M E M O R A N D U M. Mercantile Residence Inn by Marriott Request for TIF Funding

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1 3 M E M O R A N D U M TO: FROM: MRA Board of Commissioners Ellen Buchanan, Director DATE: June 26, 2017 SUBJECT: Mercantile Residence Inn by Marriott Request for TIF Funding Background As anticipated, the MRA has received an application for TIF funding for the new hotel to be constructed at 110 N. Higgins Avenue on the corner of Higgins Avenue and Front Street. The site formerly housed the Missoula Mercantile, the Bon Marche and finally Macy s Department Store. Macy s closed in January The building was eventually purchased by Octagon Partners of Charlottesville, VA, a firm specializing in restoring and reusing historic buildings. After a number of years of trying the redevelop the building, Octagon put it on the market for sale. Numerous developers from around the country tried to find a way to restore and reuse the Merc with no success. In September 2015, HomeBase Montana entered into a contract to purchase the Merc and went through an extensive exploration relative to restoring the historic building and, like others before, could not make it work financially. They also conducted a thorough structural investigation and found that there were serious structural impediments to restoration, primarily as a result of the deterioration of the brick exterior. The conclusion of their due diligence was that the only feasible way to reuse the site was to demolish the building and build new. HomeBase, now Mercantile Investors, LLC (MI), made a series of presentations in March 2016 to the Historic Preservation Commission (HPC), City Council, MRA, BID and a large public meeting held at the Wilma Theater presenting their findings and their proposed reuse of the site. The proposal was to build a new hotel with ground floor retail requiring total demolition of the building. MI applied for Demolition Historic Preservation Permit on March 8, 2016 and the HPC denied the application on June 2, 2016 despite a recommendation from the Historic Preservation Officer for permit approval. MI filed an appeal to the City Council on June 3, 2016 and after 19 hours of committee meetings, a great deal of public comment and two public hearings, the City Council approved a partial Demolition HP Permit which would require MI to save the Pharmacy Building on the northwest corner of the building. Preserve Historic Missoula and others filed a lawsuit in District Court against the City Council and the developers on August 30, That suit was litigated over the next 4 ½ months and on January 17, 2017, the District Court ruled in favor of the City Council and the developers. While the case was being litigated, MI decided to proceed with environmental 140 West Pine Street, Missoula MT phone fax mra@ci.missoula.mt.us

2 remediation to remove the remaining asbestos in the portions of the building that the previous developer, Octagon, had not planned to disturb and; therefore, did not remediate. This was permissible without the Demolition HP Permit as long as the integrity of the building was not compromised. At a meeting on September 21, 2016, the MRA Board approved a request from the developer to proceed without prejudice to remediate the remaining hazardous materials in the building in preparation for deconstruction/demolition should the lawsuit be settled in their favor. The intention was to finalize remediation in October and bring a request to the Board to fund deconstruction and demolition at the October Board meeting so that work could begin in November. Getting deconstruction started early was important because of the additional time required as opposed to demolition. The lawsuit took longer to settle than anyone anticipated and this schedule was not achievable. Once the Court ruled in favor of the City Council and the developers, MI moved quickly try to finalize costs for deconstruction, demolition, utility relocation, site work and preservation of the Pharmacy Building. Deconstruction started shortly after the January 17 ruling by the Court. Although neither staff nor the developers realized or recalled that the request to the Board to proceed without prejudice spoke specifically to remediation, the concept of deconstructing and salvaging as much of the building as possible was discussed at both the MRA Board and City Council level many times as was the fact that deconstruction, salvage and reuse of materials was eligible for TIF reimbursement and would be required if removal of the building and redevelopment were going to receive TIF assistance. Project Description & Funding Request MI proposes to construct a five-story, mixed-use building in the heart of downtown on the corner of Higgins and Front Street. The current building has been vacant since early 2010 and has continued to deteriorate and adversely impact surrounding businesses. The new building will house a 178 room custom designed Residence Inn by Marriot hotel with ground floor commercial. The building will be approximately 145,900 square feet in total floor area with 40,000 square feet on the ground floor. 22,500 square feet of the ground floor will house retail businesses and restaurants with the remainder consisting of the hotel lobby/reception area, breakfast service, seating areas, 3,000 square feet of meeting space, a pool and back of house. The second level will hill have an outside deck and fitness room as well as guest rooms. The upper three floors will consist of hotel rooms. The Pharmacy Building will be incorporated into the new building and will maintain ground floor retail space. The upper level will house the presidential suite of the hotel, inserting a mezzanine level to maintain the exterior opening locations of the historic façade. There will be an internal thoroughfare, The Mews, which will connect Higgins to Pattee Street and will celebrate the history of the original Mercantile. The Mews will show photographs of and artifacts from the building s past. To the extent possible, The Muse will incorporate materials salvaged during deconstruction. MI is requesting TIF reimbursement for four categories of work as follows: Deconstruction/demolition of the Existing Building $1,502,689 Pharmacy Building Restoration $ 335,746 Environmental Remediation $ 151,500 Utility Relocation & Site Work in the ROW $1,607,909 $3,597, West Pine Street, Missoula MT phone fax mra@ci.missoula.mt.us

3 This project will require bonding and the developer has negotiated with Stockman Bank to purchase the debt. Stockman is also financing the construction of the hotel and retail space. The first three categories listed above will require taxable bonds and the last will be tax exempt. It is expected that this project, if approved, will be structured much like the student housing project on Front Street with two subordinate bonds which will not be drawn down until the project is completed and there is TIF being generated to cover debt service. MI estimates that the project will generate $325,000 annually in property taxes based on discussions with the MT Department of Revenue. Currently, the property taxes are $23,645, netting just over $300,000/year in new TIF revenue. Staff is currently working with Stockman Bank on terms for the bonds; therefore, it will not be clear how much debt this will service until those terms are finalized. It will depend on the two interest rates and what coverage the bank will require. Based on recent transactions, it is likely that the TIF revenue from this project will not support $3.6M in bonds and the Front Street URD has no available capacity to take on more debt than this project can support. The project has grown since the consultation with DOR, so there may be some additional TIF revenue available. The current estimate of project cost is $37.9M. If the TIF revenue is sufficient to finance the entire request of $3,597,844, the ratio of public to private investment is 1:9, which is within the parameters that the Board would like to achieve. Public Benefit The Merc site has been vacant since early Federated Department Stores invested very little in the building over the years that they owned it and it has continued to deteriorate since Macy s closed. Surrounding businesses and building owners have consistently expressed concern about the negative impact of such a large and prominent building sitting empty year after year. The Downtown Master Plan was adopted as part of the City s Growth Policy in August 2009, just months before Macy s announced that it was closing its downtown store. The Master Plan emphasized the importance of maintaining a vibrant retail presence in that location. The Mercantile Residence Inn by Marriott will once again bring that vibrancy to this important corner by providing 22,500 square feet of new retail and hundreds of new visitors to downtown who are staying at the hotel. The businesses located in the vicinity will benefit from the hotel guests and new businesses will likely open in response to the new development. The current investment on Front Street is possibly already the highest of any street in the state and this project represents another $37.9 M in new investment. Design Considerations MI modified their original design concept drastically as a result of discussions with the City Council and public comment. They are now proposing a predominantly brick façade with detailing on the ground floor that is very much in keeping with the historic façade of the Mercantile. City Council created a series of seven items that they wanted MRA to consider prior to approving TIF funding for the new building. I am not clear as to the intent of some of the suggestions, but, by and large, I believe that the design proposed here is in keeping with what was presented to the City Council when they approved the Demolition HP Permit. I have attached an from Emily Scherrer, the Historic Preservation Officer in Development Services, addressing the seven items along with some illustrations of design features that 140 West Pine Street, Missoula MT phone fax mra@ci.missoula.mt.us

4 she believes would enhance the building façade. She will be at the Board meeting to address those items. I have some concerns that I have challenged the architects and the developer to be prepared to address at the Board meeting. One of the materials being proposed for use on the façade is EFIS or synthetic stucco. You may recall that EFIS is not a permitted material under our Façade Improvement Program. That was done very deliberately because of my skepticism about the permanence of earlier products of this nature, particularly Dryvit. Historically, there have been numerous lawsuits involving the material and its impermanence. A different product brand is being proposed for the hotel and I have advised MI that they need to address this issue with the Board if they want a favorable outcome. It has been represented to both the MRA Board and the City Council that MI s intention is to construct a building that will be part of downtown for generations to come, making this an important issue to resolve. The following is an evaluation of the request using established criteria: Economic Stimulus: The demolition and new construction has supported and will support construction jobs for a brief period. The longer term economic stimulus will come from the creation of new jobs and by bringing in money from outside of the community as a result of guests using the hotel. Gross revenues from the hotel alone are estimated at $6.5M and with a multiplier of 2 for this market will result in an impact of $13M. Hotel wages are estimated to be $2.6M, resulting in an impact of $4.7M using a multiplier of 1.77 for Missoula. Additionally, revitalization of this prominent block will likely spur additional private investment in the downtown. Tax Generation: Tax generation for this specific project was discussed above. Beyond that, it is likely that this and the other investments being made in this part of downtown will catalyze additional investment as Front Street transforms into the Retail Hot Spot identified in the Downtown Master Plan. Employment Generation: In addition to the temporary construction jobs created by the project, the hotel is projected to require 58 total employees with 35 being FTEs. The retail and restaurants will employ approximately 40 FTEs and possibly more if there are more restaurants. Elimination/Prevention of Blight: The vacant Merc building has been the epitome of blight for the last 6+ years. Replacing the structurally unsound, empty building with a vibrant new hotel with 22,500 square feet of retail and restaurant space is one of the most positive projects that could occur in any downtown. Impact Assessment: Neighboring properties have and will continue to experience some inconvenience and disruption during the construction process. There will also be some disruption for traffic in the vicinity. This is unavoidable with any urban construction project. Financial Assistance: This project is proposed to be financed through a combination of owner equity, a bank loan, seller financing and TIF funds. MI has a commitment from Stockman Bank for construction financing. 140 West Pine Street, Missoula MT phone fax mra@ci.missoula.mt.us

5 Developer s Past Performance: Mr. Holloran, dba HomeBase, has successfully developed both downtown hotel and residential projects in Bozeman. Timely Completion; Deconstruction/demolition is complete, site work is nearing completion and project completion is anticipated to be in the fall of 2018 with an opening in December Recommendation: Staff recommends that the MRA Board approve an amount not to exceed $3,597,844 in TIF assistance for the Mercantile Residence Inn by Marriot as requested by Mercantile Investors, LLC and authorizes the Chair to sign a Development Agreement with the following conditions; 1. An acceptable competitive financing proposal has been negotiated with a private lender, presumably Stockman Bank. 2. The bonds will be sized based on the capacity of the TIF revenue generated only from the proposed hotel project. 3. No reimbursement will be made until the project is complete and has received a Certificate of Occupancy. 4. Final TIF reimbursement shall be determined based on the bond sizing and paid invoices accompanied by lien wavers submitted by Mercantile Investors for eligible items identified in this staff report. 140 West Pine Street, Missoula MT phone fax mra@ci.missoula.mt.us

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