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09-29-2020 JOINT FINANCE COMMITTEE PACKET Meeting of the Joint Finance Committee AGENDA Wednesday, September 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 September 16, 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 ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY MICRO LOANS Current Current 9/18/20 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 $151,757.16 Y Heritage Millwork 12/22/2016 $100,000 3.00%60 $965.61 $66,834.98 Y Ralphies#1 9/10/2013 $74,999 3.00%120 $724.20 $24,431.99 Y Ralphies#2 8/28/2018 $19,175 3.00%60 $343.65 $11,847.87 Y TOTAL MICRO LOANS $254,872.00 Micro Loan Fund 240 Distinctive Iron 10/1/2019 $126,000 2.03%60 $1,050.07 183,505.69$ Y Scott Morrell LLC 8/6/2015 $200,000 2.00%60 $1,011.77 156,427.56 Y 5-Year Balloon is up Orluck 7/17/2018 $200,000 3.00%84 $2,642.66 144,795.27 Y $484,728.52 DEED Jobs Incentive Loan Fund 242 COVID-19 Small Business Emergency Loans Current 9/18/20 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 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 08/13/20: Micro Loan Fund - 240 $812,912.40 State DEED Jobs Incentive - 242 $140,244.48 Meeting of the Elk River Joint Finance Committee Held at Elk River City Hall Held in person Wednesday, September 16, 2020 Members Present: Dan Tveite, Ryan Hardin, Nate Ovall, Rhonda Magnussen (via phone), Charlie Blesener, Chad Vitzthum (via phone) Members Absent: Larry Toth and Michelle Eder Staff Present: Amanda Othoudt, Economic Development and Colleen Eddy, Economic Development Specialist Others Present: Mikaela Huot, Baker Tilly and applicant Evan Moyer, Shoot Steel 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 Dan Tveite at 3:14 p.m. 2. Consider Agenda Motion by Blesener and seconded by Hardin to approve the September 16, 2020, Joint Finance Committee agenda. Motion carried 5-0. 3. Consent Agenda Motion by Blesener and seconded by Hardin to approve the June 30, 2020 Joint Finance Committee meeting minutes. Motion carried 5-0. 4.1 Shoot Steel TIF Application Ms. Othoudt presented the staff report and policy. Ms. Huot presented the but for analysis. The group discussed the application. CM Vitzhum asked about the amount of TIF, the estimated present value of the land, and asked if the applicant had additional funds to cover the gap of the $210,000 remaining debt/equity which bumps it over the 9%. CM Hardin asked if the applicant closed on the lot yet. Ms. Othoudt responded that the public hearing was set for September 21st. Motion by Blesener and seconded by Hardin to recommend approval of TIF of $190,000 subject to the creation of the TIF District. 5.1 Announcements Ms. Othoudt notified the committee that she has accepted the Executive Director position at the Benton Economic Partnership. Her last day at the city is October 2nd. 6. Adjournment There being no further business, Mr. Tveite adjourned the meeting at 3:30 p.m. Minutes prepared by Colleen Eddy. _____________________ Tina Allard City Clerk ___________________ Amanda Othoudt Economic Development Director 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 September 29, 2020 Prepared by Colleen Eddy, Economic Development Specialist Item Description Riverwalk Apartments TIF Discussion Reviewed by Amanda Othoudt, ED Director Reviewed by Cal Portner, City Administrator 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 submitted an application 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 applicant is requesting 90% of the available increment over 26 years. The project is proposed to be completed in two phases with the first phase completed by 2023 and the second phase completed by 2027. Annual real estate taxes collected between the three parcels is $10,706. The estimated real estate taxes upon completion of Phase I is 193,964 annually. Phase II is estimated at the same, for a total of $387,928 annually. 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:  Resident Manager  Caretaker  Leasing Agent  Maintenance 3. Significantly increases the city’s commercial and industrial tax base.  The project proposed is a multi-family housing complex. N:\Departments\Community Development\Economic Development\EDA\Administrative\Agenda\Joint Finance Committee Agenda Packets\2020\09-29-2020\4.1 sr Riverwalk Apartments TIF Application.docx 4. Demonstrates the ability to encourage unsubsidized private development through “spin off” development.  It is unknown whether this project will encourage unsubsidized private development through “spin off” development 5. Facilitates the development process and achieves development on sites that would not develop “but for” the use of TIF.  The former Saxon 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.  This project is outside of the study area for the Mississippi Connections Plan and does not aid in the implementation of the Plan. 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 revealed other possible methods that could be used to increase financial feasibility and reduce the level of public participation that may be 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 requirement for equity investment. 3. TIF will not be used in circumstances where land and property price is 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. N:\Departments\Community Development\Economic Development\EDA\Administrative\Agenda\Joint Finance Committee Agenda Packets\2020\09-29-2020\4.1 sr Riverwalk Apartments TIF Application.docx  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 developer is proposing to redevelop a blighted property into high density residential. The 2018 Maxfield Housing Study Update references a need for 172 market rate units through 2025.  Jackson Hills, a mixed income project was developed after the 2018 Maxfield Housing Study was released. This was a 40-unit project featuring 32 market rate units ultimately decreasing the demand of total market rate units in the city 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, a 40-unit mixed income project in 2018, and a similar type of project in Monticello. 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 has requested from the developer a recent appraisal for the property 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 To: Members of the Joint Finance Committee Amanda Othoudt, Economic Development Director From: Mikaela Huot, Director Date: September 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 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 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 application includes an approximate $31.556 million project that would be funded by an estimated $25.245 million of debt financing and $6.311 million of equity. Financial assistance through pay-as- you-go tax increment financing from the City of Elk River has been requested to provide additional annual cash flow necessary to support the cash flow and debt service financing. Those extraordinary redevelopment costs that cannot be supported solely by the project alone typically may justify the need for public financial assistance that would 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 sources and uses of funds from the developer’s financial materials is illustrated in the table below. Sources Amount Uses Amount First Mortgage $25,245,020 Acquisition $2,464,000 Equity $6,311,255 Site Development $5,555,183 Construction $23,537,092 Total $31,556,276 Total $31,556,276 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 2022 and taxes payable 2023 • First increment collected in 2023 o Election to delay first increment by up to 4 years • Net present value (discount) rate of 4% • 0% annual market value inflation Tax Increment Revenue Estimates Revenue Estimates Estimated annual available increment (first year) $346,668 Total gross tax increment $9,013,368 City retainage (10%) $901,342 Net amount available for development (90%) $8,112,026 Estimated Maximum Revenues (15 Years) $4,680,015 Total estimated present value (4%) 15 Years $3,217,736 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 $2,464,000 (approx. $14,000/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 $5.55M has been identified as site development costs in the application and 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 the barriers that are preventing development from occurring. Further breakdown of the $5.55M is still being determined. Using the developer’s assumptions, 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. The projected annual and cumulative rate of return is below industry standards for this type of project and with annual cash flow assistance would 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. 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 may be 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. The maximum term of assistance pursuant to the City’s policy 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@bakertily.com with any questions or comments.