City of Lawrence

DRAFT City of Lawrence

Public Incentives Review Committee

June 30, 2011 meeting minutes

MEMBERS PRESENT:	Mayor Aron Cromwell, Vice Mayor Bob Schumm, Dennis Highberger, Scott Morgan, Rob Chestnut, Brad Burnside, and County Commissioner Mike Gaughan
MEMBERS ABSENT:	Cindy Yulich
STAFF PRESENT:	David L. Corliss, Diane Stoddard, and Corey Mohn
PUBLIC PRESENT:	Approximately 17 members of the public and media were present.

Mayor Cromwell called the meeting to order at 4:00 p.m.

The minutes from March 29, 2011 were considered. It was noted that there needed to be a correction listing Commissioner Gaughan as absent from the meeting. With that correction, a motion was made by Scott Morgan to approve the minutes, seconded by Brad Burnside. The motion was approved unanimously.

Mr. Corliss introduced the request concerning 9^th and New Hampshire. Mr. Mohn noted that there were developer representatives present in case there were questions. Mr. Mohn noted that there was an error in the original model, which has been corrected. He then summarized the 9^th & New Hampshire project and the request. The development group representing the mixed-use 55-unit apartment complex at that location has requested an incentive of $280,000 in TIF funds for this project. Staff has suggested a $200,000 incentive paid out over a 10 year period at $20,000 per year. Mr. Mohn mentioned several considerations regarding the request, including current debt payments on the City parking garage, the “but for” question whether the development would have occurred without the incentive, the timing of the incentive payments, and the City maintenance and improvement costs for the adjacent parking garage. Mr. Mohn indicated that the PIRC was being requested to provide a recommendation to the City Commission.

Vice Mayor Schumm asked about the source of the $280,000 request. Mr. Mohn indicated that there was a TIF plan that indicated a development of this type at the time it was considered. He suggested that the developer may have a more specific response. Bill Fleming, representing the developer, said that the amounts were developed as part of the public infrastructure portion of the project and the original TIF budget included $863,000 for infrastructure. Approximately $263,000 had been spent to date, leaving around $600,000. He said that about 80% of the total property taxes would be collected by the City due to the presence of the TIF district. He said that the incentive proposal was requesting the developer share in some of these revenues as an incentive for the project and since it was consistent with the original TIF plan. He said that way, the TIF was serving as an incentive and not a disincentive for development.

Mr. Corliss clarified that there is an existing TIF district and he stated that there is not unspent money within the 9^th and New Hampshire TIF Fund. There was a liquidated damage penalty paid by the former owner of the property related to not proceeding with a project on the lot soon after the TIF district was created. He said that it was true that the City would be the primary beneficiary of the project and the revenues. He said that the developer was not able to create a new TIF district or an NRA incentive due to the existing TIF district.

Mr. Fleming indicated that he would appreciate anything done by the city, but suggested that perhaps interest on the funds be paid if the revenue would be paid back to the project over time since the developer was going to have to borrow money on this.

Mr. Chestnut asked about taxes collected on the project. Mr. Mohn referenced a handout indicating approximately $232,000 in incremental taxes. Mr. Fleming also reported that 20 mills were withheld by the State of Kansas. Mr. Chestnut stated that with the 20 mills withheld, approximately $180,000 would be collected from the development in the first year until such time as the bonds are retired.

Commissioner Gaughan stated that this is the type of project that we want to see in downtown Lawrence. He asked about whether the best people are used for construction on the building, noting that there were a group of carpenters protesting outside of the building. Mr. Fleming responded that is likely beyond the scope of the PIRC, but that Kansas wasn’t a union state and the project was not a union job. He stated that the subcontractors working on the job are working at far above the living wage set in the city’s policy.

Commisisoner Gaughan stated that it sounded like the funds are not there now, but that through the development there would be more revenue from the project as a result. Mr. Corliss responded that there is not any TIF-reimbursable account but that all of the taxing jurisdictions would be sharing in the revenues. He said that he saw great value in this project and thought that a relevant consideration is the city’s need to maintain the parking garage.

Scott Morgan asked about the impact on the school district. Mr. Corliss clarified that the TIF already exists and the school district was part of the TIF currently. Mr. Morgan asked about whether the NRA tool required school district approval. Mr. Corliss indicated that the school district and the county control their individual participation when using NRA. However, both entities were already part of the established TIF district at this site.

Mr. Morgan indicated that he didn’t believe the school district had impact as a result of this project and he requested that future school board members be advised regarding the impact which was confusing the way the numbers were presented and he also noted that he viewed his role as being very narrow, looking only at the impact on the school district.

There was a question about timing of the request. Mr. Corliss indicated that the request was received after the commencement of the construction on the project and it is difficult to demonstrate the “but for” due to this. However, he also noted that in coming into an existing TIF district, the project would have been eligible under the TIF with this project except for the timing on the project. Mr. Fleming stated that the “but for” was answered with the creation of the TIF district from a legal standpoint. Mr. Corliss said that is the hybrid nature of this project. Mr. Corliss said that this project would be completed by the end of the year and would be added to the assessed valuation January 2012 and would be relevant to the 2013 budget revenue. Mr. Chestnut stated that the bond and interest fund cost for the parking garage was a sunk cost now and the project would generate additional revenue. He clarified that the bonds were issued at the beginning of the TIF project and the liquidated damages from the former owner were applied to this debt. Mayor Cromwell asked about the impact of any project on the other corner of 9^th & New Hampshire on the TIF District. Mr. Corliss said it would depend upon the timing of that project and the amount required at that time, but that it would clearly have an impact.

Mr. Burnside made a motion to grant the developer assistance of $280,000 over ten years. Mr. Chesnut seconded the motion. The Mayor stated that the two factors were the length of time and the amount of the incentive. He thought that the developer was willing to take the funds over time. Mr. Corliss reported that the funds were likely to come from General overhead within the General Fund. Vice Mayor Schumm said he preferred to backload the funding of the request if the $280,000 is granted, particularly since there was no revenue coming the first year. Mr. Fleming clarified that they never presumed to get a reimbursement ahead of paying the taxes. Vice Mayor Schumm suggested a friendly amendment to have the reimbursement commence in 2013. The friendly amendment was accepted by Mr. Burnside and Mr. Chestnut.

Mr. Highberger said he couldn’t support the request because the building was already established and the benefit-cost ratio doesn’t meet the 1.25 threshold and that he had concern with the reason for the request of the gap between costs and appraised value. He was concerned with shifting costs to the public that should be borne by the developer. The Mayor said that he was supportive of the project despite the ratio because it was the type of project desired for downtown. He felt that there are intangible benefits to the project that cannot be calculated. The motion was approved 6-1, with Mr. Highberger dissenting.

Mr. Corliss briefly introduced the 27^th & Iowa project and indicated that the developers of the project were in the audience. Mr. Mohn summarized the request, which was to bring Olive Garden and ancillary uses to the corner, redeveloping a deteriorated property at that location. The project would bring an estimated $5 million in annual sales from Olive Garden with $6.5 total sales annually. The request is for rebate on real property taxes over 10 years beginning with a 95% rebate in the early years, declining to 20% rebate in year 10. This rebate schedule is the same schedule utilized for the recently approved Treanor NRA at 1040 Vermont. Mr. Mohn reported that the project yielded a positive net benefit for each of the taxing districts.

Mr. Mohn indicated that there was a request by a member of PIRC to show an additional scenario in the sales sensitivity analysis for the case where only 5% of sales are considered new sales for the taxing districts and that has been provided in the packet of board materials. He said that the considerations are the amount of sales tax generation, the impact of the project on local restaurant sales and workforce, land use under the NRA, and the location of the project. He noted that this project was not in the downtown area. He reviewed the NRA policy criteria, including statutory criteria and other local criteria. He also recapped the process regarding the NRA if the project would move forward. Staff is suggesting that PIRC provide a recommendation and set forth next steps. Vice Mayor Schumm asked about the schedule for the rebates. Mr. Mohn indicated that the statute does not dictate a schedule for the rebates, as that is up to the taxing districts to decide, but most Kansas communities run NRA areas for 10 year terms. Mr. Corliss stated that the sliding scale was suggested by staff and the scale came from the City of Atchison.

Commissioner Gaughan questioned a $600,000 incentive that would cost the county real estate tax collections and wondered why this tool was chosen as opposed to one, such as CID, that did not adversely impact all taxpayers. He thought that CID wouldn’t take revenue away from the taxing jurisdictions. Mr. Corliss stated that there is no staff recommendation and that the project raises important issues related to the use of incentives for secondary jobs. Mr. Corliss stated the CID has been a challenging tool as there was relative little knowledge by the public regarding shopping in places where a CID has been implemented and that there were some Commission concerns regarding the current CID policy. Commissioner Gaughan stated that the CID was the better tool to use and suggested fixing the policy and using the CID instead of trying to fit this project into a policy that does not work as well.

Vice Mayor Schumm asked about the sales tax assumptions. He said that this works if you assume $5 million and assuming 40% is new revenue. He asked the developer to respond how those numbers have been derived. Karl Capps, MD Management, responded that Olive Garden has built around 1,800 restaurants and that they got the numbers from Olive Garden. The average Olive Garden in the US does $4.8 million per year in sales and this Olive Garden was projected at $5 million. They are aware of a number of Olive Gardens in the area that do over $5 million in sales. He reported that the Manhattan Olive Garden, built with incentives, brings in over $5 million in sales. The 40% figure was provided by Olive Garden, which has extensive credit card records tracking leakage and spending by Lawrence residents in other Olive Garden restaurants.

Mr. Schumm stated that he did not agree that this many people would come to Olive Garden from other communities to eat at a Lawrence Olive Garden. Mayor Cromwell indicated that he thought that others within Douglas County would come to this restaurant but that others would continue to go other places. Vice Mayor Schumm said that people eating here already should not be counted as net new sales. Commissioner Gaughan stated that these questions supported his argument to use the CID incentive that would tax only those who would use the restaurant, compared to the NRA which would impact all taxpayers.

Mr. Highberger asked about what expenses the NRA rebates would cover. Matt Gough, attorney for the developer, responded that unlike some tools, the NRA didn’t require specific designation of the costs being public or private, or for any particular use.

Mr. Capps returned to the analysis, asserting that even if Olive Garden is off by half on projections of sales that would be new to the community, they would still meet the City’s requirements on benefit-cost ratio. He stated that MD Management had worked for six months to try and get a CID established at 23^rd & Ousdahl, which would specifically address elements of the redevelopment and a large amount of that went to stormwater improvement. He said that he was told to hold off on a CID and to pursue an NRA. He said that under either tool, there would be a positive return to the taxing jurisdiction. He said that this project would require a public-private partnership and that they are taking a blighted and underutilized site and making it a better place.

Mr. Morgan asked for elaboration on leakage numbers. Mr. Capps said they are a percentage of Lawrence residents who eat at other area Olive Gardens and that around 7% of the sales from Olive Gardens in the area come from Lawrence residents. Mr. Gough stated that regardless of the numbers, this project would improve the corner. Mr. Morgan asked if Olive Garden had information regarding sales impact on surrounding restaurants. Mr. Capps stated that he wanted to clarify that Olive Garden is not seeking these incentives directly and he believes that Olive Garden advertising and presence in the area would create an interest in eating Italian beyond Olive Garden. He had checked with other communities and there was no adverse impact on surrounding restaurants. He relayed a story about another situation in which a restaurant tenant was adjacent to a new restaurant and was concerned with impact on sales, but that sales actually increased.

Mayor Cromwell questioned the numbers and thought that the percentage of new sales figure was inflated. He thought that for certain there would be people coming here as a result, but questioned the 40% number. He said that he has reservations about a CID and questioned the unique retail provision that may limit CID use.

Mr. Chestnut stated that CIDs were also targeted for infill. He stated that the project would generate substantial increment to the taxing jurisdictions. He referred to analysis that he created on the project and included in the packets. He said that given the blight on the property, the land owner may clear off remaining improvements and get the properties reclassified as Vacant Urban to reduce the property tax bill. He said that if you assume that the “but for” test is real, you can assume that this property may reduce from 30-35% of the property tax it is paying now, hurting the taxing districts beyond the status quo. Vice Mayor Schumm asked about the “but for” given other developments occurring in the area without the use of incentives. Mr. Chestnut said he could not answer that, but stated that there is an opportunity cost if it does not develop. He said that we already have an uneven benefit according to location in Lawrence as being downtown provides intangible benefits.

Vice Mayor Schumm asked about the $1.5 M in sales on the site other than Olive Garden. Mr. Capps responded that the property would be zoned C-S, as it currently is. The highest and best use is retail commercial use. He stated that the structure would not be built until there is a tenant but he didn’t feel that this would be a problem if the restaurant use were opened. The numbers are easy to derive taking $341 per square foot in annual sales.

Mr. Highberger asked about extraordinary costs related to the development of the site. A representative of MD Management stated that storm drainage is a factor. Mr. Corliss stated it was a challenging site for development due to the need to assemble various parcels.

Commissioner Gaughan reiterated his concern that the issue was being missed that the NRA is not the right tool here. He suggested fixing the CID policy and making the tool work. Mr. Capps said MD Management will not proceed with the process until the incentive is known. He said that if MD Management had been given direction to pursue a CID, they would have. The other advantage of a CID is there would be no concerns for the School District and the County.

Mr. Morgan said that the health of the community is important and suggested that there is perception of frustration in not knowing exactly what the rules are for those pursuing economic development projects. He suggested resolution of this issue and asked about passing this up to the City Commission. Mayor Cromwell said that the Commission recognized the need to discuss and resolve this issue. He said that the CIDs were very publicly unpopular. Mr. Morgan said that there are developments that are good for the community and the issue needed some resolution. Vice Mayor Schumm responded that the Commission was aware and he and the Commission does not want to waste staff or developer time. He stated that the developer paid too much for the property and felt that Olive Garden could pay the market rent. Mr. Highberger expressed concern about the NRA policy as it does not have a “but for” provision like the TIF or a limit on the uses. Commissioner Gaughan said that there was a benefit to the NRA tool, as with the approved 1040 Vermont project. He stated that there were tools used for developments affecting restaurants, citing Bauer Farm transportation development district. He reiterated the appropriateness of the CID for this proposal.

Mr. Burnside said that he thought this project met the qualifications of an NRA and agreed with Mr. Chestnut regarding the benefits on property tax. Mr. Burnside was concerned about using the model to pick winners and losers, stating that he was a believer in the free market. He cited consensus that the Oread project was a great project.

Mayor Cromwell stated that there were e-mails received from architects complaining about the Treanor Architects project but that project made sense and incentives were provided, so complaints do not always halt the process.

Mr. Morgan moved approval of the request as presented with the addition of language urging the City Commission to consider various related policy questions, such as if the use of incentives for this project creates an undue competitive advantage. Mr. Burnside seconded the motion.

There was discussion on the motion. Matt Gough reported that the numbers previously referenced came from Darden and he provided figures about salary numbers from Darden which were higher than those used in the City’s analysis.

Mr. Highberger expressed concerns about opening a chain restaurant on one of the busiest streets of the City and his belief that, if this project meets requirements for a subsidy, it is hard to imagine one that does not. Mayor Cromwell responded that it is a blighted site. Mr. Chestnut said that there have been a number of references to chain references and was concerned that we were considering a change in policy based on the end-user and creating a different policy relating to chain stores versus local stores.

Mayor Cromwell agreed it was a time to discuss these policy questions. The motion failed 3-4, with Mayor Cromwell, Vice Mayor Schumm, Commissioner Gaughan and Mr. Highberger dissenting.

Mr. Corliss briefly introduced the tax abatement report. Mr. Mohn summarized the report as shown in the executive summary. He stated that the two companies that had specific compliance rules in their performance agreements exceeded the threshold to maintain their full abatement. It was noted that three of the five companies would roll off next year. Mr. Burnside asked what the repercussion was for a company that failed to meet compliance. Mr. Mohn answered that the City’s abatement policy laid out percentages of compliance and what it means in terms of penalty. Commissioner Gaughan moved approval of the report. Seconded by Mr. Burnside. Motion passed 6-0 with Rob Chestnut abstaining.

Mr. Corliss noted a pending NRA request for Masonic Temple and a request relating to the Poehler Building near 8^th & Pennsylvania.

Mr. Chestnut asked if the Planning Department was relooking at the overhaul of the overlay district in the 8^th and Pennsylvania area. Mr. Corliss replied that it was generally compliant but there are some issues to resolve.

Mr. Morgan moved for adjournment. There was unanimous consensus.

Meeting was adjourned at 6:10 pm.