4.0. SR 01-31-1994
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AGENDA ITEM 4.
MEMORANDUM
TO: MAYOR & CITY COUNCIL
FROM:
WILLIAM RUBIN, ED COORDINAT~Yl.-
JANUARY 27, 1994
DATE:
SUBJECT:
TIF PLAN FOR TIF DISTRICT NO. 12
(REDEVELOPMENT PROPOSAL FOR
EDA MAIN STREET SITE)
INTRODUCTION
The Elk River City Council will consider a request for tax increment financing (TIF)
assistance in the amount of $235,000 to support the proposed construction of a two-
story, 12,000 square foot retail-office facility in the Elk River Central Business District.
The proposed site of this redevelopment project is located within the 600 block of Main
Street on two parcels of land that are owned by the Elk River Economic Development
Authority (EDA). If approved, TIF District No. 12 would be created - the boundaries of
which would encompass the two redevelopment parcels.
e BACKGROUNDIHISTORY
The Elk River EDA is proposing the creation of a "redevelopment TIF District".
Previously, the EDA approved the TIF Plan for TIF District No. 12 following a public
hearing on November 15, 1993. By way of action at its meeting on October 18, 1993,
the City Council delayed its portion of the public hearing from November 15 to
December 13, 1993. It was also at this December meeting that the City Council
considered the conditional use permit (CUP) for the Elk Park Center project.
Consequently, action on the TIF request was delayed. At its meeting on December 20,
the City Council denied the request for TIF assistance but agreed to reconsider it at a
meeting scheduled for January 10, 1994. Because input and comment was sought from
the Elk River Area Chamber of Commerce, no action was taken at the January 10
meeting. The request for TIF assistance was further delayed until January 31, 1994.
DISCUSSION - TIF REQUEST
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A. The Project: Mr. Kurt Kjellberg/Kjellberg's Carpet and Interiors, 16862 Highway
10, Elk River, Minnesota is proposing the construction of a two-story, 12,000 square foot
retail-office facility on the EDA Main Street Redevelopment site. Mr. Kjellberg was
recently awarded a Carpet One franchise which necessitates the expansion of his existing
sales floor. Carpet One would occupy the 6,000 square feet on the at-grade level; the
below-grade level would be leased to other retailers and/or office users. A site plan and
various elevation prospectives of the facility is attached to this memo. In addition, the
P.O. Box 490 · 13065 Orono Parkway · Elk River, MN 55330 · (612) 441-7420 · Fax: (612) 441-7425
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developer's agent, Mr. Chris Bulow of the Bruce Company will present an overview of
the project at the City Council meeting.
B. TIF REQUEST: The TIF assistance for this project totals $235,000, and is broken
down as follows:
- Site preparation, foundation removal, fill, compaction, etc.
- Land write down
$165,000
$ 70,000
$235,000
The below-grade nature of this redevelopment site presents numerous development
challenges. TIF assistance is justified to bring the site up to certain construction-ready
standards. As with all TIF requests, the developer is basing his/her site preparation costs
on estimates. If site preparation can be accomplished utilizing one-half of the TIF
request, the developer is reimbursed that amount. Conversely, if actual site preparation
costs are double the TIF request, the developer is reimbursed up to the original estimated
request.
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C. TIF RESTRICTIONS: A recent addition to the growing list of TIF restrictions
is that of prohibiting the developer from paying state aid losses incurred by a city for
creating new TIF Districts. For TIF District No. 12, it is proposed that the site, with
original acquisition costs estimated at $110,000, be written-down $70,000. Since this
is a benefit to the developer, the land write down, together with the site preparation costs,
brings the TIF assistance to $235,000.
The balance ofthe land acquisition costs not benefiting the developer ($40,000) will be
financed by way of a purchase money mortgage filed on the property. By coincidence, it
is estimated that the City could lose up to $40,000 in state aid as a consequence of
District No. 12. However, these costs are recovered by way of the purchase money
mortgage being repaid. At worst, the City leaves $40,000 "on the table" as a
consequence of District No. 12, and, as a consequence of the latest TIF restrictions
D. TIF REPAYMENT: The estimated finished market value (FMV) ofthe Kjellberg
redevelopment project is $625,000. It is estimated that this project will produce taxes of
$27,970. This is also the estimated captured increment as the redevelopment site is
currently tax-exempt, and therefore, produces no taxes.
To support the TIF request for District No. 12, it is necessary for the City to sell a taxable
TIF bond in an amount estimated at $202,000. Included in this bond issue are the
following costs:
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$165,000 TIF assistance
$ 6,000 Cost of issuance
$ 2,720 Miscellaneous
$ 28,280 Capitalized Interest ( two years)
$202,000
This bond issue, at a taxable rate of, say, 7% can be repaid over twelve years with level
payments of $25,432. The project's estimated taxes are $27,970 - therefore, TIF
repayment of the project debt is feasible. The life of the district is extended an additional
three years in order to recover the $70,000 land write down costs.
A similar TIF note at say 6.5% and only eighteen months of capitalized interest can be
repaid in an even shorter period.
State law allows citiesIEDA's/HRA's to collect tax increments from redevelopment
projects for up to twenty-five years. The Kjellberg project easily falls within the state
statutory parameters.
ACTION REQUESTED
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The Elk River City Council is asked to approve the TIF Plan for TIF Distirct No. 12. The
creation of District No. 12 is subject to the execution of a Contract for Private
Development by and between the Elk River EDA and Kurt Kjellberg/Kjellberg's Carpet
and Interiors.
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"\.l TAX INCREMENT DISTRICT NO. 12
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IBIT B.3
NT DISTRICT NO.12
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Jan. 7, 1994
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To: Members Downtown Development Corporation
From: Executive Committee
'Subject: Proposal for "Hole in the Ground"
On Thursday at an officially called meeting, seven members who attended were
favorably impressed with a plan to build a 12,000 square foot, $625,000 office-retail building
on the site once occupied by Elk River Hardware.
Following the presentation, those who attended (not a quorum) decided to:
1. Write this letter
2. Start a petition of business owners on behalf of the project. Stop at Johnson's Department
Store and sign the petition.
3. Meet informally with members of the City Council.
During the presentation we were surprised to hear that Mayor Hank Duitsman was quoted
as saying no downtown retailer is in favor of the development.
The proposal is to build a two-story, 12,000 square foot retail-office building at an
estimated finished market value of $625,000. The first floor would be occupied by a Carpet
One store, the nation's largest flooring retailer.
The property would be a Tax Increment Financing District and the TIF subsidy to the
developer to make the site buildable would be $165,000 plus a discount on the land of$70,000.
There would be a mortgage against the property of $40,000 which together with the $70,000
would make up what the city paid for the property. .
The building owner- developer, Kurt Kjellberg would pay $28,000 of property taxes each
year for up 15 years to pay the TIF bond and to pay the city for its land acquistion costs.
The plan has been approved by the Economic Development Authority (ED A).
It has been recommended by the Planning Commission.
On Dec. 20, the council voted 3-2 to reject it. The vote was John Dietz, Duitsman and Larry
Farber opposed and Roger Holmgren and Cecilia Scheel for. The council agreed, however,
to reconsider the matter on Jan. 31.
It is on the agenda of the Elk River Chmber of Commerce Board of Directors Tuesday.
These are the points that favorably impressed those attending the Jan. 6 presentation.
1..The Downtown needs a retail-office building on the site which is now an eyesore and a
depressant to business.
2. Tax Increment Financing is designed to aid in the rehabilitation of deteriorating
urban structures.
3. The amount of tax increment financing, $165,000 is needed to make the site buildable.
It is a 20-foot grade change. The city would have to pay at least $100,000 to make it into a
park which would not yield any tax dollars. The entire TIF would be entirely paid back by
property taxes from the developer. Another $70,000 would be recaptured by TIF and another
$40,000 would be mortgaged against the property to pay the city's land acquisition costs.
It is impossible to reduce the TIF requirement because rent would become too high.
4. The Kjellberg building is a Carpet One Store, a home shopping center, will occupy the
first floor. The story below will be a combination of retail and office space. The
development would have to have a 70 percent commitment from tenants before it would be
started.
5. If the business failed for some reason, there would be a building to re-lease.
In the words of one member, this is a win-win project. The Downtown gets a badly needed
development to attract traffic and the city gets a taxable property.
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Come home lofitl/-seITice banking.
. 11 THE BANK OF ELK RIVER
(CJtJf~Y!
G3() l\1r\IN ST., ELK RIVER, MN .'i.'i33() . PHONE 441-100()
ELK RIVER ;ViALL, 846 F1\EEPORT AVE. . PHONE 441-~J()(){)
Our Second Century MEMBER mlc
December 20. 1993
The Bruce Co.
PO Box 506
Elk River-. I"IN 55330
RE: Kurt and Diane Kjellber-g mortgage application
Dear- Chr-is:
I have done a preliminar-y review aT the per-sana 1 Tinancial
statement aT Kurt and Diane Kjellberg and the '90 through '93 FYE
statements Tor Kjellberg Carpet & Inter-ior-s. Inc..
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Ther-e is enough Tinancial strength demonstrated in these
statements Tor- me to consider a Tormal application Tor a mortgage
on the EDA site in downtown Elk River.
Subject to an acceptable appraisal, pr-ojected cash Tlow. title and
environmental searches it is my desire to bring this request
beTore our board Tor approval.
IT you have any questions, please call me.
J
Patrick H. Dwyer
Senior Vice President
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