Preliminary review of updated request for possible tax increment assistance for 830 North Broad Street; by request of MAH BKS, LLC.

Review and discussion. The EDA has the following options:

1. Request staff to provide clarification or provide additional information to be reviewed at a future meeting; or
2. Adoption of a motion directing staff to prepare materials for a hearing on April 14, 2025 regarding creation of tax increment district No. 48-1 and approval of a development agreement after obtaining a preliminary letter of commitment for project financing from a private lender; or
3. Decline to proceed with considering assistance.

On January 8, 2024, the EDA preliminarily reviewed a request from MAH BKS, LLC for tax increment assistance for a redevelopment proposal at 830 N. Broad Street for a 3-story, mixed-use building. At that time, the EDA adopted a motion directing staff to prepare materials for a public hearing. On January 22, 2024, the City Council adopted a resolution setting March 25, 2024 as the date of public hearing. The public hearing was later cancelled by the request of MAH BKS, LLC to further examine the project financing and feasibility.
 
MAH BKS, LLC (the “Developer”) previously proposed demolishing the existing substandard structure and constructing a 3-story mixed-use building (commercial and residential). The Developer has revised the redevelopment plans and is now proposing to construct a new, two-story commercial building comprising of 6,784 square feet. The estimated total project cost is $2,346,220 and construction is anticipated to occur in 2025 and 2026. It is anticipated there will be up to 25 full-time equivalent jobs created that would be associated with the new building.
 
Tax Increment Financing Review
 
The Developer is requesting pay-as-you-go tax increment financing (TIF) from the City through the creation of a redevelopment TIF district. The TIF assistance would be used to assist with the redevelopment of the site, including demolition, removal of paved surfaces from the public right-of-way, utility upgrades, curb-cut relocation, building pads, and soil stabilization. These are additional costs as compared to developing a “greenfield” vacant site.
The Developer is documenting extraordinary costs that may be eligible for assistance under the City of Mankato’s Economic Development Guidelines. The Developer is seeking TIF reimbursement of up to $490,000, which includes $95,000 for building demolition, $50,000 for environmental remediation, $50,000 for public improvements, $120,000 for site improvements, and $103,800 for property acquisition associated with the completion of the project. Additional details related to the public and site improvements are further discussed below:
 
Public improvement costs:

• Relocation for the property entrance away from Madison Ave.
• Sidewalk repairs along Broad Street
• Utilities along/in boulevard
• Curb cut repairs and road patching on Broad Street
• Alleyway parking lot entrance

 Site improvement costs:

• Foundation excavation
• Utilities within property boundary
• Building pad construction and soil stabilization
• Final grading of site

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 the term of the TIF District or earlier, 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 City contracts with Baker Tilly to review financial assistance requests. The table below summarizes the tax increment revenue estimates over 10, 15 and 20 years, and are also detailed within Baker Tilly’s attached financial analysis memo.

 

Projected Tax Increment Revenue Estimates

Existing Property Value	$173,800
Estimated Original Net Tax Capacity (Base)	$2,758
Estimated Total Completed Value	$1,042,600
Estimated Total Tax Capacity	$20,102
Captured Tax Capacity (Total less Original)	$17,344
x 2024 Local Capacity Rate	95.377%
Estimated Total Gross Tax Increment Revenue (less OSA deduction of 0.36%)	$16,482
Less: 5% for Administrative Expenses (Maximum Percentage is 10%)	$824
Estimated Net Annual Available Revenue	$15,658
City Policy 15 Year Term
Total Estimated Gross Tax Increment (15 years)	$249,390
Estimated City Retained (5%)	$12,465
Total Estimated Net Tax Increment (15 years)	$236,925
Total Estimated Present Value Net Increment with 5% interest rate	$155,000
Reduced 10 Year Term
Total Estimated Gross Tax Increment (10 years)	$164,820
Estimated City Retained (5%)	$8,240
Total Estimated Net Tax Increment (10 years)	$156,580
Increased 20 Year Term
Total Estimated Gross Tax Increment (20 years)	$332,520
Estimated City Retained (5%)	$16,620
Total Estimated Net Tax Increment (20 years)	$315,900
Total Estimated Present Value Net Increment with 5% interest rate	$188,000

The City Council’s policy decision has been to limit the tax increment reimbursements to 15 years to account for the additional tax capacity to be realized before significant depreciation in the asset is realized. The anticipated principal value of the pay-as-you-go tax increment with a 15-year term is $155,000, plus 5% carrying interest costs - $81,925. The interest costs are derived to align at, or slightly below, the private financing since the Developer must fund the activities upfront. The TIF projections assume the Developer will receive TIF reimbursement in the amount of $15,795/year in years 2027 through 2041.
 
Based on Baker Tilly’s financial analysis (attached) and available financing assumptions, without financial assistance, the project would not be financially feasible. The analysis found the developer’s return without TIF assistance is 6.09%, which is below the feasibility benchmark; therefore, Baker Tilly concluded that the project would be unlikely to proceed but for the requested TIF assistance. Baker Tilly also reviewed the estimated impact on project returns with assistance for a term of reduced term of 10 years, a term of 15 years, and an increased term of 20 years which ranges between 6.90% - 7.35%.
 
Baker Tilly’s financial analysis also included a review of third-party benchmark surveys, which are nationwide surveys of real estate investors, which identify the return benchmarks the responders would need to realize in order to pursue a project. The benchmarks can be used for establishing the likelihood of a proposed project proceeding without assistance (“But-For” Test), as well as the reasonableness of the assistance request. The Price Waterhouse Cooper (“PWC”) Rest Estate Investor Survey was reviewed, which identified a national average of desired unleveraged returns for investment in office projects ranging from 7.25% to 10.0% with an average of 8.84% and, national average for investment of commercial space ranging from 5.5% to 9%. The PWC benchmark is a conservative benchmark and represents the responses of major institutional equity real estate investors who are primarily investing in institutional-grade property on a national level. Increasing the term of TIF assistance to 20 years would result in an estimated return of 7.35% and would meet the lower range of office projects and mid-range of desired investor returns.
 
Additionally, Baker Tilly’s analysis included a review of the Debt-Coverage Ratio, which is another measure for evaluating the project feasibility. Baker Tilly found the estimated debt coverage ratios indicate that public assistance will be required to obtain debt financing for the project.
 
The City’s Economic Development Policy states eligible projects include infrastructure improvements and demolition of underutilized industrial and commercial sites to reuse previously developed land/buildings. The project specifically aligns with principle 3.09 “Fostering the successful redevelopment of vacant and underutilized commercial and industrial properties”. The project is also located in the Targeted Areas for redevelopment.
 
In summary, the EDA is asked to review the proposal and provide comments and request additional information if necessary. If acceptable, the next step in the process would be to direct staff to obtain a preliminary letter of commitment for financing from the Developer and then prepare tax increment documents for a public hearing. Contingent on receiving a preliminary letter of commitment for financing, the public hearing could be set on February 24, 2025, for the April 14, 2025 meeting. It is recommended to obtain a preliminary letter of commitment for financing before preparing tax increment documents because there have been recent instances where a TIF District was created, and the project didn’t begin. It results in certified districts that haven’t or don’t proceed. In this case, the Developer has provided documentation for preliminary commitment for private financing for the project.