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03-28-16 CC WS MinCITY OF SHOREWOOD CITY COUNCIL WORK SESSION MONDAY, MARCH 28, 2016 MINUTES 1. CONVENE CITY COUNCIL WORK SESSION 5755 COUNTRY CLUB ROAD COUNCIL CHAMBERS 6:00 P.M. Mayor Zerby called the meeting to order at 6:02 P.M. A. Roll Call Present. Mayor Zerby; Councilmembers Siakel, Sundberg, and Woodruff; Attorney Keane; Administrator Joynes; City Clerk Panchyshyn; Planning Director Nielsen; and, City Engineer Hornby Absent: Councilmember Labadie B. Review Agenda Sundberg moved, Siakel seconded, approving the agenda as presented. Motion passed 4/0. 2. TAX INCREMENT FINANCING DISCUSSION WITH SPRINGSTED Administrator Joynes noted the main purpose of this session is to educate Council on the basics of tax increment financing (TIF). He stated the City received a request for TIF assistance from Oppidan Investment Company for a senior living project and it may receive another request over the next two months. Staff asked Mikaela Huot, with Springsted, to make a presentation on TIF. At the end of her presentation Ms. Huot will explain how TIF relates to Oppidan's proposed Shorewood Senior Living development. She will also review the schedule of events for considering Oppidan's request for TIF assistance. The TIF events will be done concurrent with the planning process for the development. As the City ages it will likely received more requests for TIF assistance. That may necessitate the Shorewood Economic Development Authority (EDA) becoming more involved. Following are highlights of Ms. Huot's PowerPoint presentation about TIF. TIF is a method of capturing tax base growth generated by new development within a TIF district. A city captures new local taxes (city, county and school) from a project to pay for public improvements related to development. There is a fixed term for capturing the local taxes. Once the project is complete and the project costs have been financed that new development is added to the tax base. This is how a typical redevelopment TIF model works. The value of a property declines if no investment is made to it. At the time a TIF district is established the tax base for that property is frozen; it remains frozen over the life of the district. The increment local taxes are captured for a period of about 25 years. Once the TIF district is decertified a city, council and school then receive the new tax base from the project. A TIF development district can be the size of a project area or larger. It is the area in which tax increment can be spent subject to some spending restrictions. A TIF plan has to be approved for the TIF district. Some of the plan's key components are the budget, the geographic boundaries CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2016 Page 2 of 7 and the purpose for creating the district. A city must hold a public hearing before creating a district. After the public hearing the district must be certified to the district to the county, state and Department of Revenue. • Cities use TIF for a number of reasons. To stimulate development where it would not occur (often it falls within the "but /for" test). To encourage development of uses that would otherwise not occur (e.g., low income housing or market rate housing). To enhance the tax base. To facilitate infrastructure improvements related to a new development or redevelopment. To facilitate redevelopment in targeted areas. To coordinate new developments with existing plans. • There are restrictions on how TIF dollars can be used. Some of the allowable uses are — public improvements related to the TIF district, land acquisition, soil correction and site grading, site preparation /demolition, relocation, cost of qualifying housing, financing fees and capitalized interest to the district, and administrative costs. • Allowable public improvement costs include streets and roads, utilities, bridges and interchanges, parking, sidewalks and walkways, and soft costs related to those costs. • There are three general methods cities use to finance costs. General Obligation (G.O.) tax increment bonds can be issued without a referendum if the tax increment contributes to at least 20 percent of the debt service costs. With that method a city incurs a portion of the cost upfront through the bond issuance process and captures the tax increment over time to make the debt service payments. Pay -as- you -go notes are used when the developer finances the project in full up front and then gets reimbursed over time as tax increments are available. Revenue bonds are often used if a development is under construction or fully constructed; there is often a high "coverage" factor. • There are several different types of TIF districts that can be created. The type determines the timeframe, the uses of TIF and the ongoing requirements. For a redevelopment district it is based on the existing conditions of the site; certain conditions have to be met. The maximum timeframe for a redevelopment district is 25 years of collection after receipt of the first increment for a total of 26 years. A renewal and renovation district is similar to a redevelopment district and is also based on the existing conditions of the site. The qualifications for it are a little less stringent. It can go up to 16 years; 15 years after receipt of the first increment. An economic development district is a job based district for manufacturing, warehouse and distribution. It can have a maximum of a 9 year term based on what would be in the TIF district. A housing district is for low to moderate priced housing. There are certain restrictions for what can be built in that type of district. The maximum timeframe for a housing district is 25 years of collection after receipt of the first increment for a total of 26 years. A soils condition district is based on the current conditions of poor soils, contamination and hazardous substances within the district. Lastly, there is a hazardous substance sub - district. • Statutory findings have to be met to approve a TIF district. Council must make the findings prior to holding the public hearing. The TIF plan would afford maximum opportunity, consistent with the sound needs of a city as a whole, for development by private enterprise. The TIF plan must conform to general plans for development of a city as a whole. The project would qualify as a TIF district; there are specific criteria for each type of district. The proposed development, from a city's perspective, would not reasonably be expected to occur solely through private investment within the reasonably foreseeable future — the proposed development would not occur "but /for" the use of tax increment financing. The increased market value that could reasonably be expected to occur without the use of TIF would be less than the increase in the market value estimated to result from the proposed redevelopment after subtracting the amount of TIF used. • When considering the use of TIF the first question a city asks is if the project is feasible. Does the projected increment support the necessary project costs related to the development? A secondary question is does the projected increment support a city's costs related to the development. A city has to evaluate how TIF dollars would be used. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2016 Page 3 of 7 • Some types of TIF districts require the full maximum term. Other types may require a lesser term. A city has to decide if it wants to maximize the use of TIF to finance all related costs or minimize the use of TIF and close the district early. • A sampling of public purpose benefits include: increased employment, additional housing units (e.g.; affordable, market rate, senior), attraction of visitors who would contribute to the local economy, increased sales volume through increased development, elimination of negative or blighting influences effecting the surrounding property (Blight Curve), maximization of land use, and the addition of infrastructure (i.e.; public improvements). • Each time a city is asked to participate in a tax increment or economic development project it must consider a range of risk factors. The lowest risk is for a city to simply grant the permit and allow the project to happen; there is no request for TIF assistance. The low risk is when the developer is reimbursed as benefits are completed with pay -as- you -go notes. The developer bears the entire risk. The medium risk is when a city is the lender. The higher risk is when a city is the borrower; it issues bonds to pay for its share of public improvements or other project costs. The highest risk is for a city to be a developer and take on the full risk for the project. A city may consider a higher risk level if the rewards warrant that. • There are ways a city can reduce its risk. One way to reduce risk is a value guarantee (or minimum assessment agreement), That is where the developer agrees to a certain value of the development so that over the life of the TIF district the developer would not contest a value lower than that. It does not reduce the risk of law changes or property tax rate changes. A city could enter into shortfall payments; when the increment collected is less than the debt service the developer pays the difference. For a larger phased development project, the installation of the improvements and financing of the costs is done in phases subject to market feasibility of each phase of revenues available. There could be minimum coverage requirements for certain types of debt or the coverage could be increased to provide additional cushion to pay debt service. A city could have a debt service requirement. More than one risk reduction method could be applied. • A but /for needs analysis is done to make the finding that the development as proposed would not occur but /for TIF assistance. Two questions have to be answered. What is the need for public assistance? What is the appropriate amount of TIF assistance? A city has to be able to show that the financing of the public improvement project costs could not be supported by the developer alone without TIF assistance. The but /for determination analysis begins with the review of the developer's pro forma (i.e.; cash flow projections for the project upon completion); one pro forma with assistance and one without assistance with an understanding of the developer's potential return over, for example, 10 years. Using the level of return without assistance is how the feasibility of the project without assistance is determined. Using the level of return with assistance is how the level of assistance is determined. • Approving a TIF plan provides a city with the authority to use TIF to assist with financing of public improvements. It does not obligate a city to use TIF or provide TIF assistance; that would be in the development agreement. It does not obligate a city to issue bonds. Ms. Huot highlighted TIF financing request the city received from Oppidan for its proposed senior housing development. Oppidan proposes to redevelop three properties: 23075 State Highway 7 and 6020 and 6050 Chaska Road. It has already been determined that the redevelopment project does meet the qualifications of a redevelopment district. That is, more than 50 percent of the buildings are substandard and more than 70 percent of the area of the district is occupied by some type of structure (e.g.; buildings, streets, sidewalks). Oppidan proposes to develop them as a senior housing project consisting of independent living (28 units), assisted living (52 units) and memory care living (25 units). A total of 105 units. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2016 Page 4 of 7 • The total estimated private investment is $27,150,717. • The TIF assistance request is $1,587,343 for soil correction and $918,000 for the extension of City watermain for a total of $2,505,443. It would be done on a pay -as- you -go basis with the developer paying the cost upfront and the City reimbursing for the costs afterward. • The total estimated market value upon completion based on preliminary numbers from the assessor is $165,000 per unit or a $17,160,000. • The term of the district would be up to 25 years subject to the City withheld amount. The City has the ability to retain up to 25 percent of the tax increment dollars for other costs related to the development. Ms. Huot reviewed the schedule of events for establishing a TIF plan and TIF district. It takes about 45 — 60 days to establish a district. ➢ March 28 — City Council work session to discuss TIF and Oppidan's request for TIF assistance ➢ March 29 — County Commissioner receives a notification letter (at least 30 days prior to publication of the public hearing) ➢ Prior to April 8 — County and School District receive impact letters and a draft TIF plan (at least 30 days prior the public hearing) ➢ April 11 — City Council calls for a public hearing to be held on May 9 ➢ To be determined — Shorewood Planning Commission reviews draft TIF plan ➢ April 28 (submission deadline April 21) — Publication of notice of the public hearing in the Sun Sailor (at least 10 — 30 days prior to public hearing) ➢ May 9 — City Council holds public hearing and adopts resolution approving TIF plan and TIF district ➢ May 9 — City Council approves the development agreement ➢ May 9 — State filing and request for County certification Mayor Zerby stated if on April 11 Council schedules a public hearing for May 9 he asked why the public hearing notice would not be published until April 28. Ms. Huot stated Springsted usually does it closer to the minimum of 10 days in advance. Also, Springsted did not want the County notified until after this work session. A publication in The Laker could be done sooner because it would not have to be tied to the 30 days prior. Councilmember Woodruff asked when Council would have the opportunity to review the impact letters and draft TIF plan. The schedule shows the County and School are to receive them on April 8. Ms. Huot stated that generally councils do not review the draft TIF plan before it is sent out. Woodruff stated he has never considered TIF assistance before. Based on the schedule just reviewed the first time Council would see the TIF plan is when it gets a copy of what is sent to the Planning Commission. He commented he does not know what he doesn't know about this process. He stated he does not think it would be a good idea for Council not to see anything until it is asked to act on it. Councilmember Siakel thanked Ms. Huot for providing a very good overview of TIF. She noted Council has not discussed if it wants to provide TIF assistance to Oppidan. This seems premature. Administrator Joynes explained that this evening staff wanted Ms. Huot to provide an overview of how TIF works and staff wants to know how things should proceed. The schedule indicates Council will set the May 9 public hearing date on April 11. At that point Council will see a draft TIF plan. What is being proposed in the schedule is very routine. He noted that the schedule is very aggressive. The schedule provided is the fastest things can be done. He stated by April 11 there will be a draft TIF plan, the analysis on the but/for will have been done and the pro forma from the developer will have been CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2016 Page 5 of 7 received. He then stated this is the first time this has been done in this format. TIF assistance was provided 25 years ago but this is different. Councilmember Siakel asked if the City has received a pro forma for either request. Administrator Joynes stated staff has asked to see that for the potential The Waters of Excelsior project but it has not been given that yet. Oppidan has provided most of that information to the City but it has not been analyzed yet. Councilmember Woodruff suggested that for Council's April 11 meeting there be another agenda item which would be to discuss the impact letters and the draft TIF plan. Mayor Zerby stated he is somewhat uncomfortable with sending the impact letters and a draft TIF plan on behalf of Council without Council's review. Councilmember Siakel concurred. Administrator Joynes stated that waiting to send the impact letters and draft TIF plan until after Council reviews them on April 11 will ultimately extend the schedule out two to three weeks. Ms. Huot clarified the draft TIF plan is just a draft; it can be changed subject to Council's review. There are times when Springsted sends out a draft TIF plan that errors on the high side knowing the numbers can be backed down. Administrator Joynes stated a draft plan does not indicate Council has approved it. Ms. Huot stated it only means Council is considering it. If the letter goes out on April 8 the letter would state that Council intends to consider calling a public hearing on April 11. Mayor Zerby stated he would prefer that the numbers in the draft TIF plan be closer to what is expected when it is initially sent out. He expressed he is very uncomfortable about sending out a letter on behalf of the City indicating this is what Council is thinking when Council has not discussed it yet. Councilmember Siakel asked if Springsted was here on behalf of the City or Oppidan. Ms. Huot responded on behalf of the City and noted that Springsted is the City's financial advisor and represents the City and its interests. She noted for Springsted she works on the majority of TIF districts for municipalities. It only represents public sector clients; it does not represent any private sector clients. Siakel stated her greatest concern is the aggressive timeline yet Council has not discussed this. From her vantage point it is like there is a conclusion before Council yet Council has not discussed where it wants to go. She recommended Council have a much more robust conversation before agreeing to the proposed timeline. Councilmember Sundberg stated she was the Council Liaison to the Planning Commission when there was a public hearing on the concept and development plans for Oppidan's proposed project. There were some issues with what was proposed. It is not a cut and dried project. She envisions Council having serious discussions about the proposed project. Administrator Joynes stated the schedule will be revised to so that the impact letters and draft TIF plan are not sent to the County and School District until April 12 or later. Other dates will be changed accordingly. By that time there will have been a determination if the request satisfies the but/for test. There would also be an idea of the magnitude of the Oppidan's request. That would add a couple of weeks to the schedule. Mayor Zerby stated he thought that is the direction Council wants staff to move forward with. Ms. Huot asked if Council would be comfortable with the County Commissioner receiving the notification letter on March 29. Or does Council want that to be held until it has had further discussion. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2016 Page 6 of 7 There was Council consensus to wait on everything. Councilmember Woodruff stated he was sensitive to how much Council was going to review and approve before the Planning Commission reviews the information and makes a recommendation. He does not want to usurp its responsibilities. He then stated that based on the presentation the City is being asked to approve a request for approximately $2.5 million in TIF assistance. He asked how solid that amount is. Ms. Huot stated Springsted has almost completed its review of Oppidan's pro forma. Once it is determined that TIF assistance would be appropriate then a determination needs to be made about how much assistance is needed. That needs to be discussed with staff. Administrator Joynes explained WSB & Associates had been asked to estimate the cost to extend City watermain. The City is also going to research what needs to be done to the soils. He reminded Council that Excelsior originally said the project site could be connected its watermain. The project cost estimate at that time included a cost to do that. Excelsior reversed its position on that. The cost to extend Shorewood watermain is significantly more. There is a lot of fill on the site that would not support the project that needs to be addressed. TIF assistance is being asked for to cover that cost. Councilmember Woodruff asked if there would be any value in again asking Excelsior about extending its watermain. Administrator Joynes noted that the Excelsior City Manager has told him that Excelsior is not interested in doing that because it does not have the capacity or time to do so. Councilmember Siakel stated to extend Shorewood watermain will cost close to $1 million; that is a lot more than to extend Excelsior watermain. Shannon Rusk, with Oppidan, explained when Oppidan representatives first met with Excelsior representatives Oppidan was assured that Excelsior would provide the project site with water. Oppidan moved forward with project cost estimates with that in mind. Just before Oppidan was going to come before the Shorewood Planning Commission Oppidan received a call from Excelsior telling Oppidan it had changed its mind. At that time Oppidan stopped the project. Oppidan met with Engineer Hornby and talked about extending Shorewood watermain. The TIF assistance amounts are based on the costs it received from a general contractor. She clarified the approximate $900,000 in TIF assistance being asked for to extend watermain is the cost to extend Shorewood watermain minus the cost to extend Excelsior watermain. The soil work number is the incremental cost over what was included in its original project costs. Mayor Zerby asked Attorney Keane if this would be deserving of having an executive session about. Keane responded yes. Z.erby asked if the other members of Council they wanted to discuss this in an executive session. Siakel and Sundberg acknowledged they would support doing that. In response to a comment from Councilmember Woodruff, Ms. Huot explained that typically when Springsted reviews these types of projects it looks at a 10 -year operating pro forma both with and without TIF assistance and with and without the extra project costs to find out what the rate of return would be. There are assumptions made for at the end of the ten years (e.g.; the sale of the property even thought that might not be what actually happens). Oppidan has determined there are some extraordinary costs associated with its proposed project. Councilmember Woodruff asked if staff has considered if there is anything else the City would like to do in conjunction with this project. Administrator Joynes staff anticipates extending the Shorewood watermain to the 22 properties that currently get their water from Excelsior. Woodruff clarified he was talking about infrastructure projects such as trails, road changes, intersection modifications and so forth. Joynes stated staff has not fully discussed that. CITY OF SHOREWOOD WORK SESSION MEETING MINUTES March 28, 2016 Page 7 of 7 Councilmember Sundberg stated traffic is a very big issue in the area around the project site. Administrator Joynes stated that conversation is part of the normal planning discussion. Sundberg stated Oppidan's proposed development is going to drive the timeline. Mayor Zerby thanked Ms. Huot for coming this evening. 3. ADJOURN Woodruff moved, Sundberg seconded, Adjourning the City Council Work Session of March 28, 2016, at 6:57 P.M. Motion passed 4/0. RESPECTFULLY SUBMITTED, Christine Freeman, Recorder ATTEST: ga'A- fa'vuchT� Jea Panchyshyn, City'tlerYi ..5 t erby, M ,yor