MARKET LOFTS TIF PROPOSAL

Transcription

1 Santa Fe Drive Overland Park, Kansas / Fax: July 1, 2008 Mayor Carl Gerlach Council President Jim Hix Members of the City Council MARKET LOFTS TIF PROPOSAL Attached for your review are materials related to consideration of the Market Lofts project and TIF proposal submitted by the owner/developer of the property, Paul Goehousen, representing Market Lofts LLC. At the July 7, 2008 Council meeting several actions related to this project will be presented for your consideration. A public hearing on a Redevelopment Project Plan, originally called on May 19, 2008 and continued from that date, is scheduled to be conducted at the July 7 Council meeting. A copy of the Redevelopment Project Plan is included in Attachment 1. This public hearing has been continued several times pending completion of a Redevelopment Agreement for the project. Project Description The proposed project is to construct a four-story, mixed-use building with retail space on the first floor and residential condominium units above. The first floor would contain retail space and an outdoor plaza; the second, third, and fourth stories would be residential condominiums. Below grade parking is provided for the residential units and some spaces set aside for employees and patrons of the retail space. The project will be constructed on the former site of the NAPA Auto Parts building and the Red Cross building. Both were demolished after acquisition of the properties by the developer. Project History The Planning Commission approved this project, pursuant to the procedures for Downtown Plan Review in October of Subsequent to the Planning Commission approval, the developer made a formal request to the City for TIF assistance for the project, which was presented to the Governing Body at a Committee of the Whole meeting in February of 2007.

2 In May of 2007 the Governing Body created a redevelopment district located in the vicinity of 80 th and Marty in Downtown Overland Park. A portion of this redevelopment district, identified as Project Area A, includes the development of the Market Lofts project. Following the creation of that district, the staff engaged Economics Research Associates ( ERA ), the consultant working as a member of the Vision Metcalf project team, to assist in the financial study and review of this project. This analysis was originally presented to the Committee of the Whole in August of At that meeting the Governing Body authorized the staff to proceed with negotiations of a Development Agreement and Project Plan to be presented to the Council. Since this authorization, we have refined the ERA analysis, reviewed the project assumptions, analyzed the potential incremental increases in tax revenues that would be generated by the project and evaluated the projected return on the developer s investment with and without TIF assistance. This analysis supports the original conclusion of the ERA study that the proposed redevelopment is not financially feasible without some form of subsidy. Attachment 2 contains for your reference all documents related to Planning Commission consideration of this project and Governing Body consideration of the TIF proposal. We have also negotiated a development agreement, based on this analysis, to provide TIF assistance to the Market Lofts project. Attachment 3 contains the proposed Development Agreement for this project. The development agreement is addressed in this report and the attachment includes a summary of the agreement, prepared by Kathy Peters with the city s Bond Counsel firm, Kutak Rock. Project Cost The total project cost is estimated to be $12,363,124, summarized in Table 1. TABLE 1 Total Project Costs Acquisition of Property $ 715,000 Site Preparation 740,176 Utilities 186,820 Construction 8,037,128 Professional & Other Fees 550,000 Development Fee 400,000 Project Contingency 180,000 Construction Financing 845,000 Sales Commissions 709,000 Total $ 12,363,

3 We have reviewed and evaluated these costs and their sources to confirm that they are reasonable and do not artificially inflate the costs of the project as follows: The cost of property, acquired in 2006, is supported by an appraisal which valued the property at $805,000. Construction costs have been reviewed in comparison to available third-party construction data resources. According to RS Means, the estimated total building costs for new construction of a 4-8 story structure and underground parking is between $138 and $192 per square foot. The cost estimate for the construction of the Market Lofts project is $179 per square foot, within the range of the RS Means data. The development fee represents approximately 4% of the development costs (construction and professional fees), below the standard range of 5 10%. The contingency represents 2% of development costs (construction, parking, and professional fees), reasonable for a project of this size. Construction financing costs include loan fees and construction interest. Real estate commissions reflect the costs that will be paid from sales of the individual units. For the purpose of the financial analysis, this has been included as an offset to the income that will be generated from the project. TIF Eligible Costs We have identified the costs that would be eligible for TIF assistance in accordance with the state statute 1 and distinguished eligible costs from those that are not eligible on Table 2. These costs have been based on specific cost information submitted by the developer and reviewed by the staff and bond counsel. The proposed development agreement requires detailed documentation of each cost submitted as an eligible expense before reimbursement from TIF proceeds can be obtained. In addition, the maximum reimbursement established in the proposed development agreement is $1,500,000, nearly $350,000 less than the total eligible costs. 1 K.S.A a. defines the costs ("redevelopment project costs") which are eligible to be paid with Tax Increment Financing. They include the following categories of expenditures: acquisition of property within the redevelopment project area; payment of relocation assistance pursuant to a relocation assistance plan; site preparation including utility relocations; sanitary and storm sewers and lift stations; drainage conduits, channels, levees and river walk canal facilities; street grading, paving, graveling, macadamizing, curbing, guttering and surfacing; street light fixtures, connection and facilities; underground gas, water, heating and electrical services and connections located within the public right-of-way; sidewalks and pedestrian underpasses or overpasses; drives and driveway approaches located within the public right-of-way; water mains and extensions; plazas and arcades; parking facilities; Major multi-sport athletic complex; Museum facility; Parking facilities including multi-level parking facilities; landscaping and plantings, fountains, shelters, benches, sculptures, lighting, decorations and similar amenities; and related expenses to redevelop and finance the redevelopment project

4 TABLE 2 TIF Eligible Costs TOTAL COST TIF ELIGIBLE NON TIF ELIGIBLE Acquisition of Property $ 715,000 $ 715,000 $ 0 Site Preparation a 740, ,681 62,495 Utilities b 186, , ,820 Construction c 8,037, ,663 7,918,465 Professional & Other Fees d 550, , ,750 Development Fee 400, ,000 Project Contingency 180, ,000 Construction Financing 845, ,000 Sales Commissions 709, ,000 Total $ 12,363,124 $ 1,849,414 $ 12,363,124 a Certain costs included in the aggregate in the Site Preparation category for purposes of the Developer s budget have been broken out into additional categories for purposes of the Reimbursable Expenses exhibit to the Redevelopment Agreement, including sanitary and storm sewers, street grading, paving, curbing, guttering and surfacing and related project expenses, as well as site preparation. b Costs included in the Utilities category for purposes of the Developer s budget have been broken out into several utilities categories for purposes of the Reimbursable Expenses exhibit to the Redevelopment Agreement, including utility relocations, sanitary and storm sewers and underground gas, water, hearing and electrical services and connections located within the public right-of-way. c Costs included in the Construction category for purposes of the Developer s budget have been placed in the related project expenses category for purposes of the Reimbursable Expenses exhibit to the Redevelopment Agreement. d Costs included in the Professional & Other Fees category for purposes of the Developer s budget have been placed in the related project expenses category for purposes of the Reimbursable Expenses exhibit to the Redevelopment Agreement. Proforma Analysis We have updated and refined a proforma model based on the ERA report presented in August This pro forma has been reviewed by the staff and in detail and with the developer. The proforma reflects all available and current information. Project Income Once constructed, the Market Lofts project will be sold to various owners as condominium units. Therefore, the proforma analysis focused on the potential income from the sale of property to various owners. The plan presented by the developer anticipates 24 units on three floors ranging in size from 970 square feet to 1,440 square feet. The projected sales prices for these residential properties are $228,000 to $348,000 respectively. These prices are comparable to other condominium sales prices evaluated in an appraisal prepared for the project. The penthouse floor is expected to have six units, ranging in size from 2,000 square feet to 2,500 square feet with projected sales prices from $500,000 to $625,000. The first floor, retail space, is also anticipated to be sold. These assumptions are detailed in Exhibit K of the development agreement

5 Because the income is based on sales, this analysis has differed from that recently conducted for the Cherokee South TIF project, where the projected operating income from leasing commercial space in the project was offset by the cost of operating the center to derive a net operating income. Return on Investment The income generated from sales is the source for providing a return on the original investment in the project. The capital costs to construct the project, as outlined in the Project Costs section, represent the original investment. The sources of investment for the project are $1.5 million in equity by the developer and a construction loan, which will be retired from sales of the condominiums and retail space in the project. As part of our analysis of this proposal, we reviewed it in the context of our previous study and analysis of what represents an appropriate return. As previously reported, the best source we have found is Price Waterhouse Coopers Korpacz Real Estate Investor Survey. This survey is widely recognized and used as a source for property market information. The most recent data available, reported for the fourth quarter of 2007, reports returns for development projects between 10.0 and 25.0 percent, with an average of percent. The costs of the project, in comparison to the projected sales, generate a negative return on investment, supporting a conclusion that without any assistance, the projected return on the investment is not adequate to make the project financially feasible. The projected income from sales, estimated to be $1,071,000, is less than the initial equity investment of $1.5 million, generating a negative return. Property Tax Increment and Request for Tax Increment Financing The developer has requested that all of the eligible property tax increment be made available to this project on a pay-as-you-go basis, to provide a Net Present Value equivalent of $1.5 million in TIF assistance, to reimburse for TIF-eligible project costs (see Table 2). No TIF bonds would be issued. The developer would finance the project and assume the project risk, and receive reimbursement from TIF proceeds as they become eligible. The State law provides that all property taxes except for the State of Kansas levy of 1.5 mills and the 20 mills of the total school levy be applied to a TIF project. Although there are likely to be sales taxes generated from the first floor retail space, the developer has not requested, nor has the proforma assumed, that any sales tax increment would be made available to the project. Table 3 summarizes existing tax rates which are eligible to be applied the TIF project. A total eligible tax rate of has been used in the analysis

6 TABLE 3 TIF Eligible Tax Rates Tax Rate a TIF Excluded Rates TIF Eligible Rates State of Kansas Johnson County Johnson County Library JCPRD JCCC City of Overland Park SMSD TOTAL a Based on the levy set in 2007 ( 2007 Levy ). These levies are the basis for taxes paid in December of 2007 and May of 2008, used to support FY 2008 budgets. This total tax rate, applied to the difference between the pre-demolition assessed valuation of the properties and the projected assessed valuation generates the estimated tax increment, depicted in Table 4. TABLE 4 TIF Eligible Tax Rates Property Value prior to Demolition Projected Value c. Incremental Increase d. Market Value $575,000 $11,815,000 $11,240,000 Assessed Value a $143,850 $1,554,475 $1,010,625 Property Tax Rate b Estimated Property Tax Revenue $10,477 $113,214 $102,737 a Assessed Value of the property before demolition was based on a commercial AV rate of 25%; the Assessed Value of the redeveloped property is based on a projected value of Residential and commercial AV as the project will consist of both property types. b The property tax rate is assumed to be the same. In reality, the tax rate that will be applied to the AV will be the actual rate that is in effect each year. c The projected value is the value estimate for 1/1/2011, the first date the tax rolls are expected to reflect the full value of the property. d A detailed analysis of the property tax increment is included as Exhibit E to the Development Agreement, in Attachment 3. If TIF assistance for this project is approved, approximately $10,477 will continue to be paid to all taxing entities. This will vary as different tax rates are applied each year to the base assessed valuation of $143,850, the value of the property prior to demolition of the structures. This is in addition to the property tax not eligible for use in a TIF project that will continue to be paid (21.5 mills to the State, 20 mills of which are applied to school finance). Only the incremental increase, estimated to be approximately $102,737 will be applied to the project. This actual number will also vary based on changing assessed valuation and tax rates applied each year

7 The analysis of incremental tax collections assumes that property values will grow at a rate of 2% per year and that there will be no change in the tax rate. This generates, over the eligible 20- year TIF period, a total of $2,281,722 in property tax increment. The Net Present Value (NPV) of this increment, based on a 5% discount rate applied over the 20-year period, is $1,322,000, an amount less than the $1.5 million TIF request. To the extent that the assessed valuation of the property and tax rates generates more than is currently estimated, the increment will increase. However, the development agreement establishes the maximum NPV of the TIF payments at $1.5 million, and outlines a procedure for annual calculation of this amount. A detailed analysis of the property tax increment is included as Exhibit E to the Development Agreement, in Attachment 3. Project Internal Rate of Return (IRR) with TIF Assistance The costs of the project, in comparison to the projected sales, generate a negative return on investment, supporting a conclusion that without any assistance, the projected return on the investment is not adequate to make the project financially feasible. The projected income from sales, estimated to be $1,071,000, is less than the initial equity investment of $1.5 million, generating a negative return. When the annual property tax increment, at a NPV of $1,322,000 applied on a pay-as-you-go basis is factored into the return analysis, a 12.96% IRR is generated. In the event that the maximum TIF assistance is achieved, using a NPV of $1.5 million, a 14% return is generated. Development Agreement A copy of the proposed development agreement that has been negotiated based on the analysis outlined above, is included in Attachment 3. The following key provisions of the agreement are highlighted below. The attached memorandum provides additional summary comments regarding the agreement Project redevelopment requires compliance with the rezoning plan. A Public Financing Cap for the pay-as-you-go TIF is $1.5 million, based on a NPV analysis methodology outlined in the agreement. Developer will finance all costs and be reimbursed only after project completion and upon submission of certifications of eligible project expenses. The agreement provides for payment of tax increment on a pay as you go basis. The developer will pay all project costs, and be reimbursed from the TIF payments. Establishes the return on equity as the primary basis for analysis of return for the project. When the project is complete and a certificate of completion is submitted, an updated financial analysis will be completed. In the event that the result of this analysis generates an - 7 -

8 equity internal rate of return that exceeds 16%, the maximum TIF amount of $1.5 million will be reduced. The agreement includes provisions to ensure that the project constructed, and after completions, that it is maintained during the life of the TIF. Action for Consideration A Committee of the Whole meeting has been scheduled for July 7, 2008 in part to provide an opportunity for the staff and the developer to respond to questions regarding the financial analysis and development agreement. The public hearing on the project plan, originally opened on May 19, 2008, was continued to the July 7, 2008 Council meeting. It is recommended that this hearing be conducted at that meeting. Following the public hearing, action can be taken by the Governing Body to approve the Project Plan and Development Agreement. State statute requires that a project plan be adopted by ordinance passed by a two-thirds (2/3) vote of the Governing Body. Two-thirds of the Overland Park Governing Body of thirteen (13) members is eight and two-thirds (8.666). Passage of a redevelopment project plan would require nine (9) affirmative votes. A draft of the Ordinance adopting the project plan is included in Attachment 4. A separate issue related to a deed restriction for this project is outlined in a memorandum from Bill Ebel, included in Attachment 5. This issue will also be presented for Governing Body consideration at the July 7, 2008 Council Meeting. The ultimate decision for the Governing Body in relation to whether the Redevelopment Project Plan is approved is a policy question specifically focused on whether these improvements at this location are of a nature that the Governing Body wishes to support with the use of TIF assistance. JOHN NACHBAR, CM BILL EBEL, DPDS KRISTY STALLINGS, DCM - 8 -