HomeMy WebLinkAbout6.b. Review of Request for Amendment for Shamrock Square Office Building RFP � I
CITY OF ROSEMOUNT
EXECUTIVE SiJMMA.RY FOR ACTION
PORT AUTHORITY MEETING DATE: FEBRUARY l, 1994
AGENDA ITEM: REQUEST FOR AMENDMENT TO THE AGENDA SECTION:
SHI�MROCK SQUARE OFFICE BUILDING RFP OLD BUSINESS
PREPARED BY: JOHN MTLLER, AGENDA NO.
ECONOMIC DEVELOPMENT COORDINATOR 6 .B.
ATTACHMENTS: JANUARY 21 CORRESPONDENCE FROM APP D BY "
SPRINGSTED INC. /
Recently Ron and Kerry Johnson, developers of the proposed Shamrock Sq are office project,
requested the port authority consider providing up-front tax increment financing for the
redevelopment of the Repairs, Inc. site. The Jahnsons indicated that for their project to
be successful they must reduce the cost of the building and debt repayment.
As you will recall, the Johnsons in previous appeara.nces before you described their
efforts to reduce building costs while maintaining the aesthetic quality of the structure.
In their previous visits they also presented you with a revised pro-forma and financial
projections. To fairly evaluate the revised proposal, the commissioners asked that the
port authority's financial consultant, Springsted Inc. , review and comment on the new
material. That analysis is attached for your review and is self-explanatory. I will not
rehash it here. -
At this point in time the port authority probably has several options regarding the
Johnson project and the redevelopment of the Repairs Inc. site. In all reality, though,
there are only two.
1. Advise the Johnsons the port authority wishes to redevelop the Repairs Inc.
site as originally proposed by the Johnsons and as accepted by the board on
April 6, 1993.
2. Agree to provide the Johnsons with approximately $140, 000 of up-front tax
increment financing contingent upon their full leasing of the building.
In visiting with the port authority's legal counsel I have been advised the best method
for resolution of the request from the Johnsons is for the members to select one of the
options and advise the Johnsons of it. Then request from the Johnsons a response as to
whether that option is acceptable to them. If the Johnsons respond in the affirmative,
then the project proceeds. If not, then the proposed project is ended and the
commissioners can look at other uses for the site.
RECOP�iENDED ACTION: Commissioners discretion. Two options are
presented.
PORT AIITHORITY ACTION:
�:.
S P R I N G ST E D 12o Soutn sixtn street
Suite 2507
\;C � PUBLIC FINANCE ADVISORS Minneapolis, MN 55402-1800
(612) 333-9177
Fax: (612) 349-5230
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Suite 100 Suite 290
Saint Paul, MN 55101-2143 Brookfield, WI 53005-5935
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Suite 600
Overland Park, KS 66211-1533
(913) 345-8062
Fax: (913) 345•1770
18Q0 K Street NW
Suite 831
Washington, DC 20006-2200
January 21, 1994 Fax?�202)62231362
Mr. John Miller
Rosemount Port Authc�rity
Rosemount City Hall
2875 - 145th Street West
Rosemount, MN 55068
Re: Kerry Johnson Office Project
Dear Mr. Miller:
You have asked me #o provide comments regarding the Kerry Johnson Office Project
regarding: 1) the reasonableness of the pro forma financiai projects, 2) the accuracy in the
sizing of the TIF subsidy, and 3) the availability and costs associated with direct Port Authority
financing of the entire project.
Pro Forma Financial Projections
We have not conducted a thorough investigation necessary to provide a recommendation
regarding the reasonableness of the financials. However, we offer the following observations.
Based upon discussions with associates familiar with the Rosemount/Apple Valley market for
office space, #he proposed $9.50 tri-net rents are at the high end of the range, which reportedly
runs from around $7.00 to $10.00. Project costs are projected to tota) ab�ut $55.00 per square
foot, which is probably not adequate to provide first class space. With office vacancy rates stilf
fairly high in the area--a nearby office building has experienced ongoing problems in
maintaining occupancy--it may be a little optimistic to assume 90°� occupancy levels at such a
high rental rate, unless long-term lease commitments for the majority of the leasable space can
be signed.
We did not see a breakdown of operating costs beyond the annual total of $60,000 per year.
Given property taxes alone will be in the $40,000 range, the operating budget seems a little
thin.
The proposed mortgage interest rate of 8% is in the right magnitude, although I would expect
this ra#e would be variable rather than fixed. I suspect it would be possible to extend the
amortization period to 20 years or longer, reducing the annual payment to below $60,000 per
year. Most lenders wifl be very uncomfortable with the absence of "real" equity in the deal
Rosemount Port Authority
January 21, 1994
Page 2
(above the tax increment shown), as this suggests a lack of commitment on the part of the
owner/developer.
A{I factors considered, without providing a substantial amount of equiiy for the project, I
suspect it will be difficult to obtain bank financing. However, if long-term leases can be signed
with creditworthy tenants, the project will be able to cashflow, assuming operating costs are
not dramatically higher than projecte�.
Taac #r�crement
I understand the pr�j�ct site is I�cated within the City's existing redevelopment district, and
thus the project wil! generate tax increments through the year 2000, when the District
terminates. At tod�y's tax rates, the completed project assessed at the full $750,000 value will
generate an annuai increment of$41,489, an amount sufficient to amortize $162,000 0# debt. If
the praject is assessed at only 90% of cost, the annual increment will drop to $37,340 per year,
and the debt which can be amortized drops to $146,000. (See attached schedules for the
calculations.)
The pro forma projections anticipate $170,000 of project costs can be funded with tax
increment revenue. This number appears slightly high, and an amount in the range of
$150,Oa0 to $160,000 would be more accurate.
Port Authority Funding
The Port has the authority to issue general obligation bonds (with the City's approval) to fund
the entire costs of development projects. While the bonds issued cannot be tax-exempt, they
wil{ carry a fixed rate of one to one-and-one-half percent lower than conventional mortgage
financing. This will serve to reduce annual debt service costs from $7,000 to $11,000 per year
for the Project, and fix a low interest rate for the life of the bond issue.
Credit concerns for the Port are identical as those for any lender; lack af equity, thin cashflow
projections, and lack of long-term lease commitments all suggest added risk to the lender.
My overall suggestion is to avoid direct Port Authority involvement in the project beyond the
use of tax increment financing. I would further encourage the use of pay-as-you-go TIF, versus
the up-front cash injection envisioned by the financial projections. I have found that with a little
education, most lenders will recognize that a good pay-as-you-go TIF agreement exposes the
bank to no more risk than the debt alternative. Some equity injection by the developer will be
essential for this project to proceed.
Very truly yours,
�� ,,�
;,-
�., : �,,,1
�� �
David P. Drown
Vice President
mmc
/Saint Paul Office
cc: Mr. Dan T. O'Neill, Springsted
Enclosures
City of Rosemount, Minnesota
Kerry Office Analysis
Scenario B
Assumptions
Type of Tax Increment Financing District: Pre-8/79 District
Certification Date of TIF District Pre-8/79
Decertification Date of TIF District 04/01/2001
Originai Net Tax Capacity $p ���
1995/1996
Total Estimated Market Value $675,000 (2)
Times: Classification Rate — Com./Ind. (3) 4.60%
Total Net Tax Capacity $31,050 (1)
Fiscal Disparities Contribution 0.0000%
Percent of Captured Tax Capacity Retained 100.00%
Tax Capacity Rate 120.259% (1992/1993)
Administrativ�� Expense Percentage (maximum = 10%) 0.00%
Present Valu T Rate (Net Tax Increment) 5.50%
(1) Actual tax capacity would also include value of land.
(2) Estimated project costs of$750,000 times 90%.
(3) Assumes developer/owner has additional property in County with an EMV in excess of$100,000.
Prepared by: SPRINGSTED, Inc. ( 14—Jan-94 10:36:51) F:\USERS�MARK\TIF�ROSEINC3.WK1
City of Rosemount, Minnesota
Kerry �ffice Analysis
Scenario B
Projected Tax Increment Report
Less: Less: Retained Times: Less: Cumulative
Annual Total Original Fiscal Captured Tax Annual Admin. Annual P.V. To
Period Net Tax Net Tax Disparities @ Net Tax Capacity Gross Tax Expense Net Tax 03/01/94
Ending Capacity Capacity 0.0000% Capacity Rate Increment 0.00% Increment 5.50%
12/31/94 0 0 0 0 120.259% Q 0 0 0
12/31/95 0 0 0 0 120.259% 0 0 0 0
12/31/96 31,050 0 0 31,050 120.259% 37,340 0 37,340 32,517
12/31/97 31,050 0 0 31,050 120.259% 37,340 0 37,340 63,338
12/31/98 31,050 0 0 31,050 120.259% 37,340 0 37,340 92,553
12/31/99 31,050 0 0 31,050 120.259% 37,340 0 37,340 120,245
12/31/2000 31,050 0 0 31,050 120.259% 37,340 0 37,340 146,493
$186,700 $0 $186,700
Prepared by: SPRINGSTED, Ina ( 14—Jan-94 10:36:55) F:�USERS\MARK�TIF�ROSEINC3.WK1
City of Rosemount, Minnesota
Kerry Office Analysis
Scenario A
Assumptions
Type of Tax Increment Financing District: Pre-8/79 District
Certification Date of TIF District Pre-8/79
Qecertification Date of TIF District 04/01/2001
Original Net Tax Capacity $0 (1}
1995/1996
Total Estimated Market Value $750,000 (2)
Times: Classification Rate — Com./Ind. (3) 4.60%
Total Net Tax Capacity $34,500 (1)
Fiscal Disparities Contribution 0.0000%
Percent of Captured Tax Capacity Retained 100.00%
Tax Capacity Rate 120.259% (1992/1993)
Administrative Expense Percentage (maximum = 10%) 0.00%
Present Value Rate (Net Tax Increment) 5.50%
(1) Actual tax capacity would also include value of land.
(2) Estimated project costs of$750,000 times 100%.
(3) Assumes developer/owner has additional property in County with an EMV in excess of$100,000.
Prepared by: SPRINGSTED, Inc. ( 14—Jan-94 10:35:55) F:\USERS\MARK\TIF�ROSEINC4.WK1
City of Rosemount, Minnesota
Kerry Office Analysis
Scenario A
Projected Tax increment Report
Less: Less: Retained Times: Less: Cumulative
Annual Total Original Fiscal Captured Tax Annual Admin. Annual P.V. To
Period Net Tax Net Tax Disparities @ Net 7ax Capacity Gross Tax Expense Net Tax 03/01/94
Ending Capacity Capacity 0.0000% Capacity Rate Increment 0.00% Increment 5.50%
12/31/94 0 0 0 0 120.259% 0 0 0 0
12/31/95 0 0 0 0 120.259% 0 0 0 0
12/31/96 34,500 0 0 34,500 120.259% 41,489 0 41,489 36,130
12/31/97 34,500 0 0 34,500 120.259% 41,489 0 41,489 70,376
12/31/98 34,500 0 0 34,500 120.259% 41,489 0 41,489 102,837
12/31/99 34,500 0 0 34,500 120.259% 41,489 0 41,489 133,606
12/31/2000 34,500 0 0 34,500 120.259% 41,489 0 41,489 162,770
$207,445 $0 $207,445
Prepared by: SPRINGSTED, Ina ( 14—Jan-94 10:36:00) F:�USERS\MARK�TIF�ROSEINC4.WK1
, , .
ROSEMOUNT PORT AUTHORITY PROCEEDINGS
REGIILAR MEETING
�•=�, APRIL 6, 19 9 3
)
a minimum of one year, having relocation within the corporate city
limits of Rosemount and meeting all city codes, and the owners of
Repairs, Inc . respond to this confirmation and the offer within a
five day period. SECOND by Sinnwell . Ayes : 7 . Nays : 0 .
Miller overviewed the financ�al analysis for redevelopment of the
Repairs, Inc. site. Mr. Ron Johnson and Mr. Kerry Johnson submitted
a proposal as did The Dakota Central Partners . Commissioners and
staff were given a presentation at the January 19 , 1993 meeting on
the two proposals . Reid Hansen, representing Dakota Central
partners, presented comments on their proposal .
Discussion ensued regarding Parks and Recreation Committee
involvement and the closing of accepted proposal.s at a prior meeting,
Attorney Miles counseled that the proposals received were not
governed by rigid laws but more a matter of style of acceptance. The
Port Authority could use an award process based on overall project
merit to choose which proposal they would accept.
� MOTION by Sinnwell to accept the proposal from Ron and Kerry Johnson
for the redevelopment of the Repairs, Inc. site based upon 1} the
proposals as submitted prior to the January 19th meeting, 2)
information presented verbally on January 19 , 1993 and 3) staff
analysis of the proposals and contingent upon City Council approval
f� of a Project Plan and Project Budget for the proposal . SECOND by
Carroll . Discussion followed.
Poll of motion resulted with Ayes : 6 . Nays : 0 . Abstain: McMenomy.
Ann McMenomy commented that she was requested to comply with the
information necessary after meeting with Miller. Mr. Miller noted
that information would be helpful in making a comparison, but he did
advise her that the Board would be considering the project
infomration presented by January 19th and that any additional
information may or may not be considered.
City Administrator Jilk clarified that the City does hold title to
the property at the Repairs, Inc. site, so development committments
can be ma.de.
MOTION by Sinnwell to direct the Port Authority staff and attorney,
upon City Council approval of a Project Plan and Project Budget for
""- the proposal, to draft a "Commitment`"Agreement° with Ron and Kerry � " """'
Johnson for redevelopment of the Repairs, Inc. site to include but
not limited to: 1) dates of project start and completion, _ 2)_
financial surety for performance, 3) project financial. structure,
and 4) physical detail . Other agreements such as the tax increment
finance agreement, land title transfers, and site and building plan
review to be handled separately by the Port Authority and other city
i � commissions and boards . SECOND by Wippermann. Ayes : 6 . Nays: 0 .
Abstain: McMenomy.
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