Memorandum

City of Lawrence

City Manager’s Office

TO:	David L. Corliss, City Manager
FROM:	Diane Stoddard, Assistant City Manager Britt Crum-Cano, Economic Development Coordinator
DATE:	May 6, 2013
CC:	Cynthia Wagner, Assistant City Manager
RE:	Request to Amend South Area Redevelopment Plan for the 9^th & New Hampshire Tax Increment Financing District

Please place on the May 14, 2013 agenda the following:

Receive request from the developers of 9^th & New Hampshire to amend the South Redevelopment Plan to increase the tax increment reimbursement cap from $3.5 million to $4 million, conduct a public hearing and approve first reading of Ordinance 8865 approving a revised South Area Redevelopment Project Plan for the Ninth & New Hampshire Redevelopment District, authorizing corresponding changes in the redevelopment agreement, and authorizing consent to the assignment of the redevelopment agreement, if appropriate.

Background:

Last fall, the City Commission approved the South Redevelopment Plan for the 9^th & New Hampshire Project. This plan specifically addresses the development of the mixed-use hotel project on the southeast corner of the intersection. The adoption of the plan came after the City Commission created the Tax Increment Financing (TIF) district which extends both north and south of the 9^th & New Hampshire intersection.

A TIF district is an economic development tool to use the increased property taxes and sales tax generated from economic development activity within the district to pay for certain eligible costs. In the case with this project, the district has been split into two different project areas, relating to the mixed-use hotel project on the southeast corner of the intersection (the South project area) and to the mixed-use apartment building project on the northeast corner of the intersection (the North project area). The South Plan and its associated development agreement was approved by the City Commission last fall. The North Plan has not yet been submitted by the developer.

Request:

The developers have submitted a request to increase the tax increment reimbursement cap on the South Project from $3.5 million to $4 million. The developer has indicated that certain costs relating to the parking garage and site improvements are now estimated higher than the original estimates. The reasons for this are noted in the developer’s letter and itemized in the attachment to the letter, which provides a line item by line item comparison of the prior estimates with the new estimates.

The changes to the original South Redevelopment Plan which are included in the proposed South Redevelopment Plan are as follows:

Title page- updated date
Section II A- changes cap amount from $3.5 million to $4 million
Section V 6 – changes cap amount from $3.5 million to $4 million
Exhibit G- updates estimated project costs

A change to the redevelopment plan requires a public hearing. A notice of public hearing was published on May 8 and May 9.

Brief recap of the approved South Redevelopment Plan and Redevelopment Agreement:

Under the approved South Redevelopment Plan and Redevelopment Agreement, the TIF revenue will go to reimburse the developer for the underground parking structure, site improvements and interest costs over a 20 year period. 5% of the TIF revenue will annually be dedicated to the City of Lawrence for reimbursement of costs related to the Arts Commons project, which would involve the purchase of the Salvation Army property located south of the Arts Center. This acquisition has not been finalized at this point. The dedicated 5% of TIF increment is estimated to generate a total of $520,000 over the course of the project. The City also is guaranteed the first $850,000 generated by a 1% Transportation Development District (TDD) sales tax that will be assessed within the TDD district.

The redevelopment agreement calls for the south and north projects to work together in terms of available revenue to pay eligible costs. The agreement calls for the distribution of increment, as it is available, in the following order: 5% per year dedicated to the City’s Lawrence Arts Commons project and 95% to the developer for reimbursements of eligible expenses. If there were to be any excess revenues generated from the south, those revenues are to flow to the north project and be applied to eligible expenses. If at the end of the entire project there are revenues remaining, the City would be able to recapture funds to apply to actual costs of the Arts Commons project between the amount generated by the dedicated 5% up to a total of $900,000. Any further remaining TIF revenue would be distributed back to the taxing jurisdictions (City, County and School District).

It is important to note that the original feasibility analysis did not anticipate any remaining revenues at the end of the project. In fact, the original feasibility analysis projected a gap in available revenues to pay eligible expenses on both the south and north project. This would mean that the developer would need to make up the gap. The developer has indicated to the City that both projects are feasible to complete, despite this gap.

Chart Comparing Original Projections in the Feasibility Analysis to Updated Projections based on the request

In order to understand the potential impact of the request, it is important to review the original projections in the feasibility analysis and how those figures are changed with the request. According to the original Feasibility Analysis completed by Springsted in June 2012 and updated in September 2012, the total projected revenue (property and sales tax increment and TDD sales tax) for the south project is $7,036,796 over the duration of the project. This includes $5,994,136 in projected property and sales tax increment over a 20 year period and $1,042,660 in TDD sales tax revenue over a 22 year period. Estimated expenditures of $7,161,288 include the underground parking garage structure, site improvements, interest costs, the City’s Lawrence Arts Commons project, and the $850,000 dedicated to the City as a contribution toward the existing parking garage in the 900 block of New Hampshire. A gap of $124,492 exists between projected revenue and projected expenses under the original feasibility analysis.

The developer is requesting an increase in the cap for eligible expenses on the south project. In the developer’s request, the developer indicates that anticipated costs related to the parking garage structure and the infrastructure costs have increased by a total of approximately $753,000. The developer has also indicated that they were able to secure fixed financing at a rate of 4% for the initial 7 years of the south project. The original projected interest in the feasibility study was based upon a straight 5.5% interest rate through the 20 year period. The developer’s new interest rate projection results in a reduction of projected interest costs of approximately $567,000. When the parking garage cost and the projected interest rates are adjusted, it results in an overall increase in expenditures from $7,161,288 to $7,347,494 creating a gap of $310,698.

Should the Commission wish to proceed with the amendment to the plan, an amendment to the redevelopment agreement would need to be executed.

Discussion:

Whether to approve the increase in the expenditure cap for eligible expenses to be reimbursed to the developer is ultimately a policy decision for the City Commission to decide. Staff can make several points related to the request:

Increasing the cap on the total eligible expenses to be reimbursed to the developer would be allowed under the law. Also, placing a limit on eligible expenses is allowed under the law. For example, the City Commission chose not to allow for the reimbursement of land acquisition on the south project.
The developer’s reimbursement will be limited to actual expenses, based upon documentation submitted to the City, relating to the parking garage and site improvements, with the cap serving as the maximum amount that would be reimbursed.
Under the developer’s request, there is no change to the guaranteed revenues that the City would be eligible to receive under the redevelopment agreement.
There is a gap between available revenues to pay eligible expenses under the original feasibility study, making it unlikely that the City would be in a position to see any additional revenue to apply to the Arts Commons project over the guaranteed 5% of TIF revenue. Under the developer’s request, this gap grows, making it even more unlikely that the City would see any additional revenue to apply to the Arts Commons project.
If actual revenues grow and/or expenses decline from the projections in the feasibility study, there is a possibility that the City could gain additional revenue at the end of the project to apply to the Arts Commons project.
The developer indicates that if the new cap were approved, it would not affect the feasibility of moving forward with either the south or north projects.

Assignment of the Redevelopment Agreement:

As part of the collateral for the financing on the project, Intrust Bank is requesting the developer to assign the redevelopment agreement to the bank. This is a standard practice with these types of financing arrangements. The City of Lawrence, per the terms of the redevelopment agreement, would need to consent to the assignment. Approval for this consent is included in the ordinance approving changes to the South Redevelopment Plan and agreement. Should the City Commission not wish to approve these changes, staff requests that the City Commission act on an agreement authorizing the consent for the assignment as a separate action.

Requested Action:

Staff recommends that the City Commission approve the developer’s request.

Conduct a public hearing and adopt on first reading, Ordinance No. 8865, approving a revised South Area Redevelopment Project Plan for the Ninth & New Hampshire Redevelopment District, authorizing corresponding changes in the redevelopment agreement, and authorizing consent to the assignment of the redevelopment agreement, if appropriate.