02-23-2021 JOINT FINANCE COMMITTEE PACKET

Home Browse Search

performance and would reduce the level of public assistance that is necessary. However, any of the adjustments would not eliminate the need for public assistance. Upon review of the annual cash flow performance, increasing the projected lease rates beyond what is currently estimated would also result in additional cash flow that would provide both a higher debt coverage ratio and rate of return. Realizing these adjustments are all based on assumptions. The purpose of the sensitivity analysis is to test the level of assistance that may be needed using those assumptions to understand if the recommended level of assistance could be consistent with the City’s policy objectives and less than what has been requested. Analysis also requires a balancing of existing market conditions with what the project could support. Additional factors that may impact project feasibility and level of public assistance include review of the City’s current TIF policy and implications to the financing assumptions. The City’s TIF policy provides for TIF District terms be limited to the minimum term necessary to meet the project needs. Only projects exceeding the objectives identified in the policy will be considered to exceed those general thresholds. A Redevelopment District term has a maximum level of 15 years. The application includes a request for 26 years of assistance. A supporting preapproval letter from the potential lender has indicated that 90% of the tax increment revenues over 20 years is needed to support debt service. As outlined in the analysis, making adjustments to the financing assumptions would assist with increasing the project performance to a level that could be supported within the City’s policy criteria relative to the 15-year term of assistance. Also related to policy guidelines is the requirement of owner cash equity of 10%. The applicant’s level of equity as proposed is 20%. The City commissioned a Comprehensive Housing Market Study Update in 2018. At that time the study identified a potential demand for approximately 864 new housing units through 2025. There was also strong demand for additional market rate (172 units). Conclusion The applicant has requested financial assistance related to redevelopment of the former Saxon site and subsequent construction of two 98-unit market rate apartment buildings. Through submission of the tax increment financing application and supporting financial information, the applicant has indicated that the project would not occur as proposed without financial assistance from the City due to below market debt coverage and rates of return. The applicant has provided documentation from a potential lender indicating prequalification of financing for this project subject to: availability of sufficient equity such as cash, land or acceptable soft costs, appraisal, environmental and title for the property, and a minimum 20 year TIF equal or greater than 90% of the total tax estimate. Based on the financial analysis and available financing assumptions, without financial assistance, the project does not appear to be feasible. The applicant’s operating proforma without tax increment assistance is less than 1.0x DCR and with assistance using tax increment revenues as available cash flow, would be closer to 1.13-1.21x DCR, which is generally an acceptable level required for this type of project. Without assistance, the projected annual and cumulative rate of return is below industry standards for this type of project and with annual public assistance the project is projected to achieve marketable returns. Both the rate of return and debt coverage analysis indicate that the provided financing structure would not be financially viable without one or more of the following: 1) reduction in project costs 2) additional annual cash flow, and/or 3) additional funding sources. The projected performance of the project without as or would be necessary to obtain a level of debt financing necessary to fund all project costs and provide a reasonable return. Considerations for level of public assistance parameters include: • Public to private investment • Public assistance (TIF) and private equity • Extraordinary costs • Financial gap The applicant has requested tax increment financing from the City as a method of providing the additional cash flow revenues required to achieve financial feasibility. In addition to tax increment financing, we’ve also reviewed other possible methods that could be used to increase financial feasibility and reduce the level of public participation that has been requested and may be needed for the project. Adjusting the assumptions related to land and other development costs to a level that can be supported by a reduced term of assistance and annual revenues (lease rates) all have positive impacts to the project; thus, resulting in an estimated