6.2 EDSR 07-20-2015 - Laserfiche WebLink

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City of Elk River,Minnesota Morrell request for Tax Abatement June 23,2015 Page 5 o stabilize the tax base through equalization of property tax revenues for a specified period of time with respect to a taxpayer whose real and personal property is subject to valuation under Minnesota Rules,chapter 8100. The developer has indicated that the abatement revenues are necessary to ensure business sustainability and support projected annual debt service. The implication being that"but for" abatement assistance the project will not proceed. To complete the "but-for" test and make the determination of whether the project is likely to proceed as proposed without the use of public dollars, we review the project showing a result if the developer receives the requested assistance and one showing a result without assistance. We utilized the project cost and operating information provided by the developer to understand the anticipated performance of the project. The purpose of evaluating the operating pro forma and accompanying financial data 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(10 years). The developer has indicated the project as proposed without assistance does not provide sufficient net operating income to provide acceptable investor returns. 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.There is no set Return on Equity(ROE)and Internal Rate of Return(IRR)benchmark that dictates whether a project needs financial assistance or not. An additional measure of project feasibility is the Debt Coverage Ratio (DCR), which is a calculation detailing the ratio by which operating income exceeds the debt-service 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. The Developer's submittal includes financial and cash flow projections, sources and uses of funds, and proformas with and without abatement assistance. The application also includes a letter of commitment from the Bank of Elk River for financing of the project in the amount of$1,680,600 for a term of 20 years. There are certain conditions of the financing, one of which being a minimum debt coverage ratio of 1.20. The annual operating proformas with and without assistance indicate low return on equity based on the project not receiving abatement assistance. The proformas also illustrate that without annual tax abatement assistance,the minimum debt coverage ratios as required by the lender would not be met. The proforma with and without tax abatement is an analysis of the developer's use