To support construction of the retail center, Project 1 includes the following public improvements:

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1 First Amendment to Lee s Summit East Tax Increment Financing Plan Submitted by RED Development LLC and Merlin Entertainments Group INTRODUCTION Springsted Incorporated was engaged by the City of Lee s Summit to assist in the review of the First Amendment to the Lee s Summit East Tax Increment Financing Plan. The following report is presented on behalf of the city staff. The recommendations offered in this report represent the conclusions of the city staff made in consultation with Springsted and the city s other consultants participating in evaluation of the proposed Plan Amendment. HISTORY OF THE LEE S SUMMIT EAST TAX INCREMENT FINANCING PLAN In order to better understand this proposed Amendment to the Lee s Summit East Tax Increment Financing (TIF) Plan, it is helpful to review the history of this TIF District. The Lee s Summit East Redevelopment Area was originally created on August 24, Under Missouri state statutes, in order for an area to be eligible for tax increment financing, it must be found to be a blighted area, conservation area, or economic development area. When the Lee s Summit East Redevelopment Area was created, the City Council found the area met the requirements for blight; indicating that a predominance of one or more of the following factors retards the provision of housing accommodations or constitutes an economic or social liability or menace to the public health, safety, morals, or welfare: Defective or inadequate street layout; Unsanitary or unsafe conditions; Deterioration of site improvements; Improper subdivision or obsolete platting; or Existence of conditions which endanger life or property by fire and other causes. The previously approved Redevelopment Area comprises approximately 74 acres generally located in southeast quadrant of I-470 and Highway 50 and is divided into two Project Areas. Project Area 1 consists of 57 acres located on either side of Blue Parkway from Chipman Road on the south to I-470 on the north. Excluded from this area are the adjacent Dave Cross Motors and Bank of the West properties. Project Area 5 is a triangular-shaped, 17 acre tract located at the southeast corner of Chipman Road and Blue Parkway. Project Area 5 is included in the Plan solely for the purpose of re-aligning Blue Parkway. The lack of sequencing in the project numbers is due to changes in the Plan made during its original consideration. The proposed Amendment does not change the boundaries of the Project Areas from those included in the original Plan. (See Exhibit 2 in the Plan notebook for a map of the Redevelopment and Project Areas.) The redevelopment to occur in Project 1 consists of construction of the 548,186 square foot Summit Fair lifestyle retail center to include: One department store; Nineteen medium sized retail spaces; and Three restaurant pad sites. To support construction of the retail center, Project 1 includes the following public improvements: Realignment of Blue Parkway both north and south of Chipman Road; and Construction of a new Ward Road and relocation of associated utility lines.

2 Page 2 When the original Plan was adopted in 2006, the total redevelopment cost, including the Reimbursable Projects, was $144,436,904 plus interest and financing costs. Reimbursable Projects totaled $49,865,533 (plus interest and financing costs) to be financed through: A Tax Increment Financing district capturing 100% of the property tax increment (PILOTS) and 50% of the economic activity taxes (EATs) less annual education grants to the R-7 School District in an amount equal to 22.5% of the PILOT increment that would have been received by the School District in absence of TIF; A Super TIF capturing 20.46% of city s sales tax not captured by the Local TIF as EATs; and A Community Improvement District (CID) coterminous with Project Area 1 charging an additional 1% tax on all retail sales and imposing a $1.24 per square foot special assessment. Projects 1 and 5 are unchanged by the proposed amendment except for the capture of State Supplemental TIF which, if approved by the state, will prohibit the PILOT payments to the School District. Construction of these Projects has recently begun and the TIF Commission voted on April 2, 2007 to activate Projects 1 and 5 for purpose of initiating collection of the tax increment. The City Council will consider activation of Projects 1 and 5 on May 3, Construction of these Projects is anticipated to be completed by fall 2008, subject to completion of the area transportation improvements. THE AMENDMENT The remainder of this report solely addresses the First Amendment to the Lee s Summit East Tax Increment Financing Plan and excludes any further discussion of Project Areas 1 and 5. REDEVELOPMENT AREA The Amendment to the Lee s Summit East Redevelopment Area calls for the addition of 5 Project Areas totaling approximately 337 acres. This additional area is irregularly shaped but can generally be described as bounded by the relocated Blue Parkway on the west, I-470, the Missouri Pacific Railroad and Victoria Drive on the north, Douglas Road on the east, and NW Chipman Road on the south. Excluded from the Project Areas is the existing Summit Technical Center. (See Plan Exhibits 1 and 2 for more detailed descriptions and maps of the Project Area locations.) Nearly all of the Redevelopment Area added through this Amendment is currently undeveloped. THE REDEVELOPMENT PROJECTS Each of the additional Redevelopment Projects, while distinct, is intended to collectively form a regional tourism and retail attraction. Additional Project Areas Project Acreage Total Project Area 2 includes a 650,705 square foot power retail center anticipated to include a combination of big-box retailers, junior-box retailers, small shops, and pad sites. It is anticipated that the retail center will be owned and operated by RED with the exception of 2 big boxes and 7 pad sites totaling 282,440 square feet. The total Project cost of $99,117,594 is to be financed entirely from private sources. Construction is proposed for completion by fall Project Area 3 is the LEGOLAND Missouri theme park to be owned and operated by Merlin Entertainments Group, a subsidiary of the Lego Group. Merlin Entertainments Group operates four existing LEGOLAND parks located in Carlsbad, California; Billund, Denmark; Gunzberg, Germany; and Windsor, United Kingdom. LEGOLAND theme parks are designed for children 2 to 12 years old and feature approximately 50 Lego-themed rides, shows and attractions. The Applicant and Merlin Entertainments Group anticipate

3 Page 3 that LEGOLAND Missouri will attract approximately 1 million visitors in its first year of operation. The total cost of Project 3 is $220,710,246, including financing costs and contingency The table below identifies the estimated redevelopment project costs by type of expenditure and source of funding. Reimbursable Project Costs are those expenditures for which the Applicant seeks public funding. The Reimbursable Project Costs to be financed from public sources represent approximately 78% of the total Project 3 cost and 43% of the total Amendment cost. Type of Expenditure Total Costs Private Costs Reimbursable (Public) Project Costs Additional Funding Land $16,985,330 $- $16,985,330 - LEGOLAND 155,000,000 35,000, ,000,000 - Tudor Road Extension (Ward Road to Douglas Road) 6,154,000-6,154,000 - Railroad Crossing (Tudor Road) 4,500,000-4,500,000 - Power Line Relocation 6,200,000-6,200,000 - Utility Main Relocation 1,750,000-1,750,000 - Pedestrian Overpass 2,000,000-2,000,000 - Ward Road Expansion from 2 lanes to 4 2,500,000-2,500,000 - Additional Road Improvements 3,898,000-3,898,000 - Interest Carry Land 1,910, ,910,850 Interest Carry Public Improvements 1,518, ,518,863 Points 439, ,873 Engineering Design, Contract Admin, Testing for Roadwork 2,218, ,218,000 Legal 500, ,000 Closing Loan and Land 100,000-61,490 38,510 Development Overhead 2,000,000-2,000,000 - Destination Development Fee 2,000,000-2,000,000 - Taxes During Construction 30,000-30,000 - Construction Management 405, ,030 - Predevelopment Expenses, Including Travel 1,000, ,000,000 Appraisal 25,000-25,000 - Investment Banking Fee (IRR C&P) 4,025,000-4,025,000 - Contingency 5,550, ,550,300 Totals $220,710,246 $35,000,000 $172,533,850 $13,176,396 At the time this report was prepared, the source of the Additional Funding indicated in the Tax Increment Financing Plan was unknown.

4 Page 4 Merlin Entertainments will construct the private improvements in this Project. RED will be responsible for construction of the public infrastructure funded as Reimbursable Project Costs. Construction of LEGOLAND Missouri is anticipated to be completed by spring Project Area 4 consists of a 30,000 square foot Sea Life aquarium attraction, 85,000 square feet of entertainment focused, festival retail, and overflow parking for LEGOLAND. Like LEGOLAND, the Sea Life Aquarium is to be owned and operated by Merlin Entertainments Group. Ultimate ownership of the overflow parking for LEGOLAND located in Project 4 was undetermined at the time this report was prepared. Merlin operates 26 Sea Life Centres and Sanctuaries worldwide located in Finland, Ireland, United Kingdom, Germany, Netherlands, Belgium, France, and Spain. The festival retail would be owned by RED with the exception of four pad sites totaling 30,000 square foot to be constructed and operated by third parties. The Project cost of $29,554,791 is proposed to be financed solely from private sources. Construction completion is anticipated to occur in fall Project Area 6 is a 250-room, Lego-themed hotel to be constructed, owned and operated by a third party developer. The entire Project cost of $51,500,000 is anticipated to come from private sources. Completion of construction is proposed for fall Project Area 7 includes an 850,000 square foot office development to be constructed and operated by third party developer(s). The First Amendment does not contemplate activation of Project Area 7, or dedication of increment from Project Area 7. The total combined cost of projects 2, 3, 4, and 6 is $440,882,631. The Applicant proposes that the Amendment Reimbursable Project Costs be financed from four sources a Tax Increment Financing District, City Super TIF, State Supplemental TIF, and a Community Improvement District. The Amended Tax Increment Financing Plan calls for the TIF District to collect 100% of the Payments in Lieu of Taxes (PILOTS) and 50% of the Economic Activity Taxes (EATS) generated within Projects 2, 3, 4, and 6. The Initial Equalized Assessed Value of these Projects is estimated at $1,336,815 (2006 base year). The Estimated Equalized Assessed Value after redevelopment is estimated at $74,428,092 and is Reimbursable Project Funding Sources TIF $240,529,924 City Super TIF 70,506,057 State Supplemental TIF 134,282,000 CID 62,672,051 Total $507,990,032 projected to grow by 2% every year. Initial Project Area 2, 3, 4, and 6 annual retail sales are estimated at $48.6 million. By 2011, total retail sales are projected to increase to $257.6 million, growing annually by approximately 2% (including a 5% vacancy factor). Although the TIF will capture 50% of the CID sales tax as EATs, the Application reflects all of the CID sales tax flowing to the CID. Additional city appropriations are proposed to be provided through a Super TIF which would capture the remaining 50% of the city s sales taxes not captured by the TIF District as EATs. The City of Lee s Summit sales taxes captured by the Super TIF include the city s 1.0% general sales tax, 0.5% transportation sales tax, 0.5% capital sales tax and 0.250% parks sales tax (effective 2008). The Application does not state whether the percentage of sales tax captured by the Super TIF will be fixed or will vary based on the final cost of the Reimbursable Projects and the tax increment generated by the TIF, State Supplemental TIF, and CID. It should be noted that the incremental increase in utility taxes within the area addressed in the Amendment is also captured as EATs by the TIF and Super TIF. Of course, the increase in utility taxes is

5 Page 5 very small relative to the sales tax increment. The Amendment provides for $500,000 per year of city sales tax increment to be forwarded to the city to fund the costs of city services. Missouri state statute provides for a portion of the state s incremental revenues generated within a TIF district to be made available for payment of reimbursable project costs. Allocation of state funding is contingent upon approval by the state Department of Economic Development and annual appropriation by the state legislature. State Supplemental TIF applications may request 50% of either the net new sales taxes or net new income taxes generated within the Redevelopment Area. The Applicant has indicated its intention to seek State Supplemental TIF and the Amended Plan anticipates receipt of $134,282,000 in state sales tax increment. This amount is based upon the assumption that 82% of the sales taxes generated within the Redevelopment area will represent net new sales taxes to the state and that the state allocation will be 50% of this amount. The Applicant has proposed creation of a Community Improvement District (CID) imposing a 1% sales tax, 50% of which would be captured by the Lee s Summit East TIF District as EATs. At the time this report was prepared, it was undetermined whether this CID would be an expansion of the CID created with the original application or an additional CID. The $172,533,850 in Reimbursable Project Costs listed above plus interest and financing costs are anticipated to be financed through tax increment bonds issued by the city and/or through bonds issued by the CID. With the exception of the $500,000 annual payment to the city, the collected tax increment from the TIF, Super TIF, State Supplemental TIF, and CID, would be dedicated toward payment of the debt service on the obligations. The Applicant forecasts that these revenue sources are sufficient to fund the Reimbursable Project Costs based upon the following assumptions: 6% tax-exempt interest rate; 125% debt coverage ratio; 12 months of capitalized interest; Debt service reserve fund including one year of debt service; 3% of bond amount to pay financing costs; and Yearly surplus revenues utilized for early retirement of outstanding bonds The Applicant s amortization analysis projects that the bonds for Projects 2, 3, 4, and 6 will be fully redeemed in REQUIRED STATUTORY FINDINGS Missouri state statutes establish seven criteria, or findings, to determine an area s eligibility for tax increment financing. It is the role of the TIF Commission to advise the City Council on the Redevelopment Area s conformance with these statutory findings. Finding #1: Blighted Area, Conservation Area, or Economic Development Area The redevelopment area on the whole is a blighted area, a conservation area, or an economic development area. The Applicant suggests the Redevelopment Area qualifies for tax increment financing as a blighted area. In support of the Redevelopment Area s eligibility for tax increment financing as a blighted area, the Applicant has provided the following information within the proposed Amendment to the Tax Increment Financing Plan.

6 Page 6 Redevelopment Plan Objectives which can be summarized as: Elimination of blighting factors by constructing a regional shopping center; Construction of streets, utilities, sidewalks, parking lots and other surface improvements; Upgrade and refurbish utilities and other infrastructure facilities; Vacate any existing public right-of-way inconsistent with the Plan; Enhance the tax base and encourage private investment in surrounding areas; Promote health, safety, order, convenience, prosperity and the general welfare; Provide business opportunities; Stimulate construction, secondary and support employment; Stimulate development which would not occur without tax increment financing; Attract quality retail tenants; and Promote tourism in the City of Lee s Summit and the State of Missouri Please see Exhibit 3 of the Tax Increment Financing Plan for a complete listing of these objectives. A Blight Study prepared on behalf of the Applicant by James Askew & Associates, Inc. and updated/revised as of February 28, 2007 which concludes: The predominance of only one of the five blight factors needs to be present in the Study Area by statutory definition, but all five blight factors are present in the Study Area, and their presence retards the provision of housing accommodations, constitutes an economic and social liability, and a menace to the public s safety and welfare. The Blight Study is included as Exhibit 9 of the Plan. Staff recommendation: Find that the proposed Redevelopment Area is a blighted area as described by State Statute. Finding #2: But For Analysis The redevelopment area on the whole has not been subject to growth and development through investment by private enterprise and would not reasonably be anticipated to be developed without the adoption of tax increment financing. The City of Lee s Summit engaged Springsted, Inc. to independently evaluate whether the projects contained in the would likely occur but for the requested public subsidy. A copy of the But For Determination Report is attached as exhibit A. This evaluation concludes as follows. This First Amendment involves the expanded redevelopment of an underutilized site suited for entertainment and retail uses. The completion of the proposed attraction and accompanying retail and hotel uses will require the Applicant to take significant risk prior to completion of both the public and private components. This level of risk demands a return greater than the 3% above and ideally within the range of 10% to 20%. Based upon a Blight Study prepared by James Askew & Associates dated February 28, 2007 and upon our analysis, we conclude that the amended

7 Page 7 redevelopment area has not been subject to growth and development through investment by private enterprise and would not reasonably be anticipated to be developed without the adoption of an amendment of tax increment financing and that the proposed project would not occur on this site without a public subsidy. The costs to attract the LEGOLAND attraction to the City of Lee s Summit, including land assembly and public infrastructure are too great to be borne by the private companies involved. The completion of all the components of the project is necessary to achieve the desired result as well as the desired returns in the current marketplace. Staff Recommendation: The project would not be developed but for public assistance. Finding #3: Conformance with the Comprehensive Plan The Redevelopment Plan conforms to the Comprehensive Plan for the development of the municipality as a whole. On April 10, 2007, the Lee s Summit Planning Commission adopted an amendment to the Comprehensive Plan calling for uses in the Redevelopment Area that are compatible with the those called for in the. Staff Recommendation: Find that the proposed Redevelopment Plan conforms to the Comprehensive Plan for the development of the municipality as a whole. Finding #4: 23 Year Financial Period The estimated dates, which shall not be more than twenty-three years from adoption of the ordinance approving a redevelopment project within a redevelopment area, of completion of any redevelopment project and retirement of obligations incurred to finance redevelopment project costs have been stated, provided that no ordinance approving a redevelopment project shall be adopted later than ten years from the adoption of the ordinance approving the redevelopment plan under which such project is authorized and provided than no property for a redevelopment project shall be acquired by eminent domain later than five years from the adoption of the ordinance approving such redevelopment project. Information provided by the Applicant indicates that construction of the Redevelopment Project is estimated to begin in calendar year 2007 and be completed within calendar year Further, the application states that obligations issued to finance Reimbursable Project costs will be retired no later than 23 years from adoption of the ordinance approving the Redevelopment Project. The Applicant stated in the original Financing Plan that: The City Council may by separate action, in its sole discretion, exercise power of eminent domain to carry out objectives of the Plan. This element of the Lee s Summit East Tax Increment Financing Plan is unchanged by the Amendment. It is the intention of the city that not property will be secured by eminent domain later than five years from adoption of the ordinance approving the Redevelopment Project. Staff Recommendation: The Plan includes both an estimated date of completion and an estimated date for retirement of obligations issued to finance Redevelopment Project costs. These dates are not more than 23 years from the adoption of the ordinance approving the Redevelopment Project

8 Page 8 within the Redevelopment Area. No phase of the project is scheduled to begin more than 10 years after adoption of the ordinance authorizing the Redevelopment Plan. No property will be secured by eminent domain later than five years from the adoption of the ordinance approving the Redevelopment Project. Finding #5: Relocation Plan A plan has been developed for relocation assistance for businesses and residences that complies with Sections to of the Revised Statutes of Missouri, as amended. The Applicant has developed a Relocation Assistance Plan which is included in the Financing Plan as Exhibit 11. The submitted Relocation Assistance Plan conforms with Sections to of the Revised Statutes of Missouri, as amended. Staff Recommendation: A relocation plan has been submitted and complies with Sections to of the Revised Statutes of Missouri, as amended. Finding #6: Cost-Benefit Analysis A cost-benefit analysis has been submitted that shows the economic impact of the Plan on each taxing district which is at least partially within the boundaries of the redevelopment area, that the analysis demonstrates the impact on the economy if the project is not built, as well as if it is built pursuant to the redevelopment plan under consideration, that the cost-benefit analysis includes a fiscal impact study on every affected political subdivision, and that there is sufficient information from the developer to evaluate whether the project as proposed is financially feasible. Impact of Project on Taxing Jurisdictions and the Economy The Applicant has included the required Cost Benefit Analysis as Exhibit 7 of the Financing Plan. The summary results of this Cost Benefit Analysis are: Taxes (23 Years) With Project Taxes (23 Years) No Project Net Present Value Benefit of Project (23 Years) City of Lee s Summit $47,978,452 $400 $47,978,052 Lee s Summit School District 19,733,971 1,588,332 18,145,639 Jackson County 37,192, ,814 37,051,734 Mental Health 495,359 34, ,553 Metro Junior College 1,249,207 71,259 1,177,948 Mid Continent Library 1,378,937 94,872 1,284,065 Handicapped Workshop 429, , ,362 State of MO Blind Pension 149,051 9, ,706 Totals $108,607,028 $2,190,969 $106,416,059 Project Financial Feasibility The city hired Canyon Research to assess the feasibility of the retail and hotel portions of the Amendment. In addition, the Company was asked to forecast the net new sales to the State of Missouri resulting from the Lee s Summit TIF as a whole. A copy of this report is attached as Exhibit B. In summary, Canyon Research concluded that the retail and hotel projects were feasible in the current market. Canyon s forecasted revenues were comparable to those proposed by the Applicant. (Please see Springsted s But For Report for a comparison of Canyon Research s

9 Page 9 revenues to those contained in the Plan Amendment.) Selected conclusions from Canyon Research s Market Feasibility and Missouri Net New Sales Study are; sufficient demand exists to warrant near-term construction of all three shopping center concepts totaling approximately 1.3 million square feet planned for the Lee s Summit East Redevelopment Area. Based on directly competitive hotel market conditions and the ability of a fullservice hotel to capture room night demand generated by the approximately 1.45 million annual visitors to Legoland and the aquarium, the developer s anticipated opening date for the 250-room Legoland-theme hotel appears reasonable and achievable. Throughout the 25-year projection period total net new retail sales generated by the Lee s Summit East TIF Plan are estimated at $11.2 billion, translating to approximately 86.7 percent of total gross sales. The table below illustrates RED s and Canyon Research s sales per square foot projections at stabilization in Sales Per Square Foot Projections Source Summit Fair Power Center Festival Retail RED $298 $284 $308 Canyon Research $294 $308 $331 JB Research, a consulting firm specializing in tourism and entertainment attractions, was employed to analyze the market support, potential attendance, and per capita revenue for the LEGOLAND Missouri theme park Project. In general, JB Research s conclusions supported the attendance and revenue projections for LEGOLAND contained in the Applicant s Financing Plan. This report, titled Attendance and Revenue Outlook for the Proposed LEGOLAND Missouri in Lee s Summit is attached as Exhibit C. Key conclusions are: total annual attendance at stabilization (usually the third year of operation) is projected at slightly more than one million. Some 40 percent of total attendance will originate in the resident market and 60 percent in the leisure tourist market. The imputed overall market capture rate of 8.4 percent falls comfortably within the range reported for existing parks. The LEGO Company has projected per capita revenue at LEGOLAND Missouri at $42.50 in current dollars at stabilization. Approximately 57 percent of this total, or $24.35, will be derived from admissions. The latter figure is based on an adult admission price of $39.95 at an estimated 61 percent yield (net effective ticket revenue after allowing for scaled-down prices for children and seniors, season passes, promotional discounts, and an allowance for complimentary admissions). Revenue from merchandise sales is projected at $9.25 per capita, while revenue from food and beverage sales is estimated at $7.00 per capita. JB Research considers these projections to be reasonable in light of current experience at existing LEGOLAND parks as well as industry standards.

10 Page 10 While considering financial feasibility, it should be noted that the Plan relies on $13,176,395 from an unidentified additional revenue source. A similar consideration is the State Supplemental TIF which, at this point in time, has not been approved by the state Department of Economic Development nor appropriated by the state legislature. Failure to secure either of these revenue sources would almost make execution of the Plan impossible. Another financial feasibility consideration is the Applicant s assumed debt service coverage ratio of 125% which appears low. A higher coverage ratio would result in less bond proceeds available to fund Reimbursable Project Costs. Staff Recommendation: While a cost-benefit analysis has been developed and included in the Plan that is sufficient to show the economic impact of the Plan on each taxing district, the First Amendment to the Lee s Summit East Tax Increment Financing Plan, as currently structured, is not sufficient to finance the Reimbursable Projects. However, the financing gap does not appear insurmountable. Therefore, it is recommended that the TIF Commission make a positive finding contingent upon: 1. The Applicant revising the Plan to identify full funding for the Plan Reimbursable Project Costs prior to presentation to the City Council; and 2. Appropriation by the state legislature of funds from the State Supplemental TIF in an amount sufficient, with other identified Plan funding sources, to finance the Plan Reimbursable Project Costs. Finding #7: Gambling Establishments The plan does not include the initial development or redevelopment of any gambling establishment. A review of the Plan indicates that it does not include any gambling establishments. Staff Recommendation: The Plan does not include gambling establishments. OPEN ISSUES As of the date this report was presented, the Applicant had not presented current legal descriptions for the project areas or a Redeveloper Affidavit. These should be submitted prior to consideration of the Plan by the City Council in order to complete the Amendment Application.