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Memo Pines Mobile Home Park RedevelopmentCITY OF HOPKINS OVERVIEW MEMORANDUM DATE: November 8, 1995 TO: Honorable Mayor and City Council FROM: Jim Kerrigan, Director Planning & Economic Development SUBJECT: Pines Mobile Home Park Redevelopment Real Estate Equities is proposing a redevelopment project for the Pines Mobile Home Park that would involve the construction of 60 townhouse units. In order to undertake this project, the HRA would need to provide both up -front financial assistance of approximately $1 million and facilitate the sale of an "essential function bond." To provide the bond assistance and meet legal requirements, the HRA would need to own the project for a three to five -year period, during which the units would be rented. Following the expiration of the period, the units would be made available for sale to either the existing renters or other buyers. The existing renters will have possibly already made the required down payment on the units through their rents paid during the first five years. In September of this year the developer met with the HRA to discuss this project in some detail. At that meeting, there seemed to be a consensus among the board that Real Estate Equities should continue to pursue this project, but that the following needed to be addressed in order for the HRA to have an interest in proceeding forward: • Adequate guarantees to protect the City. • Structured so that no other financial assistance would be required, other than tax increments generated from the project and the essential function bond. • Relocation benefits resolved with existing property owners. Real Estate Equities has been working over the last few months to address the above items. At the November 14 work session, staff is proposing to discuss the project status with the City Council. Following this discussion, the Council needs to again provide direction to Real Estate Equities on whether to continue pursuing this project. 31(10315A Memo to Honorable Mayor and City Council, November 8, 1995 Page 2 ANALYSIS OF ISSUES What is the purpose of the essential function bond? • This type of financing is available to municipalities to finance publicly owned residential projects that are determined by the governing body to fill a housing need within the community. This type of bonding is tax exempt, and, therefore, provides a lower interest rate in order to make the project feasible. The City's legal counsel has stated that in order to meet the requirements to be considered publicly owned, the project would need to be owned by the HRA for a minimum of five years. What are the specifics of the project? • The project as proposed would involve the construction of 60 townhouse units. During the first three to five years the City of Hopkins would have ownership of the units. For this time period, the units would be rented. Market rates would be charged for the units (present market rates are $875 for a 2- bedroom /$975 for a 3- bedroom).. With expiration of the five years, the units would be available to the individuals for purchase. The developer is discussing with legal counsel the possibility of structuring the rental agreements to allow a portion of a tenant's rent to be used as a down payment. The proceeds from the sale of the units would be used to pay off the essential function bond. What type of housing is proposed to be constructed? • The sales price after the five -year rental period is presently projected to be $105,000 per unit. The project would be oriented toward moderate income households. The quality of the units, based on the asking price, should be comparable to the CitiGables project. What assistance would be required by the City Council /HRA? • The total cost for this project is presently estimated to be approximately $7 million; $6 million would be provided with proceeds from the essential function bond. The remaining $1 million would be provided as follows: • $400,000 of tax increment assistance • $600,000 project loan • The $400,000 would be repaid to the HRA over time, as tax increments are received for the project. JK10315A Memo to Honorable Mayor and City Council, November 8, 1995 Page 3 • The $600,000 loan would need to be provided by the City from another source, which would need to be identified. (There may be the possibility of including this amount in the essential function bond.) This $600,000 loan would be repaid once the units are sold. • Payments on the outstanding balance of the essential function bond would be provided through rents received. What are the positive impacts of this project? • Facilitate development of a deteriorated, under - utilized area. • Ensure that residents of the Pines Mobile Home Park receive relocation benefits. Under the City ordinance regarding this matter, it appears that if the owner moves the existing tenants off the site and upgrades the property to retain a mobile home park, these individuals would not be eligible for any relocation benefits. • This project meets objectives that have been identified by the City Council to encourage projects that provide owner - occupied housing. • The project would provide an increased tax base for the City once it was owner occupied. What are the risks to the HRA? • The project is proposed to be rented for a three to five -year period; however, if market conditions change drastically, all or a portion of these units could remain rental units. • There are five areas of financial risk to the City Council /HRA that have been identified for this project. They are the following: • Relocation costs more than anticipated. • Construction costs greater than budgeted. • Operation income less than projected, i.e., higher vacancy rate or lower rents than anticipated. • Sale of units or purchase price less than projected. • Tax increments not sufficient to repay the City. This should only occur if, once the units are sold, a number of the owners did not pay their property taxes. JK10315A Memo to Honorable Mayor and City Council, November 8, 1995 Page 4 • Real Estate Equities has detailed a number of guarantees to reduce the City's risk related to the above items. Staff and Sid Inman, from Publicorp, have reviewed these guarantees and feel that the developer has attempted to minimize any risk to the HRA, based upon the experience of similar market rate projects in surrounding communities. A market study will need to be completed to provide assurances,that the following will take place as projected by Real Estate Equities. • The units will rent at the projected rents. • The units will sell at the projected prices. What is the basis for the public financial assistance? • The main reason that the public financial injection is required for this project is the site assemblage costs, which include both acquisition and relocation. The purchase price that Real Estate Equities has been able to negotiate with the owner is $1.1 million. Although it could be argued that the owner is asking an unrealistic price, the value needs to be looked at not only from a reuse standpoint, but also from the existing' use of a mobile home park. If the park were updated, which in turn would justify escalating lot rents, and, subsequently, additional units were brought onto the site, the $1.1 million should be able to be justified from a value standpoint. Furthermore, according to research by Real Estate Equities, the present owner paid over $1 million for the subject property. What would be the responsibilities of Real Estate Equities? • Real Estate Equities would essentially function as a developer for this project. They would act as the agent for the City Council /HRA in overseeing acquisition, relocation, building construction, rent -up, and property management during the rental period and as sales agent at the end of the rental period. What are the specifics of the guarantees? • Real Estate Equities is proposing guarantees as part of the project to minimize City risk concerning budget costs or shortfalls. A portion of these guarantees would be funded (dollars actually in the project) and a portion would be non - funded (legal obligation of Real Estate Equities). Of the $1.3 million in funded guarantees, approximately $1 million would be included in the essential function bond, with the remaining provided by Real Estate Equities. This $300,000 would be the up -front financial risk for Real Estate Equities if the project did not perform as anticipated. JK10315A Memo to Honorable Mayor and City Council, November 8, 1995 Page 5 What additional actions n ed to occur to proc d with this project? • If the City Council /HRA is interested in continuing to move forward with this project, staff would propose that Real Estate Equities complete the following steps: • Meet with the residents adjacent to the Pines Mobile Home Park to discuss the project (prior to meeting with the Zoning and Planning Commission). • Schedule a concept review with the Zoning and Planning Commission to discuss the proposal and use (tentatively scheduled for November 8, 1995). Following completion of the above, staff proposes that the developer return to the HRA (tentatively scheduled for December 6, 1995). At that time, consideration would be given to authorizing preparation and execution of a preliminary redevelopment agreement to complete the following: • Complete a market study. • Negotiate relocation benefits with the Pines Mobile Home Park residents. With receipt of this information, staff would be in a position to make a recommendation to the HRA on whether to proceed forward with execution of a development agreement (possibly February of 1996). This document would commit the HRA to the project. What alternatives are available? • Try to facilitate the project as proposed by Real Estate Equities. • Proceed with the project as proposed by Real Estate Equities, but do not use the essential function bond. This would eliminate any City ownership and would not require the five -year rental period. In order to make this feasible, based upon the existing financial terms of the project, the HRA would need to provide an additional approximate $400,000 to $650,000 to the project for a public financial injection of $1.4 to $1.6 million. There would be no source of repayment for these additional dollars; therefore, they would need to be provided as basically a project grant. • Rezone the property to commercial. This type of project would allow a developer to pay a higher purchase price, and, therefore, could reduce or eliminate any public financial participation. JK10315A Memo to Honorable Mayor and City Council, November 8, 1995 Page 6 • Do nothing at this time. With this scenario, the following could occur. • The property could potentially be redeveloped to conform to the existing zoning of Medium High Density, Multi - family. Based on this zoning, it appears that approximately a 170 -unit rental project could be constructed on this site. With the existing purchase price, however, there would probably still be a need for some public financial assistance to make such a project feasible. • The property could be maintained as a mobile home park. In order to continue such an operation, the owner is required to make some improvements to the park. These improvements are not aesthetic in nature; therefore, the area could continue to be a visual blight. Real Estate Equities has been told by the owner that if the subject project does not proceed, he is considering adding new manufactured housing units on this site (at a cost of approximately $9,000 per unit) and selling or leasing these units. CONCLUSION The project, as proposed by Real Estate Equities, is one that could have some very positive impact on the west end of Mainstreet also. The project would help to meet the City Council goal of providing additional owner - occupied housing in the City; however, in order to secure this project, there is a fairly substantial public investment. As detailed above, there would be the need for public ownership for a period of time, which increases the potential financial risk to the HRA over and above what would be experienced with the normal tax increment redevelopment project. Real Estate Equities has done a good job of providing guarantees to deal with what are projected to be "reasonable" risks; however, they have not been totally eliminated. If there were a drastic change in the market or the overall conclusions of the market study were inaccurate, the HRA is still potentially exposed. The City Council /HRA needs to decide at this time whether to proceed, based upon the following: • Is this a good project for the City? • Has the financial risk to the HRA been reduced as much as possible? JK10315A Memo to Honorable Mayor and City Council, November 8, 1995 Page 7 The City Council /HRA should direct the developer to move forward only if they feel reasonably comfortable with this project as presently structured. This needs to be a consensus, as the property will also be required to be rezoned, which needs a 4/5 vote. Real Estate Equities will have to spend a significant amount of dollars to complete any market study and negotiate relocation benefits. If the City Council /HRA indicates they should proceed forward to address these items, there needs to be sufficient commitment that if the market study is positive regarding feasibility of this project, and relocation benefits are adequately negotiated with all residents, they are willing to consider entering into a development agreement to undertake this project. Attachment JK10315A SUMMARY OF PINES PROJECT • 60 -unit townhouse project • Total project cost of approximately $7 million • Source of funds - -$6 million bond and $1 million in public financing • Public financing to be repaid through TIF and proceeds from sale of units at end of 3 to 5 year rental period • Developer to provide adequate guarantees to minimize City risk, plus $300,000 cash at start of project • First 3 to 5 years of project, HRA would have ownership of project and rent units at market rate • After 3 to 5 years, units would be sold at estimated price of $105,000 • Developer will be responsible for overseeing construction, lease -up, management, and sale of units • Developer is to negotiate all relocation benefits prior to entering into development agreement with City PS11035A Study will be completed to determine the market for the proposed project prior to HRA entering into a development agreement MEMORANDUM TO: Jim Kerrigan - City of Hopkins FROM: Sid Inman DATE: November 1,1995 RE: Pines Mobile Home Park Redevelopment As your aware, we have been reviewing the proposal from Real Estate Equities for the redevelopment of the Pines Mobile Home Park. As part of that review we have identified 5 areas of potential risk to the city: 1. Relocation Costs 2. Construction Costs 3. Project Rental Income Estimates - lease up rate, vacancy rate, rents 4. Unit Sales - amounts, and take -down schedule 5. Tax Increment Income Items 1,2, and 5 are risks that we believe can be dealt with prior to final commitment by the city and can be minimized to a great extent. Risks 3 and 4 are based on what is acceptable risks using projected rental and sale market data. The developer has looked at the various aspects of the market and designed various guarantees around what they believe the market conditions are. For example, the current market for rental vacancy rate is assumed to be 3 %. The developer then designed cash guarantees that would allow for a 20% vacancy rate. This gives the H.R.A. almost 7 times coverage comparing the current vacancy rate to the vacancy rate cash guarantees. With this concept, the developer is guaranteeing the normal market risk and the H.R.A. would only be responsible for risk of the market that are possible but not probable. While we believe that guarantees closely reflect the market place. we would recommend that the next step is to proceed with the independent market analysis. Once we have this data, we can adjust the guarantees (if necessary) and the H.R.A. can proceed to measure what it's risks are and if they wish to proceed. N:IWPO OPKIN from the desk of Sid Inman Development Consultantftnaneial Advisor Publicorp Inc./Ehlers and Associates, Inc. 2950 Nonvest Center 90 South Seventh Street Minneapolis, MN 55402 (612) 339.9291 FAX: (612) 3390854 /arias Qakhill Cottages, New Scandia, MN Park Place Apts., St. Paul Park, MN Parkside I, Cottage Grove, MN Muller Manor, Hugo, MN Lakeville Senior Apts., Lakeville, MN Woodland Park, Cottage Grove, MN (Construction Financing) Parkslde II, Cottage Grove, MN Jergens Estates, Forest Lake, MN Briar Pond, Oakdale, MN Northway A & B, St. Cloud, MN Orleans Terrace, Stillwater, MN Dakota County LIRA Pooled Housing Program Raymie Johnson, Oak Park Heights, MN Cobble Hill Apts., Woodbury, MN Landfall Terrace, Landfall, MN Northview Manor, Bemidji, MN Jordan Tower II, Red Wing, MN Trails Edge, Faribault, MN Laurentian Manor, Virginia, MN Pooled Hsg. Refunding Bonds (1) East Metro Transitional Housing Lake Grace Apartments, Chaska, MN Dakota County General Obligation Summary of Miller & Schroeder's Essential Function Housing Bond Programs D'aii rc Id 04/01/89 07/01/89 07/01/89 07/01/89 04/01/89 04/01/88 07/01/90 07/01/90 11/01/90 12/01/90 02/01/91 05/01/91 07/01/91 1 1/01/91 11/01/91 12/01/91 01/01/92 03/01/92 05/01/92 10/01/92 03/18/93 04/28/93 05/13/93 Loci: Washington County BRA Washington County HRA Washington County HRA Washington County HRA Dakota County HRA Washington County HRA Washington County HRA Washington County HRA Washington County HRA St. Cloud HRA Washington County HRA Dakota County HRA We St. Paal Burnsville Eagan Hasrings Washington County HRA Washington County HRA Washington County HRA Bemidji EDA Red Wing HRA Faribault HRA Virginia HRA Washington County HRA Washington County HRA Carver County HRA Dakota County HRA Burnsville Inver Grove Heights Lakeville Apple Valley Bond Utz _want 20 5765,000 36 $1,174,510 40 61,690,313 28 51,548,862 40 $3,220,000 180 S 10,355,000 32 $1,315,000 30 51,440,000 196 513,200,000 102 54,390,000 50 63360,000 187 610,190,000 42 40 65 40 120 55,730,000 45 62,945,000 348 $7,270,000 60 53,800,000 104 54,825,000 50 53,380,000 80 65,050,000 0 318,700,000 20 51,095,000 91 54,100,000 140 68,990,000 20 50 20 50 311 a=1 Senior Fancily Family Senior Senior Family Credit TI SBT SBT SBTfTI SBT/1T Fancily SBT Senior SBT Family L/C Pam. & Sr. Section 8 Senior SBT Senior SBT Senior Senior Senior Senior Fam. & Sr. Section 8 Senior SBT Family Senior ODA Senior Section 8 Family TI/SBT Senior SBT/II Pam. & Sr. SBTITI Family Section 8 Family SBT Senior County G.OJSBT Senior Senior Senior Senior continued Summary of Miller & Schroeder's Essential Function Housing Bond Programs - continued Pooled Housing Program Northland Community College Housing Prairie Acres Apamncnts Project Cliathassen Apartments Project Chanhassen Apartments Project LJC - Letter of Credit ODA - Operating Deficit Agreement SBT Q Special Benefit Tax TI - Tax Increment 06/29/95 Northwest MN Multi- County HRA Baudene Thief River Falls Rostar Badger 06/29/95 Thief River Falls 08/01/95 Worthington HRA 08/01/95 Carver County HRA 08/01/95 Carver County HRA 'btu' 410 (1) Refunded seven previous issues. (2) Refunded previous issue. (3) Refunded two previous issues and financed 20 units of new construction senior housing. E. August 28, 1995 174 S12,615,000 Fam. do Sr. 42 83 41 8 40 52,690,000 16 $1,005,000 65 64,130,000 65 3705,000 3,552 $218,781,685 Fart. & Sr. Fat. & Sr. Family Family Student Family Senior Senior City GO/ODA City GO City GO Summary of Miller & Schroeder's Essential Function Housing Bond Programs - continued Pooled Housing Program 05 /27/93 Humphrey Manor East, Wader's, MN Whispering Oaks Projects, Oakdale, MN Erick Pond Apartments, Stillwater, MN Lakeshore Place & Forest Park West Apts Germain Towers, St. Cloud, MN fp Pooled Housing Program Series A & B East Metro Transitional Housing (2) Lake City General Obligation Washington County G.O. (3) 4i FamilyApts., Sandstone, MN ) Mesabi Community College Housing 07/06/93 09/08/93 09/08/93 10/13/93 12/22/93 05/17/94 08/01/94 08/24/94 11103/94 12/30/94 06/15/95 Southeentrai MN Multi- County HRA Arlington Courtland Gaylord Gibbon Henderson Janesville Lafayette Madelia St. Clair St. James Sherburne Minoru VVinthrop Wadena HRA Washington County HRA Washington County HRA Grand Rapids HRA St. Cloud HRA Nonhdest MN Multi-County HRA Ada Argyle Clearbrook Crookrtott Erskine Fertile Fisher Fosston Greenbush New Folden Park Rapids Shelly Warren Washington County HRA Southeastern MN Multi- County HRA Washington County HRA Sandstone EDA Virginia HRA 332 $20,315,000 Pant. & Sr. 26 30 8 12 26 12 14 16 8 12 24 36 8 28 14 10 8 8 59 52,770,000 93 S1,985,000 40 51,150,000 96 86,405,000 60 83,300,000 347 523,635,000 31 8 6 10 40 30 10 14 14 12 12 12 8 36 60 8 16 20 0 51,095,000 50 53,000,000 20 88,565,000 72 55,048,000 24 81,835,000 Family Senior ODA Family Senior Senior Sertik r Fami Family Senior Senior Family Senior Senior Family Senior Senior Family Senior Senior Section 8 Family SBT Family SET Fam. & Sr. ODA Senior Section 8 , Fam. & Sr. ODA Senior Family Family Senior Family Senior Family Senior Family Family Senior Fancily Family Family Senior Family Family Senior Family Senior Faro. & Sr. Pam. & Sr. Student Section 8 City GO County GO City GO /ODA continued Educational Facilities 11 Total S4I,748,095 Etaln 7/13/92 7/15/92 9/01/92 11/01/92 12/01/92 12/16/92 4/22/93 4/30/93 7/15/93 10/01/93 7/26/95 81,755,000 S1,875,000 5418,103 89,450,000 8549,992 $ 1,380,000 81,250,000 8860,000 53,710,000 82,500,000 518,000,000 Correctional Facilities laatc A1310Jini 10/01/81 86,000,000 2/01/85 815,833,684 8/15/86 812,360,000 8/15/86 88,100,000 12/01/86 85,780,000 8/01/87 81,830,000 9/01/88 $11,350,000 7/15/91 835,000,000 3/01/93 56,430,000 4/01/93 $39,895,000 ls� Richfield ISD No 280 Cert of Put Honeywell, Inc. Grand Rapids ISD No 318 Cents of Part Honeywell. Inc, Nashwauk- Keewatin ISD No 3219 Certs of Part Honeywell, Inc. Washington County HRA Lease Rev Bonds Ser 1992 So Washington County Schools Project St Anthony —New Brighton ISD No 282 Certs of Part Honeywell, Inc. Notth Branch ISD No 13$ Certs of Part Honeywell. Inc. Monticello ISD No 882 Cents of Part Honeywell, Inc. Crosby— Ironton ISD No 182 Cells of Part Honeywell, Inc. Mounds View ISD No 621 Certs of Part Honeywell, Inc. St. Paul HRA Comm Dev Rev Bonds Ser 1993 St. Paul Academy d4/ Summit School Project Washington County HRA Celt of Part Ser 1995 (Northeast Metropolitan Intermediate School District 916) Anoka Jail Facility Rev Bonds Ser 1981, Anoka Cty Unlimited Tax Lease Obligation St. Cloud Law enforcement Center Rev Bonds Ser 1985 Stearns County Unlimited Tax Lease Obligation Dakota County HRA Jail Rev Bonds Ser 1986, Dakota County Unlimited Tax Lease Obligation Dakota County Certs of Part, Dakota County Building Authority Court Expansion Project Anoka Jail Fac Rev Rfdg Bds Ser 1986, Anoka County Unlimited Tax Lease Obligation Dakota County HRA Jail Fae Rev Bonds Ser 1987, Dakota County Unlimited Tax Lease Obligation Stearns County Cents of Part, Stearns County Building Authority, County Administration Building project Washington County HRA Ja1I Refunding Rev Bonds Ser 1991, Dakota County Unlimited Max Lease Obligation Dakota County BRA Jail Refunding Rev Bonds Ser 1993, Dakota County Unlimited "ILx Lease Obligation Washington County HRA Jail Facility Revenue Bonds Ser 1993, Washington County Unlimited Tax Lease Obligation