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3.0. HRSR 02-05-2001
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3.0. HRSR 02-05-2001
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2/5/2001
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Ehlers is often asked how cities justify the amount of tax increment assistance <br /> that is given to developers. It has been our experience that there are two <br /> questions that cities grapple with when providing tax increment assistance. .0' , ''� <br /> The first is what is referred to as the"but/for analysis." That simply says that <br /> 0/ <br /> the project would not go forward without tax increment. In most cases, the <br /> answer to that question does not require numerical analysis but relies upon <br /> specific economic ans site factors affecting the development. <br /> Once a city has established that the development needs tax increment, the tougher question is "how <br /> 1 much." Cities use a variety of methods to analyze this question depending on a number of factors. Some <br /> cities have determined that due to the number ofpositive attributes that their cityhas,they simply will <br /> p <br /> i not provide any tax increment assistance for any reason. Other cities have determined that their objective <br /> f a is to attract as many jobs and as much tax base as they can and therefore will provide the maximum <br /> amount of tax increment available. Most cities are somewhere in between. <br /> f _ The question then is how do you determine the amount of assistance. Real estate transactions are <br /> extremely complicated and difficult for a citizen to understand in the context of a council meeting. <br /> ,' Therefore when we have been asked to conduct an analysis we have determined that the best way to <br /> present the material is to reduce it down to a simple proforma analysis. We attempt to display the <br /> amount of return on equity that the developer will receive with and without the use of tax increment. <br /> Ee <br /> Using this method,people analyzing the transaction will be able to identify those returns with their own <br /> personal investments. This gives the reviewer the opportunity to quantify the amount of tax increment <br /> that their city is providing in terms that are understandable to them. <br /> 411,0002:50: Attached is of a project proforma with and without tax increment assistance for your review. You will <br /> € note that without tax increment,the project returns a little over 7.74%to equity partners. This is to say <br /> that anyone investing in this project could expect to receive around 7.74%return. When one understands <br /> that real estate transactions are highly speculative and risky venture for the investors,you quickly arrive <br /> t at the conclusion that 7.74%is not sufficient enough return to attract any equity capital. <br /> When one evaluates the pro forma with tax increment assistance, the return is almost 12%. When <br /> k '` reviewingthis return in today's market it is our opinion that this approaches a level sufficient to attract <br /> 4} Y � P PP <br /> equity capital to a project. <br /> a It is important to understand that when evaluating these types of transactions, no one can be totally <br /> accurate as to the eventual returns or outcome of the project. The simple objective is to try within certain <br /> k :i <br /> variables to come up with an analysis that provides a comfort level to all those participating in the <br /> E j project. <br /> E <br /> C e <br /> f matialgabigg <br /> EHLERS&ASSOCIATES, INC. 3060 Centre Pointe Drive, Roseville, Minnesota 55113 (651) 697-8500 <br />
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