7.1. SR 10-17-2016 - Laserfiche WebLink

Home Browse Search

City of Elk River, Minnesota SBH Properties, LLC Tax Abatement Project September 23, 2016 Page 6 sufficient cash flow for debt service payments on the first mortgage. The lender has provided a letter indicating that financial assistance through the forgivable loan and tax abatement programs are an important component of receiving financing. Based on our analysis of the provided annual cash flow, additional annual revenues through an increase in rental incomes or other funding source (or a reduction in debt service payments through reduced mortgage amount) beyond the tax abatement would be needed to meet both the annual payments on the first mortgage (with assistance) and equipment loan (with or without assistance). Tax abatement revenues would be necessary, absent other annual revenue increases, to support first mortgage debt payments. For illustration purposes, an increase in the rental rate from $5/square foot to $6/square foot would provide approximately the same annual revenues as the City and County abatement assistance. The developer has also requested a $200,000 forgivable loan from the EDA to assist with the upfront financing of acquisition, construction and equipment expenditures related to the project. Financing the additional $200,000 as a first mortgage would not be projected to be supported from the provided annual per square foot rental rate of $5 ($66,560 annually) and would require additional annual revenues from the project. Conclusion The applicant has requested tax abatement assistance from the City to assist with financing a portion of the project costs associated with construction of an approximate 13,312 square foot new facility. The applicant has indicated that the project requires tax abatement assistance to provide sufficient returns and cash flow upon project completion. Supporting documentation from the applicant’s lender, The Bank of Elk River, has stated that financing may be available up to $1.45M and the final loan amount will be determined based on the lesser of 80% of appraised value or cost and be amortized over 20 years. Stated within this documentation is that the City and EDA’s forgivable loan and tax abatement assistance is an important component to allow the project to proceed and obtain the financing. As discussed, there are several methods to determine if a project would proceed “but for” the assistance. When making a but-for determination, it is also necessary to understand what components may impact the likelihood that a project would proceed as proposed with or without public assistance. An increase in revenues (through public assistance or owner investor equity or increased rental rates beyond the projected $5/square foot) and/or decrease in project costs may assist with reducing a potential gap and may increase the likelihood that a project would proceed as proposed without public assistance. . We understand all adjustments are subject to market and feasibility. In this project, assuming all variables remain constant, an increase in the rental rate from $5 to $6 per square foot (as illustration) is estimated to provide approximately the same annual revenues as projected City and County tax abatement revenues. The City has information through MNCAR showing several existing leases in the City with rates greater than $5. Additional discussion on the ability to increase annual rates may be warranted, which should reduce and/or eliminate the need for public assistance through tax abatement. Thank you for the opportunity to be of assistance to the City of Elk River. Please contact me at 651-223-3036 or mhuot@springsted.com with any questions or to discuss.