05-06-2019 Council Packet - Laserfiche WebLink

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. © 2018 Baker Tilly Virchow Krause, LLP assistance. Analysis of the proformas include review of the development budget, projected operating revenues and expenditures, and the project’s capacity to support annual debt service on the permanent financing. 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 10-year period. Ten years may not be indicative of the developer’s intended investment period as the financing is for a 40-year term and the developer intends to retain ownership of the project. However, when analysing the potential investment and projected returns, 10 years is a reasonable term for review. 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. The developer has demonstrated that without assistance, it is able to obtain financing of $61 million with the remaining approximately $16+ million financed by equity. Based on the annual operating revenues and expenses and debt service payments on the permanent financing, it would be not be financially feasible, generating below-market returns to the developer as the project is not able to support the entire $77.9 million of project costs. With the tax increment as additional annual revenues, the developer would be able to obtain $66 million of financing leaving approximately $11 million necessary as equity. Tax increment would provide additional cash flow to support operating expenses and debt service and provide a reasonable return to the developer. In addition, upon project stabilization the project is expected to have debt coverage of 1.25x. Project Financing There are generally two ways in which assistance can be provided for most projects, either upfront or on a pay- as-you-go basis. With upfront financing, the City would finance a portion of the developer’s initial project costs through the issuance of bonds or as an internal loan. Future tax increment would be collected by the City and used to pay debt service on the bonds or repayment of the internal loan. With pay-as-you-go financing, the developer would finance all project costs upfront and would be reimbursed over time for a portion of those costs as revenues are available. Pay-as-you-go-financing is generally more acceptable than upfront financing for the City because it shifts the risk for repayment to the developer. If tax increment revenues are less than originally projected, the developer receives less and therefore bears the risk of not being reimbursed the full amount of their financing. However, in some cases pay as you go financing may not be financially feasible. With bonds, the City would still need to make debt service payments and would have to use other sources to fill any shortfall of tax increment revenues. With internal financing, the City reimburses the loan with future revenue collections and may risk not repaying itself in full if tax increment revenues are not sufficient. The developer’s financial information includes pay-as- you-go financing.