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Home My WebLink About2.c. Request for special assessment financing for public improvements4ROSEMOUNTEXECUTIVE SUMMARY CITY COUNCIL City Council Workshop Meeting March 10, 2010 AGENDA ITEM: Request for special assessment GE SECTION: I financing for public improvements W SM W 1W PREPARED BY: Dwight Johnson, City Administrator AGENDA NO. 2.C. ATTACHMENTS: Analysis worksheet; area map APPROVED BY: RECOMMENDED ACTION: Consider request for special assessment financing for public improvements in the proposed Prestwick development on Akron Avenue BACKGROUND Scott Johnson of Arcon Development has requested that the City consider installing public improvements with City financing for a new residential development known as Prestwick to be located just west of Akron Avenue and north of the future route of Connemara Trail. The project was previously reviewed and approved in 2007 as a concept plan, but there are changes proposed in the concept plan that will need to be separately reviewed and approved by the Planning Commission and City Council. The purpose of this memo is only to review a request for possible special assessment financing of the improvements. The first phase of this development would consist of 40 -45 single family homes. City financing of the streets, utilities and other public improvements is allowed under Chapter 429 of the State Statutes. The procedure is for the City to issue bonds for the improvements and repay the principal and interest with special assessments against the property. The City has done this type of financing in the past, but not in recent years when the economy was good and private financing was readily available to developers. DISCUSSION Need for special assessment financing Arcon Development says the paving of Akron Avenue, now under contract with Federal ARRA funds, is a key to consideration of a new residential development. However, developers are still concentrating mainly on developing existing distressed lots. The development of new lots must economically compete with existing lots in other communities. The combination of Akron Avenue paving and a reduction in the selling price of the land by Arcon is projected to allow new single family lots to sell at $55,000, which is the target price Arcon says is needed to attract a major homebuilder to develop the property at this time. Special assessment financing may be needed to finance the project since private financing is still difficult to obtain. Parameters of City bonds The proposed bonds for the development of the public improvements for phase 1 would require a general obligation bond issue of about $1,000,000. The bond issue would be repaid in five years and would probably have an interest rate of about 2.5 %. Risk to the City The bonds are expected to be paid back with special assessments against the property and not require any property taxes to be used for the principal and interest payments. Special assessments are normally paid off at the time of sale of a lot. However, if for some reason a large number of lots are unsold for an extended period and the lot owners default on their special assessment payments, then other remedies must be found to pay the bonds. In this case, a condition of approval would be that a letter of credit from an approved institution equal to 100% of the bond amount would be required to guarantee the bonds. Arcon Development will accept this condition. If both special assessment collections (which are part of the property tax bill) and the letter of credit fail, the City would be obligated to levy a tax to pay the bonds. The amount of principal and interest due each year would total about $215,000. Staff believes that the probability of having to levy a tax in any year is less than 10 %. Further, since special assessments are part of the property tax collection process, it is likely that within 2 -3 years the City could recover all or a major portion of any defaulted special assessments through Sheriff's sales of the lots in default. The small amount of the proposed debt ($1,000,000) combined with the rapid repayment of the debt (5 years) would be too insignificant to affect our City bond rating negatively. Benefits to the City The development of 40 -45 new lots would not only add to the property tax base over the long term, but also bring in building permit revenues and park dedication funds. Non -tax supported funds such as water, sewer and storm water funds would also receive new revenues. New development also entails some new expenditures for police, parks, public works and other City functions. In this case, however, the attached table shows that revenues are likely to significantly exceed expenditures, even after factoring in the risk for default of special assessment payments. In addition, Rosemount is developing a shortage of available residential lots because housing has been constructed faster than lots have been created over the last several years. Our development could be substantially curtailed as soon as 2011 if no new lots are created this year, even if economic conditions substantially improve. This is because there is a substantial lead time involved in platting and developing property. Finally, residential development in this area will help facilitate the construction of the future extension of Connemara Trail, although this development would be responsible for only a small portion of the cost of the extension. The special assessments would include a pro -rated amount for the portion of future Connemara Trail serving the property to be platted. The internal rate of return, after consideration of the risk factors and allocated future expenditure obligations for park construction, calculates to 9% for the five year period of the bonds. CONCLUSION Although staff is normally hesitant to add to the City's public debt at a time when we have concentrated on using our surplus funds to reduce debt, there is low risk to the City with a strong letter of credit in place. With our low number of platted lots available, our interest in extending Connemara Trail for both residential and commercial development possibilities, and expected revenues from building permits and park dedication payments, staff believes that special assessment financing is warranted in this case and would be in the City's overall best interests. 2 ANALYSIS PROPOSED SPECIAL ASSESSMENTS FOR PRESTWICK DEVELOPMENT REVENUES Amount Property taxes $ 40,000 Building Permit Fees (40 homes x $2700) $ 108,000 Park Dedication Fees (40 homes x $3400) $ 136,000 Subtotal $ 284,000 EXPENSES General Fund services (equal to property tax) $ 40,000 Portion of new nbad park $ 36,364 Subtotal $ 76,364 FINANCING RISK $1 million bond @2.5% for five years = $215,246 per year. Estimated expectation of loss is 10% default probability with 2.5 years recovery time $ 53,857 TOTAL EXPECTED RETURN $ 153,780 (revenues less costs and estimated risk) N / ' 1 • r a s• S r a al .Ir t� � 1 f to • � � �� -r V_ f' T" r 0 •� z 0 Q A