Workshop Item - Erik Thorvig, Community Development Director
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Southwest Corner of 105th Avenue and Radisson Road Development Financial Request
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Background
The Metropolitan Airports Commission (MAC) owns significant land that encompasses the airport and surrounding areas. Over the last several years, MAC identified certain parcels as excess land and offered them for private development. The southwest corner of 105th Avenue and Radisson Road is one of those areas. In February, MAC entered into a long-term land lease with Pinpoint Community Development, LLC (Pinpoint). Pinpoint was one of the groups that submitted for the 105th Avenue Redevelopment RFP and is headed by Mike Breese. The agreement outlines a 120-day due diligence period which allows the developer to complete necessary work to determine whether the development proposal is able to move forward.
The developer has submitted plans to the City and is going through the site plan approval process identified in the newly created zoning ordinance for the 105th Avenue Redevelopment Area. The proposed site was not included in the 105th Avenue Redevelopment Area RFP, however is included in the 105th Avenue zoning district as the site was expected to be developed and the City desired to have development on the proposed site be consistent with development occurring north of 105th Avenue. The developer is scheduled to go before the Planning Commission on March 14, 2023.
The development site is approximately 3.32 acres and currently has one soccer field. The developer has been working with the NSC to improve and share the parking lot directly to the west of the project along with shared access points from 105th Avenue.
Per the developer’s submittal, the following is information about the project.
PinPoint Community Development, LLC is proud to present a two-phase development plan to accentuate the ambitious city of Blaine goals to expand opportunities for local residents and traveling guests to enjoy more options in the realm of restaurants, retail, entertainment and Class A office space. At its completion, local and traveling folks will find plenty to enjoy for the entire day and into the evening; even overnight at the upcoming adjacent city center hotel located next to Kwik Trip. Phase I will consist of two commercial buildings of mixed use.
Building One will be a 9,100+ square foot Pizza Pub Prime (7,000 FFL, 2,100 SFL) with a 3,000+ square foot roof top patio and 1,000+ square feet of ground patio space. This is the 10th Pizza Pub to be built, with the 9 previous restaurants all operating today and at a profit. The design is to provide customers with unique experiences at each visit, as the interior and multiple floors and patios will enjoy different ambiances. Features will include a condensed version of the Pizza Pub staple menu plus a new addition to the Blaine pub, the enhanced Prime menu featuring higher end appetizers and entrees. The main level will be constructed to accommodate families and the 2nd floor will serve and entertain more of an adult crowd, including private banquets and events. The design scheme will show a higher end finish without intimidating a family that enjoyed a day at the NSC, Victory Links or other activities. A true balance of higher end feel but built to endure higher athletic traffic as well.
Building Two will consist of 20,000+ square feet (12,000 FFL, 8,000 SFL) mixed use of a Mexican restaurant with a Tequila Bar focus, private member club, office, health/athletic services, retail and grab n’ go food. Many tenants to be determined, thus the buildings final design to be finalized, however, a planned concept to fill tenants to suite is also accompanied in the package. Both buildings will tie together in exterior aesthetics and carry into phase II if successful. Amenities in building two will include roof top patios for the Private Club and Restaurant as well as office tenants, courtyard design in the middle for smaller retailers and a shared elevator for 2nd floor tenants and ground patios. Synergistic mixed uses of the site will be the lead determining factor in tenant and use selection.
PinPoint for a potential Phase II, not for contemplation today, is in negotiations to expand to the south 12 acres, to include but not limited to: 40,000 square foot indoor Pickle Ball facility, 15,000 square foot Minnesota Hockey Hall of Fame, 13,000 square foot Day Care with drop and go, two more 12,000 square foot retail buildings and another restaurant/clubhouse facility. This phase is in vision development along with negotiations with the MAC, NSC and Blaine. The site plan for phase I is constructed with ability to enable phase II expansion.
Financial Analysis
Along with preparing the necessary civil and architectural plans, the developer has also prepared a project proforma. The overall project costs are approximately $12.2M. The developer is requesting city assistance in the amount of $1,525,112. The following is a list of infrastructure costs the developer is seeking the assistance for:
Radisson Road Turn Lane - $200,000
Grading/Curb/Gutter/Asphalt - $300,000
Water/Sewer/Storm Piping - $150,000
Street/Parking Lot Lighting - $39,000
Underground Water Retention - $385,000
Resurfacing NSC Lot - $110,000
Private Road Expansion - $65,000
Dirt Fill - $250,000
Park Dedication Waiver - $26,112
TOTAL - $1,525,112
Typically, the City does not financially assist with development of vacant land unless there are extraordinary site development costs that a developer would typically not incur for a “shovel-ready” site. There are several unique circumstances with this project/site that could warrant the need for financial assistance. Those include:
NSC Property/Underground Water Retention/Dirt Fill
The development requires significant parking to accommodate the proposed uses. The parking needs are not required by the City, but by the developer to make the site function appropriately. The developer has worked with the NSC to utilize parking controlled by the NSC to the west. In order to utilize the parking, the NSC is requiring repaving of the existing lot at a cost of $110,000. This also includes improvement and expansion of the shared private road that serves the development and NSC at a cost of $65,000. Additionally, the developer is proposing to utilize underground water retention versus surface retention ponds. Surface retention ponds take up significant land and the developer would prefer to utilize the land for parking and place structures underground to manage stormwater. This cost is $385,000. Lastly, the developer will have $250,000 in soil corrections to make the site buildable. The total costs for these improvements are $810,000.
Typically, when there are unique costs associated with making a site “shovel-ready” this is addressed through a reduction of the sale price of the property. Unfortunately, in this scenario, because the developer is not purchasing the land but instead leasing, it’s not possible to reduce the land sale cost.
Staff believes there is justification to assist with the $810,000 in costs identified above. The other identified costs would typically be paid by the developer and is factored into their overall project proforma. The developer argues that City assistance with the additional costs are required to make the project financially feasible. This results in the need to analyze the overall project proforma related to the costs identified above, other significant infrastructure costs identified by the developer and the overall financial returns of the project related to rent rates and equity return.
A proforma analysis is a set of calculations that projects the financial return that a proposed real estate development is likely to create. It begins by describing the proposed project in quantifiable terms. It then estimates revenues that are likely to be obtained, the costs that will have to be incurred, and the net financial return that the developer expects to achieve.
The proforma is the basic “go / no-go” analysis that developers use to decide on whether to move forward with a project. There are few “absolutes” as to how such analyses can be constructed, but there are common practices and techniques that nearly all proformas attempt to provide in one form or another.
The developer states: The numbers are based on garnering rent revenues at the top end of the current market, $30 NNN PLUS the land lease pro rata to each tenant. We believe that in time the market will catch up to what the project is delivering and rents year 4 on will escalate closer to the $35-40 that is attainable once the market adjusts. Delivering a newer level of product can bring initial sticker shock, but once the reality of the premium finish is realized and as the various phases of development are built, the market settles into the new ‘norm.’ At least that is the risk we are willing to take on futures which is the only way we can achieve mid-teen to upper teen returns that a developer needs to obtain. We are also charging Pizza Pub Prime $38 NNN, 26% above current market peaks (doesn’t even include the land lease portion), to help make the project pencil. That will help the comps as well.
However, if we are wrong, we need to know the project is at least stable with a low return and with city help, there is at least a nominal single digit return.
The alternative is to capitalize on the location with a more vanilla build, avoid the traffic relief and safety needed and it will pencil fine. My understanding is that the city wants this area to stand out and be different, create local culture with the enhanced design build, mostly with local business owners and be positioned for multiple expansion opportunities (Phase II, parking ramp, pedestrian bridge, etc) and improve traffic flow and safety. The good news is that we will be setting the trend ahead of the larger parcels, Phase II & the City Center, etc. So, we will be the guinea pig to setting a new trend in higher cost but delivering a much better product. Our market analysis is that its here in Blaine, we just need to warm into it. Quantifying what that means can be a challenge but let’s say there is 100,000 leasable square feet coming there, comps adjust the new rents being $35 vs $30 (max today is $30 unless your Starbucks or Jersey Mikes, which we agree we have too many of) will have a financial impact of $500,000 per year or $7,692,307 of value at a 6.5% cap rate. That doubles if we can get our site to $40/sq ft ahead of other buildings opening up.
When reviewing financial requests, the City utilizes the expertise of Baker Tilly to review the development proforma and determine whether the proposed costs are justified and whether the net financial return or return on investment (ROI) is reasonable with city assistance provided. This information is not yet ready at the time of publication of the staff report however will be made available prior to/at the workshop.
Project Timing
In January, city staff was made aware of new federal regulations related to protections of habitat for the northern long-eared bat. The US Fish and Wildlife Service finalized the status change of the bat from federally threatened to federally endangered and the change will go into effect on March 31, 2023. This means that impacts to the bat habitat (i.e., tree removal) will no longer be permitted between April-November in any calendar year. The short notice has resulted in government entities and developers moving quickly to determine whether trees can be removed prior to March 31 in order to keep projects on schedule. This project is impacted as the developer would like to remove 28 trees on the property in March so development can begin in April/May. If trees are not removed in March, the project would be delayed until 2024.
Staff is concerned with the developer removing trees prior to knowing whether the City will provide financial assistance as the project will likely not move forward absent the assistance. Therefore, there is urgency from the developer to know whether the city is willing to provide assistance. If the response is favorable, the developer will remove trees in March. If the response is not favorable, the development would likely not occur, and the trees would remain.
Given the impacts of the new regulations to city projects and development, staff will be providing the city council a more general update in the near future.
Financial Source
This project would not be eligible for creation of a new tax increment financing (TIF) district as it doesn’t meet the statutory requirements for the various types of TIF districts allowed. However, the EDA has various existing funding accounts that could be utilized for this assistance. The following is information on various EDA accounts and current balances which could be used for this project:
General EDA Capital - $798,104
Misc. Funds from Property Sales, etc. - $2,033,012
EDA Wetland Bank Balance from Sold Credits- $2,162,244
Redevelopment Pooled TIF - $577,066
TOTAL: $5,570,426
No future expenditures have been identified at this time from these accounts, however, these funds could be a source if additional property acquisition is needed in the 105th Avenue redevelopment area and/or Northtown.
Staff Recommendation
Discuss the proposal and provide feedback to staff and the developer.
Attachment List
Map
Plans