Memorandum

City of Lawrence

City Manager’s Office

 

TO:

David L. Corliss, City Manager

 

FROM:

Diane Stoddard, Assistant City Manager

 

DATE:

September 27, 2012

 

CC:

 

Cynthia Wagner, Assistant City Manager

Britt Crum-Cano, Economic Development Coordinator

 

RE:

Ninth and New Hampshire Redevelopment Project Items:  Tax Increment Financing (TIF) District Plan for the South Project Area, Transportation Development District (TDD) and Industrial Revenue Bond (IRB) Financing

 

Please add the following on the agenda for the October 2, 2012 City Commission Meeting:

 

Consider the following items regarding the Ninth and New Hampshire Redevelopment Project:

After opening the public hearings, the City Commission will provide direction on the Redevelopment Plan and then continue the consideration of all items to the October 23, 2012 meeting.  No formal action on the items is planned.

 

Background:

In early August, the City Commission established the 9th and New Hampshire Redevelopment District (TIF District).  The next step in the process is consideration of the redevelopment plan and agreement.  As the Commission may recall, there are two project areas identified in the TIF district.  The south project area will be completed ahead of the north project area.  Therefore, the South Project Plan is ready to proceed.  The project plan for the north area will come forward in the future and will go through the same process of adoption as the south project plan. 

 

South Project Plan Summary:

On August 13, 2012, the developer submitted the Redevelopment Plan for the South Project.  This plan has been delivered to the School District and County and filed with the City Clerk.  Additionally, the plan has been reviewed by the Planning Commission on August 20, and found to be in conformance with the City’s comprehensive plan, Horizon 2020. 

 

The plan generally outlines the authorization steps taken by the City Commission regarding the TIF District, a description of buildings, facilities and improvements, a summary of the feasibility study, and how TIF and TDD revenues will be distributed and shared.  The provisions of the plan are then outlined in more detail in a redevelopment agreement between the City and the developer. 

 

The South Project Plan sets forth the planned mixed-use hotel project on the southeast corner of 9th and New Hampshire. Both the property tax increment and sales tax increment will be captured on the new development, with the base taxes continuing to be distributed to the taxing jurisdictions. The developer will front all of the funds to proceed with the project, with the exception of the Arts Commons portion of the project. The developer will then be reimbursed, over time, for costs associated with the underground parking garage, public improvements and infrastructure, related to the construction of the mixed-use hotel building on the southeast corner of 9th and New Hampshire, to the extent that revenue is captured by the TIF to reimburse these costs, subject to an overall cap of $3.5 million in project costs, not including interest.  The plan also sets forth the possible Arts Commons project, which envisions the possible purchase of the Salvation Army tract for future Arts Center use.  The funds for this portion of the project would be fronted by the City and reimbursed with five percent (5%) of the annual captured TIF revenue from the district, plus any increment remaining after the developer’s costs are reimbursed, up to a total of $900,000.  Based upon incremental revenues projected, it is anticipated that the five percent (5%) allotment to the City would generate approximately $520,000 (updated projection) over the twenty year period, with revenues from the South and North Project areas combined.  The City will also receive the first $850,000 from TDD revenues derived from the project to go toward the debt on the existing parking garage in the 900 block of New Hampshire.  This issue is addressed more fully in the TDD section of the memo. 

 

Since the distribution of the August 13, 2012 Redevelopment Plan, it has become evident that there is some necessity to update this Plan to reflect some technical changes.  Additionally, there are some changes that the developer wishes to make and some additional requests that the developer has submitted.  In consultation with Gary Anderson with Gilmore & Bell, who is serving as the City’s bond counsel, it is suggested that the City Commission discuss the following proposed changes and requests, and then provide direction to staff regarding updating the Redevelopment Plan and drafting a redevelopment agreement to reflect that direction.  Once a new Redevelopment Plan for the South Project is drafted, it will be delivered to the County and School District, in advance of the October 23 consideration, so that those entities will have a chance to review the updated plan. 

 

The following is a summary of possible changes to the Redevelopment Plan for the South Project Area:

Staff-recommended items:

·         Interest Rate Calculation: Staff has recognized a conflict between two references within Sections V. concerning the calculation of the interest rate.  City staff and the developer have further discussed the interest rate issue and both would recommend the following regarding how interest would be calculated and reimbursed to the developer:  interest would be calculated based on the actual rate of borrowed funds at the time that permanent financing is put in place, not to exceed the Prime Rate plus three percent (3%) as published in the Wall Street Journal and not to exceed the actual rate the developer is paying on its Industrial Revenue Bond financing or other permanent financing mechanism for the entire project. The developer will need to certify the interest rate to the City. We believe that this language is fair to both parties and encourages the developer to seek the lowest interest costs. 

·         There are some other minor clean-up items regarding a few typographical errors.

Developer-requested items:

·         Internal Use Changes: The developer has submitted a letter dated September 20, 2012 indicating several changes to the interior uses within the hotel project.  These changes include the elimination of the rooftop restaurant and pool area which are replaced with three condominium units on the top floor, the elimination of projected apartments replaced with 11 additional hotel rooms bringing the total project to 92 hotel rooms, and the conversion of approximately 350 square feet of the first floor lobby space to retain use, and the inclusion of a first floor pool area.  The changes do have some minor impacts on the revenue projections outlined in the feasibility study.  This will be discussed in more detail further in the memo.

·         Land Acquisition Costs:  The developer has submitted a letter dated September 27, 2012 requesting that the City consider inclusion of $695,000 in land acquisition costs as a reimbursable expense, with no change in the overall $3.5 million expense cap for the South Project.  Land costs are an eligible cost under the TIF statute. However, this expense had not been previously requested by the developer.

·         Arts Commons Project Timeframe: The developer is also requesting a five-year time frame within which the City would need to initiate the Arts Commons project. If the project isn’t initiated within the five-year window, the developer is proposing that the revenues allocated for that project would be shifted to be applied to eligible developer reimbursements. 

 

Springsted, the financial advisor which completed the original feasibility study for this project, has analyzed the financial effect of the use changes (elimination of the restaurant and apartments, addition of more hotel units and retail square footage) on the original feasibility study. Springsted’s letter concludes that “based upon the Developer’s projections, the revised project should result in increased property tax increment of $4,906 annually, offset by decreased annual sales tax increment of $15,713 and $6,162 in annual TDD revenue.  Overall, the adjusted project is expected to result in an annual decrease in total TIF and TDD revenue of $16,969.  This is an approximately five percent (5%) decrease from the stabilized annual revenue projected in the original Feasibility Study.”  They further conclude that “the project changes will likely have a minimal impact on the overall feasibility of the project”. The developer estimates that approximately $12,000 in additional guest tax will be collected annually as a result of the additional hotel rooms.  This is in addition to the $75,000 annually projected previously.  As Springsted points out, these figures were not included in the net increment figures because guest tax is not a captured revenue with the TIF project.  These revenues will flow directly to the City’s guest tax fund as the project commences operations. 

 

Staff has updated the summary sheet showing eligible expenses and revenues for the overall project in accordance with the developer’s revised projections and requests.

 

Transportation Development District (TDD):

In addition to the TIF request, the developer has requested that a new one percent (1%) Transportation Development District sales tax be added to sales on property owned by the developer.  Original projections indicated this TDD sales tax would generate approximately $1.18 million over the maximum 22 year period.  Due to some of the use changes internal to the Hotel project, the revised projections estimate $1.04 million in TDD sales tax revenue over the 22 year period. The developers have submitted a petition requesting the TDD and setting the maximum collection at $3 million, though this amount is not expected to be generated.  Of the amount collected, the first $850,000 is proposed to be dedicated to the City toward repayment of the bonds issued by the City on the existing parking garage in the 900 block of New Hampshire.  It should be noted that the total revenue to be collected by the TDD will be driven by actual sales at the facilities.  Also, while the change to the TDD projections do not have a dramatic effect on projected revenue, the gap between the amount projected and the $850,000 to go to the City is narrowed.  It should also be noted that there is no guarantee related to the $850,000 coming to the City from the TDD sales tax.  The redevelopment agreement would require the developer to place the TDD signage at the locations the TDD sales tax is collected, in accordance with the City’s TDD policy. 

 

Redevelopment Agreement:

The redevelopment agreement will set forth the details of the reimbursement of the TIF eligible expenses and TDD revenues for the South Project Area.  In order to complete the development agreement, direction regarding the proposed changes to the South Project Plan are required.  The redevelopment agreement reflecting that direction would be considered, along with other items related to this project, at the October 23, 2012 City Commission meeting.

 

Another item of note is the transference of revenues from the South Project to the anticipated North Project.  Should there be any remaining revenues in the TIF fund or TDD fund after the eligible South Project Costs have been paid, these revenues would be eligible for reimbursement on future North Project Costs, related to the mixed-use apartment building on the northeast corner of the intersection. 

 

Industrial Revenue Bond Financing:

Previously, the City Commission adopted a Resolution of Intent to issue up to $17.25 million in industrial revenue bonds for the development of the 9th and New Hampshire project.  As previously noted, industrial revenue bond financing is a conduit financing mechanism.  The developer is responsible for all principal and interest payments on the bonds.  The main benefit of industrial revenue bond financing for this project is a sales tax exemption on construction materials for the project. 

 

Action Requested: