04-27-2022 Workshop Packet - Laserfiche WebLink

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Developer Pro forma Analysis including But-For Upon approval of a TIF district and project, the City must make several findings, including the “but for” test: that the proposed development would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future. The developer has stated that but for the provision of tax increment financing, the project as proposed would not occur. The developer has provided financial information including total sources and uses of funds and 15-year operating cash flow proforma demonstrating a financial gap of approximately $1,000,000 gap due to reduced rents of the project at both 60% area median income (54 units) and 30% area median income (6 units). The reduced operating revenues resulting from the restricted rents limits the ability of the project to support the total development costs with existing sources of revenue. Based on the developer’s stated position relative to the need for tax increment financing assistance, the City could make its “but for” finding and provide tax increment assistance. We recommend, however, that the City review the provided assumptions to consider if the project meets the but-for test and, if so, what an appropriate level and type of TIF assistance may be based on the information submitted by the developer. Following thorough evaluation of the project as provided allows the City to be prepared to make an informed “but-for” decision based on the likelihood of the project needing assistance, as well as the appropriate level of assistance. As stated previously, the developer’s request for financial assistance of $1,000,000. Based on current revenue projections, it would the entire term of a new housing TIF District to support repayment. To complete the but-for analysis, we reviewed the developer’s total sources and uses of funds and 15-year operating proforma, showing a result if the developer received the assistance as pay-as-you-go (reimbursement for TIF eligible costs) and showing a result if the developer did not receive assistance. Our analysis of the proformas included a review of the development budget, projected operating revenues and expenditures, and the project’s capacity to support annual debt service payments. The purpose of evaluating the operating proformas is to understand the potential cash flow performance to assist with making the determination that 1) tax increment assistance is necessary and 2) an appropriate level of assistance will be provided. An additional measure of project need and financial feasibility is the Debt Coverage Ratio (DCR), which is a calculation detailing the ratio by which operating income exceeds the debt-service payments for the project. If the DCR is greater than 1.0 it indicates the project has operating income that is greater than the debt-service payment by some margin; conversely if the DCR is less than 1.0 it indicates the project is incapable of meeting its debt-service payment and would need to seek additional revenue sources in order to pay its debt. Typical lending standards will require a DCR of greater than 1.0 as a measure of cushion in the event actual revenues and expenses are different than projected. The amount of debt financing available for the project is based on net operating income (NOI), which is lease revenues less operating expenses. Due to the reduced revenues generated by the affordable housing units (6 30%-units), the annual cash flow of the project will be limited and requires additional funding sources beyond the traditional debt and equity as debt repayment is based on payments to be made to the lender with available cash flow. Public funding including tax increment revenues from the City and other public agencies (grants) provides the additional sources required to close the financial gap resulting from the reduced project revenues. Thank you for the opportunity to be of assistance to the City of Little Canada. We will be prepared to discuss the financial analysis and project financing components at the City Council Workshop scheduled for April 27. Please contact me at 651.368.2533 or Mikaela.huot@bakertily.com with any questions or comments.