7.1. SR 10-17-2016 - Laserfiche WebLink

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City of Elk River, Minnesota SBH Properties, LLC Tax Abatement Project September 23, 2016 Page 4 Project Financing There are generally two ways in which assistance can be provided for most projects, either upfront or on a pay-as you go basis. With upfront financing, the City would finance a portion of the applicant’s initial project costs through the issuance of bonds or as an internal loan. Future revenues would be collected by the City and used to pay debt service on the bonds or repayment of the internal loan. With pay-as-you-go financing, the applicant would finance all project costs upfront and would be reimbursed over time for a portion of those costs as revenues are available. Pay- as-you-go-financing is generally more acceptable than upfront financing for the City because it shifts the risk for repayment to the applicant. If revenues are less than originally projected, the applicant receives less and therefore bears the risk of not being reimbursed the full amount of their financing. However, in some cases pay as you go financing may not be financially feasible. With bonds, the City would still need to make debt service payments and would have to use other sources to fill any shortfall of revenues. With internal financing, the City reimburses the loan with future revenue collections and may risk not repaying itself in full if revenues are not sufficient. The form of financial assistance proposed in this case would be pay as you go financing whereby the applicant would incur all project costs upfront and be reimbursed annually as tax abatement revenues are generated. The applicant has illustrated in the sources of revenue that the project would be financed upfront with a combination of debt financing, equity and EDA forgivable loan. The applicant would be responsible to provide financing for the full project cost amount upfront, including any portion that would be reimbursed by the City, through additional debt or equity that would be subject to project feasibility and market. Should the tax abatement be approved, the City would collect the annual abatement revenues from the proposed project and provide as reimbursement to the applicant. No interest component would be incorporated. Applicant Proforma “But For” Analysis In approving an abatement project, the City and EDA have requested that a finding be made that the proposed project as proposed would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future. The applicant has provided a “but-for” argument stating that the financial assistance from the City is necessary to provide sufficient project cash flow and market returns to the investor that will achieve project feasibility, through an increase in revenues and estimated total return on equity upon project completion. The applicant plans to lease the space and use the rental income (at a rate of $5/square foot) to support annual debt service payments on the mortgage with any tax abatement assistance providing additional cash flow. It has been the practice of the EDA and City of Elk River relative to the use of tax abatement revenues to typically finance extraordinary costs and the level of assistance for each project is, in part, dictated by the ‘extraordinary’ costs of the project. Based on the applicant’s stated position relative to the need for tax abatement assistance and supporting documentation, the City could make its “but for” finding and provide the assistance. However, additional review of the ‘extraordinary’ costs of the project and the factors driving the financial gap may also be considered. Our analysis of the financial information provided by the applicant indicates that the tax abatement has a positive impact on the projected returns and cash flow of the proposed project. Without the abatement assistance, the project is not projected to produce sufficient cash flow to service annual debt service. This is based on a rental rate of $5