7.1 EDSR 05-20-2024 - Laserfiche WebLink

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Memo – Draft for Review To: Brent O’Neil, City of Elk River From: Mikaela Huot, Director Date: April 25, 2024 Subject: Preliminary Tax Increment Revenue Projections for Proposed Heritage Millwork Inc Economic Development Project Executive Summary Baker Tilly Municipal Advisors has undertaken a review of the request for TIF assistance by Heritage Millwork Inc. (“HMI” and the “developer”) for construction of an approximate 110,000 square foot new industrial building on approximately 14 acres of City-owned property in the Nature’s Edge Business Center (Phase 1). The construction plans also include the potential for a 40,000 square foot expansion in a future year (Phase 2). The total development cost of Phase I is estimated to be $21,169,472 and the request for financial assistance is in the form of land write down for the estimated land purchase price of $1,372,140. A revised application also includes a request for additional $264,520 as pay-as-you-go reimbursement for site improvements. Construction of the proposed development is expected to begin in 2024 and be completed in 2025. The developer has also applied for the City’s Energy Incentive Program and Economic Development Microloan Program. Prior to establishing a tax increment financing district, there are findings that need to be made by the City that include: 1) determination that the project qualifies as a TIF district, 2) determination that the project as proposed would not proceed without public assistance (meeting the “but-for” test), and 3) the increased market value of the property to be developed is greater with tax increment than if no public assistance is provided. When reviewing requests for financial assistance it is important to understand how the level of financial assistance would impact the ability of the project to proceed as proposed and maximize new value created on the current project site. Review of the financial projections and statements provides an understanding of financial feasibility for this project and need for public assistance. The purpose of the analysis is to test the level of assistance that may be needed and if the recommended structure is reasonable while remaining consistent with the City’s objectives for providing assistance. Based on the financial analysis and available financing assumptions, without financial assistance, the project would not be feasible due to the extraordinary development costs mixed with current market conditions. Without assistance, the projected debt coverage ratios and annual/cumulative rates of return to the developer is projected to be below industry standards for this type of project. The debt coverage and rate of return analyses indicates 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 (tax increment revenues), and/or 3) additional funding sources (workforce housing grant program). With annual public assistance, the project is projected to be more financially feasible by providing additional cash flow (annual tax increment revenues) to the project. The level of public assistance is projected to have a positive impact on what the projected debt coverage and returns for the project could be as compared to no assistance. The purpose of the memorandum is to provide a summary of the financial review of the request for tax increment financing assistance as submitted by the developer, including estimated tax increment revenue projections. to assist the City with making a determination 1) if the project as proposed would be unlikely to proceed “but-for” the requested Tax Increment Financing (TIF) assistance, and 2) if assistance is necessary, to determine an appropriate level of public assistance that may be considered. Page 35 of 64