4.1. EDSR ATTACHMENT 03-28-2017 - Laserfiche WebLink

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City of Elk River, Minnesota But For Analysis of Jackson Hills Residential Suites TIF Project March 24,2017 Page 5 site and inability of the project to support those costs upon completion. The current estimated project costs are in excess of the estimated future value of the building upon development as provided by the Sherburne County Assessor. Based on the developer's stated position relative to the 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 and type 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 will focus on financing of the 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 the development of affordable housing in the community. Following thorough evaluation of the project as provided allows the City to 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 reviewed the developer's provided operating proforma and also constructed similar ten-year project proformas, showing a result if the developer received the assistance as pay-as-you-go (reimbursement for TIF eligible costs)and showing a result if the developer did not receive assistance. Our analysis of the proformas 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 any secondary notes. To understand potential returns realized by the developer, with and without assistance, we utilized the project cost and operating information provided by the developer to generate the ten-year operating proformas and calculate estimated performance of the project. The purpose of evaluating the operating proformas is to understand the potential returns 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. 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 are no set rate of return benchmarks that dictates whether a project needs TIF assistance or not; however there are market/industry standards for certain types of projects,as well as more specific investor/developer thresholds that need to be achieved. 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