7.1 SR 06-03-2024 (2) - Laserfiche WebLink

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review the provided assumptions to consider if the project meets the but-for test and, if so, what an appropriate level and type of TIF assistance may be based on the information submitted by the developer. Following thorough evaluation of the project as provided allows the City to be prepared to make an informed decision based on the likelihood of the project needing assistance, as well as the appropriate level of assistance. To complete this analysis, we reviewed the developer’s provided financial data showing a result if the project received financial assistance as requested and did not receive assistance. Analysis of the project includes a review of the development budget, projected lease rates and operating income and the project’s capacity to support annual debt service on the new debt financing. The purpose of evaluating the operating revenues is to understand the potential cash flow performance through initial development of the project and the annual operations of the project to assist with determining if the project is financially feasible and in need of public participation. Measuring project feasibility is typically accomplished by analyzing a combination of 1) projected rate of return – both annual and cumulative and 2) estimated debt coverage ratio (DCR). Rate of return (IRR) analysis illustrates the projected return to the investor(s) using the available cash flow after payment of operating expenses and debt repayment as a measurement to the initial equity investment. Industry standards for certain development types indicate the level of investment a developer is willing to make based on projected returns from the project. Should the projected annual and cumulative returns fall below those standards, the project would require a reduced level of equity participation and/or increased cash flow to be feasible. Debt Coverage Ratio (DCR) is a calculation detailing the ratio by which operating income exceeds the debt 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. For a project to be considered financially feasible and likely to secure private financing, lenders are going to want to see a project with an estimated net operating income that exceeds the debt-service amount by a specific threshold or more. This is a test based on a stabilized year of revenue. Typically, we see lenders identifying a desired threshold for DCR of 1.10-1.20 or greater, meaning an expectation that the stabilized net income of the project will exceed debt service by 1.10 to 1.20. We anticipate additional review as related to the updated request that includes an additional request for pay-as-you-go assistance as related to site improvements in the amount of $264,520. Conclusion The developer has requested financial assistance to facilitate construction of a new 110,000 square foot industrial building on approximately 14 acres of City-owned property. The request is for a reduction in upfront costs through a City land write down. Pursuant to the City’s tax increment financing policy, assistance for this type of project would be consistent with policy considerations. The request for a land write down in which the City would use future tax increments to pay for the land costs is also a consideration that is approved on a case-by-case basis. Through submission of the tax increment financing request and supporting financial information, the developer has indicated that the project would not occur as proposed without financial assistance from the City due to the significant capital investment needs and limitation on level of debt financing that may be achieved. Based on the developer’s financing assumptions and considerations of current market environment, without financial assistance, the project would not be financially feasible. The requested assistance would allow for additional working capital needed by the company to complete Phase 1 of the project as proposed, with potential acceleration of Phase 2. With public assistance through tax increment assistance and supplemental city programs, the project is projected to achieve feasibility. The developer has requested tax increment assistance to close a financial gap in the project. An additional test to assist with understanding 1) if the project would proceed without assistance and 2) if assistance is required, what a reasonable level of assistance would be, is to adjust the upfront project costs and net income for debt payments to test feasibility of the project and potential reduction in tax increment assistance. The viability of these scenarios is subject to additional financial review and is intended to provide an illustration of what adjustments may be needed to reduce and/or eliminate the assistance. The additional analysis has verified the Page 43 of 64Page 404 of 464