Workshop Item - Erik Thorvig, Community Development Director
Title
Title
Rainbow Village Apartment Proposal
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Background
In 2021, Roer’s Companies presented a development proposal for the Rainbow Village shopping center at 551 87th Avenue. The development proposal presented in 2021 included demolition of the former Rainbow grocery store and construction of 250 units of multi-family housing. The new owner of the strip center was also proposing aesthetic upgrades to the exterior of the center including new building elevations, site signage, lighting, and landscape upgrades. The development plan included a request for tax increment financing (TIF) to off-set redevelopment costs and allow for the rent structure of the building to be slightly less than market-rate and target rent levels for those making 70% of the area median income, or approximately $82,740 for a family of four.
The June 14, 2021 workshop focused on whether the City Council would be interested in changing the existing land use designation from CC (Community Commercial) to HDR-2 (High Density Residential-2) to accommodate the multifamily building at up to 60 units/acre. This action requires five affirmative votes from the City Council. Direction at the workshop indicated there was interest from at least five councilmembers to change the land use. Feedback was provided to the developer about designing the site so the impact to the single-family residential properties across Jefferson Street would be reduced.
The October 11, 2021 workshop focused on whether the City Council would support providing TIF. The developer request was $7,225,000. The Council was generally supportive of providing some level of TIF, but potentially not to the level that would allow the project to move forward. There was discussion about the rent structure and how that resulted in the need for TIF beyond the extraordinary redevelopment costs.
Minutes from the June 14, 2021, and October 11, 2021, workshops are included.
After the October 11, 2021 workshop, staff had individual meetings with councilmembers, and it became apparent that there likely wasn’t enough support to have the project move forward as proposed.
Since last fall, the City has finalized the Northtown Area Redevelopment Plan and reviewed existing EDA fund balances to better understand the potential financial commitment needed in the Northtown area to catalyze private redevelopment consistent with the plan. The Northtown plan identifies a shift in land uses from a predominately retail area to a mix of retail, residential, office and civic uses. The market study completed identifies the demand for up to 750 additional Class “A” multi-family units in the next ten years for the area. Class “A” generally means market rate/luxury buildings with high-end exteriors, interior amenities, and high-quality construction. The master plan identifies redevelopment of this site consistent with the proposed plan. With that said, the master plan was based on the previous proposal submitted by Roer’s. Pages from the Northtown plan related to the market study and short-term phases are attached.
The property owner has been patiently waiting to bring a proposal forward until the Northtown plan was finalized. Roer’s is still interested in developing a multi-family project on the site. The site plan and project has changed since the discussions in 2021. General differences are:
• 220 units of market rate apartments - The number of units has been decreased since the original proposal and the rents are now proposed to be market rate for the area and higher than previously proposed.
• The building has been shifted to the west to create a larger setback from the residential properties on Jefferson Street.
The attached narrative provides further information on the project, including unit makeup, amenities, etc.
The developer is still requesting TIF to off-set the redevelopment costs associated with the project. Tax increment financing is a tool the City may consider using to support financial assistance for the project, subject to meeting the “but for” test and need for public financial participation. A blight inspection confirming qualification of the building as substandard for inclusion in a TIF District is being completed to provide the basis for which a Redevelopment TIF District could be established.
City staff, with assistance from Baker Tilly, have been working with Roer’s to understand the developer’s financial pro-forma for the project and determine the amount of TIF necessary for the project to be financially feasible. The developer has identified the overall project cost to be $53,637,851 which has increased from $48,78,851 as proposed in 2021. The developer has requested $7,500,000 in TIF.
Baker Tilly has reviewed the pro-forma. They analyze the potential TIF generation from the project and extraordinary costs that the developer would incur due to the nature of the project being a redevelopment. In other words, what costs are unique to the project that the developer would incur due to redevelopment, that they otherwise would not incur on a greenfield project.
They also analyze project financial feasibility based on the TIF request. The financial analysis of the project based on the developer’s submitted information has resulted in the determination that public assistance through tax increment financing is necessary for the project to proceed as proposed. This determination is based on results of the projected financial performance of the project that includes estimated developer equity returns and debt coverage ratios that have calculated at below-market levels without any level of public assistance. Without public assistance the developer is not able to attract the necessary equity at market returns, therefore making the project not financially feasible. This is a basis for the “but for” test required to provide public assistance.
Further discussion between city staff, Baker Tilly and the Developer need to occur to further analyze the project costs and rent structure. Staff and Baker Tilly have several concerns regarding acquisition and developer fee costs which could potentially be reduced, therefore reducing the potential TIF request. Rents are proposed to be higher than proposed in 2021 and are termed “market rate” by the developer. Market rate is an arbitrary term depending on the market. In general, market rate rents in Blaine are not 100% of the area median income, and closer to 80%. The following is information to consider based on different TIF funding levels.
• $7.5 million TIF Request - The developer is proposing a conservative rent structure. Based on the proposed rents, extraordinary costs and financing structure, this amount could be justified and meet the “but for” qualification.
• $3.5 million - $7.49 TIF Provided - The developer is proposing a conservative rent structure. The developer is leery of what level of rent the area could attract given this could potentially be the first, new multi-family project in the area. If the developer were able to increase rents either initially or over time to increase the annual rent revenue by $300-400,000, less TIF would be required to make the project financially feasible.
• No TIF Provided - If the developer were to offer rents at a true market rate, no TIF would be required for the project as the increased rent revenue of approximately $700,000 annually would off-set the amount of annual TIF provided. Again, the developer is leery of what level of rent the area could attract and is not proposing rents at the level to not require assistance.
Again, further discussions will occur between the City and Developer to further analyze the project costs and rent structure. It’s expected that another TIF discussion will occur with the Council after these discussions have occurred. For the purposes of advancing the discussion, staff is seeking feedback from the City Council on these general parameters:
1. Is the City Council willing to support TIF for this project understanding the extraordinary redevelopment costs and need for TIF to make the project financially feasible?
2. Based on the information provided, do councilmembers have opinions on the amount of TIF requested?
3. Does the City Council feel strongly about the term of a potential TIF district? Typically, redevelopment districts are 26 years. There was indication at previous discussions about providing a lesser TIF amount so the district would be completed in a shorter timeframe, therefore bringing the full positive tax impact of the property to the various taxing entities sooner. However, providing a lesser amount may not make the project financially feasible.
Staff Recommendation
Staff and the developer are seeking the feedback on the physical characteristics of the project along with the three questions identified in the TIF portion of the staff report.
Attachment List
Narrative
Concept Site Plan
Project Pro-Forma
Market Analysis
Short-Term Plan
June 14 Minutes
October 11 Minutes