Resolutions Terminating Development Agreement, Decertifying Tax Increment District No. 43-1 and Establishing Development District No. 50 and Tax Increment District No. 50-1 – Hotel Mankato LLC (101 East Main Street, 121 East Main Street, 118 South 2nd Street).

Adoption of the attached resolutions.

On August 12, 2024, the Economic Development Authority (EDA) reviewed a development proposal from Hotel Mankato, LLC (the “Developer”) and adopted a motion directing staff to prepare tax increment documents and to set a date for a public hearing. The proposal involves demolishing two vacant buildings and constructing two adjoining hotels totaling approximately 250,000 square feet with a total of 282 hotel guest rooms, a rooftop restaurant including an outdoor patio, 168-stall underground parking garage and nine surface parking stalls. At the intersection of Riverfront Drive and Main Street, a four-story extended stay Element by Westin is proposed which will include 126 all-suite guest rooms. At the intersection of Second and Main Street, a 10-story AC by Marriott is proposed with 156 hotel guest rooms. The two hotels would be adjoined by a common lobby with a direct connection to the existing City skywalk, providing hotel guests with direct access to the Civic Center. The hotels will share common guest amenities, including a pool, fitness center, guest laundry, lounge spaces, business pods, and a conference room. A coffee shop at the main level is planned along with a restaurant on the 10th floor of the AC hotel that will include a rooftop patio overlooking the Minnesota River Valley. A courtyard area will be provided between the Element and common lobby with grilling stations, fire pits, and an outdoor social lounge area.
The estimated total project cost is $92,710,000 and construction is expected to begin in late 2024 or early 2025 and be completed in 2026. It is anticipated there will be a total of 116 full-time equivalent jobs created for both hotels and the rooftop restaurant.
 
The City Council approved a conditional use permit, certificate of design compliance, and vacation of an alley for the redevelopment project at their August 12, 2024, meeting.

Project Background
The building at 121 East Main Street has been vacant for four years. Previously, there were different redevelopment plans for 121 East Main Street which called for renovating the Landmark building and a building addition for apartments and a distillery. The City Council established a tax increment financing district (43-1) encompassing 121 East Main Street and 118 South 2^nd Street on March 14, 2022, and a development agreement was executed for the mixed-use project. After TIF approval, the project costs significantly increased, which delayed redevelopment of the site and led to redesigning and expanding the redevelopment plans. While new plans were being developed for the site, a portion of the Landmark building’s roof collapsed in February 2023. The roof collapse caused the redevelopment plans to again evolve as the condition of the building significantly worsened. Due to the worsening, substandard condition of the building, the redevelopment plans changed to propose demolishing the building and constructing a new building on the site while also expanding the boundaries of the redevelopment to include the former City Center Hotel at 101 East Main Street. The former City Center Hotel has been vacant since June 2023. The existing tax increment district 43-1 will need to be decertified first before a new tax increment district can be established. The existing development agreement from 2022 that was associated with the mixed-use proposal will also need to be terminated. Resolutions are attached for the decertification of tax increment district 43-1 and termination of the 2022 development agreement.
 
Summary of Financial Assistance Request
The Developer is requesting pay-as-you-go tax increment financing (TIF) from the City through the creation of a redevelopment TIF district. The table below illustrates the proposed uses of TIF assistance for the project.

 

Estimated Tax Increment Available (26 years)	Amount
Annual Tax Increment (2027)	$171,916
Annual Tax Increment (2028-2052)	$390,884
Annual City Admin Retainage (5%) (2027)	$9,048
Annual City Admin Retainage (5%) (2028-2058)	$20,573
Net Total Principal TIF Available for Project Costs – 26 years	$5,152,848
Interest on Developer Pay-Go Note (5%)	$4,791,168
Gross Total Proposed TIF Available	$9,944,016

  The Developer would be eligible to receive an increment annually on a pay-as-you-go basis, from the remaining increment that is not retained for the City’s 5% admin retainage. The anticipated principal value of this pay-as-you-go note for the Developer project costs is $5,152,848, plus 5% carrying interest costs. The TIF projections assume the Developer will receive TIF reimbursement in the amount of $171,916 in year 2027 and $390,884 annually in years 2028-2052.

The City would not upfront the funds as that would require either internal City debt financing or bond issuance. Instead, the Developer would receive two payments per year after the property taxes are paid for a term of 26 years or less, depending on if the reimbursable costs are repaid earlier. This is referred to as pay-as-you-go reimbursement. During the term of the reimbursement, the local taxing jurisdictions will still collect and retain the taxes associated with the original tax capacity as part of ad valorem taxes.
 
The Developer is documenting extraordinary costs that may be eligible for assistance under the City of Mankato’s Economic Development Guidelines. The table below illustrates the proposed Developer TIF reimbursable budget based on available tax increment:
 

Developer – Requested TIF Eligible Expenditures	Amount
Developer Project Costs - Developer Pay-Go Assistance (Principal Amount) Building Demolition Site Demolition Environmental Soil Corrections Earth Retention Dewatering Site Improvements Site prep, utilities reroute Site Lighting Water, Sanitary, and Storm Construction fence Utilities reroute Acquisition Design, engineering fees	$5,152,848
Developer TIF Reimbursable Project Costs	$5,152,848
Interest Expense	$4,791,168
Total Developer TIF Reimbursable Budget	$9,944,016

 
The extraordinary costs listed above would make this project unfeasible without some level of assistance. The proposal seeks to maximize the development potential, but doing so comes with higher costs. This includes building demolition, environmental remediation and site improvements. These are added costs to develop a site that was previously developed compared to developing a greenfield site.
 
On October 1, 2024, the Minnesota Department of Employment and Economic Development (DEED) notified the City of a redevelopment grant award for the project in the amount of $1,114,071. The City is currently waiting to receive the grant agreement which will outline the approved grant activities. The grant agreement will be brought to the City Council at a future meeting. The City also intends to submit an application to DEED for a contamination cleanup grant on November 1, 2024. The identified TIF-eligible costs and grant eligible costs exceed the amount of available increment.
 
Background on Tax Increment Financing
TIF is an economic development tool authorized by the State of Minnesota. TIF works by capturing the increment generated by a new development and allowing it to be used to off-set specified eligible costs. Any project utilizing TIF must pass a “but for” test, which is to say that “but for” TIF, the project would not be feasible, or in other words, the project will not happen without TIF. Due to the higher cost associated with redevelopment of an existing site, such as the Hotel Mankato, the project will not move forward without TIF.

If the project doesn’t proceed, then property taxes will likely remain around $74,062 per year for the site (based on 2024 property taxes). If the TIF district is approved, the base property tax will remain as is and be collected and distributed to the taxing jurisdictions (state, county, city, and school district) throughout the duration of the TIF district (in this case, 26 years) and the increment generated by the new buildings, which is projected to be $640,800 per year, will be captured and reimbursed to the City and Developer for eligible costs and up to a maximum amount as approved by the City Council. The City would receive a 5% fee to cover administrative costs of the district. At the end of the 26-year term, the full property taxes go onto the ad valorem tax rolls and become part of the City’s general fund.
 
The City’s TIF policy discusses the use of TIF for redevelopment activities. The use of TIF has been crucial for a number of redevelopment projects. The economic development policy states eligible projects include infrastructure improvements and demolition of underutilized industrial and commercial sites to reuse previously developed land/buildings. Finally, the proposal is associated with the capacity to add full-time employment to the community, which is one of the central goals of the policy. Of the 10 guiding principles of the Economic Development Policy, the Hotel Mankato project aligns with principle “3.09 Fostering the successful redevelopment of vacant and underutilized commercial and industrial properties.”

Development Agreement
The attached development agreement contemplates pay-as-you-go reimbursement. Article III contains the majority of the mechanisms for reimbursement, including the following:
 
The amount of the increment to the Developer is capped at $5,152,848 of principal to be repaid according to the internal tax increment note contained in Exhibit B of the development agreement. The Developer tax increment note is at 5%. This schedule contemplates a pay-as-you-go repayment and the Developer will be eligible to receive an increment annually on a pay-as-you-go basis from the remaining increment that is not retained for the City’s 5% admin retainage. The remaining increment will reimburse the Developer for Developer project costs incurred with the redevelopment of the site. The total payments to the Developer, including interest, is $9,944,016.
 
The repayment of the tax increment is contingent on the available tax increment generated by the project. This means that if there is a “shortfall” or tax increment is not generated as contemplated, the City is not financially responsible for the difference or the “shortfall.”
 
There is an internal tax increment note for the Developer project costs. It is not a general obligation and solely payable from tax increment. Essentially, the “note” is a payment schedule for disbursing the tax increment to the Developer. Payment of tax increments is contingent that the project is not in default. Default provisions are contained in Section 4.1 and requires conformance with the terms of the agreement. The tax increment payments may be assigned to the lender of the project, under the same terms of the agreement.
 
Planning Commission Action
The Planning Commission reviewed the development district to determine compliance with the Comprehensive Plan at their September 25, 2024, meeting which was approved.
 
Requested Actions
The requested actions of the Council are adoption of the resolutions approving the development district and tax increment district, as well as decertifying TIF District No. 43-1 and terminating the associated development agreement. The resolutions also authorize the City Manager to enter into a development agreement with the Developer.