MEMORANDUM. MRA Board of Commissioners. Southgate Mall Revised Request for TIF Assistance

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1 MEMORANDUM TO: FROM: MRA Board of Commissioners Ellen Buchanan, Director C;f; DATE: September 9, 2015 SUBJECT: Southgate Mall Revised Request for TIF Assistance Project Description and TIF Request Southgate Mall Associates presented a request for TIF funding along with a request that the City consider including the Mall in URD Ill at a Special MRA Board meeting held on July 9, At that time, the Board did authorize the staff to take a recommendation to the City Council requesting that staff conduct the necessary studies to amend the URD Ill boundary to include Southgate Mall in the District. The Board did not choose to take any action on the request for TIF assistance. The concerns expressed by the Board revolved primarily around the large size of the request and the issue of purchasing right of way from Southgate Mall Associates in order to build a street that benefits the Mall. In response to that discussion, the applicants have revisited the project scope and made significant revisions to the request. MRA has received a revised application for Tax Increment Financing assistance for the project. The application, prepared by WGM Group, describes the long range vision for Southgate Mall as a mixed-use, walkable neighborhood which includes housing, entertainment and services. This transformation is supported by a safe and healthy transportation network, innovative architecture and new public spaces. The project will occur in a number of phases, with the first three, 1A, 1 Band 1 C, being the subject of this funding request. A portion of the work being proposed is currently not within the District; however, it involves building a new street and the costs associated with that construction. The street will connect Brooks to Reserve through Mary Avenue and the Mall property. State law allows the the use of TIF funding for an extension of infrastructure outside of a district which provides connectivity that benefits a TIF District, so the infrastructure and related costs are eligible for TIF assistance regardless of whether the Mall becomes part of URD Ill. The three phases consist of the following: Phase 1A Theater Lifestyle Retail Building Initial phase of new public street and multi-use trail 140 West Pine Street Missoula MT phone fax mra@ci.missoula.mt.us

2 Curley's demolition Paxson Plaza partial demolition and reconstruction Utility relocation and improvements Entry plaza Phase 1B Sears demolition and renovation Public street connection to Brooks with multi-use trail New Brooks Street traffic signal & intersection improvements Phase 1C Mary Avenue public street connection with railroad crossing Multi-use trail Roundabout for future Johnson Street extension Retail/office buildings Utility improvements In this initial series of phases, SMA is requesting TIF assistance in the amount of $7,598,337 with a private investment of $64,234,784 for a total Phase 1 project cost of $71,833, 121. The private investment includes acquisition of land and improvements that have been done in the immediate past in addition to almost $37M of private investment in the upcoming phases. Thus, we are leveraging just over $8.50 for every dollar of public funds in Phase 1. One of the more costly items in the original request was for right of way acquisition. The new street will be constructed across what is currently private property. There has been discussion with the developers, MRA and the City about the merits of a public street within public right of way as opposed to a private street within a transportation easement. It is the City's position that this should be a public street that is controlled by the City; thus, the need for public right of way for the street and sidewalk. Both the MRA Board and the City Council have expressed a reluctance to the use of public funds to purchase right of way from SMA to build a street through the Mall property. The right of way needed for this new street is owned by four different parties - SMA, JC Penny Properties, Bob Ward & Sons and the Beach family. There will also be an easement needed from MRL in order to cross the railroad tracks and make the connection to Mary Avenue. There is a right of way exhibit in the Site Plan appendix that shows the ownership graphically. The revised request is for TIF assistance for acquisition of only the right of way owned by the third parties; consequently, that part of the request has been reduced from $5.2M to $638,861. This number is based on $8.00/square foot and could change as a result of an appraisal or a negotiated price. Construction of the new street requires not only building and site demolition, but also relocation of utilities and reconfiguration of the parking adjacent to the new

3 street, sidewalk and multi-use trail. It is common in these construction projects to have expenditures that restore the areas adjacent to the new facility, commonly known as the "cost to cure". The Public Street Improvements exhibit in the Site Plan appendix shows the area included in the request for public right of way improvements. Also, as part of the infrastructure improvements, a traffic signal on Brooks will be relocated to the Agnes Avenue and Brooks Street intersection along with intersection improvements. This will provide a better Brooks Street crossing for bicyclists and pedestrians as well as better access to the Mall. In addition to the new infrastructure, Phases 1A, 1 Band 1 C will consist of a 47,000 sf theater, 24,000 sf lifestyle retail center, renovation of the Sears building with 24,500 sf of retail and a 32,000 sf market and a 23,500 sf expansion of buildings around the Mall. The current application includes a request under the URD Ill Fac;ade Improvement Program for $50,000 each for improvements to the Sears and Paxson Plaza facades. The northern half of Paxson Plaza will be demolished and the remainder will be renovated to provide new display windows and storefronts, awnings and exterior lighting. Sears will be improved with new storefronts, new exterior materials, canopies and new exterior lighting. Neither of those projects is developed enough at this point to be considered for FIP assistance and the Sears building assistance will not be possible unless the property becomes part of the District. These will be brought before the Board for consideration at an appropriate time. Thus the current request for TIF assistance is reduced to $7,498,337. The TIF request is as follows: Demolition Utility Relocation Public Right of Way Improvements Right of Way Acquisition $ 1,711,742 $ 638,502 $ 4,509,232 $ 638,861 $ 7,498,337 Tax Generation and Public Benefit WGM Group has worked with the MT Department of Revenue to estimate the new taxes that will be generated by the initial phases of the project. Based on those discussions, they project that Phases 1A, 1 Band 1 C will generate new taxes of just over $323,000. This is not adequate to debt service $7.5M in bonds, so the increment from whole District will need to be pledged to any bonds. The ultimate tax generation will be much greater than these initial projects as a result of the future development planned by SMA and the inevitable spin off that will follow an investment of this magnitude. The letter from Stevens & Co. included in the TIF Application appendix addresses the potential for spin off investment and growth of tax base as a result of the Mall expansion. The City has received the new taxable values and URD Ill did not see the revenue gains that we had expected. We are above last year's revenues, but still below the revenues that we were receiving several years ago. We believe that is partially a result of timing of demolition and new construction elsewhere in the

4 district, but there are indications that properties in the district are losing value. There is a limited evaluation of this in the Property Value Analysis appendix in the application. When the improvements at South Crossing and South Crossing 11 are fully accounted for, we hope to get back to the levels we were seeing in We have two other large projects in URD Ill that are currently in the design phase so those final costs are unknown and at least one of them, the South Reserve Trail Crossing, will require bonding. We are working with our financial advisors to determine bonding capacity at current levels and believe that we have adequate capacity to fund all three projects, Southgate Mall, Brooks Street improvements and the South Reserve Trail Crossing, with more than adequate coverage. It should be noted that this is the first phase of a multiphase, long term project and there will be future requests for funding. These will require a similar analysis of capacity as they are submitted. The public benefit of this project cannot be overstated. If Southgate Mall goes into a decline like many other similar malls across the US have done and continue to do, the impact on Midtown Missoula will be devastating and the cost to rectify it will greatly exceed the size of this request. This project is Missoula's best hope of assuring that a decline will not occur. Additionally, the long-term plan by SMA will bring new residential opportunities and much needed park land in a future phase. More immediately, URD Ill will get a street network that is safe and friendly for all modes of travel and a neighborhood will be connected across the Bitterroot Branch Line to the Mall, Brooks and other shopping and employment opportunities. These are the things that were envisioned in the Midtown Missoula Plan developed by the Urban Land Institute more than a decade ago. The following is an evaluation of the request using established criteria: Economic Stimulus: The demolition and new construction will support construction jobs for a brief period. The longer term economic stimulus will come from the creation of new jobs and the private investment that is catalyzed in the surrounding area as a result of this project. The connectivity created by the Mary Avenue crossing will open up that area to the west of the Mall to new development opportunities. Tax Generation: Tax generation is estimated to be just over $323,000 for these initial phases. It is impossible to speculate about new taxes that will likely result from other projects for which this will serve as a catalyst. Employment Generation: It is estimated that this project will provide approximately 732 temporary construction jobs and 378 long-term retail, office, theater and market jobs. Elimination/Prevention of Blight: The Mall is currently healthy because of investments that the owners have made in it over the years. Based on national trends, it is apparent that continued investment in the Mall as it presently functions is not going to suffice. This project is taking positive steps to externalize the Mall, create a place that meets the needs of today's shoppers,

5 diversify the things that the Mall has to offer on both a neighborhood and regional scale, create connections to traditional neighborhoods and between existing arterial streets and replace and repurpose obsolete buildings and uses. Unique or Special Opportunities: This project presents MRA with the opportunity to provide the incentive to foster good development on a scale that is not generally available in a developed area. It provides the opportunity to proactively mitigate the decline of the Southgate Mall and create a multi-modal connection between existing neighborhoods and commercial and employment opportunities. Impact Assessment: Neighboring properties may experience some inconvenience during demolition and construction, but it should be minimal since the site is large enough to provide staging areas for construction. Financial Assistance: The project will be financed through a combination of private equity, bank loans and TIF funds. SMA has a commitment from First Interstate Bank for construction financing Project Feasibility: The project has been discussed with stakeholders and their concerns have been add.ressed. These include addressing parking for Bob Ward's, permission from Montana Rail Link for a crossing at Mary Avenue, and agreements with impacted property owners for their participation in the project. Construction funding is in place and SMA has a strong design team. Developer's Past Performance: SMA has both the management team and financial equity in place to complete this project. SMA consists of individuals who have a long history of building and managing successful projects in Missoula, including the Southgate Mall, the 1821 Building on South Avenue, the Double Tree Hotel and Cafe Dolce on Brooks Street. Timely Completion: Phase 1 A will begin in the fall of 2015 and is scheduled for completion by January Phase 1B is scheduled to closely follow Phase 1A. Phase 1 C, Mary Avenue construction, will be completed in The buildings associated with Phase II will be constructed after the street construction. Recommendation: Staff recommends that the MRA Board approve the TIF request for $7,498,337 and forward a recommendation to the City Council to issue bonds secured by URD Ill revenues to service the debt with the following contingencies: A value for the right of way acquisition must be established, A more detailed financial analysis of the capacity of URD Ill must be completed by the City's financial advisors that demonstrates that the debt can be sold publically or placed with a local lending institution, The City Council must approve the issuance of bonds to fund the improvements.