 2015 "AfURE Page 6of14 (I' I VI1. MEETING SCHEDULE 2015 Housing and Redevelopment Authority & City Council Meeting Schedule For Review of Applications related to Housing assistance APPLICATION EDA Finance HRA CITY DEADLINE Committee (1St Monday) COUNCIL (1.111 Monday) _ 4th Tuesda Wt Monday) Jan 26 Feta 24 Aril 6 Ari(6 Feb 23 Mar 24 May 4 May 4 Mar 30 Aril 28 Jean 1 Jun 1 Apr 27 May 26 July 6 July 6 May 26 Jun 23 Aug3 Aug3 Jun 29 Jui 28 Sep 8 Sep 8 Jul 27 Aug25 Oct 5 Oct 5 Aug31 Se 29 Nov 2 Nov 2 Sep 28 Oct 27 Dec 7 Dec 7 Oct 26 Nov 24 Jan 4 2016 Jan 4 2016) Nov 30 Dec 22 Feb 1 2016 Feb 1 2016 Dec 28 Jan 26 (2016) Mar 7 2D16 Mar 7 (2016) ALL REQUIRED APPLICATION MATERIALS MUST BE SUBMITTED BY THE DEADLINE OR YOUR APPLICATION WILL BE POSTPONED TO THE NEXT MONTH City of Elk R2 ver Tax Increment Financing Policy&Application-Rousing w F E 9 Y Amended April$2015 [NATURE Page 7of14 VIII. SAMPLE BUT-FOR ANALYSIS WITH NO WITH TAX ABATEMENT TAX ABATEMENT SOURCES AND USES SOURCES AND USES SOURCES SOURCES Mortgage 9,600,000 8,667,000 Equity 2,400,000 2,400,00 Tax Abatement 0 933,000 TOTAL SOURCES 12,000,000 12,000,000 USES USES Land 1,500,000 1,500,000 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 542,000 542,000 Developer Fee 540,000 540,000 Contingency 250,000 250,000 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 7.74%1 12.00% City of Elk River Tax Increment Financing Policy&Application-Housing 0 w f A t U 9 y Amended April 8 2015 ek-INATURE1 Page 8 of 14 2015 Financial Incentive Elk - Application River ^ Housing Tax Increment Financing 1 . PROJECT INFORMATION Property Information (pleaseprint) Address: XXX Jackson Ave Parcel Number: 75- 134- 2303 �� The project will be: X Housing Other LIC) Vv1`[ G The project will be; Owner Occupied ,„_Leased Space If Leased Space 50Percent Occupied 6 months after Certificate of Occupancy Total Amount of Tax Increment Requested: $ 500,00001'r 1 Syears. City Portion: Annual$ 11k Total$ 165k County Portion: Annual$ 11k Total$ 165k ISD 728 Portion: Annual$ 11k Total$ 165k Current Real Estate Taxes on Project Site: $ 2748.00 ` Estimated Real Estate Taxes upon Completion: Phase I$-4F-0-0— Phase II$ I 4 �� Construction Start Date 7_17 Construction Completion Date 5-1$ Percent of project complete on December 31,current year. 20% II. CONTACT INFORMATION Public Information Notice Generally,correspondence to and from Staff is considered public information. Specific data related to a financial assistance request is deemed not public: Financial Information,Financial Statements, Net worth Calculations,Business Plans,Income and Expense projections,Balance Sheets,Customer Lists,Income Tax returns. When public financial assistance is received,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 with public funds. The city does allow an applicant to submit sensitive financial information directly to the City's financial consultant, for additional security. Property Owner Information (please print)Name: PLB Rev Trust E- mail address: Address: 19021 Freeport Street guute WO-P City of Elk River Tax Increment f=inancing Policy&.'application-Housing P Q W E R I R 8 T Amended April 8 2015 INATURE Page 9of14 strect City Elk River star, MNpCod, 55330 Phone : 612-919-1561 Legal Name of Business: J addr,4 1Ai 415 9-e5,4^,l 1 t A �C_n ��, L LC— Check One: Proprietor Corporation x Partnership Federal ID # State ID # Agent Information (print) Same as Property Owner f—] Different,as below r_j (Check one) x Name: Patrick Briggs E-mail address: pat@thebriggscompanies.com Address: 19021 Freeport Street Suite 500 Elk River mN 55330 Street City State Zip Cade Phone (w): 763-633-1080 III. SIGNATURE i certify thatc Q—js defined as a Small Business,For-Profit and is not a religious, usiness name) Political,Casino,Sports Facility,or Pornographic Enterprise. I further certify that all information provided in this application is true and correct to the best of my knowledge. I authorize the city of Elk River and the Finance Committee to check credit references and verify Financial and other information. I further agree,if approved, to the loan security and guarantees required by the Subsidy policy. I agree to provide any additional information as may be requested by the city. Agreement to Pay Costs of Review It is the policy of the City of Elk River to require applicants to pay costs incurred by the City in reviewing and acting upon applications,so that these costs are not borne by the taxpayers of the City. These costs include all of the City's out-of-pocket costs for expenses, including the City's costs for review of the application by the City's Financial Consultant and City Attorney, or other consultants, recording fees,and necessary publication costs. The application processing fees cover anticipated costs;costs incurred above the application fee will be invoiced as they 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 this agreement,the City may suspend the application review process and may deny the application for failure to comply with the requirements for processing the application. Payment for costs will be required whether the application is granted or denied. The undersigned has received the City's policy regarding the payment of costs of review,understands that reimbursement to the City of costs incurred in reviewing the application will be required,agrees to reimburse the City as required 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. Note:All Major shareholders will be required to sign personal guarantees and a minimum assessment agreement if up front financing of the project is required. APPLICANT SIGNATURE: TITLE: Managing Member DATE: 1-9-17 City of Elk River Tax increment Financing Policy 8c application-Housing P E E ll 6 Y Amended April 8 2015 1`4A URE Page 10 of 14 IV. 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]ob Creation/Retention(Complete table in Section V). New industrial development which will result in additional private investment in the area. XEnhancement and/or diversification of the City of Elk River's economic base. XThe project contributes to the fulfillment of the City's Economic Development Strategic Plan. Removal of blight. xRehabilitation of a high profile or priority site. —X-Significantly increase the City's tax base. V. SOURCES & USES SOURCES NAME AMOUNT" Bank Loan Lakewood Mortgage $ 4,800,000 Other Private Funds Briggs Properties, Inc $ 300,000 Owner Cash Equity PLB Rev Trust $ 400,000 Fed Grant/Loan $ State Grant/Loan $ EDA Micro Loan $ Tax Abatement $ 500,000 ID Bonds $ TOTAL $ 6,000,000 USES AMOUN Land Acquisition $ 400,000 Site Development $ 300,000 Construction $ 4,855,00 Machinery &Equipment $ Architectural&Engineering Fees $ 75,000 Legal Fees $ 10,000 Interest During Construction $ 130,000 Debt Service Reserve $ Contingencies $ 230,000 TOTAL $ 6,000,000 VI. ADDITIONAL DOCUMENTATION AND CHECKLIST Please provide one paper and one electronic copy of following: (Incomplete applications will delay thq review of an application) !/--A) Application deposit of$10,000,with any unused portion to be refunded if project does not proceed. B) Written Narrative: Please give a brief summary of your business,its products or service,the project and how this subsidy will impact your project. The narrative should include a statement demonstrating how the project meets the public purpose in IV(above). City of Elk River Tax Increment Financing Policy&Application-Mousing P E t fl T Amended April 8 20115 "� Page 11 of 14INA 1i URE C) Business Plan. The business plan should include the following: I. Description of Business 2, Ownership I Management 4. Date Established 5. Products/Services 6. Future Plans 7. Market for Business D) Project Proforma' 1. Sources and uses of funds to finance the project,and ? Operating cash flow assumptions that include: a. Projected revenues, b. Operating expenses, c. Net operating income,and d. Annual debt service and loan payments. E) Financial Statements for previous Two Years and the Current year to date ' Profit&Loss Statement Balance Sheet V/ F) Financial Projections for Term of abatement,up to 10 Years G)Personal Financial Statements of all Major Shareholders,Partners, Guarantors ✓ H) Letter of Commitment from Applicant Pledging to Complete During the Proposed Project Duration ✓ I) Letter of Commitment from the Other Sources of Financing, Stating Terms and Conditions of their Participation in Project Completion J) Written statement of contact information (Name,Company,Address,Email, Phone,Fax) for project team,including: Attorney,Accountant,Financing Sources (lenders,partners,etc...),Parent Company,Architect 'Sensitive financial documents,while not-public information,may be submitted directly to the City's financial consultant by signing the attached confidentiality agreement, for additional confidentiality. The attached Cgnfidentiality Agreement array be signed and included with the application. V/ K) Construction Plans and Itemized Project Construction Statement L) Attach the following documentation as Exhibits Exhibit A—Corporation/Partnership Description Exhibit B—List of Shareholders/Partners Exhibit C—Bxt-For Analysis Exhibit D—List of Prospective Lessees (if applicable) —�Exhibit E—Legal Description M) Site and Construction Plans City of Elk River Tax Increment Financing Policy&Application-Housing V ' w Amended April 8 2015 TU E Page 12 of 14 CONFIDENTIALITY AGREEMENT This agreement is made this Z7 day of Flu �wv� ,20 j by and between r;`y�5 �A,,,A;,r, , a C4� cy rrc� I,�, hereinafter"Developer,"and Springsted ldcorporated, a Minnesota corporation,hereinafter"SDringsted." WHEREAS, Developer is �Yti L41;,)-�t r� r.t!l,' ,hereinafter the"Project," pursuant to a (form of agreement)with 0— ITI (public entity),hereinafter the"City,"dated and WHEREAS, Springsted has been hired by the City to investigate certain financial aspects of the Developer and the Project; and WHEREAS, in conjunction with such investigation, Springsted desires to examine the financial information of Developer relative to Developer and the Project;and WHEREAS,Developer is willing to disclose such information only on the condition that such information be kept confidential. NOW, THEREFORE, in consideration of the terms and mutual covenants contained herein,the parties agree as follows I. Developer agrees to make its financial information,development pro forma and projection,budget information,and such other financial information concerning the Project as Springsted may reasonably request,hereinafter the"Information,"available for inspection by Springsted, but solely for the purpose set forth above. 2. Springsted shall accept the Information in strict confidence solely for that purpose and shall make no other use of the information, or disclose it to any Other person or party, including the City, without the express written consent of Developer. Notwithstanding the foregoing, Springsted may use the Information in summary form only to report its findings to the City provided that Springsted first presents its proposed report to Developer and obtains Developer's written consent to ensure that no inadvertent disclosures of confidential information or other inaccurate information are contained in such report. 3. Inspection of the Information shall take place in such manner and at such place and time as the parties may agree. The Information shall not be copied, duplicated, abstracted, summarized or recorded, directly or indirectly, by any means whatsoever, without the prior consent of Developer. 4. The Information shall remain the property of Developer, and any Information provided in tangible form shall be returned to Developer upon completion of such inspection. Any copies, duplications, abstracts, summaries or other recordings of the Information made with Developer's consent shall be returned to Developer upon demand. 5. Springsted agrees that any breach of the obligation of confidentiality imposed hereby shall constitute irreparable harm to Developer and shall entitle Developer to equitable relief enjoining any further breaches of this Agreement,together and in conjunction with any and all such other remedies as may be available to Developer at law or in equity. IN WITNESS WHEREOF,the parties have hereunto set their hands the day and year first above written. DEVELOPER Its S INGSTED INC. By Its City of Elk River Tax Increment Financing Policy&Application-Housing F 0 W E R f 0 0 Y Amended April 8 20154ATURE Page 13 of 14 A Thursday,January 26,2017 To Whom It may concern Elk River,MN 55330 Dear City, Briggs Properties,Inc is Pledging to work in good faith to complete this project under said timeline in Tiff application attached: The applicant also pledges in good faith to commit to the terms below upon a successful Tiff Application of a 40 unit Market Rate Apartment Building. FACILITY ONE: Amount: $4,800,000.00 Purpose: Term loan on Multifamily New Construction Mini Perm Term: 3 year term,25 year amortization Collateral: 1"Real Estate Mortgage on the following properties: 1)xxx 6``1 Street NW River,MN 55330 Pricing: TBD Guarantees: Business guaranty of Briggs Properties, Inc. Closings Costs: TBD THE TERMS AND CONDITIONS OF THE TRANSACTION ARE SUBJECT TO, BUT NOT LIMITED TO THOSE OUTLINED IN THIS LETTER. THOSE MATTERS THAT ARE NOT COVERED BY OR MADE CLEAR IN THIS OUTLINE ARE SUBJECT TO MUTUAL AGREEMENT. THIS TRANSACTION HAS BEEN APPROVED BY THE BOARD OF DIRECTORS. I hope that you will find that the terms and timeline outlined herein will meet with your approval. Please call me at 763-633-1080 to discuss the proposal. Thank you for allowing us the opportunity to present this proposal. 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I :S� �` �W z iS a� z I _ orc f OoLn viij I m'o (Y h 0 •r ~CNS •Z I IN II I V) ¢tai. I W a-o, (If 0 ¢ �¢ J I v# o I r a {. I Is I - I E II I 7 I E I I w I m� Hz V r lot I .I z II SO = C 3 d cn r L f6 7 O 1� C cd 7 s6 C11 7 O m o O o a C a > v N N 'o v d td U7 .LV-. n c 3 N a a m a o c 2 C13C7 s c c o a %r�T�,IFFFFFF���IIIIII m m �u �n U E 2 o rn F= 6 o w o E E 6 u 3a w m C m o 0 0 0 o o cn m o c c� cn ¢ U) LL 0o �n • inui0 o tnu� �� CLcu p " - s a zv p is w _ � r � Oq a bL9 i Ft C 1 7i )49. - - _ r rd =w �,K yTz j jai � ° ~i.,� '�`-•�1;.. r, t9 0 4 �� LL L9 N m 3 c v 0 0 � D MN Statute 469.174 Subd. 10. Definition of a Housing district. "Housing district" means a type of tax increment financing district which consists of a project,or a portion of a project, intended for occupancy, in part, by persons or families of low and moderate income, as defined in chapter 462A, Title II of the National Housing Act of 1934, the National Housing Act of 1959, the United States Housing Act of 1937, as amended, Title V of the Housing Act of 1949, as amended, any other similar present or future federal, state, or municipal legislation, or the regulations promulgated under any of those acts, and that satisfies the requirements of section 469.1761. Housing project means a project, or a portion of a project, that meets all of the qualifications of a housing district under this subdivision, whether or not actually established as a housing district. Housing districts are subject to various income limitations and requirements for residential property. For owner occupied residential property, at least 95% of the housing units assisted with of must be initially purchased and occupied by individuals whose family income is less than or equal to the applicable income requirements. The income limits for owner-occupied units are 100%to 115%as adjusted for family size. For residential rental property, the property must satisfy the income requirements for a qualified residential rental project and follow the low-income tax credit guidelines. The income requirements include that at least 20% of the units must be restricted for persons or families at 50%of area median income or 40%of the units restricted at 60%®of area median income. Tax increment is generally used for financing of extraordinary and qualifying improvements deemed necessary for a new development to occur. land acquisition, demolition, site improvements, public improvements and infrastructure, utilities and related soft costs are generally eligible project costs. Actual construction costs related to a housing project can also typically be financed by tax increment revenues. The term of a Housing District is 25 years after receipt of first increment. MN Statute 469.176 Subd. 4d. Spending Limitations for a Housing District Revenue derived from tax increment from a housing district must be used solely to finance the cost of housing projects as defined in sections 469.174, subdivision 11, and 469.1761. The cost of public improvements directly related to the housing projects and the allocated administrative expenses of the authority may be included in the cost of a housing project. c O 4 cO V 0 m [O a N N v 1CUt- M O C1 m l cD r M LD cn Ch Q 00 t/] co M t— In f� C kQ N N m c N r— -e — L[) O m m QI ocN 00 O o0 <`? cD t— +r a) M cD O co a y a-- N cw] cL r O Q Ln m (j ti G C O O M N O N CD -.t O� a[7 m "cc M c: LoW r c`3 m ko N Do L1 M 117 cD O N y c ca CD CV ti E in t-- Lx) of 00 O m 0 fD N Lo V C m O [L1 G co 0o ti L g O f1 N V mrnma)m � E r ni ct Z a N v In CM �, a m co m c o o c v Z8 45 cu v Lo cD lq T 0 ]. w " Yo3 N 'D E to Co cn m o u3 tL O n cD 47 CMV cD O O tOD cri N I NN V ww coi o a N 'r N N Q r m d C O c C> OG C) O V O � OC)0� tc E2 r-.: m V c0 cD N o C N V 1n m m V d to G O c C O M E m m cD a) cD 0 /n — w NLo l3 N m O O l j OMi N Q N m Q f� co _9 W r N M (n d M N cO O � O cD O n Nm A M N cD m W o p r go d N MU:- ti N w 0 0 0 0 co E N M LO cD 00 0 = N O � 'o O c OO d iD O LL7 O el N cD c+3 O 00 O C a0 pf CO ao U1 CN7 [�7 (.O N N r o d2 UC m U� c O O C 1.2t m �+ C O r — c0 0 0 0 0 0 0 c y � cn LOC] n Q UO � M cO0 cm0 U d r r r � r 0I ^ q1 ^ Eosp C E LD V cRf N Lo C m C C N N131 eq CL _ -; w r �1� 7 .� m 7 CC '� E co ca_O .pC c6 cid a1 N Gl kl� W N 41 a4) N 3 0 O 0 0 0 N c> d 0 CS r O 0 o O o ycam] u7 lD r M c17 eD r � w E 0 W J C E J D E L Springsted Incorporated 380 Jackson Street, Suite 300 - - Saint Paul,MN 55101-2887 Springsted Tel: 651-223-3000 Fax: 651-223-3002 www.springsted.com MEMORANDUM TO: Amanda Othoudt, City of Elk River FROM: Mikaela Huot,Vice President/Consultant DATE: March 24, 2017 SUBJECT: Financial Feasibility/But for Analysis for Jackson Hill Residential Suites Housing Project The City of Elk River received an application for financial assistance through Tax Increment Financing (TIF)to assist with financing a portion of the development costs related to the construction of a 40-unit residential rental multi-family affordable housing project located in the City of Elk River. The developer, Jackson Hills Residential Suites, LLC, has requested tax increment assistance to finance a portion of the costs associated with development of the project and providing a portion of the units as affordable. The purpose of this memorandum is to provide a summary of Springsted's review of the development project costs and operating pro forma as provided by the developer in order to assist the City with making a determination if the project as proposed would be unlikely to proceed "but-for' the requested Tax Increment Financing (TIF) assistance, and also to determine the appropriate amount, if any, of public assistance. Background The developer submitted a request for TIF assistance with the purpose of using tax increment to finance costs associated with construction of the project. The developer has proposed construction of an approximate 40 unit multi-family housing project in which a portion of the units would be affordable. The Sherburne County Assessor has provided a new assessed value of the building to be approximately$3,310,000 upon completion which equates to a value per unit of $82,800 (land and building). The actual value may be subject to further review and final building details. Developer Request for Assistance Assistance has been requested for financing a portion of the costs associated with construction of the project. The developer has proposed the $6 million project will be funded by an estimated $700,000 of equity and $4.8 million of private financing with a financial gap of $500,000 as requested to be financed through TIF funds. The developer's Public Sector Advisors City of Elk River, Minnesota But For Analysis of Jackson Hills Residential Suites TIF Project March 24,2017 Page 2 submitted information provides that the request for assistance would be pay-as-you-financing as reimbursement for extraordinary development costs. Following review of the developer's application and in accordance with existing City policy regarding TIF Housing Districts, it has been determined the developer may be eligible to receive up to 65% of the requested amount of assistance. This equates to a revised amount of assistance of up to$325,000. The developer has indicated the receipt of City financial assistance is necessary for the project to proceed to finance a portion of the project costs. The developer's initial request for assistance ($500,000) is equal to approximately 8.3% of total project costs. The estimated revised amount based on City policy is equal to $325,000 and is approximately 5.4% of total project costs. See complete sources and uses below from the developer's supporting financial materials submitted to Springsted. These figures are slightly different from the original application with some adjustments made to the debt and equity amounts, as well as the revised TIF amount. Sources Amount Uses Amount Equity $1,018,197 Land Acquisition 400,000 Debt $4,656,803 Site Work 300,000 TIF $325,000 Construction 4,855,000 Architectural &Engineering 75,000 Legal Fees 10,000 Interest during Construction 130,000 Contingencies 230,000 Total $6,000,000 Total $6,000,000 Tax Increment Assumptions In order to estimate the amount of TIF revenues generated by the proposed project, certain assumptions were made based on the value of the project, construction schedule, and anticipated financing terms. • Total project area(2 parcel) 0 75-134-2303 (EMV of$61,100) 0 75-134-2305 (EMV of$233,700) o Base value of TIF District o Estimated original net tax capacity of$3,685 ■ Classified as residential rental class rate • Estimated total market value upon completion 0 40 units at$82,800/unit o Total estimated completed value: $3,310,000 o Based on Assessor review • Maximum term of housing district(26 total years) • Increment based on difference between existing land value and new land/building value • Construction commences in 2017 and is completed in 2018 City of Elk River, Minnesota But For Analysis of Jackson Hills Residential Suites TIF Project March 24,2017 Page 3 0 20%assessed in January of 2018 for taxes payable in 2019 0 100%assessed in January of 2019 for taxes payable in 2020 • Payable 2017 tax rates remain o City: 46.193% o County: 50.458% o School: 36.659% o Other: 4.509% o Total 137.819% • Class rates remain constant through term o Residential rental rate of 1.25% o Classification of existing property as rental • 0% annual market value inflator assumed • Present Value assumptions 0 4.5% discount rate ■ (current private financing rate) 0 2/1/18 present value date • Developer PayGO 0 90% pledged to developer 0 10% retained by City o Approximately 10.5 years 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 below. Actual revenues generated by the project will be based on realized assumptions. TIF District Scenario Total Gross Tax Increment(26 years) $1,351,985 City Retainage(10%) $135,206 Net Amount Available for Developer(90%) $1,216,779 Developer Requested Terms Estimated Principal Amount $325,000 Estimated Interest(at 4.5%)Amount $109,483 Estimated Total Payments over approximately 10.5 years $434,483 Estimated Surplus (use to be determined) $782,296 City of Elk River, Minnesota But For Analysis of Jackson Hills Residential Suites TIF Project March 24,2017 Page 4 It is important to note that the maximum term of a housing district is 25 years after receipt of first increment. The current assumptions would include providing 90% of the revenues to the developer with the City retaining 10%. Based on the developer qualifying for up to 65%of the requested amount,there are different ways that the deal could be structured should the City be interested in retaining a greater portion of the increment to finance other eligible affordable housing costs. The City could retain a greater percentage than 10% each year. This would result in the City retaining more increment on an annual basis but would also result in the term of assistance to the developer extending beyond the estimated 10.5 year term. Project Qualifications Housing districts are a type of tax increment financing district that consist of a project intended for occupancy, in part, by persons or families of low and moderate income. Low and moderate income is defined in federal, state, and municipal legislation. A project does not qualify if more than 20% of the square footage of buildings that receive assistance from tax increments consist of commercial, retail or other nonresidential use. In addition, housing districts are subject to various income limitations and requirements for residential property. For owner occupied residential property, 95%of the housing units must be initially purchased and occupied by individuals whose family income is less than or equal to the income requirements for qualified mortgage bond projects under section 143(f) of the Internal Revenue Code. For residential rental property, the property must satisfy the income requirements for a qualified residential rental project as defined in section 142(4)of the Internal Revenue Code which states the following: • at least 20%of the units will be occupied by persons or families with incomes no greater than 50% of county median income or • at least 40% of the units will be occupied by persons or families with incomes no greater than 60%of county median income. Tax increments derived from a housing district must be used solely to finance the cost of housing projects as defined in section 469.174, subd. II and 469.176 of the TIF Act. 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. The City anticipates using tax increment revenues to finance a portion of the extraordinary costs associated with providing the affordable housing units. Developer Pro forma 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 financial information showing that the operating cash flow requires financial assistance from the City to reduce the amount of debt and equity necessary to finance total project costs, as provided through the annual tax increment revenues from the project, and provide a reasonable return on investment. The developer has stated the assistance is necessary due to the high costs of developing the City of Elk River, Minnesota But For Analysis of Jackson Hills Residential Suites TIF Project March 24,2017 Page 5 site and inability of the project to 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 Sherburne County Assessor. Based on the developer's stated position relative to the 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 and type 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 will focus on financing of the 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 the development of affordable housing in the community. Following thorough evaluation of the project as provided allows the City to 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 reviewed the developer's provided operating proforma and also constructed similar ten-year project proformas, showing a result if the developer received the assistance as pay-as-you-go (reimbursement for TIF eligible costs)and showing a result if the developer did not receive assistance. Our analysis of the proformas 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 any secondary notes. To understand potential returns realized by the developer, with and without assistance, we utilized the project cost and operating information provided by the developer to generate the ten-year operating proformas and calculate estimated performance of the project. The purpose of evaluating the operating proformas is to understand the potential returns 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. 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. There are no set rate of return benchmarks that dictates whether a project needs TIF assistance or not; however there are market/industry standards for certain types of projects,as well as more specific investor/developer thresholds that need to be achieved. 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 City of Elk River, Minnesota But For Analysis of Jackson Hills Residential Suites TIF Project March 24,2017 Page 6 seek additional revenue sources in order to pay its debt. Typical lending standards will require a DCR of significantly greater than 1.0 as a measure of cushion in the event actual revenues and expenses are different than projected. Based on the provided information, financial assistance from the City will be necessary to provide sufficient annual cash flow to meet those minimum coverage requirements. Without assistance, the annual coverage is projected to be just at 1x upon project stabilization. Our review of the various operating proformas based on with assistance as paygo and, alternatively, with no assistance, provides a range of projected returns to the developer and are illustrated in the table below. It is important to note that certain assumptions were made based on the developer's provided information including the debt and equity amounts, lease rates for the apartments, vacancy rates and annual revenue and operating expense inflators in order to analyze the projected returns to the developer and overall project performance. Changes to those assumptions may have a significant impact on the actual performance of the project. The table below represents the projected returns to the developer and debt service ratios utilizing the developer's provided financial information including sources and uses of funds and operating proforma. Projected Performance Metrics With Assistance Without Assistance Internal Rate of Return 12.52% 4.84% Debt Service Coverage 1.16x 1.01xx Based on the information provided and the calculated returns and coverage, we assume without assistance the project would be infeasible due to the low debt service coverage. With assistance it is projected to provide a reasonable internal rate of return which may indicate that a reduction in assistance due to the application review is possible to stay within reasonable ranges. *calculated using stabilized net operating income and net project costs financed by the developer Prosect Financinq 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. 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 City of Elk River, Minnesota But For Analysis of Jackson Hills Residential Suites TIF Project March 24,2017 Page 7 payments and would have to use other sources to fill any shortfall of tax increment revenues. With internal financing, the City reimburses the loan with future revenue collections and may risk not repaying itself in full if tax increment revenues are not sufficient. The developer's financial information includes pay-as-you-go financing. Conclusion The developer has requested financial assistance of approximately$500,000 as related to construction of the 40-unit multi-family affordable housing project. Assistance has been requested as pay-as-you-go financing (supported solely by tax increments generated from this project). City policy guidelines have indicated the maximum amount the developer could be eligible for is 65%of the total request to equal a revised amount of$325,000. Through the submission of the tax increment financing application and supporting financial information, the developer has indicated that the project as proposed would not occur on the current site without financial assistance from the City due to the below-market returns and low debt coverage metrics projected to be generated by the project. Based on the current assumptions, without assistance the project as proposed would not be considered feasible. With assistance the project is expected to generate returns that the developer has indicated are sufficient to allow the project to proceed. An overall reduction in project costs and/or increase in revenues may assist with achieving greater market feasibility in the future. The City may also choose to perform a post-development cost audit to determine actual costs as opposed to projected (and thus driving the need for public assistance)to determine if the recommended amount of assistance is appropriate. Based on the projected performance of the project with assistance, it appears the City will have an opportunity to reduce the amount of assistance while still meeting the developer's needs. Without assistance, the debt coverage ratio is 1x and below typical lender standards. Providing annual cash flow assistance will allow the project to achieve market debt coverage ratios, thus allowing the project to proceed. It is important to note the project as proposed is providing affordable housing units within the City. By establishing a Housing TIF District, the developer is agreeing to maintain a portion of the units as affordable (meeting the income requirements as outlined previously) over the life of district. Without tax increment assistance the developer is not required to maintain any affordable units. Due to the projected infeasibility of the project based on current assumptions, absent additional revenue source(s)to meet minimum coverage thresholds, we assume the developer would increase the rents without assistance, reduce the scope of the project to reduce costs or not proceed with the project,or some combination. Based on the provided financing assumptions, there is a financing gap resulting from providing a portion of the units as affordable and some sort of financial assistance would be necessary to support a portion of the extraordinary project costs and meet minimum return thresholds that would allow the project as proposed to proceed. To support this conclusion and as illustrated in the analysis outlined above, the projected debt coverage ratios and rates of City of Elk River, Minnesota But For Analysis of Jackson Hills Residential Suites TIF Project March 24,2017 Page 8 return that the project as proposed is infeasible without some level of assistance absent changes to either the project cost assumptions, permanent debt assumptions and/or projected operating income. A reduction in the amount of assistance provided to the developer, resulting both from City objectives regarding public participation amounts and available increment, may require the developer to renegotiate the current acquisition price and/or look at other cost savings in the project. As shown in the estimated tax increment revenue section of this memorandum, there are projected to be surplus revenues available from this project that could be used to finance other eligible affordable housing projects within the City. Further discussion regarding how those surplus funds could be used, whether through a pooling program or on an annual basis, is recommended to occur. Thank you for the opportunity to be of assistance to the City of Elk River. Please contact me at 651.223.3036 or 651.368.2533 or mhuot(cDspringsted.com with any questions or comments. IX. WORKSHEET- HOUSING PROJECTS TO BE COMPLETED BY CITY STAFF The project must meet the criteria set forth in Section IV of the City's Tax Increment Financing policy to continue. V"a) Meets minimum thresholds for size,value, and tax revenue. ! Z6) Meets at least one of the objectives in Section II and satisfies all of the provisions set forth in Section III. c) Demonstrates need for TIF with the but for analysis. d) Consistent with all city plans and ordinances. `fie) Serves at least two public purposes as defined in Section IV (f). 1. Ratio of Private to All Public Investment in Project: Points: _.�� —. Greater than 7:1 10 Private investment 6:1 8 $ WD Public Investment 5:1 6 1 o t Ratio Private: Public Financing 4:1 4 3:1 2 Less than 3:1 1 2. Project provides housing that is restricted Points: to persons 55 years and older: 10 3. Market Value/Tax Base Generation: Points: (/J Project will result in an estimated C market value per unit $135,000/Unit 5 (land and building) of to 16 06 Lo $125,000/Unit 4 $115,000/Unit 3 Wit GL V11i'li4t'*"'�iUU ✓ J - $105,000/Unit 2C�sSt�StulL��' h $ 95,000/Unit 1 4. Project proposts rehabilitation of existing housing, housing stock, and maximizes utilization of existing infrastructure: Points: 10 5. Project proposes a location near existing jobs, transportation, recreation, retail services, social services, and schools: Points: 3 6. Project includes community/ neighborhood: Points:� facility (pool, community center, etc.) I- V. Points based on scale o improvement (1-5) Yes 5 I C Vt� rlr� 7. Type of Housing Project: Points: 100% Owner Occupied 2 C Investment Property 8. Likelihood that the project will result in Points: C unsubsidized, spin-off development. 1�5 High 5 VotklA I yll.D F p j QC¢, Moderate 3 Low 1 Sub- Total Points: a — (t of a possible 50 points. 9. Bonus Points Bonus Points.: The project will not be 100%Pay-asyougo TIF. -5 points The project does not require modification to land use plan. pints ✓ The project contributes to the goals of Energy City. 2 oints • Product promotes sensible use of energy,OR • Project utilizes significant energy efficient design&/or materials in construction. 91 Total Points: - Overall project analysis: bank Points Max eligible High 45-50 points 100% Moderate 37-44 points 85% Low ints 65% of Eligible 0-29 points — -� J �.