HomeMy WebLinkAbout4.2 Resolution adopting a Modification to the Development District No.1
Memo
To: Christine Costello, Economic Development Director
From: Jason Aarsvold, Ehlers
Date: November 7, 2018
Subject: Analysis of Request for TIF Assistance Up North Plastics
The City of Cottage Grove requested that Ehlers review the Tax Increment Financing (TIF)
request from Up North Plastics for their proposal to construct a new building/expansion on their
existing property at 9480 Jamaica Avenue South. Up North Plastics project involves
construction of an approximately 421,000 square foot plastic trash bag manufacturing facility.
The facility will be a stand-alone building on the companys existing 88-acre parcel. If approved,
the project is expected to commence in April 2019 and be complete by October 2020.
Up North Plastics project meets the requirements necessary for the City to establish an
Economic Development TIF district. The s TIF request is for 9 years of tax increment
payments, which is the maximum number of available years in an Economic Development TIF
District. Based on our estimates, the project is expected to generate a present value of
approximately $895,000 in tax increment over the 9 year life of the district.
In addition to the tax increment assistance, Up North Plastics received an award of up to $1.5
million Minnesota Investment and Job Creation Funds. The business is also
eligible to receive $400,000 through the Minnesota Job Skills Partnership which provides
workforce training.
The purpose of this memorandum is to evaluate whether all the contemplated assistance for Up
North Plastics project is necessary for financial feasibility in comparison to typical market-based
expectations and alternative investment options available to the company. This is commonly
referred to as meeting the but for test, which means the project would not occur on this site
but for the public assistance being provided.
But For Test
As the company evaluated potential locations to invest in this new facility, it was considering
alternative investment options outside both the City and the State of Minnesota. The business
indicated that local assistance was necessary to make investment at this location financially
feasible. Based on our negotiations with the company, we were able to conclude that Up North
Plastics
outside assistance.
Analysis of Request for TIF Assistance Up North Plastics
November 17, 2018
Page 2
While this conclusion generally meets the but for test, we believe its good policy to subject
these requests to a more rigorous analysis to determine whether the assistance is indeed
necessary for financial feasibility. For this reason, we took a second approach to analyzing the
request.
The second approach to the but for analysis treats this project as an independent income
producing real estate venture that might be built by a third party (developer) and leased back to
Up North Plastics. In this scenario, we explored whether the project costs and end sources of
funds (rent paid by the business) would meet typical market returns to attract private financing
from a bank and developer equity. The table detailing this analysis is attached to this
memorandum and is summarized below.
Summary Analysis
Up North Plastics proposes to use equity and the requested public assistance as the
sources of funds for this project. There is no bank financing contemplated.
The total development costs for the real estate portion of this project are
approximately $41.5 million or $98.57 per square foot. This excludes $60 million in
equipment costs to make the facility operational. Equipment costs are generally a tenant
expense in a lease scenario and are, therefore, excluded from this analysis. The TDC
is higher than other similar projects in the metropolitan region but is what the company
feels is necessary to build out the facility.
The applicant is not taking a developer fee on the project.
For this analysis, it was assumed the building could be leased at a blended
(manufacturing/office) rate of $5.15/sf with 0% vacancy since the applicant will occupy
all of the space. This lease rate is comparable in the market for this type of
manufacturing/warehousing space.
Based on the anticipated development costs and potential rental income, the projected
cash-on-cost return is 5.4% without TIF assistance and 5.8% with TIF assistance. Cash-
on-cost return is simply the annual income from the property divided by the TDC.
Industrial developers typically need a cash-on-cost return of between 7% and 9% to
attract private financing. With the requested TIF assistance, the projected returns are on
below the typical investment returns.
As noted above, however, the TDC projected by the business is higher than what we
would typically see for projects of this nature. We would expect to see TDC closer to
$80 per square foot for a project like Up North Plastics. Given this discrepancy, Ehlers
also completed this analysis assuming the TDC was reduced to $33.68 million, which is
$80 per square foot. In this scenario, the projected cash-on-cost return is 6.7% without
TIF assistance and 7.2% with TIF assistance. These projected returns are right on the
low end of the typical investment returns and are not excessive.
Analysis of Request for TIF Assistance Up North Plastics
November 17, 2018
Page 3
Recommendations
Based on our review of the project and market trends, we conclude that the proposed
development would not reasonably be expected to occur solely through private investment
within the reasonably foreseeable future. Therefore, if the City and state choose to provide the
requested assistance, we believe it will help facilitate the project and not unduly enrich the
company.
TIF assistance would be provided on -as-you-basis in the amount of $895,000. With
pay-as-you-go TIF assistance, the City does not provide any funding up-front. Instead, the City
enters into an agreement to provide tax increment payments that are generated solely from the
actual increased property taxes for up to nine years. The applicant uses those
future tax increment payments to obtain additional debt and/or support equity returns. If the tax
increment is insufficient to pay the $895,000 TIF note in nine years, the City does not make up
the shortfall.
Please contact me at 651-697-8512 with any questions.
City of Cottage Grove
Up North Plastics - TIF Analysis ($41.5 Million TDC)
% OF WITHOUT TAX WITH TAX
FINANCINGINCREMENTINCREMENT
SourcesSourcesSources
Bank Loan0%$0$0
DEED Funds4%$1,500,000$1,500,000
Equity96%$40,000,000$40,000,000
TOTAL SOURCES 100%$41,500,000$41,500,000
UsesUsesUses
Land$0$0
Building Cost$40,000,000$40,000,000
Site Development$250,000$250,000
Off-Site Development Costs$1,250,000$1,250,000
TOTAL USES ($98.57/sf)
$41,500,000$41,500,000
IncomeIncomeIncome
Rent - $5.15 Sq/Ft$2,168,150$2,168,150
Vacancy - 0%$0$0
Est. Tax Increment Assistance (annual)$0$137,005
TOTAL INCOME$2,168,150$2,305,155
$2,168,150$2,305,155
Net Income
5.4%5.8%
Cash-on-Cost Return*
*Total Income/Total Uses (less DEED Funds)
But For Test 11-7-18
City of Cottage Grove
Up North Plastics - TIF Analysis ($33.68 Million TDC)
% OF WITHOUT TAX WITH TAX
FINANCINGINCREMENTINCREMENT
SourcesSourcesSources
Bank Loan0%$0$0
DEED Funds4%$1,500,000$1,500,000
Equity96%$32,180,000$32,180,000
TOTAL SOURCES 100%$33,680,000$33,680,000
UsesUsesUses
Land$0$0
Building Cost$33,680,000$33,680,000
Site Development$0$0
Off-Site Development Costs$0$0
TOTAL USES ($98.57/sf)
$33,680,000$33,680,000
IncomeIncomeIncome
Rent - $5.15 Sq/Ft$2,168,150$2,168,150
Vacancy - 0%$0$0
Est. Tax Increment Assistance (annual)$0$137,005
TOTAL INCOME$2,168,150$2,305,155
$2,168,150$2,305,155
Net Income
6.7%7.2%
Cash-on-Cost Return*
*Total Income/Total Uses (less DEED Funds)
But For Test 11-7-18
COTTAGE GROVE ECONOMIC DEVELOPMENT AUTHORITY
CITY OF COTTAGE GROVE
WASHINGTON COUNTY
STATE OF MINNESOTA
RESOLUTION NO. 2018-010
RESOLUTION ADOPTING A MODIFICATION TO THE DEVELOPMENT
PROGRAM FOR DEVELOPMENT DISTRICT NO. 1, ESTABLISHING TAX
INCREMENT FINANCING DISTRICT NO. 1-19 THEREIN AND ADOPTING A
TAX INCREMENT FINANCING PLAN THEREFOR.
WHEREAS, it has been proposed by the Board of Commissioners (the "Board") of the Cottage
Grove Economic Development Authority (the "EDA") and the City of Cottage Grove (the "City") that the
EDA adopt a Modification to the Development Program (the "Development Program Modification") for
Development District No. 1 (the "Project Area") and establish Tax Increment Financing District No. 1-19
(the "District") and adopt a Tax Increment Financing Plan (the "TIF Plan") therefor (the Development
Program Modification and the TIF Plan are referred to collectively herein as the "Program and Plan"), all
pursuant to and in conformity with applicable law, including Minnesota Statutes, Sections 469.090 to
469.1082, and Sections 469.174 to 469.1794, inclusive, as amended (the "Act"), all as reflected in the
Program and Plan and presented for the Board's consideration; and
WHEREAS, the EDA has investigated the facts relating to the Program and Plan and has caused
the Program and Plan to be prepared; and
WHEREAS, the EDA has performed all actions required by law to be performed prior to the
adoption of the Program and Plan. The EDA has also requested the City Planning Commission to provide
for review of and written comment on Program and Plan and that the Council schedule a public hearing on
the Program and Plan upon published notice as required by law.
NOW, THEREFORE, BE IT RESOLVED by the Board as follows:
I. The EDA hereby finds that the District is in the public interest and is an "economic development
district" under Minnesota Statutes, Section 469.174, Subd. 12, and finds that the Program and Plan
conform in all respects to the requirements of the Act and will help fulfill a need to develop an area
of the State of Minnesota which is underutilized and that the adoption of the proposed Program and
Plan will help provide employment opportunities in the State and will result in the preservation and
enhancement of the tax base of the City and the State because it will discourage commerce and
industry from moving their operations to another state or municipality and thereby serves a public
purpose.
II. The EDA further finds that the Program and Plan will afford maximum opportunity, consistent with
the sound needs for the City as a whole, for the development or redevelopment of the Project Area
by private enterprise in that the intent is to provide only that public assistance necessary to make
the private developments financially feasible.
III. The boundaries of the Project Area are not being expanded.
IV. The reasons and facts supporting the findings in this resolution are described in the Program and
Plan.
V. The EDA elects to calculate fiscal disparities for the District in accordance with Minnesota Statutes,
Section 469.177, Subd. 3, clause b, which means the fiscal disparities contribution would be taken
from inside the District.
VI. Conditioned upon the approval thereof by the City Council following its public hearing thereon,
the Program and Plan, as presented to the EDA on this date, are hereby approved, established and
adopted and shall be placed on file in the office of the Community Development Director.
VII. Upon approval of the Program and Plan by the City Council, the staff, the EDA's advisors and legal
counsel are authorized and directed to proceed with the implementation of the Program and Plan
and for this purpose to negotiate, draft, prepare and present to this Board for its consideration all
further plans, resolutions, documents and contracts necessary for this purpose. Approval of the
Program and Plan does not constitute approval of any project or a Development Agreement with
any developer.
VIII. Upon approval of the Program and Plan by the City Council, the Executive Director of the EDA is
authorized and directed to forward a copy of the Program and Plan to the Minnesota Department
of Revenue and the Office of the State Auditor pursuant to Minnesota Statutes 469.175, Subd. 4a.
IX. The Executive Director of the EDA is authorized and directed to forward a copy of the Program
and Plan to the Washington County Auditor and request that the Auditor certify the original tax
capacity of the District as described in the Program and Plan, all in accordance with Minnesota
Statutes 469.177.
Approved by the Board on November 13, 2018.
_______________________________
Myron Bailey, President
ATTEST:
__________________________
Jennifer Levitt, Executive Director
As of November 7, 2018
Draft for EDA consideration
Section 1 - Modification to the Development Program
for Development District No. 1
Section 2 - Tax Increment Financing Plan
for Tax Increment Financing District No. 1-19
Minnesota
Statutes ("M.S."), Sections 469.090 to 469.1082M.S., Sections 469.174 to
469.1794
M.S., Chapter 117
M.S., Sections 469.174 to 469.1794
M.S., Section 469.174, Subd. 12
"Economic development district" means a type of tax increment financing district which consists of any
project, or portions of a project, which the authority finds to be in the public interest because:
(1)it will discourage commerce, industry, or manufacturing from moving their operations
to another state or municipality; or
(2)it will result in increased employment in the state; or
(3)it will result in preservation and enhancement of the tax base of the state; or
(4)it satisfies the requirements of a workforce housing project under Section 469.176, Subdivision
4c, paragraph (d).
M.S., Section 469.176, Subd. 4c,
M.S., Section 469.176, Subd. 7
M.S., Sections 273.111273.112, or 273.114Chapter 473H
M.S., Section 469.175, Subd. 1, and M.S., Section 469.176, Subd. 1
M.S., Section 469.176, Subd. 1b.
M.S., Section 469.174, Subd. 7 and M.S., Section 469.177, Subd. 1
M.S., Section 469.177, Subds. 1 and 2
M.S., Section 469.174 Subd. 4 and M.S., Section 469.177, Subd. 1, 2, and 4
M.S., Section 469.177, Subd. 4
M.S.,
Section 469.175, Subd. 4
M.S., Section 469.175, Subd. 3.
M.S., Section 469.177, Subd. 3
M.S., Section 469.177, Subd. 3, clause a
(1)The original net tax capacity and the current net tax capacity shall be determined before the
application of the fiscal disparity provisions of Chapter 276A or 473F. Where the original net
tax capacity is equal to or greater than the current net tax capacity, there is no captured net tax
capacity and no tax increment determination. Where the original net tax capacity is less than
the current net tax capacity, the difference between the original net tax capacity and the current
net tax capacity is the captured net tax capacity. This amount less any portion thereof which the
authority has designated, in its tax increment financing plan, to share with the local taxing
districts is the retained captured net tax capacity of the authority.
(2)The county auditor shall exclude the retained captured net tax capacity of the authority from the
net tax capacity of the local taxing districts in determining local taxing district tax rates. The
local tax rates so determined are to be extended against the retained captured net tax capacity
of the authority as well as the net tax capacity of the local taxing districts. The tax generated by
the extension of the lesser of (A) the local taxing district tax rates or (B) the original local tax
rate to the retained captured net tax capacity of the authority is the tax increment of the
authority.
M.S., Section 469.177, Subd. 3:
(c)The method of computation of tax increment applied to a district pursuant to paragraph (a) or
(b) shall remain the same for the duration of the district, except that the governing body may
elect to change its election from the method of computation in paragraph (a) to the method in
paragraph (b).
M.S., Section 116J.993, Subd. 3
M.S., Section 116J.552, Subd. 3;
M.S., Section 469.174, Subd. 23
M.S., Section
469.174, Subd. 19
M.S., Section469.1813
M.S., Sections 116J.993 to 116J.995
M.S., Section 469.175, Subd. 1a
M.S. Section 469.175 Subd. 2(b)
M.S. Section 469.175 Subd. 2(b)
M.S. Section 469.175, Subd. 1 (a), clause 7
M.S. Section 469.175, Subd.
3, clause (b)(2)
M.S., Section 469.174, Subd. 25
M.S.,
Section 469.177
M.S., Section 273.1384
M.S., Section 469.175, Subd. 4
M.S., Section 469.175, Subd. 4(e)
M.S., Section 469.175 Subd. 4(f)
M.S., Section 469.174, Subd. 12
M.S., Section 469.177, Subd. 1
M.S., Section 469.174, Subd. 14,
other than
M.S., Section 469.178
M.S., Section 469.174, Subd.
25, clause (1)
M.S., Section 469.176, Subd. 4h
M.S., Section 469.176, Subd. 3
M.S., Section 469. 177, Subd. 11
M.S., Section 469.176, Subd. 6
if, after four years from the date of certification of the original net tax capacity of the tax
increment financing district pursuant to M.S., Section 469.177, no demolition, rehabilitation
or renovation of property or other site preparation, including qualified improvement of a
street adjacent to a parcel but not installation of utility service including sewer or water
systems, has been commenced on a parcel located within a tax increment financing district
by the authority or by the owner of the parcel in accordance with the tax increment financing
plan, no additional tax increment may be taken from that parcel, and the original net tax
capacity of that parcel shall be excluded from the original net tax capacity of the tax
increment financing district. If the authority or the owner of the parcel subsequently
commences demolition, rehabilitation or renovation or other site preparation on that parcel
including qualified improvement of a street adjacent to that parcel, in accordance with the
tax increment financing plan, the authority shall certify to the county auditor that the activity
has commenced and the county auditor shall certify the net tax capacity thereof as most
recently certified by the commissioner of revenue and add it to the original net tax capacity
of the tax increment financing district. The county auditor must enforce the provisions of this
subdivision. The authority must submit to the county auditor evidence that the required
activity has taken place for each parcel in the district. The evidence for a parcel must be
submitted by February 1 of the fifth year following the year in which the parcel was certified
as included in the district. For purposes of this subdivision, qualified improvements of a
street are limited to (1) construction or opening of a new street, (2) relocation of a street,
and (3) substantial reconstruction or rebuilding of an existing street.
M.S., Sections 469.090 to 469.1082
M.S., Section 469.176, Subd. 4
M.S., Chapter 462C. M.S., Sections 469.152 through 469.165M.S., Sections 469.178
M.S., Chapter 462C, M.S., Sections 469.152
through 469.165M.S., Sections 469.178
M.S., Section 469.176, Subd. 4.
M.S., Section 469.176, Subd. 2
M.S., Section 469.176, Subd. 5
M.S., Section 469.178
M.S., Section 469.177, Subd. 8
M.S., Section 469.175, Subds. 5, 6, and 6b
M.S., Section 469.175, Subd. 5
M.S., Section
469.175 Subd. 5 and Subd. 6,
M.S., Sections 469.090 to 469.1082
M.S., Section 469.1763, Subd. 3
M.S., Section 469.1763, Subd.
5
Additional information to be added prior to the public hearing