04-01-2019 Council Packet 2 - Laserfiche WebLink

Home Search

City of Lino Lakes, Minnesota Prelim Review of Lyngblomsten Request for TIF Assistance April 1, 2019 Page 4 developing/redeveloping the site, including acquisition of the 17-acre site, in addition to the properties on the corner to create a larger redevelopment opportunity. There are also significant public improvement and site development costs to allow access into the site. The project is unable to entirely support those extraordinary costs upon completion. 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 also consider an appropriate level and type of TIF assistance for the project based on the information submitted by the developer. The application includes a requested 15-year term of assistance to equal approximately $5.3 million. The City’s position relative to the use of tax increment has typically been to finance extraordinary costs and the level of assistance is in part dictated by the ‘extraordinary’ costs of the project. Historically, on past projects the maximum term of assistance has been about 5-6 years. 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. The “but-for” test is used to determine whether a project is likely to proceed as proposed without the use of public dollars. To complete this analysis, we review the developer’s provided operating proforma and will also construct similar ten-year project proformas, showing a result if the developer receives the assistance as pay-as-you-go (reimbursement for TIF eligible costs) and showing a result if the developer does not receive assistance. Our analysis of the proformas include a review of the development budget, projected operating revenues and expenditures, and the project’s capacity to support annual debt service on the bank loan. The purpose of evaluating the operating proformas is to understand the potential returns to the developer through the initial development of the project and the operation of the enterprise over a period. A 10-year period may not be indicative of the developer’s intended investment period. Generally, should the rates of return lie below a reasonable range without assistance; we could assume the project as proposed would not move forward without assistance. Should the returns lie within a reasonable range with the assistance, we could assume the amount of assistance tested is appropriate for the project. All such estimates should be viewed as general indicators of performance and not exact forecasts. The number of current and future variables affecting these estimates and actual results are great. There are no set rate of return benchmarks that dictates whether a project needs TIF assistance or not; however, there are market/industry standards for certain types of projects, as well as more specific investor/developer thresholds that need to be achieved. An additional measure of project 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 significantly greater than 1.0 as a measure of cushion in the event actual revenues and expenses are different than projected.