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Memo - Block 64 Redevelopment I Economic Development I MEMORANDUM TO: Honorable Mayor and City Council COPIES: Kersten Elverum, Sid Inman, Bob Deike FROM: Jim Kerrigan, Director of Planning & Economic Development DATE: April 21, 2005 SUBJECT: April 26 Work Session, Block 64 Redevelopment Project The preliminary development agreement that has been executed for this project requires that GPS Financial Group ("GPS") submit various information and documents over a 50-day period, All items have been submitted in whole or in part except for Section 3(k)--a preliminary financing commitment. In accordance with the agreement. Sid Inman of Ehlers & Associates has reviewed the information provided by the developer and prepared a report detailing the following: (i) Whether any public financial assistance required by the Developer in connection with the Development is necessary and appropriate; (ii) Whether there will be sufficient cash flow and tax increment from the Development to pay all of the costs associated with the Development; (iii) Whether there is a sufficient source of funding to bridge any financial gap relating to the Development and whether the use of such funds by the Authority will unduly impair the Authority's ability to undertake other redevelopment activities; Memo to Mayor, et aI., April 21,2005 - Page 2 (iv) Whether, based on a review of the market study provided by the Developer pursuant to Section 3, the Development is supported by market conditions; and (v) Indicating any other actions to be performed by the Authority or Developer in order to proceed with the Development. The purpose of the meeting on April 26 is to allow time for Mr, Inman to review this report with the Council and to discuss the key elements of a potential development agreement. Staff has tentatively scheduled action on the May 3 HRA agenda to authorize staff to negotiate a development agreement with GPS, Attachment: Memo from Ehlers & Associates EHLERS & ASSOCIATES INC o :iE w :iE CC: From: Date: Subject: Jim Kerrigan, City of Hopkins Kersten Elverum, City of Hopkins Robert Dieke, Bradley Dieke Sid Inman and Rebecca Kurtz, Ehlers & Associates April 21, 2005 Financial Feasibility for the GPS project - Block 64 To: Section 4, Authoritv Undertakinos (a) of the preliminary development agreement requires that Ehlers and Associates provide to the City our analysis and recommendations of the Financial Feasibility of the Block 64 redevelopment project. For this review we requested that the developer provide us with detailed Sources and Uses for each of the three phases they purposed, As of Thursday afternoon April 21 we had not received that information. There for, our review is based on the first version of the pro forma documents supplied to us by the developer GPS and is limited to the information provided at that time, Our review is also based on a market study dated March 2005, which was prepared by the McComb Group, LId, At the current time the request for assistance and our analysis is based on the Pay As You Go method for financing any TIF assistance. As you are aware, this means that in the beginning the City and the developer will agree on the level of assistance that is needed to make the project financially feasibly, As the project progresses, regardless of the amount of assistance agreed upon, the developer would only receive what tax increment is available. This places all financial risk on the developer and not on the City. If in the future, if some other method is suggested to provide all or a portion of the assistance, we believe a new Financial Feasibility should be prepared establishing any additional risk to the City. The preliminary development agreement sets out five areas of Financial Feasibility analysis: (i) Whether any public financial assistance required by the developer in connection with the development is necessary and appropriate; We have reviewed pro formas provided by the developer, which set out sources and uses of the project. It currently assumes three phases. We have reviewed the estimated expenses for the project. While we believe the expenses fairly represent expenses that would be seen in similar projects, we have made no independent review or comparison. This is due to the "Look Back" provision that will be included in the final development agreement. The developer has provided us with estimates on sources and uses that we will use to determine the level of assistance, They have also agreed that when the project is completed, they will provide us with audited copies of the actual sources and LEADERS IN PUBLIC FINANCE 3060 Centre'Poin'te Drive Roseville, MN 55113-1105 t uPhone: 651-697-8516 Fax: 651,697-8555 rkurtz@ehlers-ine.com uses. They further understand that if the project did better than an agreed upon target return percent, the City can adjust the assistance down to reflect that actual result. Based on our review of the current pro forma, the project is well below normal industry standards for investor returns, and we believe the assistance is necessary and appropriate, It was also noted that assuming no increase in market value over the life of the TIF district, the cash flow shows below normal industry standards for investor returns. In order for the developer to receive close to a normal return, the market value of the project must increase over the life of the TIF district, which will result in more tax increment going to the developer, thus increasing their investment return, (ii) Whether there will be sufficient cash flow and tax increment from the development to pay all of the costs associated with the development; Based on our review of the current pro forma the project has sufficient cash flow and tax increment to pay all of the costs associated with the development. It is again noted that assuming no increase in market value over the life of the TIF district, the cash flow shows a below normal industry standard for investor returns. In order for the developer to receive close to a normal return, the market value of the project must increase over the life of the TIF district, which will result in more tax increment going to the developer, thus increasing their investment return developer. (iii) Whether there is a sufficient source of funding to bridge any financial gap relating to the development and whether the use of such funds by the Authority will unduly impair the Authority's ability to undertake other redevelopment activities; We refer you to (ii) as to the answer to the first part of the analysis, As to the second part, as long as the method of financing the assistance remains as Pay As You Go, the use of such funds by the Authority will not unduly impair the Authority's ability to undertake other redevelopment activities, (iv) Whether, based on a review of the market study provided by the developer pursuant to Section 3, the development is supported by market conditions; We offer our comments as a summary of the findings and recommend that for a complete review of the findings, you refer to the market study itself. The market study analyzed the project based on two options of sales prices and arrived at a sale price per square foot for both options, Looking at the low and high range in both options results in four possible sale price analysis, While the highest per square foot sale price is close to what the developer is using, all four of the market study's square foot price are below the square foot price the developer is using, Further, the market study assumes it would take from 4,5 to 5,5 years to sell the units, The developer pro forma assumes 3 years to sell the units, If the results of the actual sale values and timing of sales reflects the lower values in the market study, the project may experience problems with its financial performance, Since the method of providing the assistance to the developer is Pay As You Go, any problems with the financial performance places all financial risk on the developer and not on the City, (v) Indicating any other actions to be performed by the Authority or developer in order to proceed with the development. The developer is currently working with a lending instation to determine their level of commitment. Once that is received, we will provide any if necessary additional comments to our financial analysis, We will be at the Council Meeting on April 26 to discuss any questions the Council may have.