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HomeMy WebLinkAbout 08-12-10 IV. a. Authorize Signature: Development Agreement - TIF District No. 5.Memo To: John Hinzman, Community Development Director From: Jessica Cook and Jonathan North Cc: Dave Osberg, City Administrator Char Stark, Finance Director Date: July 27, 2010 Subject: TIF Assistance for the NAPA Auto Parts Store Linn Investment Properties is proposing to construct a NAPA Auto Parts at 1501 Vermillion Street. Currently this property has a market value of $239,900 and currently pays approximately $3,000 annually in taxes. Upon completion, the Napa Auto Parts when fully constructed is expected to have a market value of $1,300,000 and pay over $43,000 annually in taxes (including approximately $13,000 in tax increment). Linn Investment Properties (the “Developer”) has requested $128,000 of financial assistance from the Hastings Economic Development and Redevelopment Authority (HEDRA) in the form of Pay-As You-Go (PAYGO) tax increment over a sixteen (16) year period, to assist in offsetting some of the high redevelopment costs related to land acquisition, demolition, soil corrections, and site preparation associated with removing the old Jiffy gas station and house that were on the site. Ehlers has completed a review of the Developer’s proforma to determine how much assistance, if any, is warranted for the redevelopment. We have reviewed the project from the perspective of general industry standards for construction, purchase price of land, reasonable developer fees, and return on investment. We have also reviewed completed environmental reports, reports on soils conditions, prior marketing efforts, and other documentation provided by the developer. Project and Proforma Analysis As we complete this analysis we first look to determine whether the costs are appropriate and reasonable. We review the fees and return on investment that the private developer/owner will receive from the project over the long-term, and we analyze whether the project can support private financing and equity without tax increment assistance. Based on the analysis, the developers request for $128,000 in tax increment financing (TIF) appears justified and warranted. Specifically, the need for assistance can be supported by looking at three key elements of the project: Land costs, developer profit, and financing gap. 3060 Centre Pointe Drive Roseville, MN 55113-1105 Phone: 651-697-8545 Fax: 651-697-8555 jnorth@ehlers-inc.com 1.Land Costs. Land assembly for the project is $562,530 ($528,170 for land acquisition and $34,360 for demolition and environmental testing), which equates to $17.40 per square foot. This amount exceeds the range of $8 to $10 per/square foot for vacant, buildable sites for similar types of development elsewhere in the market area, which would result in land costs of approximately $300,000. 2.Developer Profit. The construction budget includes a developer fee of $50,000, or 4% of the total development costs. The typical range of developer fees for a commercial redevelopment project would be in the range of 7% to 10% of development costs. Based on our analysis, and even with the tax increment assistance, we expect the cash-on-cash return on investment to be less than 5%. By comparison, most real estate equity investors seek returns of 9% or more. 3.Financing Gap. A financing gap is the difference between the equity plus the mortgage financing the developer can obtain, and the costs of the project. First we determine the maximum mortgage amount by evaluating the income potential of the project. The developer intends to own and operate the NAPA store. Nonetheless, if he were to rent the building to a NAPA operator, he would receive $12-$15 per square foot. This rent would generate between $100,000 and $130,000 of annual revenue. The chart below shows the maximum mortgage amount this revenue could support, assuming a 20-year term at 5.75% interest rate. (The developer has a 5.75% interest rate locked for the first five years, but it will be re-set every five years.) Range LowHigh Annual Revenue100,000$ 130,000$ Less ROI for Equity Investors(35,480)$ (35,480)$ Available for Debt Service64,520$ 94,520$ Maximum Mortgage Supported755,300$ 1,106,500$ The total project costs, including redevelopment costs, are $1,774,000. Assuming the developer puts in 20% equity, or $355,480 he would need a return on equity of about 10%, or $35,000 per year. Using the above assumptions, which are consistent with current market conditions and the higher mortgage amount, the financing gap for this project is over $300,000. Total Project Costs$1,774,000 Less Developer Equity($354,800.0) Less Mortgage Financing(1,106,500)$ Financing Gap$312,700.0 To summarize, the developer’s request for $128,000 in tax increment financing (TIF) appears justified and warranted. Terms of Assistance The developer has requested up to $128,000 in TIF assistance in the form of a PAYGO note. This form of financing is the least risky for the HEDRA because no bonds are issued. Essentially, the HEDRA provides a Note to the developer promising to pay the developer a portion of the increment as it is received from the County. The developer uses the increment to reimburse himself for expenditures made to complete the project. It is proposed that 90% of the increment, up to a maximum amount of $128,000, be paid to the Developer. The remaining 10% would be available for HEDRA’s administrative costs, including the preparing of the TIF Plan and the Development Agreement. TIF is limited to eligible expenditures such as land acquisition, demolition, and site preparation. The developer will have to submit invoices showing his actual costs for these items prior to receiving the first TIF payment. The HEDRA’s attorney has drafted a development agreement and TIF Note for the Board’s consideration. Key Provisions of the Development Agreement 1.The HEDRA’s obligation to repay the developer is limited to 90% of the tax increment generated by the project. The note is not a general obligation of the HEDRA or the City of Hastings. 2.The HEDRA agrees that it will reimburse the Developer for up to $128,000 of site improvements and preparation, including tank removal, asbestos abatement, soil correction, and other costs that may be determined to be eligible. 3.The HEDRA’s reimbursement of the developer for these costs shall be accomplished through the issuance and delivery to the developer of a Tax Increment Note. 4.At its option, the HEDRA shall approve the construction plans, and any changes to those plans. 5.The Developer may not sell the property or the Note to another party without the prior written approval of the HEDRA. 6.Who pays the costs?