Memorandum

City of Lawrence

City Manager’s Office

TO:	Tom Markus, City Manager
CC:	Diane Stoddard, Assistant City Manager Casey Toomay, Assistant City Manager
FROM:	Britt Crum-Cano, Economic Development Coordinator
DATE:	August 14, 2018
RE:	Heritage Tractor request for Industrial Revenue Bond financing

Please see attachments at end of memo.

Project Overview

Heritage Tractor has distributed agricultural equipment since 2009 at its Lawrence location on 1110 E. 23rd Street. On May 5, 2018, a fire destroyed their current facility.  The business is now doing business across the street at 1105 East 23rd Street until a new facility can be built.

The company wishes to rebuild a larger facility at their current site and is requesting Industrial Revenue Bonds (IRB) to obtain a sales tax exemption on construction materials. Plans call for a 22,000 square foot building to be constructed on 3.5 acres to replace the 14,000 square foot building that was destroyed. 

This facility would allow Heritage Tractor to keep its existing Lawrence employees.  The Company reports its existing Lawrence employment base is 28 jobs at an average annual salary of $50,000. In addition, the company expects to increase employment by another 5-10 jobs over the next few years. 

Incentive Request

Staff received an application from Heritage Tractor on July 3, 2018, requesting Industrial Revenue Bond (IRB) financing to access a sales tax exemption on project construction materials. The applicant is requesting up to $3,000,000 in industrial revenue bonds to cover total project costs.  Of that amount, approximately $1.5 million is estimated to be spent on project materials subject to sales tax.

Note this IRB request is not affiliated with a property tax abatement. (State statutes require a benefit-cost analysis be performed for a tax abatement, but not for a sales tax exemption IRB.)

About Industrial Revenue Bonds

Industrial Revenue Bonds (IRBs) are an incentive established by the State of Kansas to enhance economic development and improve the quality of life.  Considered a “conduit financing mechanism” whereby the City can assist companies in acquiring facilities, renovating structures, and purchasing machinery and equipment through bond issuance, IRBs can be useful to companies in obtaining favorable rate financing for their project, as well as providing a sales tax exemption on project construction materials.

IRBs are repayable solely by the company and place no financial risk on the City.   When IRBs have been issued, the municipality owns the underlying asset and the debt is repaid through revenues earned on the property that have been financed by the bonds.  If the company defaults, the bond owners cannot look to the City for payment.

IRB Eligibility

According to City policy (Resolution No. 7184, dated January 15, 2017), the City may consider, and from time to time issue IRBs when a proposed project furthers the economic goals and objectives of the City, as outlined in Horizon 2020 (the City’s Comprehensive Plan).

Economic goals of the City as set forth in policy and Horizon 2020
(Comprehensive Plan of Lawrence and Douglas County):
Horizon 2020 Goals	Project Notes	Qualifies (Y/N)
Place high priority on retention and expansion of existing businesses.	Heritage Tractor is a local, existing business with 28 full-time employees.	Yes
Encourage existing industry to expand.	In addition to replacing a destroyed facility, the new building will accommodate additional employees.	Yes
Assist new business start-ups	Does not apply	No
Recruit new companies from out-of-state and internationally	Does not apply	No
Encourage high technology and research based businesses.	Does not apply	No
Encourage training and development of Lawrence area employees	The company provides over 40 hours of annual training to all employees, much of which is provided by corporate John Deere as well asthrough other outlets.	Yes
Encourage location and retention of businesses which are good "corporate citizens" that will add to the quality of life in Lawrence through their leadership and support of local civic and philanthropic organizations.	Heritage Tractor provides ample employee training.  The company is actively involved with the Douglas Co. Fair, multiple local schools and churches, and local FFA and Vo-tech programs.	Yes

Additional eligibility criteria, as stipulated in the Policy, are outlined below, along with notes on related project qualifications:

2.5	IRBs REVIEW CRITERIA
Public Benefits		Project Notes
2.5.1	In considering whether to approve an application for an IRB, the Governing Body shall determine if the proposed project achieves one or more of the following public benefits:
	(a): The project meets the economic development goals and objectives of the City, as outlined in this policy and in Horizon 2020, the Comprehensive Plan for the City of Lawrence and Unincorporated Douglas County;	Supports full-time jobs with benefits
	(b): The project enhances Downtown Lawrence;	No-project is not located Downtown
	(c): The project promotes infill through the development of vacant lots, the rehabilitation of deteriorated properties, or the adaptive reuse of historic properties;	In-fill development on site of existing, destroyed facility
	(d): The project incorporates environmentally sustainable elements into the design and operation of the facility;	New facility will incorporate LED lighting throughout facility and green space as allowed.
	(e): The project provides other benefits to the City or meets other goals of the City, particularly those set forth in Horizon 2020, the Comprehensive Plan for the City of Lawrence and Unincorporated Douglas County.	Yes: See H2020 Table
Benefit/Cost Threshold		Project Notes
2.5.2	When considered in conjunction with a property tax abatement, it is the policy of the City to view more favorably those applications requesting the City to issue IRBs where the proposed project is projected to result in a positive benefit/cost ratio of 1.25 or greater, over a 15-year period, as determined by application of the benefit/cost model described in more detail in Section 1.8.1, above.	n/a: No property tax abatement requested
Competitive Advantage		Project Notes
2.5.3	It is the policy of the City to view more favorably those applications requesting the City to issue IRBs, where the project generates revenues from outside this community and enhances the quality of life for residents of this community. The City does not favor those applications requesting the City to issue IRBs, where the project primarily will compete with existing businesses. See also Section 1.8.8:	Customers are drawn from an approximate 60 mile radius of site with over 65% of company revenues coming from outside the city limits of Lawrence.
1.8.8	No Unfair Advantage: It is the policy of the City to deny any application or petition requesting economic development incentives where, in the judgment of the Governing Body, the economic development incentive, if granted, will provide a business with an unfair competitive advantage over another existing business that competes in the same local market for the same consumers.	Due to the destruction of business property by fire, the IRB sales tax exemption helps restore business operations within the community.
Targeted Businesses		Project Notes
2.5.4	It is the policy of the City to view more favorably proposed projects involving targeted business as set forth at Section 1.3.3:
	1.3.3 (a): Life Sciences/Research	No
	1.3.3 (b): Information Technology	No
	1.3.3 (c): Aviation and Aerospace	No
	1.3.3 (d): Value-added Agriculture	No
	1.3.3 (e): Light Manufacturing and Distribution	No
Retail and Residential Projects		Project Notes
2.5.5	It is the policy of the City to decline to issue IRBs for projects that are largely retail or residential in nature, except that:
	(a): City may consider the issuance of IRBs for proposed projects that are primarily retail in nature, if the applicant demonstrates that the proposed project is exceptional and that it is likely to add to the City’s retail base by attracting additional retail sales to the community or by capturing retail sales that are leaking from the community to other markets.	A new facility will help draw customers from a wide radius, allowing Lawrence to keep those revenues within the community.
	(b): City may consider the issuance of IRBs for proposed projects that are primarily residential in nature, if the primary purpose of the proposed project is to provide affordable housing, multi-family dwellings, senior living, or a mixed-use development.	n/a: No residential
2.5.6	If the proposed project requesting the City to issue IRBs includes any residential dwelling units, then the proposed project must comply with the City’s policy regarding economic development incentives and affordable housing as set forth in Section 1.8.3.	n/a: No residential

Continued

City policy also mentions other project qualities that are favored or preferred when issuing IRBs.  Those aspects are outlined below, along with project notes.

Other Policy Considerations
1.8.1.2 In addition to the foregoing nonexclusive factors, in performing the benefit/cost analysis the City may also consider one or more of the following nonexclusive factors:	Project Notes
(a) the degree to which the proposed project improves the diversification of the City’s economy;	n/a
(b) the kinds of job the proposed project will create in relation to the kinds of skills available in the local labor market	Project allows retention of 28 current Lawrence employees with $50,000 annual average salary.  Company provides generous health care to its employees.
(c) the degree to which the ultimate market for the proposed project’s products or services reside outside the community, recognizing that outside markets bring “new money” to the local economy;	Over 65% of company revenue comes from outside the city limits.
(d) the potential of the proposed project to expand and create additional jobs in the future;	After the new facility is built, the company anticipates adding 5-10 jobs within the next few years.
(e) the beneficial impact the proposed project may have on the City, resulting from its creation of other new jobs and businesses, from its use of local products or other materials and substances in manufacturing, or from its creation of niche businesses, such as those in the bioscience arena;	The company's local jobs support agricultural production activities in the area, which brings in additional revenue and jobs.
(f) the beneficial impact the proposed project may have on the environmental quality of the region or, through its products or services, nationally, as well any efforts the proposed project makes to promote sustainability or to mitigate environmental harm.	New facility will incorporate LED lighting throughout facility and green space as allowed.
(g) the beneficial impact the proposed project will have on a particular area of the City, including designated enterprise zones and areas of needed revitalization or redevelopment; or	This will benefit east Lawrence in an area that could otherwise not be developed for some time.
(h) the compatibility of the location of the proposed project with land use and development plans of the City and the availability of existing infrastructure facilities and essential public services.	The project will require a rezoning to combine two parcels into one.  Land use will be the same as previous facility.

As indicated above, the proposed project appears to meet City eligibility criteria for support.

Previously Authorized IRBs

The below tables summarize City IRB support on community development and economic development projects for not-for-profit and for-profit companies.

IRBs: Outstanding
Company	Date of Issue	Issuing Ord. #	Year Matures	Amount Authorized	Project
Bowersock: Series 2011B & 2011C	2010/2011	8607 & 8620	2037	$27,000,000	Hydro-Electric Facility
Rock Chalk Park	Oct. 2013	8862	2023	$40,000,000	Commercial Recreational Facility
826 Pennsylvania Street*	Dec. 2016	9316	2018	$3,200,000	Mixed-Use Commercial/Multi-Family Residential
Dwayne Peaslee Technical Training Center, Inc.: Series 2016*	Dec. 2016	9321	2019	$2,000,000	Technical Training Center
Boys & Girls Club*	Dec. 2017	9431	2020	$5,000,000	Teen facility addition to College & Career Center
Vermont Place	Note 1				Mixed-Use Commercial/Residential
Humane Society	Note 2				New Animal Shelter
* Stand-alone IRB used for a sales tax exemption on construction materials
(1)Resolution of Intent No. 7173 authorized 10-3-2017.  Bond have not yet been issued.
(2) Resolution of Intent No. 7249 authorized 5-1-2018.  Bonds have not yet been issued.

IRBs: Matured (no longer outstanding)
Company	Date of Issue	Issuing Ord #	Matured	Amount Authorized	Project
800 New Hampshire: Series 2016*	April 2016	9210	2018	$7,800,00	Mixed-Use Commercial/Multi-Family Residential
1101 Indiana Street (HERE KS)*	Nov. 2014	9053	2017	$76,000,000	Mixed-Use, Retail and Student Housing
100 East 9th Street LLC (888 New Hampshire, North Project): Series 2015*	Mar. 2015	9093	2017	$23,000,000	Mixed-Use Commercial/Residential
Dwayne Peaslee Technical Training Center, Inc.: Series 2015	May 2015	9111	2017	$1,600,000	Technical Training Center
DST Systems, Inc: Series 2001	2001	7331	2012	$9,000, 000	Acquisition & Renovation of Existing Office Building
Neuvant House II*	2013	8901	2014	$2,500,000	Specialty Healthcare Facility
9th & New Hampshire LLC: Series 2012 (South Project)*	2012	8804	2015	$17,250,000	Mixed Use Hotel (900 New Hampshire Street: South Project)
PROSOCO, Inc: Series 1998A ($5,800,000) & Series 1998B ($2,240,000)	1999	7060	2019	$8,040,000	Manufacturing Facility
Pioneer Ridge*	Feb. 2016	9184	2017	$14,500,000	Commercial, Independent Living Facility
Eldridge Expansion (705 Massachusetts Street)*	Oct. 2015	9161	n/a	$12,500,000	Hotel expansion, did not proceed. Terminated by applicant in 2016.

Historical IRB Support
Ord	Ord Date	Project	Bond Series	Bonds	Amount Authorized (up to)	Purpose
Ord 4948	7/25/1978	Prairie- Ridge	Series July 1, 1978	Revenue Bonds (Housing Development)	$2,310,800	Senior Apartments, low income housing.  Some HUD subsidized.
Ord 5045	5/15/1979	Vermont Towers	Series May 1, 1979	Revenue Bonds (Housing Development)	$1,757,000	Apartments. Low-rent, subsidized
Ord 6553	5/31/1994	Drury Place at Alvamar	Series 1994	Revenue Bonds (Elderly Housing)	$2,880,000	Acquiring, constructing, installing and equipping an Elderly Housing Apartment Project
Ord 6395	12/22/1992	Brandon Woods	Series 1993	Revenue Refunding Bonds (Multi-Family Housing Development)	$6,000,000	Refund Multi-Family Housing development variable rate demand revenue bonds, Series 1987 Multi-Family Housing Development
Ord 5739	3/31/1987	Brandon Woods	Series 1987	Variable Rate Demand Revenue Bonds	$6,000,000	Acquire, purchase, construct and install a Commercial Multi-Family Housing Project.
Ord 4627	11/11/1975	Lawrence Presbyterian Manor	Series 11-1-1975	IRB	$2,000,000	Elderly Housing
Ord 5706	7/1/1986	Lawrence Presbyterian Manor	Series 1986	IRB	$3,500,000	Purchase, construct and equip certain additions and improvements to an existing Nursing Home Facility.

Estimated Sales Tax Savings

The costs of incentives are restricted to a sales tax exemption on construction materials for the project.  Assuming a total project cost of $3,000,000 and using the most recent (January 2018) Kansas Department of Revenue countywide sales tax ratios, staff estimates the total value of exempted sales taxes to be approximately $135,000.

Breakout of Sales Tax Savings Estimations
Total Project Costs	Materials Expense %	Estimated Materials Cost
$3,000,000	50.00%	$1,500,000
Heritage Tractor:  Sales Tax Exemption
Taxing Jurisdiction	Tax Rate (Jan 2018)	Est Sales Tax Amount
City	1.55%	$23,250
County	1.00%	$15,000
City Portion of 1% Countywide Sales Tax		$8,545
County Portion of 1% Countywide Sales Tax		$5,478
Other County Municipalities Portion of 1% Countywide Sales Tax		$977
State	6.50%	$97,500
Total	9.05%	$135,750

Of this total exemption, the City is estimated to forego approximately $31,800 in sales tax revenues and the County is estimated to forego approximately $5,500 in sales tax revenues. The State would forego approximately $98,000 in sales tax revenues.

Summary of Estimated Sales Tax Savings:  Heritage Tractor
City	Tax Rate	Est Sales Tax Amount	Total
City Sales Tax	1.55%	$23,250	$31,795
City Portion of Countywide 1% Sales Tax	0.57%	$8,545
County	Tax Rate	Est Sales Tax Amount	Total
County Portion of Countywide 1% Sales Tax	0.37%	$5,478	$5,478
State	Tax Rate	Est Sales Tax Amount	Total
State	6.50%	$97,500	$97,500
Other	Tax Rate	Est Sales Tax Amount	Total
*Other County Municipalities Portion of Countywide 1% Sales Tax	0.07%	$977	$977
Total	9.05%	$135,750	$135,750

It should be noted that per the City’s economic development policy (Resolution No. 7184, Section 2.9.1-2), for IRBs requested solely to obtain a sales tax exemption, the applicant shall pay the City an IRB origination fee, at the rate of 0.004 on the par amount of bonds being issued, at the time of bond closing. If the applicant is a Federally registered not-for-profit organization or if the project will create primary jobs or provide affordable housing, the City may waive a portion or all of the origination fee.  The origination fee on $3,000,000 of IRB issuance is estimated at $12,000.

IRB Origination Fee

Per the City's economic development policy (Section 2.9.1), the applicant shall pay to the City 0.004 of par amount of bonds that are issued, unless exempted[1].  For a $1,500,000 bond issuance, the origination fee would be $6,000.  For a $3,000,000 bond issuance, the origination fee will be $12,000.

Actions To-Date

City Commission Receipt of Request:

The City Commission received the request at their July 10, 2018 meeting and referred it to the Public Incentives Review Committee (PIRC) for review and recommendation.

PIRC Recommendation:

The Public Incentives Review Committee (PIRC) met on August 13, 2018 and voted 7-0 to recommend approval of Industrial Revenue Bond financing so Heritage Tractor can obtain a sales tax exemption on construction materials to rebuild the facility destroyed by fire at 1110 E. 23rd Street.

Action Requested

Receive recommendation from the Public Incentive Advisory Committee on the issuance of Industrial Revenue Bonds for rebuilding the Heritage Tractor facility at 1110 E. 23rd Street.

Adopt Resolution No. 7257, a Resolution of Intent for issuance of up to $3,000,000 in Industrial Revenue Bonds for Heritage Tractor to obtain a sales tax exemption on construction materials for rebuilding their facility at 1110 E. 23rd Street, if appropriate.

Attachments

1. Application & Request Letter

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[1] Per Section 2.9.2 in the City of Lawrence Economic Development Policy (Resolution 7184, January 15, 2017), where the applicant if a federally registerd not-for-profit, where the proposed project will create primary jobs, or where the primary purpose of the proposed project is to create affordable housing, the City may waive a portion or all of the origination fee.