12-29--2020 JOINT FINANCE COMMITTEE PACKET
Meeting
of the
Joint Finance
Committee
AGENDA
Tuesday, December 29, 2020
7:30 a.m.
Elk River City Hall
Upper Town Conference Room
1. CALL MEETING TO ORDER
2. CONSIDER AGENDA
3. CONSENT AGENDA
Considered to be routine and noncontroversial by the Economic Development Finance Committee and will be approved by one
motion. There will be no separate discussion of these items unless a Committee member, staff member, or citizen so requests, in
which case the item will be removed from the consent agenda and considered under the regular agenda.
3.1 November 24, 2020 Meeting Minutes
3.2 Revolving Loan Fund Balance Report
4. GENERAL BUSINESS
4.1 River Walk Apartments Proposed Redevelopment TIF Application
5. ANNOUNCEMENTS
6. ADJOURNMENT
Meeting Protocol
No sidebar discussions
No interruptions
State your concern
Ensure you understand
Don’t take things personally
Adhere to time limits
Come prepared
Ensure all are heard
Meeting of the Elk River Joint Finance Committee
Held at Elk River City Hall
Held in person
Tuesday, November 24, 2020
Members Present: Ryan Hardin, Charlie Blesener (via phone), Chad Vitzthum (via phone),
Rhonda Magnussen (via phone) and Larry Toth
Members Absent: Dan Tveite, Michelle Eder, and Nate Ovall
Staff Present: Colleen Eddy, Economic Development Specialist
Others Present: Mikaela Huot, Baker Tilly and applicant Terry Morrell, Scott Morrell, LLC
1. Call Meeting to Order
Pursuant to due call and notice thereof, the meeting of the Elk River Joint Finance
Committee was called to order by HRA Chair Larry Toth at 7:49 a.m.
2. Consider Agenda
Motion by Hardin and seconded by Vitzhum to approve the Joint Finance
Committee agenda. Motion carried 5-0.
3. Consent Agenda
Motion by Hardin and seconded by Vitzhum to approve the September 29, 2020 Joint
Finance Committee meeting minutes. Motion carried 5-0.
4.1 Morrell Companies Microloan Extension
Ms. Eddy presented the staff report.
Ms. Huot presented the financial analysis. The committee discussed the applicants request
and the financials.
Motion was made by Vitzhum and seconded by Magnussen to recommend approval
of the request to the EDA. Motion carried 5-0.
5.1 Announcements
Ms. Eddy stated that there are two vacancies on the Joint Finance Committee; Jim
Gromberg and Michelle Eder’s positions. If anyone has any recommendations, please pass
them on to Ms. Eddy.
6. Adjournment
There being no further business, Mr. Toth adjourned the meeting at 8:02 a.m.
Minutes prepared by Colleen Eddy.
_____________________
Tina Allard
City Clerk
___________________
Cal Portner
EDA Executive Director
ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY
MICRO LOANS
Current Current 11/13/20
Loan Loan Interest Term Monthly Principal
Borrower Date Amount Rate (Months)Payment Outstanding Current
Die Concepts 6/3/2016 $185,200 2.00%60 $936.90 $150,388.18 Y
Heritage Millwork 12/22/2016 $100,000 3.00%60 $965.61 $65,235.56 Y
Ralphies#1 9/10/2013 $74,999 3.00%120 $724.20 $23,768.87 Y
Ralphies#2 8/28/2018 $19,175 3.00%60 $343.65 $11,532.94 Y
TOTAL MICRO LOANS $250,925.55 Micro Loan Fund 240
Distinctive Iron 10/1/2019 $126,000 2.03%60 $1,050.07 182,321.61$ Y
Scott Morrell LLC 8/6/2015 $200,000 2.00%60 $1,011.77 154,924.19 Y 5-Year Balloon is up
Orluck 7/17/2018 $200,000 3.00%84 $2,642.66 140,228.23 Y
$477,474.03 DEED Jobs Incentive Loan Fund 242
COVID-19 Small Business Emergency Loans
Current 10/13/20
Loan Loan Interest Term 6-month Monthly Principal Forgivable
Date Amount Rate (Months)Deferment Payment Outstanding
Chow Mixed Grill and BBQ 7/6/2020 $20,000.00 0%60 1/1/2021 166.67 $20,000.00 $5,000.00
Daddy-O's Café, Inc.7/6/2020 $5,000.00 0%60 1/1/2021 41.67 $5,000.00 $5,000.00
Inspire Studio, LLC 7/6/2020 $20,000.00 0%60 1/1/2021 166.67 $20,000.00 $0.00
Pinnacle Foods, LP 7/6/2020 $5,000.00 0%60 1/1/2021 41.67 $5,000.00 $5,000.00
4.5.
Pyramid Fitness Group 7/6/2020 $20,000.00 0%60 1/1/2021 166.67 $20,000.00 $5,000.00
Snap Fitness 8/3/2020 $20,000.00 0%60 2/1/2022 166.67 $20,000.00 $0.00
Elk River Country Club 8/3/2020 $5,000.00 0%60 2/1/2020 41.67 $5,000.00 $5,000.00
Eagles Club 8/3/2020 $2,374.00 0%60 2/1/2020 19.78 $2,374.00 $2,374.00
$97,374.00 $27,374.00
Fund Cash Balances 11/13/20:
Micro Loan Fund - 240 $825,345.88
State DEED Jobs Incentive - 242 $148,777.48
5-Year Balloon is up
DEED Jobs Incentive Loan Fund 242
Finaled out
$15,000.00 x
$0.00 x
$20,000.00 x
$5,000.00 x
Final Principle
Loan Balance
$15,000.00 x
$20,000.00 x
$0.00 x
$0.00 x
$75,000.00
The Elk River Vision
A welcoming community with revolutionary and spirited resourcefulness, exceptional
service, and community engagement that encourages and inspires prosperity. Updated: August 2020
Request for Action
To
Joint Finance Committee
Item Number
4.1
Agenda Section
General Business
Meeting Date
December 29, 2020
Prepared by
Colleen Eddy, Economic Development Specialist
Item Description
Riverwalk Apartments TIF Discussion
Reviewed by
Cal Portner, City Administrator
Reviewed by
Action Requested
Review application and provide a recommendation to the Economic Development Authority to establish Tax
Increment Financing District.
Background/Discussion
Sun Rae Apartments, LLC applied for Tax Increment Financing to construct two 89-unit apartment complexes
located at 17354 Zane Street, Elk River. This project is proposed as a Redevelopment TIF District.
The developer’s original application included an approximate $31.556 million project funded through combination
debt and equity. Following receipt of additional information as requested from the September JFC meeting, the
developer provided updated sources and uses of funds with a revised total development cost of $34.1 million with
80% as debt financing and 20% as private equity. Financial assistance through pay-as-you-go tax increment
financing from the City of Elk River is requested to support the debt and project cash flow to repay annual debt
service payments.
Typical extraordinary redevelopment costs that cannot be supported solely by the project alone could justify the
need for public financial assistance and allow the project to proceed as proposed to provide appropriate upfront
funding and meet the minimum debt coverage requirements. The developer has indicated the receipt of city
financial assistance is necessary for the project to proceed.
Public Purpose
The City of Elk River will consider TIF for projects that achieve one or more of the following:
1. Demonstrate long-term benefits to the community.
The proposed redevelopment project removes a long-standing blighted property
The redevelopment project includes a park and trail opportunity for future generations
The redevelopment will increase the housing stock by 178 units in Phase I and II
2. Retain local jobs and/or increase the number and diversity of jobs that offer stable employment and/or attractive wages and
benefits through:
Diversification of the local economy
Developer indicated a total of 4 jobs at approximately $20/hour would be created upon completion
of the project:
o Resident Manager
o Caretaker
o Leasing Agent
o Maintenance
3. Significantly increases the city’s commercial and industrial tax base.
The project proposed is a multi-family housing complex.
4. Demonstrates the ability to encourage unsubsidized private development through “spin off” development.
Spin off development is unknown
5. Facilitates the development process and achieves development on sites that would not develop “but for” the use of TIF.
The site has been vacant for over 10 years. Several developments have been proposed on the site, but
none of the projects ever came to fruition.
Using the developer’s assumptions, Baker Tilly’s analysis suggests without financial assistance, this
project does not appear to be feasible.
6. Removes blight and/or encourages redevelopment of commercial and industrial areas resulting in high quality redevelopment and
private reinvestment.
The proposed project is projected to enhance the city’s economic base as it removes and redevelops a
blighted property on a high-profile site.
7. Offsets redevelopment costs (i.e. contaminated site cleanup) over and above the costs normally incurred in development.
It is unknown at this point whether the site has any soil contamination.
Approximately $5.55M has been identified as site development costs in the application. Further
breakdown of the $5.55M is still being determined.
8. Aids the implementation of the Mississippi Connections Plan.
Does not aid in the implementation of the Mississippi Connections Plan as it is outside of the plan area.
The proposed project meets public purpose objective #1, #2, #5, #6, and potentially #7.
Policy Considerations
1. Each Project is required to meet the but for test to determine the need for and level of assistance.
Using the developer’s assumptions, Baker Tilly’s analysis suggests that without financial assistance, the
project does not appear to be feasible. The developer’s operating proforma without tax increment
assistance is less than 1.0x DCR and with assistance would be closer to 1.13-1.21x DCR, which is
generally an acceptable level required for this type of project.
Baker Tilly’s analysis shows other potential methods to increase financial feasibility and reduce the
level of public participation needed for the project. Adjusting the assumptions related to land costs,
equity contributions and annual revenues (lease rates) all have positive impacts to the project; thus,
resulting in a reduction in the potential level of assistance that is needed and focusing on the
extraordinary redevelopment costs of the site.
2. Developers receiving TIF assistance shall provide a minimum of ten percent cash equity investment in the project. TIF is not to
be used to supplement cash equity.
The developer indicated Owner Cash Equity in the Riverwalk Redevelopment project of
$6,311,255.00 equivalent to 20% percent equity in the project, which is higher than our minimum.
3. TIF will not be used in circumstances where land and property price are in excess of fair market value.
The developer’s application identified acquisition costs of $2.464M. The applicant determined this
amount using the following calculation: 2.46m/178 units = 14k per door.
Our consultant is awaiting an appraisal of the property to determine fair market value.
4. The developer shall demonstrate a market demand for the proposed project. TIF shall not be used to support purely speculative
projects.
The 2018 Maxfield Housing Study Update references a need for 172 market rate units through 2025.
Jackson Hills Residential Suites, a mixed income project was completed in 2019 with 40-units (32
market rate) decreasing total desire of market rate units to 140.
5. 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, amount other factors, including size and scope of the
proposed project.
Briggs Properties developed Jackson Hills Residential Suites and a similar project in Monticello, MN.
6. 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.
Our consultant has requested the developer identify the $5.555M of site development costs within this
sworn construction statement.
Our consultant requested a recent property appraisal to determine the market value.
7. The City of Elk River shall only use TIF to encourage economic growth and development within the city limits.
The project is located within the city limits of Elk River.
Financial Impact
N/A
Mission/Policy/Goal
The City of Elk River shall utilize TIF to encourage desirable development or redevelopment that would not
otherwise occur but for TIF.
Attachments
TIF Application
Baker Tilly Analysis
Memo – Draft Updated
To:
Members of the Joint Finance Committee
Cal Portner, City Administrator
Colleen Eddy, Economic Development Specialist
From: Mikaela Huot, Director
Date: December 22, 2020
Subject: Riverwalk Tax Increment Financing Redevelopment (TIF) District Revenue
Projections and Financial Analysis
Background
The City of Elk River received an application from Sun Rae Apartments, LLC, the developer, for financial
assistance through Tax Increment Financing (TIF) to assist with financing a portion of the extraordinary
redevelopment costs related to the existing property located on the former Saxon site and subsequent
construction of a new 178-unit apartment project. Assistance has been requested to offset a portion of the
redevelopment costs that cannot be supported solely by the project itself.
The developer’s original application included an approximate $31.556 million project that would be funded
through a combination of debt (80%) and equity (20%) with tax increment revenues requested to provide
additional cash flow to support debt repayment. Following review of the application and supporting financial
information at the September Joint Finance Committee meeting, the developer was asked to provide additional
information related to the identified site development costs, appraisal and/or supporting information for land
acquisition costs and confirmation of lease rates for the apartments. The additional information was provided
by the developer and has been incorporated into the updated analysis for presentation at the December 29
Joint Finance Committee meeting.
The purpose of this memorandum is to provide a summary of Baker Tilly’s review of the development project
costs and operating pro forma as provided by the developer (both original and updated) 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 to determine the appropriate amount, if any, of public assistance.
Prior to establishing a tax increment financing district, there are findings that need to be made by the City that
include: 1) determination that the project qualifies as a TIF district and 2) determination that the project as
proposed would not proceed without public assistance (meeting the “but-for” test. When reviewing requests for
financial assistance it is important to understand how the level of financial assistance would impact the ability of
the project to proceed as proposed and maximize new value created on the current project site.
Developer Request for Assistance
The developer’s original application included an approximate $31.556 million project that would be funded
through a combination of debt and equity. Following receipt of additional information as requested from the
September JFC meeting, the developer provided an updated sources and uses of funds with a revised total
development cost of $34.1 million with 80% as debt financing and 20% as private equity. Financial assistance
through pay-as-you-go tax increment financing from the City of Elk River has been requested to provide
additional revenues to support the required level of debt and project cash flow to repay annual debt service
payments. Typical extraordinary redevelopment costs that cannot be supported solely by the project alone
could justify the need for public financial assistance and allow the project to proceed as proposed to provide
appropriate upfront funding and meet the minimum debt coverage requirements. The developer has indicated
the receipt of City financial assistance is necessary for the project to proceed.
The updated sources and uses of funds from the developer’s financial materials is illustrated in the table below.
Sources Amount Uses Amount
First Mortgage $27,290,542 Acquisition $1,780,000
Equity $6,822,636 Site Development $3,329,888
Construction $21,934,089
Soft Costs $4,065,261
Developer Fee $890,000
Contingency $1,246,000
General Conditions $867,940
Total $34,113,178 Total $34,113,178
Sources/Uses of Equity Amount
Developer fee (deferred) $890,000
Land $1,780,000
General contracting $1,144,000
Arch/Eng $320,400
Closing costs $235,850
Add’l developer funds: $2,452,386
Tax increment financing has been requested as pay-as-you-go and would not be an upfront funding source and
instead be used to support level of first mortgage and return on equity
Qualifications
The City of Elk River has been approached by Sun Rae Apartments, LLC for redevelopment of the project site
and would require the establishment of a Tax Increment Financing Redevelopment District. Tax increment
financing is a tool the City may consider using to support financial assistance for the project, subject to meeting
the but-for test and need for public financial participation. A blight inspection confirming qualification of the site
for Tax Increment Financing was completed in 2015 and would provide the basis for which a Redevelopment
TIF District could be established.
Project Financing
There are generally two ways in which assistance can be provided for most projects, either upfront or on a pay-
as-you-go basis. With upfront financing, the City would finance a portion of the developer’s initial project costs
through the issuance of bonds or as an internal loan. Future 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 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 project financing as requested includes pay-as-you-
go for reimbursement of eligible costs.
Tax Increment Revenue Assumptions
The County Assessor provided a taxable value estimate for the project. To estimate the amount of available
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 existing value of $442,400
o Parcel ID: 75-704-0205
o Base value as of Jan. 1, 2020
o Original net tax capacity (ONTC) of $5,530
o Assuming reclassification to rental rates
Rental classification is 1.25%
Estimated total market value upon completion
o $21,759,300
o 178 new units at $122,243/unit
Classification for all units as rental
o Rental class rate (1.25% per unit)
Incremental value based on difference between existing and new land/building value
Construction commences in 2021 and is completed in 2022
o Project values 100% complete for assess 2023 and taxes payable 2024
First increment collected in 2023
o Election to delay first increment by up to 4 years
Net present value (discount) rate of 4%
2% annual market value inflation
Tax Increment Revenue Estimates
Revenue Estimates
Estimated annual available increment (first year) $346,668
Total gross tax increment (26 years) $11,966,132
City retainage (10%) $598,306
Net amount available for development (90%) $11,367,826
Estimated Maximum Revenues (15 Years) $5,520,575
Total estimated present value (4%) 15 Years $3,740,228
Developer Pro forma Analysis including But-For
Upon approval of 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 stated that but for the provision of tax increment
financing, the project as proposed would not occur. 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 review the provided assumptions to consider if the project
meets the but-for test and, if so, what an appropriate level and type of TIF assistance may be based on the
information submitted by the developer.
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. To complete this analysis, we reviewed the developer’s provided operating proforma and
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 outstanding debt. The
purpose of evaluating the operating proformas is to understand the potential cash flow performance through
initial development of the project and the annual operations of the project over a 10-year period to assist with
determining if the project is financially feasible and would need public participation.
Measuring project feasibility is typically accomplished by analyzing a combination of 1) projected rate of return –
both annual and cumulative and 2) estimated debt coverage ratio (DCR). Rate of return analysis illustrates the
projected return to the developer using the available cash flow after payment of operating expenses and debt
as a measurement to the initial equity investment. Industry standards for development types indicate the level
of investment a developer is willing to make based on projected returns from the project. Should the projected
annual and cumulative returns fall below those standards, the project would require reduced level of equity
participation and/or increased cash flow. Debt Coverage Ratio (DCR) is a calculation detailing the ratio by
which operating income exceeds the debt 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 seek additional revenue sources in order to pay its debt. Typical lending standards will require a DCR
of greater than 1.0 as a measure of cushion in the event actual revenues and expenses are different than
projected.
We reviewed the financial information as provided by the developer to assist with making the determination 1)
that tax increment assistance is necessary and 2) what is an appropriate level of assistance. We analysed both
the projected rate of return and debt coverage ratios using the available information. The level of debt financing
the project can obtain and support is based on the net operating income (NOI). The annual lease and other
(parking) revenues and operating expenses have been provided by the developer to project the NOI.
Review of the operating proformas based on with assistance as pay-as-you-go and with no assistance provides
the range of financial feasibility for this project and what the estimated gap would be without assistance. It is
important to note that certain assumptions were made based on the developer’s provided information and
market industry standards for annual lease rates, vacancy rates and annual revenue and operating expense
inflators in order to understand the project performance. Adjustments made to those assumptions assist in
understanding potential impact on project performance and what a required level of assistance may be.
To understand viability of the project and need for public assistance, we provided a sensitivity analysis to the
proformas with adjustments made to the total project costs (land acquisition) and funding sources, as well as
annual lease rates. The property was previously purchased for redevelopment in 2014. Included in the total
development costs is an acquisition price of $1,780,000 (approx. $10,000/unit). A per unit value land sale
assumption is typically subject to market and condition of the site, post-redevelopment, and what can be
supported by the development. An appraisal can also assist with determining purchase price. The developer
has included as a funding source the value of the land as equity for the project. All other assumptions
remaining the same, reducing the purchase price and corresponding equity amount, subject to market, is
expected to positively impact the projected rates of return. However, it would not impact debt coverage or
eliminate the need for public assistance. Upon review of the annual cash flow performance, adjusting the
projected lease rates through an increase would result in additional cash flow that provides both higher debt
coverage ratio and rate of return. Realizing these adjustments is subject to market conditions and what the
project could command for rents.
Other factors that may impact project feasibility include review of the City’s current TIF policy and implications to
the proforma assumptions. The maximum amount of assistance that could be provided for the project following
the policy guidelines is 15 years. The developer has requested 26 years of assistance with a letter of interest
from its potential lender indicating 90% of the tax increment revenues over 26 years is needed to support debt
service. Also related to policy guidelines is the requirement of owner cash equity of 10%. The developer’s level
of equity as proposed is 20% and is a combination of land, cash and deferred developer fee.
The City commissioned a Comprehensive Housing Market Study Update in 2018. At that time the study
identified a potential demand for approximately 864 new housing units through 2025. There was also strong
demand for additional market rate (172 units).
Conclusion
The developer has requested financial assistance related to redevelopment of the site and subsequent
construction of a 178-unit market rate apartment building. Through submission of the tax increment financing
application and supporting financial information, the developer has indicated that the project would not occur as
proposed without financial assistance from the City due to below market debt coverage and rates of return.
Approximately $5.38 million has been identified as site development costs as necessary for redevelopment to
occur. In part, focus of the level of assistance based on the proposed establishment of a redevelopment district
should be on the demolition and site clean-up costs that are considered barriers preventing redevelopment from
occurring. Further breakdown of the $5.38 million of site development costs from the updated sworn
construction statement is provided below:
Sources Identified
Amounts
Potential
Amounts
Excavating/grading $1,460,888 $1,460,888
Concrete work $1,558,451 $1,558,451
Driveway $178,000 $178,000
Masonry/precast $1,869,000 $229,117
Landscaping $313,772 $313,772
Subtotal $5,380,111 $3,740,228
Using the developer’s assumptions, without financial assistance, the project as proposed does not appear to be
financially feasible. The developer’s operating proforma without tax increment assistance is less than 1.0x DCR
and with assistance would be closer to 1.13-1.21x DCR, which is generally an acceptable level required for this
type of project. Without assistance, the projected annual and cumulative rate of return is below industry
standards for this type of project and with annual public assistance the project is projected to achieve
marketable returns. Both the rate of return and debt coverage analysis indicate that additional annual cash
flow, additional funding sources or reduction in project costs would be necessary to obtain a level of debt
financing necessary to fund all project costs and provide a reasonable return that allows the project to proceed.
Considerations for level of public assistance parameters include:
Public to private investment
Public assistance (TIF) and private equity
Extraordinary costs
Total development costs
Financial gap
Availability of tax increment revenues
City policy
The developer has requested tax increment financing from the City as a method of providing the additional cash
flow revenues required to achieve financial feasibility. In addition to tax increment financing, we’ve also
reviewed other possible methods that could be used to increase financial feasibility and reduce the level of
public participation that has been requested and may be needed for the project. Adjusting the assumptions
related to land costs, debt and equity contributions and annual revenues (lease rates) could all have positive
impacts to the project. All are subject to market and feasibility conditions and could result in a reduction in the
potential level of assistance that is needed while focusing on the extraordinary redevelopment costs of the site.
The maximum term of assistance pursuant to the City’s policy for redevelopment districts is 15 years and less
than what the developer has requested and provided in possible lender requirements.
Thank you for the opportunity to be of assistance to the City of Elk River. Please contact me at 651.368.2533
or Mikaela.huot@bakertilly.com with any questions or comments.