09-29-2020 JOINT FINANCE COMMITTEE PACKET

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To understand viability of the project and need for public assistance, we provided a sensitivity analysis to the proformas with adjustments made to the total project costs (land acquisition) and funding sources, as well as annual lease rates. The property was previously purchased for redevelopment in 2014. Included in the total development costs is an acquisition price of $2,464,000 (approx. $14,000/unit). A per unit value land sale assumption is typically subject to market and condition of the site, post-redevelopment, and what can be supported by the development. An appraisal can also assist with determining purchase price. The developer has included as a funding source the value of the land as equity for the project. All other assumptions remaining the same, reducing the purchase price and corresponding equity amount, subject to market, is expected to positively impact the projected rates of return. However, it would not impact debt coverage or eliminate the need for public assistance. Upon review of the annual cash flow performance, adjusting the projected lease rates through an increase would result in additional cash flow that provides both higher debt coverage ratio and rate of return. Realizing these adjustments is subject to market conditions and what the project could command for rents. Other factors that may impact project feasibility include review of the City’s current TIF policy and implications to the proforma assumptions. The maximum amount of assistance that could be provided for the project following the policy guidelines is 15 years. The developer has requested 26 years of assistance with a letter of interest from its potential lender indicating 90% of the tax increment revenues over 26 years is needed to support debt service. Also related to policy guidelines is the requirement of owner cash equity of 10%. The developer’s level of equity as proposed is 20% and is a combination of land, cash and deferred developer fee. 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 developer has requested financial assistance related to redevelopment of the site and subsequent construction of a 178-unit market rate apartment building. Through submission of the tax increment financing application and supporting financial information, the developer 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. Approximately $5.55M has been identified as site development costs in the application and focus of the level of assistance based on the proposed establishment of a redevelopment district should be on the demolition and site clean-up costs that are considered the barriers that are preventing development from occurring. Further breakdown of the $5.55M is still being determined. Using the developer’s assumptions, without financial assistance, the project does not appear to be feasible. The developer’s operating proforma without tax increment assistance is less than 1.0x DCR and with assistance would be closer to 1.13-1.21x DCR, which is generally an acceptable level required for this type of project. The projected annual and cumulative rate of return is below industry standards for this type of project and with annual cash flow assistance would achieve marketable returns. Both the rate of return and debt coverage analysis indicate that additional annual cash flow, additional funding sources or reduction in project costs would be necessary to obtain a level of debt financing necessary to fund all project costs and provide a reasonable return. The developer 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 may be needed for the project. Adjusting the assumptions related to land costs, equity contributions and annual revenues (lease rates) all have positive impacts to the project; thus, resulting in a reduction in the potential level of assistance that is needed and focusing on the extraordinary redevelopment costs of the site. The maximum term of assistance pursuant to the City’s policy is 15 years and less than what the developer has requested and provided in possible lender requirements. Thank you for the opportunity to be of assistance to the City of Elk River. Please contact me at 651.368.2533 or Mikaela.huot@bakertily.com with any questions or comments.