Memorandum

City of Lawrence

City Manager’s Office

TO:              David L. Corliss, City Manager

CC:               Britt Crum-Cano, Economic Development Coordinator

FROM:          Diane Stoddard, Assistant City Manager

DATE:           December 15, 2011

RE:               9^th and New Hampshire project summary and TIF request

Overview

First Management is constructing a new, 55 unit apartment building at the intersection of 9^th and New Hampshire in Downtown Lawrence.  A building permit was issued for construction of this project on October 5, 2010.  The building will include space to allow First Management to relocate its operations Downtown, as well as a new restaurant and two professional fitness centers. In total, about 54 new jobs would be created. The building is projected to cost about $10.85 million to construct.  A preliminary appraisal estimates that the building will be worth about $10.6 million.  The owners of the building have requested $280,000 of Tax Increment Financing (TIF) funds to help with public infrastructure associated with the project as well as discounts on 65 parking passes for the parking garage at 10^th and New Hampshire.  The primary reason they have made the TIF request is because of the gap between the appraisal estimate ($10.6 million) and the costs of construction ($10.85 million).  TIF financing would make the equity and debt contribution to the project equal to the appraised value of the apartment building.

History of the Project

The property is located in an existing TIF district.  The TIF district was created in 2000 to support the development of the existing parking garage at 10^th and New Hampshire and other commercial, office, and apartment developments.  On September 18, 2000, a redevelopment agreement was signed by the City and the “Developer of Record” – 9-10, L.C. (c/o Martin Moore).  The agreement provided for three primary components:

1) An exchange of lots, providing the City with the parking garage and Lawrence Art Center lots and the developer with other lots between 9^th and 10^th Streets and New Hampshire;

2) A payment by the City to 9-10, L.C. of around $7.3 million for construction of the garage; and

3) An allowance under TIF for “allowable site redevelopment and infrastructure improvements within the Redevelopment District,” the specifics of which are outlined by line-item in the agreement.

Under this agreement, 9-10, L.C. was to complete all buildings within five years of commencing the project (2005).  Due to economic conditions, 9-10 L.C. did not construct the additional buildings to support commercial, office, and residential uses at the northeast corner of 9^th and New Hampshire.

Incentive Request – Parking Assistance

On December 10, 2010, Treanor Architects submitted a letter to City Manager David Corliss on behalf of 9^th & New Hampshire, LLC to reserve 65 covered parking spaces in the parking garage and to provide these at no cost for two years and at a fixed rate of $195 for the following 13 years.  The letter also requested a proviso to reserve another 25 spaces for the project upon request of the developer. 

On December 14, 2010, former Economic Development Coordinator/Planner Roger Zalneraitis performed a Parking Utilization Analysis for the parking garage on 10^th and New Hampshire.  The results showed an inventory of 494 total spaces with 471 at that time publically available.  Utilization averages around 50% and is growing.  The conclusion of this staff analysis was that, based on current growth rates, this garage could reach mid-week capacity by 2013 or 2014 if 65 spots were reserved, and sooner if more were reserved.

On January 17, 2011, 9^th & New Hampshire, LLC reduced their request to 65 “hunting passes” (not reserved) at a reduced rate of $100 in years 1 and 2 and a locked price of $195 for the next 13 years.

Incentive Request – TIF

On December 10, 2010, a memorandum was sent to City Manager David Corliss from Treanor Architects estimating the financial impact to the City of the 9^th & New Hampshire, LLC project at $2.4 million over 10 years.  These estimates provided by Treanor were calculated based on capturing incremental taxes from the existing TIF district.

On December 13, 2010, another memorandum was sent to City Manager David Corliss from Treanor Architects summarizing information in support of requests for $280,000 of TIF assistance for public infrastructure.  Treanor included statements to show the new project meets the requirements of “but for” in the TIF statute, that funding for site improvements was included in the original redevelopment agreement with 9-10, L.C., and that the new project meets the City’s policy promoting downtown development.

Analysis

On January 17, 2011, 9^th & New Hampshire, LLC agreed to allow City staff to prepare a preliminary financial analysis of the project, with eventual submission to the Public Incentives Review Committee (PIRC) for review.  The incentive application form was received on February 4, 2011 and a memo was prepared by Roger Zalneraitis on February 24, 2011.  To summarize, the result of the analysis showed that over the next 10 years, the apartment complex will generate about $7 million of tax revenues (this is not discounted) and about $3 million in costs resulting from the project.  Once accounting for the incentive, the cost-benefit ratio for the City would be about 1.25 over the next 10 years.  The City economic development policy uses a 1.25 ratio as the threshold for approving tax abatements but does not speak to a threshold for TIF projects.  The City would reach a breakeven point on the project about five years after the building opens.  The County has a cost-benefit ratio of about 2.13, and the School District a little over 5.  This analysis assumed $265,000 of increment would be reimbursed to the developer in year 1 and the remaining $15,000 in year 2.  Doing so would net the City about $255,000 net present value over the next 10 years. 

Bond counsel at Gilmore & Bell has concluded that the project appears to be generally consistent with the one previously envisioned in the approved Project Plan and thus the TIF Project Plan does not need to be amended.  The City is free to enter into an agreement with 9^th and New Hampshire, LLC with assistance from bond counsel.

Consideration – Current Debt Payments

Many, but not all, of the street and infrastructure improvements in the original plan have been made, and the parking garage has been constructed.  The City is currently paying off the debt on the parking garage using general tax revenue.  Unless otherwise allocated, incremental property taxes generated from the 9^th and New Hampshire apartment complex would be used to help pay off the remaining debt on the parking garage. 

Consideration – “But For”

The financial analysis performed by Roger Zalneraitis did not include any review of TIF District policies, or a “but for” evaluation of whether the project would occur if the incentive was not provided.  The City’s TIF Policy (Resolution 6789) states:  “Each TIF proposal must demonstrate that ‘but for’ the use of TIF, the project would not be completed.”  Typically the approval of incentive agreements occurs prior to actual site development commencing.  9^th & New Hampshire, LLC believes “but for” was already met through the original TIF process in 2000 and that these costs are already outlined in the City’s agreement with 9-10, L.C.  They also contend the gap between what the project will appraise for ($10.6 million) and the cost to build the project ($10.85 million) makes the project untenable without TIF assistance. 

Consideration – Timing of Incentive Payments

The request made to the City by 9^th and New Hampshire involves front-loaded TIF incentive payments, with $265,000 reimbursed in year 1 and the remaining $15,000 reimbursed in year 2.  The analysis performed by City staff was based on this payment structure.  Additional payment structures are allowable under TIF and could be contemplated through the life of the TIF district (2020).

Public Incentive Review Committee (PIRC) Consideration/Recommendation

The PIRC considered the request at its June 30, 2011 meeting.  Minutes from the meeting are attached.  The PIRC discussed the project in detail and there was consensus that this project was very beneficial for downtown Lawrence.  A motion to recommend that the developer be granted assistance of $280,000 over ten years, commencing in 2013, was approved on a vote of 6-1. 

Staff Recommendation

Staff recommends the City assist the project as recommended by the Public Incentive Review Committee.  Staff further recommends that the City sell the developer 65 “hunting passes” (not reserved) at full price. 

Performance Agreement

Staff has drafted a performance agreement with Ninth and New Hampshire, LLC, setting forth the requirements the developer must meet in order to gain the reimbursement.  The agreement further outlines how the $280,000 will be paid out over the ten year period, beginning in the year 2013.  In order to gain the annual reimbursement, the company must demonstrate that it has a certificate of occupancy, must have completed its public improvements and must be current on its real estate taxes. 

Recommended Action

The City Commission should discuss the proposal and take action, as appropriate.  Should the Commission wish to follow the PIRC recommendation, the Commission should authorize the Mayor to execute the performance agreement with the developer, which follows the PIRC recommendation.  Additionally, the City Commission should provide direction regarding the parking pass issue.