JOINT FINANCE COMMITTEE PACKET 09-16-2020

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projected available tax increment revenues generated by the project ($190,000). As a result, any level of financial assistance provided would be less than what has been requested. To complete the but-for analysis, we reviewed the applicant’s provided sources and uses of funds and operating proforma and constructed similar ten-year project proformas, showing a result if the applicant received the assistance as pay-as-you-go (reimbursement for TIF eligible costs) and showing a result if the applicant 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 payments. The purpose of evaluating the operating proformas is to understand the potential cash flow performance and projected rates of return of the project over a 10-year period to assist with making the determination that 1) tax increment assistance is necessary and 2) an appropriate level of assistance will be provided. An additional measure of project need and financial 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 seek additional revenue sources in order to pay its debt. Typical lending standards will require a DCR of greater than 1.0 as a measure of cushion in the event actual revenues and expenses are different than projected. The applicant’s operating proforma without tax increment assistance includes a 1.15x DCR, which is the minimum level generally required for this type of project. Altering the level of financing through tax increment financing assistance is expected to increase the performance of the project, resulting in approximately 1.28x DCR with assistance. To understand viability of the project and need for public assistance, we provided a sensitivity analysis to the proformas with adjustments made to the upfront funding sources. The applicant provided a ‘with’ and ‘without’ scenario based on a $400,000 gap. The ‘with assistance’ scenario assumes receipt of the entire $400,000 of requested assistance and would provide additional annual cash flow and higher return on equity (18.86%). With no assistance, the annual cash flow and returns are reduced to a level the applicant has deemed infeasible for the project to proceed (8.06%-9.07%). In addition to reduced returns, the annual revenues may not be sufficient to support the level of debt necessary for the project to proceed. The applicant is also limited in the level of debt financing and equity investment it can receive based on project performance. A modified level of assistance based on availability of revenues and need for assistance is estimated to provide more reasonable annual cash flow and returns on equity (12.78%). The amount of financing available for the project is typically based on net operating income, which is lease revenues less operating expenses. The annual cash flow is based on assumptions relative to lease revenues, operating expenses and debt repayment. The applicant provided terms of the lease revenues that includes 5- year term at $17,000 per month. Rent is adjusted equal to the real estate taxes to be paid during the calendar year. Moyer Properties, LLC will lease the building to Shoot Steel, Inc for occupancy. Debt repayment is based on payments to be made to both Village Bank as first mortgage lender and SBA loan with remaining cash flow available as returns to the equity investor(s). The City’s current TIF policy provides parameters regarding maximum amount of assistance that could be provided and minimum cash equity contributions. The policy guidelines and statutory limitations for the term an economic development is 8 years after receipt of first increment. The policy guidelines also include a requirement that owner cash equity is a minimum of 10%. The current sources of funds include approximately 9.96% of investor and cash equity. A reduction in the amount of tax increment assistance based on availability of revenues is expected to result in the increase of both lender and equity requirements. Conclusion The applicant has requested financial assistance related to construction of the new project and relocation of the business from existing small leased space to owner-occupied space in the City of Elk River. Due to estimated costs for land acquisition, site improvements and storm water ponding, the project is expected to experience an estimated $400,000 cost overrun prior to construction commencing. The applicant’s primary lender, Village Bank, has provided a financing proposal for a loan amount of $1,259,050 based on approximately 50% of total original project costs. Terms of the loan are 4.05% interest rate, fixed for 7 years then adjusting and fixing every 5 years. Terms of the SBA loan include 25-year repayment at 2.75% interest rate. Remaining funding