If the TIF boundary change isn’t accepted, the city will go ahead with a TIF-like deal for a project not in a TIF district. They’ll still “pay back” the “loan” with their taxes. So, it seems we are creating our own city TIF program without the benefits of TIF? Why wouldn’t all developers request that same deal in the future? And, isn’t this essentially illegal that we would not collect taxes for this piece of property? Don’t we have to tax everyone with the same rules? In the past we’ve been told we can’t do this. Can CDBG start using this kind of scheme to create affordable housing?
Language from the TIF report is as follows:
In the event the amendment is not state-certified, Developer will be credited for the amount of annual taxes levied on the Project to repay the loan, estimated at an average of approximately $750,000 per year. The City’s portion of this levy would be about $270,000. Developer shall guaranty that taxes levied against the Project shall equal or exceed projected levels or pay the difference to the City. All other provisions of the TIF Loan Agreement, including but not limited to the personal guaranty, PILOT payment (if Project is sold to a tax-exempt entity), Clawback Payment and the Equity Participation Payment shall apply to the Loan as the though the Project were located within a TID.
Um, are we going to use the County, School Board and MATC taxes to “pay back” the “loan”? Did they agree to that? I can’t tell from the language. Here’s the discussion, the motion is to adopt items 21 ($3.4M in TIF) and 22 ($200,000 in BREWD funds) together. The 3 lobbyists for the project registered in support, available to answer questions.
Staff Presentation
Aaron Olver, the Economic Development Director leads the presentation. Joe Gromacki, the TIF Coordinator joins him at the table once he finds a chair.
Olver gives a brief overview as Joe finds a chair. This is a project on one of three Don Miller, city owned property. Its on the 700 block on the north side of E. Washington Ave, its primarily a residential project – a residential tower that is 12 stories with 220 apartments, 30,000 sq feet of retail and commercial space and 280 parking stalls. (Wait, one stall per unit and 60 for the commercial and retail space? Does that sound inadequate?) There are three things in Joe’s TIF report that you probably want to take a look at. First, there is a provision about the clawback language. This is proceeding through the land use phase, its on its way to UDC, so we put in claw back language so that if there are savings the city and the developer will share in those. It is an incentive for the developer to generate cost savings and it benefits the city. The second thing is that the TIF amount came in at 59% of the increment, so this requires an exception to the 50% rule in the city’s TIF policy. (The city frequently ignores the 50% rule when it is less than a 10% increase – so that probably isn’t a big deal to some extent.) He says there are two reasons for it, one the one hand, relative to the commercial, the number is a little bit low based on the rents they are seeing in the commercial market and ULIs application it looks like rents could come in above this amount. So the fact of density and residents to keep the market strong keeps this number low. The other reason is that the TID is 7 years old. If this was in a brand new TID it would be at about 51%. The third issue is that this project requires a boundary amendment for TID 36 and that creates a problem with certification in that the Department of Revenue won’t actually certify the TID and officially recognize it until next year around March or April. The project is ready to go right now, in order for it to be available for the rental cycle it has to break ground this spring and we had to figure out how to deal with the timing issue. In an ideal world, in the event that the TID fails to be certified by the Department of Revenue, for whatever reason, we’d like to convert this to a straight up loan. That proved to be not feasible from the banks point of view, they would consider that subordinate debt, so the city has agreed to bear that risk that the TID may not be certified. This is a fairly routine, technical process, virtually all the TIDs in the state do get certified. Th process is well defined, we have staff that have done many of these, so I don’t expect it to fail but it is important for you to know there is some possibility. (For the record, I agree with his assessment of the risk.) So, what happens if it fails. First of all, the Department of Revenue has had a change based on substantial compliance, so if we substantially get the process right, they will still recognize our TID. If the TID fails to get created, the project will go on the city tax rolls immediately, rather than at the end of the TID. The Finance Office did an estimate on that over the life of the TID and projected that if the project was immediately on the rolls that would generate a net present value of %2.2M for the city. That gives us about 64% coverage. So the city does have some exposure in the unlikely event that the TID fails to get certified for some reasons. That could be about $1M, about $100,000 in debt service over 10 years. (That means we will pay back about $140,000 per year for 10 years in principle and interest) In their view, that is a risk worth taking. At least in his view, he won’t speak for anyone else. In his view this is a pioneering project in an area that hasn’t seen investment for 40 or 50 years and they are stepping up to the plate and going first to help us jump start this area. Second we know that the financing markets are difficult, and so we understand what they are going through with their banks and third, there are 200 acres here that have potential development depending upon its intensity there is $500 million to a billion dollars of value over time, and we want to jump start that. So, relative to the potential value we can create he thinks the risk that the city is taking is relatively small. And finally, TID 36 has lived for 7 years without a generator and we really want to get a generator going. We are making a very small amendment, as small as possible, and we will double and triple check this to make sure everything goes right. So Joe, is there anything you want to cover. (Now that you have a chair and Olver briefly filled us in?)
Gromacki mutters something that was not easily heard in person or on camera.
Olver informs the group that he is under the weather.
DISCUSSION/QUESTIONS
Mike Verveer asks if they could go through the other provisions of the TIF policy on the reverse of the report, issue that have been deal killers like the equity kickers. Could you go through the big areas where this does comply? (Wow, so its ok to mostly comply with the policies these days? Just get the big ones and show you were partially willing to do what the city requires?)
Gromacki says the largest one where it complies is the equity participation, equity investment by the developer has to exceed the amount of TIF we have in this, at the present point, the developers equity is $5M, our policy is that TIF has to equal or be less than the equity in the deal, so we are in pretty good shape at $3.4M. As far as the equity participation agreement, our policy is that the developer, at the time of sale or transfer of the property, the developer provides us with a percentage of the proceeds that equates to the amount of TIF as a percentage of total costs, in this case it is $8.5%. That number is capped at the amount of TIF provided to the project so the cap on that would be $3.4M. The one caveat that was negotiated as a part of this was that the developer asked what if they are upside down in 20 years. In other words if more debt than value in the project, if that is the case, we would take some steps where the developer would have to demonstrate that us and we wouldn’t have a problem. It is highly unlikely that they would have that debt, if they do, they have bigger problems than paying us back the equity. We did provide some flexibility in adding that language.
Verveer asks if this is the first time we have done that.
Gromacki says that yes, that is the first time. He says he suspects that is part of what is happening in today’s market, in reaction to a lot of commercial properties being upside down at present. And maybe some pessimism that in 20 years it will still be the same. In our minds that was like insuring them against the building getting hit by an iceberg, if that makes them feel better and get the project done, that’s ok.
Verveer asks if other development teams argued that?
Gromacki says no, typically they just don’t want to pay it.
Verveer says yes, I’m familiar with that.
Verveer asks if there are other issues.
Gromacki says the personal guarantee and pilot payment. The PILOT payment is relatively new, the mayor proposed that. Starting with the University Ave. project staff thought that was kind of a neat thing to keep in the language hereafter. So we are going to keep that in as an added fail safe. We haven’t seen any push back on that, maybe that is our iceberg insurance for the city. He says if you look through the report the costs were in an acceptable range, what is causing the gap is that the rents, which were also in an acceptable range, for this type of project, were simply not enough to generate enough investment to cover the gap. So, its a combination of costs, which in this case the soil conditions were a big contributing factor, to be able to build a foundation, its $2.5 – 3M in extra costs. And driving pilings into the ground to keep the building up – remember that this was primarily a swamp and a dump for about 100 years so that is going to be an on-going issue for very tall buildings, not midrise buildings. Combine that with financing being based on value, value is down because the rents are lower (WHAT?! THEY WENT UP 18% IN ONE YEAR!) These won’t be downtown rents, but they are ok for that particular area. Suburban rents of $15 -16 are fine. That’s all over town that way. We didn’t see a problem with that, they just couldn’t attract enough investment, so that causes the gap. One of the reasons for the clawback provision in this case was, we’ve used them, but not a prominently as we are today. One of the reasons there is a lot of uncertainty about the final costs and financing – not just this project – is a question of what the banks will put on the table, what the investors will put on the table and the outcome of the planning process. Um, yeah, that is why the TIF is supposed to be decided with the land use. You can add or subtract costs at that point. So we thought we should put the clawback out front, it is similar to what we used to do with condos. So, if any of the financing or costs are different so there is less gap we get 50% back. We do that to encourage them to save costs if they can. Arguably we should get all of it, but we’ve negotiated to 50% and that seems to be amenable to them, especially when we were doing condos, that was a number that everyone could live with.
Verveer thanks Gromacki for being thorough, but what about the broader TIF policy about housing, could you articulate what the current policy says about housing. Realizing that the gap is attributed to the soil and parking. Verveer says there is a general notion in the community that we don’t fund apartment projects. That’s right boys, come on down, line forms at the left to speak to Mr. Gromacki about your apartment projects as long as you can call the costs parking and soil related.
Gromacki says that we have changed over time is that we started out wanting to invest in owner-occupied, back at the turn of the century, we wanted to invest more in owner-occupied because the market was 80 or 90% rental and we wanted more 60/40 or 50/50. As a result of investing in the first project, by Kenton Peters (Union Corners) we were able to put about 1200 units on the market. We’re not at 50% but we are a lot better. Slightly before the crash we decided we primed the pump enough and we are no longer doing housing. However, the policy still states that we will encourage a wide variety of housing choices in redevelopment areas and that is one of the objectives of the policy.
Verveer says and the project plan.
Yes. Generally we have been down on rental, especially in the UW area, where there are 8 people sharing a flat. That housing has been done without us. It doesn’t make sense to fund that with TIF. In general, if they can demonstrate a gap, we’ll take a look at it. In this case the project had a number of reasons creating the gap. In particular, the University Square project we looked at it. In that project we took out the government and housing portion because they didn’t need TIF, so we are kind of saying no. The commercial did have a need due to the parking.
Gromacki, clearly under the weather, asks if that makes sense through the cold medicine, for all he knows, he could be giving you a recipe for chicken soup.
And with that, they pass the $3.6M in assistance and open the flood gates for developers to ask for more, more, more! Rental housing, non-TIF “loans” and more to come, I’m sure. AFter all, these are “tools” we can “use”.
