Workshop Item - Erik Thorvig, Community Development Director
Title
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Rainbow Village/Roer’s Apartment Tax Increment Financing (TIF) Request Discussion
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Background
At the June 14, 2021 City Council workshop, a redevelopment proposal was presented to the City Council for the Rainbow Village retail center located at County Road 10 and 87th Lane. The new owner of the site is proposing to remove the old Rainbow grocery store tenant space (which has been vacant for 7+ years) on the east side of the site, and Roer’s Companies would construct a 220-unit apartment building. In addition to the apartments, the proposal includes renaming the center to the Blaine Lakes Center, new building elevations, new site signage, new lighting and landscaping upgrades.
After discussion at the June 14, 2021 workshop, a majority of the City Council was supportive of continuing the process with the developer. Prior to the project moving forward, the developer needs clarity from the City Council regarding TIF assistance for the project. This action would require the establishment of a TIF Redevelopment District.
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 would need to be 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 $48,787,851. The developer has requested $7,225,000 in TIF.
A memo is included from Baker Tilly that analyzes the financial pro-forma of the project. When reviewing the pro-forma, city staff and Baker Tilly analyzed the 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.
The developer has identified TIF-eligible expenditures equaling approximately $8,380,000 (breakdown included in Table 2 on attached memo). Financial analysis of the project has resulted in the identification of a range of approximately $5.5M- $8.3M of eligible expenditures that could be considered ‘extraordinary’ to the project and a barrier to redevelopment occurring. Typical extraordinary redevelopment costs that cannot be supported solely by the project alone could justify the need for public financial assistance and allow the project to proceed as proposed to provide appropriate upfront funding and meet the minimum debt coverage requirements. Based on current tax increment projections, it is estimated to take approximately 15 years of increment collections to repay TIF assistance totaling $5.5M. This is less than the maximum term of 26 years for a redevelopment TIF district (see table 3 on attached memo). The developer would finance the total development costs of $48.7M upfront and would be reimbursed for a portion of those costs on an annual basis using future tax increment revenues.
Project Financing
There are generally two ways in which assistance can be provided for most projects, either upfront or on a pay-as-you-go basis. With upfront financing, the City would finance a portion of the developer’s initial project costs through the issuance of bonds or as an internal loan. Future tax increment would be collected by the City and used to pay debt service on the bonds or repayment of the internal loan. With pay-as-you-go financing, the developer would finance all project costs upfront and would be reimbursed over time for a portion of those costs as revenues are available.
Pay-as-you-go-financing is generally more acceptable than upfront financing for the City because it shifts the risk for repayment to the developer. If tax increment revenues are less than originally projected, the developer receives less and therefore bears the risk of not being reimbursed the full amount of their financing. However, in some cases, pay as you go financing may not be financially feasible. With bonds, the City would still need to make debt service payments and would have to use other sources to fill any shortfall of tax increment revenues. With internal financing, the City reimburses the loan with future revenue collections and may risk not repaying itself in full if tax increment revenues are not sufficient. The project financing as requested includes pay-as-you-go for reimbursement of eligible costs.
Rent Rates
The rent rates for this project are proposed to be lower than market rate, however above what would be considered affordable by statute which would allow for additional funding sources for affordable housing either from the state, county or city. The developer’s rationale is to provide a housing product type for the missing middle demographic. The goal is to keep the rents at or below what rents would be for individuals with incomes at or below 80% area medium income (AMI). The goal is to create a product that diversifies housing options in the community. Finishes and amenities are similar to that of a market rate project, however include larger units targeted towards families. Additionally, the developer is attempting to create a housing product that enables individuals who do not qualify for affordable housing based on income but also cannot reasonably afford top of the market rental housing. The subsequent financial gap created with lower rents creates another extraordinary financial gap which justifies the need for tax increment financing.
If the project moves forward and TIF is provided, the City will impose rent caps within the TIF and development agreements which will ensure the rents stay at a level that meets that market gap. This would prevent the developer from inflating rents that would generate additional income nullifying the need for TIF that assists in covering the financial gap that exists with lower rents.
Conclusion
The developer has requested financial assistance related to redevelopment of the existing retail center and subsequent construction of 220 units of apartment units, of which all would be affordable below 80% median income. Through submission of the tax increment financing request and supporting financial information, the developer has indicated that the project would not occur as proposed without financial assistance from the City due to below market rates of return.
Based on the financial analysis and available financing assumptions, without financial assistance, the project would not be finanically feasible. Upon approval of a TIF district and project, the City must make several findings, including the “but for” test; that the proposed redevelopment would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future. Based on the financial analysis relative to the need for tax increment financing assistance, city staff and Baker Tillly agree that the “but for” finding is met. Without assistance, the projected annual and cumulative rate of return is below industry standards for this type of project and with annual public assistance, the project is projected to achieve marketable returns. The rate of return analysis 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, and/or 3) additional funding sources.
Parameters for an appropriate level of public assistance that were considered when understanding what the extraordinary costs of the project are and those that may be financed through tax increment revenues include the following:
• Return on Investment
• Purchase price and other development costs
• Public to private investment
o Past practice of the City providing in the range of 10% of overall project costs. Providing TIF of $5.5M is closer to the past practice of providing approximately 10% over the overall project costs.
• Public assistance (TIF) and private equity
• Extraordinary costs
• Financial gap
• Term of collection (district)
o City’s preference to have the shortest length of the TIF district as possible which would result in providing $5.5M in TIF over a 15-year period. Providing the amount requested by the developer would result in the need for a full term of the district which is 26 years.
• Other necessary public improvements
Staff Recommendation
As indicated in the conclusion, based on the financial analysis and available financing assumptions, without financial assistance the project is not financially feasible. The amount of TIF requested by the developer ($7.225M) is at the high end of the extraordinary costs range of approximately $5.5M- $8.3M.
Information will be provided by Baker Tilly and developer regarding the rationale for the amount of assistance provided. The City Council will need to consider that information and provide direction to staff and the developer regarding the amount of TIF should be provided to the project.
Attachment List
Proposed Project Plans
Memo from Mikaela Huot with Baker Tilly