|
Ehlers Advisor March 2006
<br />(NDRTHFIELD RIVERFRONT continued from page 4)
<br />"The Council's willingness to use tax increment financing served
<br />as the lynch pin that enabled this partnership between the Ciry
<br />and Mendota Homes to redevelop this important entry into the
<br />listoric downtown of Northfield," O'Connell said. For nearly a
<br />year, Ehlers assisted the City staff in negotiating a development
<br />agreement and establisling a TIF district for the site. The
<br />agreement sets out how City assistance will cover the costs
<br />necessary to eliminate contaminated soil, correct substandard
<br />soils, and assist with extraordinary land acquisition costs.
<br />Throughout the process, the City was determined not to
<br />provide a level of assistance which would reduce the
<br />developer's cost for the land below other comparable parcels
<br />elsewhere in the community. The T1F revenue was to be used
<br />only to place this site on a competitive basis with other
<br />TAX I N C R E M E N T
<br />
<br />.'
<br />,-:,
<br />- m
<br />~~ '-~ ~ -
<br />~~~
<br />~'~~~j
<br />, -
<br />~„ ,
<br />. ,. ~a ~ ,-. ~, -~, ;a_-~..~ _ s a,.-_-
<br />- -
<br />. _ ,
<br />.. .
<br />.,
<br />~.
<br />By Sid Inman, Financial Advisor
<br />While we normally hate to use this term, we have
<br />had a paradigm (pair-a-dime) shift in the way
<br />we finance TIF redevelopment projects.
<br />In the 1980s and 1990s, most of our redevelopment projects
<br />consisted of commercial or rental housing or a combination of
<br />both. In these projects cities issued pay-as-you-go notes and the
<br />developers normally turned them into cash (monetized the
<br />notes) by including them in the permanent loan with their
<br />primary lender. The notes were then assigned to the lender,
<br />and the new building was used as collateral for the notes.
<br />With the new "urban village" concept and the change in
<br />housing lifestyles, most of our new,redevelopment projects are
<br />driven primarily by "for sale" housing. The problem created by
<br />this change in real estate is that when the developer is done,
<br />the housing is all .sold and all the loans are paid off. The
<br />developer cannot monetize the notes because there is no
<br />"asset left" to serve as collateral for the notes.
<br />So what is the solution?... "Take-out financing" using tax
<br />increment revenue bonds. (Whether you call the financing
<br />notes or obligations, they are all, under state law, bonds).
<br />So here is how it works. When the project starts, the city
<br />issues a typical pay-as-you-go note to the developer. But, in the
<br />redevelopment agreement, the city agrees that at the time the
<br />project is complete, it will consider (very important to use
<br />consider) issuing tax increment revenue bonds to refund the
<br />pay-as-you-go note that was initially issued to the redeveloper.
<br />The redeveloper then takes the agreement to their primary
<br />("short-term") lender. Because the pay-as-you-go note will likely
<br />be refunded at the end of the project, the short-term lender
<br />will monetize the note for two to three years.
<br />When monetizing the pay-as-you-go notes, the short-term
<br />lender will require promises and other forms of credit from the
<br />redeveloper such as presale requirements, market studies,
<br />personnel guarantees and other pledges.
<br />Once the buildings are up, an investment banker can then sell
<br />the tax increment revenue bonds as take-out financing in the
<br />market. These revenue bonds are much easier to sell because
<br />the buyer knows the actual market value of the homes and can
<br />very accurately determine the future TIF generation. Further,
<br />the people paying the taxes are homeowners, and the chances
<br />of them or their lender not paying the taxes is small.
<br />Remember, in Minnesota the property tax is a lien that is prior
<br />to the mortgage.
<br />We have even had versions of the take-out financing that have
<br />been done with tax-exempt interest rates. This provides a
<br />wider market, often lower interest rates than apay--as-you-go
<br />note, which would then reduce the need for TIF and reduce
<br />the term of the district.
<br />There are many parts of this process that require significant
<br />due diligence. Specifically, who is the investment banker
<br />issuing the tax increment revenue bonds; who will pay any
<br />additional costs associated with the financing; should inflation
<br />be included; and what happens if the development is not
<br />completed in a timely fashion? Be sure you involve your TIF
<br />or bond attorney and your financial advisor.
<br />property in town so as not to undercut other developments
<br />that had not requested CitS> financial assistance.
<br />As part of the agreement, Mendota Homes is deeding the
<br />riverfront back to the Cite. Since the property will not be
<br />owned by the developer upon completion, financing was very
<br />complicated. Working with Mendota Homes, Piper Jaffray,
<br />Ehlers, and Kennedy & Graven, the City approved a taxable
<br />TIF revenue note for construction financing. This note is
<br />expected to be refunded, using tax-exempt TIF revenue bonds,
<br />when all three phases of the project are complete.
<br />The Ciry is pleased about the end result of the redevelopment
<br />planning efforts. Most of the City's goals for this property have
<br />been met through the team efforts of Brian O'Connell,
<br />Northfield's Commtuiry Development Director, other City
<br />staff, the developer, and Ehlers & Associates.
<br />REVENUE BONDS
<br />•5•
<br />
|