JOINT FINANCE COMMITEE PACKET 04-30-2024

Home Browse Search

Background The City of Elk River has been working with Heritage Millwork Inc. (“HMI” and the “developer”) on the anticipated sale of City-owned property in the Nature’s Edge Business Center for the construction of an approximate 110,000square foot new industrial building. Construction of the new facility would reduce the current business operations from three buildings to one, as well as incorporating relocation of Traditions Finishing Inc (TFI), the wholly owned finishing company, to also be housed within same building to reduce handling and overhead costs and improve lead time. HMI has also indicated there is a possibility of expanding the business and building in the future that would include an additional 40,000 square feet. HMI has stated there will be a financial gap related to acquisition of the property and construction of the new building to house their full business operations. PLM Properties (PLM) is the real estate holding entity who is purchasing the property and will be leasing the land to the business entity. HMI would be the business operating entity and lease the building from PLM. The ownership of both entities is the same and would be on the bank financing documents. To assist with financing of the project, HMI has submitted applications for public assistance to the City. Developer Request for Assistance HMI has submitted applications to the City for public assistance through the City’s tax increment financing program, energy incentive program and economic development microloan program. The total development costs of the project are approximately $21,169,472. Funding sources to support development costs include first mortgage, SBA loan 504, developer equity, City/EDA microloan and land write down (to be repaid through future tax increment revenues). The loans (first mortgage and SBA) are approximately 83% of total funding sources, equity is 10%, microloan is 1% and TIF is 6.5%. The primary debt financing structure will be subject to availability of net income from the building to support debt repayment and the lease rate between PLM and HMI will be limited to no more than 10% of the principal, interest, and taxes. Typical extraordinary development costs that cannot be supported solely by the project alone could justify the need for public financial assistance and allow the project to proceed as proposed. In addition, current market conditions of increased interest rates requiring reduced debt financing and increased equity amounts have resulted in higher funding gaps. Tax increment financing from the City provides an additional funding source to the project that allows the developer to obtain an appropriate level of upfront funding and meet minimum debt coverage and investor return metrics. The microloan is an additional source of funds to close the financing gap with eligible expenses related to construction of the project and in addition to costs that would be supported by TIF. Summary of the sources and uses of funds is illustrated in Table 1 below. The recommendation for a reasonable level of public assistance is balanced by a combination of extraordinary costs and projected financial cash flow performance of the project, public policy guidelines/considerations and potential financial parameters as further outlined below: • Return on Investment: (City benefits) • Purchase price and other development costs: (reasonable ranges and supported by project) • Public to private investment: (public participation 10% or less) • Public assistance (TIF) and private equity: (public does not exceed private equity) • Extraordinary costs: (development) • Financial gap: (limit on private debt and equity) • Market conditions (financing limitations) • Term of district collection: (economic development term of up to 9 years) • Other identified public improvements: (case by case basis to be determined) Sources and Uses of Funds The proposed total development cost of the project is estimated to be $21,169,472. The building hard cost construction estimate of $12,000,000 equates to approximately $109 per square foot. The purchase price of the property is $1,372,140 for 14 acres and per square foot sales price of $2.25. The developer has identified the sources of funds for the proposed project, including bank financing and SBA loan, equity (primarily through building sale), City/EDA microloan and TIF assistance as land write down. The developer has requested land write down of $1,372,140, in which the City would collect the future tax increment revenues to reimburse itself for the initial write down. The maximum term of collection would be 9 years and terms of potential tax increment district and projected revenues is included in the following section.