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Memo SuperValu N Anex PropertyEconomic Development MEMORANDUM TO: Honorable Mayor Maxwell and Hopkins City Council Members FROM: Jim Kerrigan, Director Planning & Economic Development DATE: February 27, 2002 SUBJECT: North Annex Property INTRODUCTION Staff has scheduled time at the March 6 City Council work session to discuss the future redevelopment of the SUPERVALU North Annex property. This is meant to be a follow- up to the January 8 work session discussion at which representatives of SUPERVALU and their real estate consultant discussed present and future real estate market conditions. It is anticipated that as a result of this discussion, staff and SUPERVALU will receive direction on the Council's desire for the future development of this property. Sid Inman of Ehlers & Associates and Dick Paik of Bonz/REA, Inc., will be present at this work session. Mr. Inman will be available to provide his perspective on redevelopment alternatives and tax increment issues. Mr. Paik completed the market analysis for the East End Land Use Study, which includes the subject property. It is anticipated he can provide some insight on the impact of development on this east end area and issues relating to today's market conditions. Staff has tentatively scheduled discussion of this issue with representatives from SUPERVALU at the March 28 work session. OVERVIEW Redevelopment Alternatives The redevelopment alternatives that are potentially available for the North Annex property include the following: Business Park-zoned project. This is the existing zoning and would allow the following uses: ° Office, manufacturing, production, processing, storage, servicing repair, hotel ° Warehousing that does not exceed 40 percent of the gross floor area of the building Memo to Honorable Mayor and City Council, February 27, 2002 -Page 2 ° Retail sales that does not exceed 15 percent of the gross floor area or 3,000 square feet of the building in which the sales area is located, whichever is less • Mixed-use project. This could include a combination of office, production/manufacturing, residential, and retail. Office project. This could be a single user corporate headquarters, i.e., Medica- type project, or a variety of tenants. There is also the possibility that SUPERVALU could sell the subject property to a business that would utilize it "as is" with little or no redevelopment. Project Facilitation The basic question in discussing the redevelopment of the North Annex that the Council needs to address is what type of development project do they wish to facilitate. This facilitation effort can be accomplished with any or all of the following: • Renegotiate or terminate the HRA purchase option Rezone the property Provide public financial assistance A developer has the ability to bring a project to the City that meets the Business Park zoning requirements. In this situation the City would probably be required to grant approval, subject to reasonable conditions; however, if the HRA purchase option were in place, it would provide a title cloud that would probably restrict a developer from securing financing of the project. If the City wished to facilitate a project during this option period, there could be action by the Authority to renegotiate the option agreement. The second alternative available to facilitate a project is a rezoning of the property to allow~for a project that could not presently be constructed under the Business Park zoning. SUPERVALU has stated there is presently some developer interest in a mixed- use project, i.e., office/retail/residential. Such a project would require a rezoning. Public financial assistance is a third tool that could be used to facilitate development. It has been assumed that such assistance would probably be in the form of tax increment. The level of assistance can be fairly limited, i.e., a few years of increment, to a significant assistance package, i.e., all of the increment generated through the life of the district, which is until the year 2025. Development Issues In considering the type of project that is best for this property, the Council needs to consider the following: ~a~w„`~v~,a«w.l kro~~w,s.;r-x'W mia>~..~...;rs,.ts.~c~.w-~ate~•.w~=i.c:.~,.k ~,~:-=R-~...a~x ~ ,Fa _ ,. _ - ., _ _,s . .,. ., .... ... _ _. .~ ~ . >. , , ~ " ~ _ s w. «Eh ~l <,v ~r..~.. ~,~., ..,......,mss . ~ _ ~ ',app Memo to Honorable Mayor and City Council, February 27, 2002 -Page 3 Job creation. Manufacturing and retail-type uses may create a fairly significant number of new jobs; however, there is potential, especially as concerns retail, that these jobs would be lower paying and, therefore, have less economic spin- off impact. Office type uses, especially corporate-headquarters-type operations, usually provide higher paying positions. Project timing. Presently there is a fairly strong market for new residential construction and also for retail in good locations. A mixed-use project that included these types of uses could probably be built within the near future. On the other hand, there is a weak market for new office space. This is due to the slow economy, which has resulted in a fair amount of vacant office space that needs to be absorbed before there will be a demand for new construction. In talking with developers and real estate consultants, the feeling is that it could take anywhere from two to five years for the North Annex property to be developed as an office project. • Increased future tax base. A high quality office project would probably provide the most increase in overall tax base. This is fairly expensive space to construct, and it generates high rent, which translates into a higher overall market value. Residential, on the other hand, has a lower tax rate than commercial property; therefore, it generates less in property value. • Tax increment. A mixed-use project, especially with big-box retail, could possibly be built with little or no tax increment assistance, a sthis type of use can pay higher land costs; however, an office project will require a significant public assistance package. Another issue concerns tax increment and what is called the five-year rule. This requires that all activities for which tax increment is to be reimbursed must be completed within five years of the establishment of the district. For the North Annex site, this means that all tax increment reimbursed expenditures must be made by April 2004. After that date, to utilize tax increment, the following options would potentially be available: Decertify the North Annex property from Tax Increment District 2-11 and create a new district Seek special legislation to allow the HRA to extend the five-year rule by one or two years Proiect Impact. From an impact perspective, a redevelopment of this property, no matter what it is, will have a positive impact on both the east end and the City as a whole; however, ahigh-end,, office-type project would definitely create a positive image to encourage other quality redevelopment, especially on the east end. ~~.t~:*ze'~~v.L~-~k&w~c~su.n.a~u~~u~~~~s`~-.~su=t.M~>~{i~~.-.~~=.~~.. :_, ~.. .~k ~k~> ..2 ,..~ ~.._- ,,s~s_ ,.,~ - - -. ~ ~- - _ ~ r.. a ~ysc.~w«'w tarp. Memo to Honorable Mayor and City Council, February 27, 2002 -Page 4 • HRA Option. The HRA option for purchase of the subject property presently would commence in October 2002 and be in effect for approximately one and one-half years. There is the possibility of moving out the commencement and expiration dates of this option. Presently, staff has discussion of this matter scheduled for the April 6 HRA meeting. CONCLUSION From the Council's standpoint, in deciding what type of project would be most desirable on the North Annex property, the two main issues seem to be timing and impact. From a timing perspective, if there is a desire to see something happen fairly soon, the property will probably need to be rezoned to allow for amixed-use type of development. This would allow a developer to construct a retail and residential component now and not wait for the office market to pick up at a future date. On the other hand, if there is a desire to see a project that is high-end-type office, it will probably be a two- to five-year wait to facilitate such development.