7.1 HRSR 03-03-2014 - Laserfiche WebLink

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City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 7 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 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 has typically been to finance 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 construction affordable housing on the project site. Following thorough evaluation of the project, the City will 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 constructed and examined two ten -year project proformas, one showing a result if the developer receives the requested TIF assistance and one showing a result without assistance. Our analysis of the proforma 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 notes. Springsted performed an analysis using the Internal Rate of Return (IRR) mechanism to estimate the proposed project's rate of return. The internal rate of return measures the average annual yield on an investment, generally over a longer period of time, which in this case is 10 years. The internal rate of return measurement is typically what is used by public agencies to determine the need for a subsidy. 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. In order to understand the potential return realized by the Developer, with and without the tax increment assistance, we utilized the project cost and operating information provided by the Developer to generate a 10 -year operating pro forma to calculate an estimated IRR analysis. The purpose of evaluating the operating pro forma is to understand the potential return 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. The first step in analyzing the return to the Developer is to determine if the costs presented are reasonable. We provided a breakdown of the estimated project costs within a previous section of the memo. Assuming all other assumptions and variables remain constant, a reduction in total project costs may have a positive impact on the projected returns. The majority of the project costs outlined above are estimates, and subject to future change, however appear to be reasonable within the scope of the project.