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VII.1. 325 Blake RoadAlatus Development CITY OF HOPKINS Memorandum To: Honorable Mayor and Council Members Mike Mornson, City Manager From: Kersten Elverum, Director of Planning & Development Date: October 8, 2024 Subject: 325 Blake Road/Alatus Development _____________________________________________________________________ PURPOSE The purpose of the discussion is to present a financing structure that allows the development at 325 Blake to move forward in advance of a full-funding commitment from the private market. Staff will be asking for an indication of support from the City Council to allow for the issuance of temporary Tax Increment Financing (TIF) bonds. If supported, the Contract for Private Redevelopment will be amended to reflect this commitment and brought back for approval at a subsequent meeting. INFORMATION The Alatus development at 325 Blake Road led with the Chorus apartment building, a 100% affordable building, completed November 2023. This was to be the first building of a total of six developments including a senior cooperative, townhomes, a retail establishment, a mixed-income apartment and a 15-story midrise with market rate apartments, community space, a restaurant, and hotel units. The remainder of the planned buildings have stalled due to unfavorable market conditions including rising interest rates, capital markets pausing investment and high construction costs, thereby impacting financing available for development. Changes were made to the development that include partnering with Ron Clark Construction to develop the 32 townhomes (site F) and Artessa to develop the senior cooperative (site B), with Alatus being responsible for constructing buildings C, D and E. The first amendment to the contract in February 2024, established the willingness of the City of Hopkins to assess the public infrastructure costs (including public parking and the publicly owned street and utilities that run through the site) to sites C and D. While this action was viewed as a positive by the private investors, it has not resulted in a financing commitment that the project needs to move forward, allowing Alatus to purchase the land for buildings C and D, construct the public infrastructure and the assessment levied against the property. Without the infrastructure moving forward, Ron Clark and Artessa, developers of sites B and F, cannot close on the land and start construction, even though they are prepared financially to do so. It also prevents the MCWD from moving ahead with their investment as the infrastructure is linked via the storm water management facilities. Planning & Development City staff, MCWD staff, Alatus and the elected liaisons from both the City and MCWD, met to discuss the impasse with the intent to find a path forward to construct the public road and utilities through the site, thereby unlocking the senior cooperative and townhome development and allowing for the MCWD public improvements to begin moving forward. Staff and the City’s financial consultant, are recommending the issuance of temporary Tax Increment Financing (TIF) Bonds to finance the construction of the main roadway through the site, following the closing on sites B and F. The bonds would be the general obligations of the City for which its full faith, credit and taxing powers are pledged. The bond would be issued with capitalized interest for three years and no payment would be due until after that period. If development did not move forward, the City would have the ability to reissue the bonds for another three years and ultimately could use TIF from sites B and F to make the bond payments or assess the cost of the road to sites C and D, as previously planned. More detail on the financing structure is included in the attached memo from Stacie Kvilvang, Ehlers, our financial advisor. It is important to note that the bonding request does not increase the amount of public subsidy going towards the development. The City Attorney, City’s Financial Advisor and the developer, Alatus, will be at the Council meeting to provide more detail and answer any questions. FUTURE ACTION If the City Council is supportive of the concept of issuing temporary TIF Bonds to pay for the cost of the infrastructure to the development, staff and the City Attorney will begin drafting a second amendment to the Contract for Private Redevelopment that will be considered at a future HRA/City Council meeting. The amendment will authorize the bond issuance, as well as update other elements including the current timeline for the project. MEMORANDUM TO: Mike Mornson – City Manager Kersten Elverum, Director of Planning and Development FROM: Stacie Kvilvang - Ehlers DATE: October 8, 2024 SUBJECT: 325 Blake Redevelopment – TIF Bonds For Infrastructure Pursuant to the Amended and Restated Contract for Private Redevelopment with Alatus, the City agreed to issue 429 assessment bonds to fund (1) the City Public Improvements (consisting of the roadway, utilities and landscaping); and (2) the public parking located within Building D. The costs for the public improvements totaled approximately $7.2 million and the public parking totaled approximately $6.1 million. Alatus would sign a petition of waiver for the special assessments, the City would place the assessments on the property when Alatus purchased the land and those assessments would in turn be used to pay the debt service on the respective bonds. As you are aware, lack of funding from the capital markets for multi-family projects due to interest rates and cap rates have stalled development of apartments. However, these financial restrictions haven’t impaired the for-sale market as much and the sr. cooperative and town home developers would like to move forward in early 2025 with their portion of the development. Staff, Alatus and the Watershed District (the “Watershed”) agree it would be preferred to see development move forward to (i) assure that grant funding for the cascade and other Watershed improvements would not be jeopardized; (ii) allow the Watershed to move forward with its improvements; and (iii) show continued development progress towards the total “vision” for the site. In order for the for-sale housing developments to move forward and for Alatus and the Watershed to expend/commit the grant funds, the Public Improvements have to be started. In order to do this the City would have to issue bonds prior to Alatus closing on the property for the two remaining apartment projects (buildings C and D). The City would issue temporary General Obligation Tax Increment Bonds (the “Bonds”) in 2025 once the bids have been awarded for the work to commence. The Bonds would have a three-year term, we would capitalize all payments until maturity so there would be no out of pocket expenses and they would mature on February 1, 2028. If no development on the parcels where buildings C and D are to be located has occurred, the City could reissue the Bonds for another three-year period. After the full six years has expired the City would need to either have the Bonds paid in full or issue permanent bonds for a term to be determined. The cost of developing the City Public Improvements was always intended to be partially or fully paid by the development. As you recall, in the original agreement the City was providing a $3.750M TIF grant to go towards those costs (didn’t cover 100% of the costs). However, an amended agreement was approved since those TIF grant funds were diverted to The Chorus so that it could be developed. To this end, we would request that as the property owner, the Watershed approve a petition and waiver for special assessments (like Alatus would have if they owned the property and agreed to as part of the amended agreement). This would preserve the right for the City to issue long-term GO Assessment Bonds once development commences on the remaining vacant parcels. Issuing GO Assessment bonds provides flexibility to whomever develops those parcels to either pay less for land up front (remaining balance of approximately $6M per the purchase agreement with the Watershed) and pay the assessments related to development of the City Public Improvements over time; (ii) pay more for the land ($6M + all the Pulice Improvement costs); or (iii) a combination of the two aforementioned (pay $6M for the land and a portion of the Public Improvement Costs and accept assessments over time). As part of the petition and waiver of special assessments, the City would be agreeing to defer the assessments until development of the land commences so that the Watershed as the owner would not be required or obligated to make any payments on any long-term debt issued (intent is for the future development to make those payments). By deferring the assessments until there is development, we have reviewed a worst-case scenario that no development happens on the site over the next six years. We reviewed the TIF that would be generated from the Sr. Cooperatives and the town homes as a source of repayment on the permanent Bonds. Based upon the costs of issuing two temporary bonds and having a term on the bonds that correlates to when the District expires (December 31, 2049), the City risk would be an annual levy payment to cover 100% of the bond payment of approximately $8,000. That being said, I think all parties agree that at some point the remaining land will be developed for high-density apartments so this scenario may not be likely. In addition, we would have discussions with the Watershed regarding purchase price of the land and that they recoup all or a portion of the costs of the City Public Improvements as part of their transaction to a developer other than Alatus.