Meeting #1 SR 02-05-2001 - Laserfiche WebLink

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Ehlers is often asked how cities justify the amount of tax increment assistance that is given to developers. It has been our experience that there are two questions that cities grapple with when providing tax increment assistance. The first is what is referred to as the "but/for analysis." That simply says that the project would not go forward without tax increment. In most cases, the answer to that question does not require numerical analysis but relies upon specific economic ans site factors affecting the development. Once a city has established that the development needs tax increment, the tougher question is "how much." Cities use a variety of methods to analyze this question depending on a number of factors. Some cities have determined that due to the number of positive attributes that their city has, they simply will not provide any tax increment assistance for any reason. Other cities have determined that their objective is to attract as many jobs and as much tax base as they can and therefore will provide the maximum amount of tax increment available. Most cities are somewhere in between. The question then is how do you determine the amount of assistance. Real estate transactions are extremely complicated and difficult for a citizen to understand in the context of a council meeting. Therefore when we have been asked to conduct an analysis we have determined that the best way to present the material is to reduce it down to a simple proforma analysis. We attempt to display the amount of return on equity that the developer will receive with and without the use of tax increment. Using this method, people analyzing the transaction will be able to identify those retums with their own personal investments. This gives the reviewer the opportunity to quantify the amount of tax increment that their city is providing in terms that are understandable to them. Attached is of a project proforma with and without tax increment assistance for your review. You will note that without tax increment, the project returns a little over 7.74% to equity parmers. This is to say that anyone investing in this project could expect to receive around 7.74% return. When one understands that real estate transactions are highly speculative and risky venture for the investors, you quickly arrive at the conclusion that 7.74% is not sufficient enough return to attract any equity capital. When one evaluates the pro forma with tax increment assistance, the return is almost 12%. When reviewing this return in today's market, it is our opinion that this approaches a level sufficient to attract equity capital to a project. It is important to understand that when evaluating these types of transactions, no one can be totally accurate as to the eventual returns or outcome of the project. The simple objective is to try within certain variables to come up with an analysis that provides a comfort level to all those participating in the project. EHLERS & ASSOCIATES, INC. 3060 Centre Pointe Drive, Roseville, Minnesota 55113 (651) 897-8500